Gold has been holding above $1,300 per ounce for the last couple of days.  This is a new nominal high.  It continues to be a tug-of-war between the gold market and the bond market.  Interest rates remain low, which means bonds remain strong.

The bond market may see trouble ahead, but it isn’t inflation trouble.  The gold market also sees trouble ahead, but it sees more inflation and weakness of the dollar.  One of them will win out eventually.

Bonds could easily win out in the short-term.  If there is another stock market crash and another panic, people may flock to “safety”, which to many means bonds.  The reason “safety” is put in quotation marks is because bonds are not necessarily safe, especially with the threat of higher inflation and higher interest rates.

Ultimately, the gold market will win out.  The federal government is so far in the hole, that it is likely to default.  Whether it defaults outright by repudiating the debt (unlikely in the near term) or it defaults by creating money out of thin air (more likely), it will not be good for the bond market in the long-term.  While there are no guarantees, gold is a better long-term bet.

Should you invest in foreign currencies?  I’m not against investing in foreign currencies for speculation.  At the same time, there are better plays to hedge against the U.S. dollar.

If you live in the U.S. and work in the U.S. and your income is in U.S. dollars, then it is important to diversify yourself out of U.S. dollars.  But remember that your debts are also in U.S. dollars.  If you have a fixed rate mortgage, then you don’t really have to worry about inflation as far as that goes.  You do have to worry about your investments and your general cost of living.

While investing in foreign currencies may provide a hedge against a falling dollar, it is still a speculation.  All of the major currencies used on this planet are fiat currencies.  They are not backed by gold, silver, or anything else other than the taxing and printing power of the governments.  You could invest in Japanese yen or the euro to diversify out of the U.S. dollar.  It might work, but they might also go into free fall together.

That is why gold is still the best investment to hedge against the U.S. dollar.  You don’t have to worry about someone printing gold.  The only way there will be additional gold is by the hard work of mining.  Even then it is unlikely that there would be an explosion in the supply of gold.

If you want to speculate in the euro, yen, yuan, New Zealand dollar, or any other currency, then go for it.  Just remember that, just like the U.S. dollar, it is a fiat currency.

It is a good idea to have gold and gold related investments as part of your portfolio at all times.  It is even more important in our current times.  You should have a certain holding as a disaster hedge.

It is another thing to speculate with gold.  This would be buying gold at, say, $1,100 an ounce and selling it a month later for $1,200 an ounce.  Your short-term profit is $100 an ounce (excluding any transaction fees and taxes) in terms of dollars.

There was an article posted on LewRockwell.com today that talks about the short-term surges in gold prices and how they can range from 13% to 35%.  If we are currently in one of these surges, gold may go to $1,400 an ounce, easily, in the next few months.  It makes for an interesting speculation.  I am not bold enough to predict this outcome as it is impossible to do so.  But it does make sense that if you are adding gold holdings to your portfolio, to buy on dips.

However, if you don’t have any gold exposure or even very little, you shouldn’t wait to buy.  It is hard to time prices and you need your core position immediately.  The price could take off tomorrow and never go below $1,300 an ounce ever again.  Again, I’m not saying this is likely, but it is possible.

Like defense stocks, it is not a bad idea to have a small portion of oil and other energy stocks in your portfolio.  Five percent is not a bad number.  Energy stocks tend to be volatile.  They can be more volatile than the price of oil.  If the economy goes into free fall again, oil stocks may take a hit.  That’s why you should limit yourself to five percent.

Oil stocks provide a good hedge against a few things.  Most people use gasoline, so it is a good hedge against the price of gas.  The two things don’t move exactly the same, but there is certainly a strong correlation.  Oil and other energy stocks are also a good hedge against inflation in general.  Since oil is a commodity, it is likely to go significantly higher with high inflation.

