R

E
T
P
A
H
C
G
N
I
MISS

HOW TO
INVEST BEFORE
THE COLLAPSE
BY JAMES RICKARDS
Bestselling author of Currency Wars and The Death of Money

How to Invest before the Collapse

Introduction
After studying the evidence for a coming financial collapse, some
investors might be tempted to give up, buy guns, ammo, and canned
goods and move to a bunker in Idaho. But history teaches otherwise.
Catastrophes have happened throughout history and society has
always picked up the pieces and found new ways to move forward.
Sometimes the landscape is radically altered, but its not the end
of the world. Radical changes in global finance, trade, and capital
markets are coming, but investors who prepare now will preserve
wealth and be well-positioned for the new system to come. This
chapter offers some practical advice on how to do that.
History is a great teacher. In 1914, the international monetary
system abruptly collapsed as countries abandoned the classic gold
standard and resorted to money printing and deficit spending to
finance the First World War. The period immediately after the
war, 1919 to 1923, was marked by hyperinflation and deflation,
expansion and depression, depending on the exact country and
year one selects. Between 1922 and 1925, the major trading and
financial powers reconstituted a gold standard, but it was a hybrid
involving gold and foreign exchange and was called the goldexchange standard for that reason. It was badly flawed and soon
led to the Great Depression of 1929 to 1940.
But all was not lost during this period of turmoil. Some of the
greatest commercial real estate investments of all time, the
Empire State Building and Rockefeller Center, were launched
between 1930 and 1933 in the depths of the Great Depression.
The stock market rallied strongly from 1933 to 1936 in the middle
of the Great Depression. Gold rose almost 75% from $20.67 per
ounce to $35 per ounce in 1933 immediately after the longest
sustained period of deflation in U.S. history. These results may
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How to Invest before the Collapse

seem anomalous at a superficial level, but they were available to

investors who understood the dynamics of inflation, deflation,
interest rates, commodities, and real assets.
Similar dynamics took hold in the 1970s. In 1971, Richard Nixon
ended the convertibility of dollars into gold for trading partners of
the U.S. This unleashed a decade that included a stock market crash
in 1974, three recessions in quick succession, in 1973, 1979, and
1980, and 50% inflation in a mere five years from 1977 to 1981.
Again, astute investors did not have to be passive victims of the
turmoil. Leverage investment in farmland was highly profitable.
Commodities boomed. Gold increased 2,200% from 1971 to 1980.
Of course, the turmoil ahead will not be exactly like that of the
past. Writer Mark Twain is often credited with saying, History
does not repeat, but it does rhyme. In fact, theres no evidence
Twain actually said this, but he did say something similar:
That no occurrence is sole and solitary, but is merely
a repetition of a thing which has happened before and
perhaps often.
The technical name for this phenomenon is Historic Recurrence,
and it is as useful for investors to understand as it is for writers and
historians. The key for investors is to comprehend the dynamics
behind the headlines one reads every day. A firm grounding in
history and dynamics gives investors the best chance of preserving
wealth and not being a victim in the turmoil ahead.
The biggest single difficulty in investing today is that both
inflation and deflation are in play. The deflation potential, through
deleveraging and liquidity preference, is a natural result of the
structural depression that has gripped the world since 2007. The
inflation potential, through central bank policy, is the only feasible
solution to non-sustainable public debt and deficits.
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How to Invest before the Collapse

The two forces deflation and inflation are pushing against each
other like tectonic plates under the San Andreas Fault. The fault
line can be quiet for sustained periods of time, as it has since 2009.
But when enough energy builds and one vector begins to slide over
the other, an earthquake results. The direction of the energy release
toward inflation or deflation is unknown, but the earthquake
itself is entirely foreseeable. The key for investors is to prepare for
an earthquake without knowing exactly where all of the debris will
land once the earthquake stops. There are ways to do this.
What follows is an overview of investment strategies in stocks,
bonds, foreign exchange, commodities, fine art, land, alternatives,
and cash. With the right degree of diversification, careful selection,
and a healthy dose of patience, investors can earn income, preserve
wealth, and be well-positioned for growth in the years ahead.

Stocks
The stock market is the traditional favorite of investors and for
good reason. A diversified stock portfolio has produced high, real
returns over sustained periods of time. However, the stock market
has ceased to perform this real-return function since the late 1990s.
Stocks today are only slightly higher in real terms than they were
in 1999. During that period, investors suffered two collapses the
dot-com crash of 2000 and the financial panic of 2008. Gains since
2009 have been high in percentage terms, but participation has
been low, and most investors have not shared in the gains.
Lately, indices have been driven to record highs by a toxic
combination of high leverage, low volume, and robotic executions.
This is catalyzed by a combination of easy money and high
technology.

