By Justice Litle
Earlier we talked about the rising tide of geopolitical risk in places like North Korea, Iran, and Israel.

For lack of space, we didn’t touch on further events unfolding in places like Afghanistan, Pakistan, Nigeria, Russia and Venezuela – all tied in to the global scheme of things by way of nuclear arms, oil supply, or both.

There is at least one clear lesson to be taken from this rising drumbeat of ominous news: You want to have gold in your portfolio.

Gold and silver have been on a tear as of late (for reasons we’ve discussed at length in these pages, and will address in further detail soon). To give you the quick and dirty version, the yellow metal has been bid up as more traders and investors anticipate a loss of faith in government assets – and a coinciding return of inflation.

Where gold hasn’t gotten much respect, at least in recent months, is as a form of crisis insurance. Gold is not only the asset du jour in a time of rampant currency debasement... it’s also one of the last, best stores of value in a world gone mad.

Mr. Market, for his part, is a terrible predictor of geopolitical risk. The historical record shows that bonds and equities are happy to remain blithe and serene in the face of pending catastrophe, pressing as the situation might appear, right up until full-scale disaster hits. Then, when the unthinkable happens, the panic and the mayhem tends to appear all at once.

There are many factors that play into this occurrence, human nature not least among them. But in a nutshell, the pattern plays out over and over because Mr. Market simply does not know how to price low probability, high risk events. He is forever flummoxed by the low / high combo.

The low probability, high risk event – like the threat of war in the Middle East, for example, or the threat of North Korea’s collapse – is a sort of Gordian Knot that simply cannot be cut. And so, confronted with the unsolvable nature of the problem, Mr. Market, by and large, just shrugs... and ignores such events completely. (Until the day comes when he can no longer do so.)

The Pressing Logic of Crisis Insurance...

Having a growing roster of low probability, high risk geopolitical events on hand, then, is like filling up one’s garage with oily rags and rusty drums of kerosene. Thumbing one’s nose at the problem is like continuing to back the car into the garage, hot exhaust pipe and all, with no thought as to what might happen.
The general likelihood remains, of course, that nothing much at all will happen. But only a nut would be comfortable with such an arrangement. The risks are too serious to be ignored.

That’s why gold makes so much sense from a crisis insurance standpoint for one’s portfolio – not unlike fire insurance for one’s home – as well as an inflation buffer and fiat currency debasement play. The world has oily rags stuffed in countless nooks and crannies now, and kerosene aplenty.

The funny thing is, if all the giant institutional players bought just a wee smidge of gold as crisis insurance to protect themselves – a mere handful of percentage points in the portfolio – the yellow metal would already be trading at many thousands of dollars per ounce.

...And a Puzzling Lack of Common Sense

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