The possibility of war with Iran has seemed to diminish, but it is another reason to hold oil stocks.  If there is war, Iran could retaliate by trying to stop the passage of oil through nearby waters.  This would be devastating for the whole world economy.  You could see oil go to $500 a barrel easily.  Hopefully Obama has his hands full enough and will not start anything there.

It is hard to pick stocks because any individual stock could go down even if oil goes up.  Look at energy mutual funds like Fidelity’s energy fund (symbol: FSESX).  Again, keep your exposure fairly low due to the possibility of another crash in the stock market.

Those who study Austrian economics and understand the business cycle that is caused by government/ central bank tampering, often have reason to be negative.  But we often forget that for as bad as the government is, the free market is a great force for good.  Even with huge government intervention, the market still often finds a way around things.

An article on LewRockwell.com today, by Dom Armentano, points out that not everything is gloom and doom.  This is important to remember.  While I think we have a lot of problems and that the economy may get worse before it gets better, it is probably not the end of the world.  There is a huge growth in the liberty movement due to the internet and these forces will eventually have an influence in weakening the government.

While you should certainly make some preparations, financially and otherwise, for things getting worse, it doesn’t mean that things won’t ever get better.  For all we know, a drastic reduction in government at all levels and a return to liberty and free markets might be right around the corner.  If we ever had the economic freedom of 19th century America with today’s technology, it is mind boggling to think of what could be achieved.  Our standard of living would go through the roof and everybody would be living like kings.

While we should be realistic, there is also good reason to be optimistic.

Should defense stocks be part of your investment portfolio?  My short answer is, yes, but only a very small portion.

Defense stocks have done ok in the last decade.  They have done better than the broad market.  We would have expected them to do even better considering the fact that there have been 2 major wars.

The stock market is still on very shaky ground.  The economy is trying to deleverage, but the government is trying to prop things up with stimulus packages and fiat money.  It is a tug of war.  The overall stock market is very risky right now if you are not diversified outside of the stock market.  Any one individual stock is highly risky at any time.  Therefore, if you invest in defense stocks, it would be best to diversify.  Fidelity has a nice mutual fund that you can invest in (symbol: FSDAX).

I wouldn’t put more than 2 or 3% of your entire portfolio in defense stocks.  They are just too risky.  The defense stocks may benefit from more war, but even that is questionable.

Some libertarians will question whether it is ethical to buy defense stocks because the companies are profiting off of war.  While that is an individual decision, my opinion is that buying some company stock isn’t going to affect whether or not a war will be fought.  As long as you aren’t cheering for more war because you are looking for bigger profits, then I don’t see a problem.  If it was a problem, then you also wouldn’t be able to buy U.S. government bonds and a whole host of other investments.

Houses are a consumer good.  People don’t see a house as being a consumable item, but it is.  It may be a necessity, but the reason most people buy a house is because they need a place for shelter.  It was during the housing boom that people really started viewing houses as investments, although that mentality did exist before then.

Houses are not quite like cars.  Cars die on us eventually and it is usually in less than 20 years.  Houses last much longer, but even most houses eventually die unless they are completely renovated.

The only reason that houses go up in value (not counting the last 4 years) is because of inflation.  It is because the money we use is a fiat currency and the central bank has a habit of inflating the money supply.  This is really the only reason that housing prices go up over time.  In a world of sound money, house prices would probably gently fall over a long period of time.  This is not a bad thing.  Houses would be more affordable.  You could still invest in houses as a business, but your profit would not come from capital gains (housing prices going up).  Your profit would come from the cash flow, if well managed.

There is a lot of discussion on what housing will do next.  Is the bottom here?  Will prices drop another 20% before recovering?  While these discussions are relevant, you should really buy a house because it is something that makes sense for you.  You need a place to live in.  Buying a big, fancy house isn’t a good investment, but it might be what you need and what you can afford.  You should buy based on your own circumstances and what you need.