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How to Invest before the Collapse

The Federal Reserve intends for the indices to go up to create the socalled wealth effect designed to stimulate spending. But the wealth
effect has broken down because investors liquidity preferences
have shifted as a result of the dual shocks in 2000 and 2008. What is
happening is clearly a bubble, yet the Fed has shown itself incapable
of identifying bubbles until after they burst. This is the best way to
understand the stock market today a bubble about to burst.
The next crash may be tomorrow or it may be a year or two away.
TV talking heads will continue to promote stocks right up until the
day the bubble bursts.
Nevertheless, there are some ways to participate in stocks that
will weather the storm better than others. Investors could give
consideration to companies with real assets in their core business.
This includes companies in transportation, natural resources,
energy, and agriculture.
Its best for the individual investor to stick with large, established
firms in their respective industries. Quality railroad names include
Union Pacific, Norfolk Southern, and Canadian National Railway.
In the natural resources sector, some high-quality companies include
ExxonMobil, Chevron, and EOG Resources (oil & gas), FreeportMcMoRan (gold and copper), and Potash (agricultural chemicals).
Instead of trying to pick individual stocks (which most mutualfund managers cant even do well), investors can consider owning
broadly diversified exchange-traded funds (ETFs). For example,
the iShares U.S. Oil & Gas Exploration & Production ETF gives
investors exposure to dozens of established energy companies.
Investors should avoid companies with high leverage, which
becomes a burden in deflation. They should look for companies
with significant amounts of cash that can fund internal operations if
the commercial paper market shuts down again as it did in 2008.
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Companies with good prospects in emerging and frontier markets

in Asia and Africa will also offer good returns. An example here
is Phillip Morris International, which is the international offshoot
of cigarette giant Altria (formerly Phillip Morris). Phillip Morris
International is the worlds largest cigarette seller outside of the
United States. Its a company that will benefit from the worlds
growing middle class.

Bonds
Investors should avoid credit risk in corporate, municipal, and junk
bonds. However, certain sovereign bonds offer good risk-adjusted
opportunities. Major sovereign bonds mitigate credit risk, leaving
only the interest rate and currency risks that investors can manage.
Much has been written and said to the effect that interest rates
are near all-time lows and that the bond market is a bubble. A lot
of this analysis is superficial. Investors must distinguish between
nominal rates and real rates. It is true that nominal rates are near
all-time lows, but real rates are historically high once disinflation
and potential deflation are taken into account.
For example, if nominal rates are 10% but inflation is 13%, as it
was in the late 1970s, then the real rate negative 3%. If nominal
rates are 3% but inflation is 1%, then the real rate is positive 2%. In
the second case, the nominal rate is much lower (3% versus 13%)
but the real rate is much higher (2% versus -3%). Investors should
care more about real rates because that is how wealth is made or
lost in a world of inflation and deflation.
It is also a quirk of bond math that a fixed percentage-point decline
in yields produces larger percentage gains when rates are at lower
absolute levels. For example, when rates go from 3% to 2%, the
capital gains on the bonds are much larger than when rates go from
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How to Invest before the Collapse

9% to 8%. In both cases, the yields dropped 1%, but in the first case
(similar to todays rates) the capital gain is much larger. If yields on
U.S. Treasury 10-year notes moved from the current level of about
2.6% to 1% (still higher than Japanese 10-year notes today), it would
be one of the strongest bond market rallies in history.
Taking into account the prospects for disinflation, the high credit
quality of U.S. government bonds, excellent liquidity, and the
potential for capital gains, an allocation to 10-year U.S. Treasury
notes has a place in an investors portfolio today.

