Buying Gold as a Mouthguard

Everyone has a plan until they get punched in the mouth...

MIKE TYSON isn't famed for his eloquence.

But while he's no Mohammed Ali perhaps, he did a stage tour this year to promote his autobiography, out next month. And Tyson's best boxing tip – that "Everyone has a plan until they get punched in the mouth" – is much deeper a comment than the former world heavyweight champion may have intended.

Remember when everyone you spoke to was heavily invested in the stock market? What about housing? A decade ago I thought that my friends should consider putting a percentage in cash, or perhaps buying some gold. Because the equity and real estate markets just seemed over heated to me.

It was just a general observation of course, and one that many other people made at the same time. But the old axiom that what goes up, must come down kept coming to my mind. My friends and acquaintances ignored me though. Their investing was brilliant and they knew better. Who needed to worry about buying gold when stocks and housing kept going up?

During the 2008 market meltdown, I remember speaking to one friend who had been convinced of his golden touch in stocks. He admitted that he was so full of himself and his success that he was not prepared for what happened. He took a big hit. Essentially he got punched in the mouth.

Yes, my friend had a plan (buy stocks) but it was one without any precautions (buy some insurance, too).  He only saw one future and did not prepare for other outcomes. Or as Iron Mike might put it, he thought he could box, but he didn't even wear a mouthguard.

Even the biggest, heaviest-hitting investors are diversified. They own companies outright, plus other assets away from the stock market as well. Failing to diversify is the same as taking your car on a long road trip without having prepared. What are the preparations you must make for a long trip, whether by road or investing?

Now, there are several ways to protect oneself from a punch in the mouth in the financial markets. But one must consider the flexibility of any non-correlated asset – meaning an asset which is unlikely to move in the same direction as the rest of your portfolio if things turn bad. And it has been commonly held by many professional investment advisors that a five to 10% investment in gold should be part of the long term investor's strategy.  In times of greater insecurity and confidence that number is often raised to higher levels.

In a recent radio interview on New York Markets Live, I asked Mickey Fulp, the Mercenary Geologist and an expert in the mining industry, about his thoughts on the gold market. His comment?

Insurance is good word when it comes to gold. The only difference is that once you've buy it, your gold never becomes worthless or expires. No, you don't plan on needing it. But you don't want to get punched in the mouth without.