It does baffle my mind that a bank will lend you money for 30 years at a rate around 4 to 4.5% these days.  While I don’t like inflation, it is probably inevitable.  If you take out a 30 year fixed-rate mortgage today that you can afford, your last payment 30 years from now will probably be the cost of a nice lunch.

This article today on LewRockwell.com gives some good arguments on buying silver.  The first good news about this piece is that he did not constantly talk about how there is a supply shortage of silver and that it won’t be able to keep up with increasing demand.  Those arguments have been going for decades and they are useless.

This article talks about the gold to silver ratio.  The author says that the ratio is unusually high and that it has been typically much lower in the past.  This is an interesting statistic to look at and keep an eye on, but at the same time, past results don’t necessarily indicate future trends.

Silver is the poor man’s gold.  There is nothing wrong with buying silver.  It is easier to buy a silver coin every week than buy a gold coin every week unless you happen to be wealthy.  With stocks and ETFs, it makes no difference.

Personally, I prefer gold to silver because gold is perceived to have monetary characteristics more so than silver.  Gold is also much less volatile.  Of course, if we have a bull market in metals, silver could easily outperform gold by huge percentages.

I recommend that you have both, but you should have far more gold and gold related investments.  If you have 20% of your portfolio in gold, then 5% of your portfolio in silver would be good.  In other words, I recommend you have about an 80/20 split in favor of gold.  If the metals go down, you won’t take as big of a hit with gold.  If they go up, at least you will have a small portion in silver to benefit from the huge gains.

This article by Peter Schiff is a good read.  Peter Schiff understands economics and knows how to communicate it.  He knows how to break it down into simple examples.  I would not use Schiff for investment advice for short-term investing, but then again, there are very few people who are good speculators in the short-term.  Listen to Schiff’s analyses for your long-term investments.  He understands Austrian economics and he articulates well for anybody to understand.  His predictions about the possible collapse of the dollar are worth listening to.

In this article, Schiff does a good analysis of what happened during the 1930’s and the 1970’s.  Pay particular attention to the 1970’s.  While anything can happen and our situation is unique right now, the 70’s are a better comparison because of the world we live in today.  The country was completely off the gold standard after 1971 and the FDIC has been existent since the 30’s.  While our current economic woes may be a combination of the two time periods, there is definitely more in common with the 70’s.  Unlike the 30’s, there won’t be massive runs on banks that lead to a contraction of fractional-reserve lending (and deflation) because of the FDIC and the government’s willingness to bail out the big banks.

Anyway, Schiff’s article gives a good presentation on the cycles within a recession/depression.  It is common to see wild swings in both directions.  There will always be winning investments and losing investments.  It is just a matter of picking the winners by picking the long-term trend.

The gold price, in terms of U.S. dollars, hit another high today.  It seems that we are living in bizarro world.  It is quite strange that bonds are doing well and gold is doing well.  Bonds go up in value when interest rates go down.  Interest rates represent the price of money.  They also represent risk.  When it comes to buying U.S. government bonds, there is little risk (or at least that is the perception).

Right now, the bond market is saying that there is little threat of future inflation.  Gold is saying otherwise or else it is trying to price in other risk, such as a geopolitical event.  I don’t see this trend continuing for a long time.  Either bonds will fall or gold will fall (or at least not go much higher).  Gold could easily go to $1,300 or $1,400 an ounce.  But for gold to go to $2,000 and higher, it would seem that interest rates would go up significantly.

It is not that higher interest rates cause higher gold prices.  It is just that they tend to be correlated.  You could see gold go up in price and see interest rates follow behind it.  That is why you should have a substantial part of your portfolio (at least 20%) in gold and gold related investments.  You can’t predict when the price might take off.  Gold might be more of a signal for higher interest rates than the other way around.

The bond market and the gold market are in competition right now.  People are looking for safety and some are going to bonds and others are going to gold.  The people going to bonds might win out in the short term.  In the medium term (let’s say 5 years), gold could easily win out.  The bond market doesn’t see inflation as a threat yet, but I think it will eventually.