Foreign Exchange
When investors allocate to certain asset classes such as stocks and
bonds, they must also decide how much foreign exchange exposure
to take. An investor buying stock in a Spanish bank, for example,
will not only have the normal stock exposure, but will also be taking
exposure to the euro since that bank keeps its accounts and reports
its profits in euros, and trades on exchanges denominated in euros.
It is also possible for investors to get direct exposure to currencies
independently of stocks and bonds denominated in those
currencies, using derivatives traded on the Chicago Mercantile
Exchange, certain ETFs traded on the New York Stock Exchange,
certain specialty mutual funds, or simply by holding cash in
foreign currency denominated bank accounts.
The world is now engaged in a currency war in which certain
major economic powers are attempting to steal growth from their
trading partners by cheapening their currencies. This is unlikely
to be a successful strategy and typically results in inflation for the
parties engaged in the war. Other countries or economic zones
understand the futility of currency wars and are trying to promote
growth and exports through technology, investment, and sound
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How to Invest before the Collapse

money policies. Understanding which countries are engaged in

which policies is the key to selecting currencies that will preserve
wealth instead of eroding it.
Foreign currencies that investors should consider owning are the
euro, Swiss francs, Korean won, Canadian dollar, and Singapore
dollar. Currencies to avoid are the Japanese yen, Chinese yuan, and
the Australian dollar.

Commodities
The principal commodity investments for wealth preservation
in uncertain times are gold and silver. However, gold and silver
are not interchangeable as stores of wealth. There are important
differences. Here is some practical advice for investing in both and
some things investors need to know.
There is no fixed ratio of gold to silver prices. Both have
fluctuated widely over time as has the ratio itself. Gold is a pure
monetary metal. It has almost no practical uses except as money
or a store of wealth in the form of jewelry. Silver is an important
industrial metal as well as a monetary metal. Therefore, its dollar
value can be more volatile than gold and is affected by the business
cycle as well as monetary policy.
Gold and silver should be held in physical form as coins or bars.
So-called paper gold contracts such as ETFs, COMEX futures
or bank unallocated forwards should be avoided because of
counterparty and contractual risk. Investors should not use leverage
to purchase precious metals because the metal is highly volatile
today and leverage only serves to amplify this volatility.
The physical gold or silver should be kept in secure storage
outside the banking system because there is a strong conditional

Copyright James Rickards, 2014. All Rights Reserved.

How to Invest before the Collapse

correlation between dramatic price increases in precious metals

and the kind of financial stress than can result in the banking
system being closed and inaccessible. Secure storage can be
arranged through reputable non-bank firms such as Brinks, Dunbar,
Loomis, or local vaults that are bonded and insured.
Coins should be new, preferably issued by the U.S. Mint as
American Gold Eagles or Silver Eagles. Buyers should not
pay a premium for numismatic value. Sales pitches involving
pre-1933 gold coins are mostly scams. Small quantities can
be purchased online from the mint at www.usmint.gov. Larger
quantities can be purchased from reputable dealers, some of whom
are recommended on the U.S. Mint website. Dealer commissions
vary, but 3% to 7% is customary.
A reasonable allocation of investible assets to precious metals is
about 10%. Of this, most should be in gold, but some allocation
to silver is practical in case the metal is needed for barter-type
exchanges. A U.S. Mint monster box consisting of 500 oneounce Silver Eagles, currently about $10,000 for the box, is a good
addition to any survival kit in the event of an economic collapse
and temporary disruption in banking and exchange channels.

Fine Art
Most investors reaction to buying fine art is that they cannot
afford the millions of dollars needed to purchase individual
pieces of true museum quality art. While true, this need not be a
deterrent to art investing because a small number of high-quality
art funds have been organized that allow investors to purchase
fund units for $200,000. Those proceeds are pooled with others
to allow multi million-dollar collections to be obtained. Investors
then receive a pro rata share of any sales proceeds, net of fees,
when the art is sold.
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Such funds must be carefully selected. Many art funds are

organized by dealers, which is not ideal from an investors
perspective. Some such funds have a built-in conflict of interest
if the dealer is using investor proceeds to finance his own dealer
inventory. It is better to invest in art funds organized by art and
financial experts who are not dealers, and whose interests are better
aligned with their own investors.
Art funds offer attractive returns, especially in inflationary
environments, but they are not liquid. They function somewhat like
private-equity funds, where investors must commit their money
for five to 10 years depending on the specific terms of the fund.
However, they do offer the potential for sizeable gains and are tax
deferral until the art is actually sold. One reputable fund with a good
track record based on the success of a prior fund is the Twentieth
Century Masters Collection (http://thecollectorsfund.com).

Land
Land is an asset class with the potential to perform well in inflation
and deflation. For this purpose, an investor should consider vacant
land or farmland with current income. In both cases, investors
should purchase land with good development potential, in prime
locations, and with a low cost of carry from property taxes.
In an inflationary episode, the nominal price of the land should go
up at or above the rate of inflation, thereby preserving wealth.
In a deflationary episode, the nominal value may go down, but
development costs can go down even faster. This means an
investor can undertake development at rock-bottom prices and
then later sell the developed property in the next upward cycle
following the deflation.

