Ride High with Inflation

The primary trend is increasing inflation at least through the end of 1986, peaking perhaps at an annual rate of 25 percent by that time.


One of my investment principles over the years has been that of contrary opinion—that investment markets are at their best when the fewest people want to be in them. This, obviously, is the buy low, sell high concept. It has its limitations, of course: there were wonderful bargains in Saigon real estate the week before Vietnam fell. But if you have the primary trend correct, you can avail yourself of some awesome buys.

The De Beers organization pulled off one of the most incredible coups of our time. Over a two-year period following the 1980 peak in the diamond markets—while everybody was worrying about De Beers's stability and whether it had run out of money to support the diamond markets—De Beers was continually buying diamonds from the mines at lower and lower distress prices and squirreling them away. Anyone who thinks De Beers ran out of money might be interested to know that a significant percentage of its net income in the last year (perhaps more than half) came from investment returns on cash, other than from its diamond investments.

De Beers is going to feed those stones into the market carefully and benefit tremendously from increased prices. At first, the smaller, lower-investment-grade stones will be going for use in jewelry. Later on, however, one-carat, investment-grade stones of top quality will eventually enjoy the most appreciation, because they are the most scarce and most rare. So you should consider these as part of your portfolio.

Let's consider now, in order of relative strength, those investment opportunities that appear to enjoy the strongest trends. First, but just by a nose, are South African gold-mining shares. American mining shares will probably appreciate as much but will not enjoy the kind of dividends you will see from South African shares. It's one of the few stock investments that I appreciate not only for its capital-gains possibilities but also for its income potential. Many argue that gold does not produce a regular stream of income. But when gold is brought out of the ground and sold, it brings profits to the mining companies.

In a cluster right behind gold-mining shares are platinum and, of course, silver. I am very bullish on platinum over the long haul. And silver is my bellwether investment for the '80s. If I had to bet everything I have on what will appreciate most, I would probably bet on silver even though at this time it comes in behind gold shares in relative strength. And I am not going to consider selling my silver until the price is at least $80 an ounce and preferably over $100 an ounce. Based on both fundamental and technical factors, that's what looks most reasonable from this perspective.

Gold bullion and bonds are next on my list of investment opportunities. I do agree somewhat with Doug Casey, however, that the biggest rally in bonds is behind us. There are still profits to be made, but the risk-reward ratio is not what it was some months ago. I still want some bonds in my portfolio, though, simply because there is still the chance that the whole economic system will come unglued and thrust us into a great deflationary depression. It's a one-in-ten chance, so I don't mind having one dollar out of ten in bonds as a hedge—given the fact, too, that I expect some capital appreciation in addition to the interest earned on the bonds.

I prefer US Treasury bonds. You never know when the credit-rating organizations, Standard & Poor's and Moody's, are going to lower the rating of a corporate or municipal bond and create an instant market drop—as recently happened to the state of California. Treasury bonds offer a hedge against the ultimate possible depression, in case the Federal Reserve should miscalculate in its attempts to keep everything afloat.

I can now offer some general advice to follow in adjusting your investment portfolios over the next year.

The first thing I recommend is perhaps my key investment message. The primary trend is clear—increasing inflation at least through the end of 1986, peaking perhaps at an annual rate of 25 percent by that time. Our best opportunity is to leverage ourselves through this trend. And the most advantageous vehicle for leveraging is not the futures market—because of the margin-call risk—but options on gold-mining shares. They will outperform gold futures, at least until it seems clear that leadership has passed from the shares to bullion and there is no longer the risk of a margin call. At least part of your money should be in those leveraged investments.

A second recommendation is that you test your level of aggressiveness. See how aggressive you can get and still be comfortable. Work toward the outer limits of your comfort range and get accustomed to reaching. We've got to grasp the iron while it is hot—a cliché, but no less true for being a cliché—and it's going to be hot for awhile.

Another bit of advice is this: learn to accept setbacks—they are going to come. Truly they are going to come. At times the markets will go against us. We will make mistakes—mistakes of timing—but the primary trend will bail us out. Indeed, in none of my recommendations will the primary trend not bail us out. Moreover, don't be emotionally attached to any investment. An investment doesn't care if you like it or not—it will perform the same either way.

And my last injunction is: invest in the next generation. One way to do this is to forge a close partnership with the up-and-coming generation, as I am doing with my children. Look for opportunities to put your capital and experience into the establishment of small businesses for the future. One way we can save this country is by having enough people owning businesses to form a national constituency for the free-enterprise system.

Unfortunately, it is historically true that those who have consistently voted for programs that eventually erode the free-enterprise system are the wage earners of America. On the other side of them, generally speaking, have been the capitalists of America. This doesn't mean that there is class warfare here; it simply means that American wage earners do not often understand the personal stake they have in the free-enterprise system.

To make sure that more and more people do become aware of their stake in the free-enterprise system, we can create a pact between the generations—not one that transfers wealth through Social Security taxes to the retired, but one that passes the assets and experience of the retired to the new and rising generation. And nothing creates a capitalist more quickly than the chance of profit or loss

Howard Ruff is editor of The Financial Survival Report and author of several books on investment and financial survival—most recently, Survive and Win in the Inflationary Eighties. This article is adapted from his closing speech to the Howard Ruff National Convention in Orlando, Florida.