Ron Paul's investment strategy is gold

According to research by the Wall Street Journal, U.S. Rep. and presidential hopeful Ron Paul (R-Tex.) has stood by his economic beliefs and invested personally in gold.

Bob Moon: One way to gauge how well a politician might be able to turn the economy around is to see how they manage their own money. The Wall Street Journal has spent two years looking into the investment activities of all 535 members of Congress. And today, the paper is focusing on presidential hopeful Ron Paul -- the Texas congressman who has long crusaded for a return to the gold standard. As you might expect, his investment preferences reflect that -- in a big way.

Jason Zweig is the Journal's investing columnist. Thanks for joining us.

Jason Zweig: Good to be with you, Bob.

Moon: Tell us what you found out about Ron Paul's portfolio?

Zweig: It's one of the most unusual portfolios I've ever seen. It's certainly the most unusual portfolio on Capitol Hill.

Moon: So where is he putting his money?

Zweig: Gold. Almost all of it. You know, most people who have a strong view about the financial future put a little more money in the thing they believe in, and a little less in the things they don't believe in. And he's pretty much made an all-in bet on the one thing that he does believe in, which is that gold is sound money, and that government bonds are not. And apparently, the stock market also is not.

Moon: Now he's really taking aim at the foundations of both the U.S. and global economy. Is there anything wrong with him investing in gold? Isn't he putting his proverbial money where his mouth is?

Zweig: That's exactly what he's doing. Whether it's prudent is maybe a different question. I mean obviously, if Ron Paul's view of the world turns out to be true, this kind of portfolio will also turn out to be a profitable one. But if you've got 64 percent of your money riding on a bet that your worldview is correct and you do turn out to be wrong, it's not going to be a pretty picture.

Moon: Well let's look at the performance -- has he lost any money in the last two, three years?

Zweig: No, I don't think so. It's hard to get a precise measurement on rate of return with any congressional portfolio because the disclosure requirements don't require detailed reporting on the dollar amount of the positions. So we can only make the roughest estimate, but I have no doubt that this portfolio has outperformed the stock market as a whole over the past few years.

Moon: And as you would probably underscore, past performance is no guarantee of future return.

Zweig: Yeah, that's correct. And one of the concerns here is, you know, diversification is a form of insurance. And when you diversify, you're not just insuring against the risk that other people are wrong, but you also want to insure against the risk that you're wrong. We might have inflation coupled with a collapse in the U.S. dollar, as Ron Paul foresees, but there are a lot of other bad things that could happen to the American economy, too, and this kind of portfolio won't protect against those. Plus, good things could happen, and in that case, this kind of portfolio is unlikely to make much money at all.

Moon: Jason Zweig is an investing columnist for the Wall Street Journal. Thanks very much.

Zweig: Thanks Bob, my pleasure.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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Ron Paul definitely has a concentrated and risky portfolio. But it's actually not that much riskier than most people's portfolios, which are concentrated in long positions in U.S. stocks and bonds. Diversification is the one true "Free Lunch" of investing. But if a person starts with just considering long stocks, bonds and real estate as being the only portfolio options, then true diversification cannot be achieved. I discuss this throughout my best-selling book and am pleased to provide a complimentary link to the final chapter where I present the performance of a specific "Free Lunch" portfolio at: http://bit.ly/vxDo6v

DR in NC: Do tell, then - what /is/ money?
I doubt you could begin to recognize it. For example you say gold is a "rare commodity" whose value derives from this supposed rarity. That's BS. Gold isn't "rare". In fact, of the commodity metals, it has the largest ratio of stocks to annual "flows" (mining to consumption in some finished goods other than bullion coin). And it is this very large and very hard to destabilize ratio that lets everyone be so certain about the "value" of gold - it doesn't change much. Heck, Roman gold coins with actual Ceasars pressed into them such as Jesus himself preached about aren't even /very/ rare!

Gold, of course, is not the only source of certainty in life, and so it should never be the sole "value" underlying money. Other certainties (such as "How Paris Is Fed" Bastiat's short essay), and economic entropy arising from due diligence in the short term bill market that keeps supplies flowing through our cities are equally solid, organic, market-based values formerly used to support issues of bank notes when they were still "sound money".

As to Dr. Paul, let's review: it's 1999 - Kevin Hassert is writing "Dow 36,000"; Ron Paul is advocating backing the US dollar by gold (then $250/oz). Now it is is 2011 -
Marketplace is turning to Hassert as some "expert" to sneer at RP's economics, gold is $1600 (having been at $1900)/oz this year. Dr. Paul's portfolio is WAY up with no sign of corrupt insider dealing, and you dolts are whining about how it's not diversified into all the loser things you've been selling for the last decade. You guys are a disgrace to your name "MarketPlace" - you haven't an ounce of respect for what a Free marketplace can be. Fess up. Run a review of how you guys made out two years ago when you bought one gold coin for a 25% premium (chumps!). You're ahead now, aren't you - even after a brutal drop in the gold price this quarter. How about a retrospective of the sneering you did back then?

To DR in NC, you may not think gold is money, but it has been used as such for thousands of years. It is not so much an investment as it is a store of value, and as such, there is little risk in holding it regardless of future events. If gold isn't money, do you think those dollars made of linen is money? If so, why has it lost virtually all of its value over just the last century, when Five and Dime shops became Dollar Trees today, whereas an ounce of gold has bought a fine suit of men's clothing since the Romans?

Ron Paul's sincerity is admirable, even if you don't agree with his position(s). However, gold is NOT money. It's a rare commodity, and it has value only because of that rarity.
BTW, don't get too enamored of anything with unrealized appreciation. An investment without realized return is mere speculation. Investing in petroleum-related stocks would probably be better than gold.

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