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Jim Cramer: Gold Is Your Insurance Policy (Video)

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Jim Cramer raised a great point on Mad Money this week. You wouldn’t own a house or a car without the proper insurance. So why would you have a portfolio of investments without insurance? Gold is that insurance – the only asset that is guaranteed to minimize the downside risks when there is economic or geopolitical uncertainty. When all other assets are crashing, the price of gold generally rises.

The only area where Cramer is a bit off-base is in dismissing physical gold. He recommends owning GLD, the largest gold exchange-traded fund, which generally moves closely in-line with the price of gold. The problem with GLD is that while it is supposedly “physically backed,” investors cannot redeem their holdings of GLD for actual physical gold. On top of that, the gold held by the GLD Trust doesn’t have to be insured.

GLD allows investors to cheaply invest in the price of gold, but to truly insure your portfolio, you want to own physical bullion.

Highlights from Mad Money:

“You need some gold, because gold has a special property. One that makes this metal precious to any diversified portfolio. Now, I don’t want this to be 20% of your portfolio. That won’t work. It’s way too much. I think 10% is the upper limit, because I consider gold as an insurance policy and no worthwhile insurance policy should be 20% of the money you’re investing.

“Why do I like gold? Because gold tends to go up when everything else goes down. It’s your insurance against economic or geopolitical chaos, uncertainty, and inflation. All things that could cause most stocks to decline, but also cause the price of gold to rise. Before you curse me out because gold has done nothing for a couple years, remember – you wouldn’t own a home without homeowner’s insurance. You wouldn’t own a car without car insurance.

“It’s also been the best performing asset for the past decade, racking up gains consistently over a period when at some point, every other asset class has disappointed you. So it was a winner for a long time. Lately, it’s cooled.

“Owning gold is not about the upside, though. It can be considered. It’s about minimizing your risk to the downside. At any given moment there will probably be a whole host of factors [or] sectors that outperform gold. But none of them work like an insurance policy…”

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