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How to Invest before the Collapse

Governments must avoid deflation at all costs, so if a deflationary

episode occurs, it will likely be followed by governmentinduced inflation. The investor who develops land at the bottom
of the deflation-inflation cycle will reap the largest gains in the
subsequent inflation.

Alternatives
Some of the investments already mentioned including gold,
silver, fine art, and land are properly considered alternative
investments, but in this section, we specifically focus on hedge
funds, private-equity funds, and start-ups or angel investing.
Hedge funds are an asset class that works fine in theory but
awful in reality. The theory is that hedge funds pursue strategies
that work well in up and down markets and deliver returns that
are not correlated to stock and bond markets. The reality is that
most hedge funds do not deliver on their promises, underperform
indices, and charge high fees.
The key to hedge-fund investing is manager selection. A small
percentage of all hedge funds actually do live up to the promise of
the asset class, but finding those managers is extremely difficult
without extensive experience in the hedge-fund industry.
Investors should avoid hedge funds that are heavily involved in
credit and asset-backed securities because they will do poorly
when the existing system of banking and credit unravels in the
years ahead. One of the best strategies is to invest with a seasoned
global-macro strategy manager who is opportunistic and nimble
in moving among currencies, markets, and long or short positions.
One of the best in this category is the wPraxis 3x strategy managed
by Willowbridge Associates.

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How to Invest before the Collapse

Private-equity funds are best avoided for the time being because
the leverage being used inside these funds is excessive, and
valuations of target companies are inflated. However, once a
serious market reversal occurs, perhaps in 2015 or soon thereafter,
newly organized private-equity funds will be able to make cheap
acquisitions from distressed sellers, which can lay the foundation
for good returns going forward.
Investing in start-up companies is highly risky and typically results
in a 90% failure rate. However, a few discrete successes that produce
returns that are high multiples of the amounts invested can make up
for such losses and produce positive overall returns. The best advice
here is to select areas that are familiar to you and entrepreneurs that
you know personally or are introduced through reliable contacts.

Cash
Given the dangers facing the global banking system, cash, typically
held in the form of bank deposits, might seem an unusual choice. But
cash has many benefits including the fact that it is an excellent hedge
against deflation. In deflation, the value of cash goes up in real terms.
In addition, cash has valuable embedded optionality, which is often
overlooked by investors. This comes from the fact that an investor
holding cash has the ability to pivot swiftly into other asset classes
when new information becomes available, whereas a fully invested
party may have difficulty pulling out of one investment to redeploy
in another direction.
Cash should be spread among several banks and never deposited
in excess of amounts covered by FDIC insurance. Currently, the
insured amount is $250,000 per customer for each institution.
However, this amount is subject to change. An investor can
increase his or her insurance coverage by spreading a large deposit
among several banks.
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How to Invest before the Collapse

Conclusion
It is important for investors to understand that the suggestions
offered here are intended to offer reasonable income, to preserve
wealth, and to offer potential gains through a coming period of
unprecedented economic collapse.
They will not necessarily produce the greatest gains in the
immediate future. High short-run gains will come from bubble
activity that is prone to sudden and unexpected collapse, resulting
in losses of 30% or 50% or even more in very short periods of
time. Since no one knows the exact timing of a collapse, such
bubbles are best avoided.
It is also the case that not all of these strategies will produce high
returns in all conditions. This is an all weather portfolio designed
to preserve wealth through inflation, deflation, confiscatory
taxation, and high volatility.
For example, if inflation is suddenly and unexpectedly high, the
bond allocation may underperform, but gold will outperform.
Likewise, if deflation is persistent and begins to overwhelm central
banks, gold may temporarily underperform, but the bonds will
produce large gains. Land is positioned to do well in inflation and
deflation for the reasons noted above.
A diversified portfolio of the above asset classes might look like
the following:
15% stocks with underlying real assets
15% 10-year U.S. Treasury notes
10% gold and silver

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How to Invest before the Collapse

10% fine art

15% land with good development potential
10% alternatives such as global-macro hedge funds
25% cash, diversified among dollars, euros, Swiss francs, etc.
This is a suggested portfolio only, and there is ample scope for
variation around these particular themes. For example, a more
concerned investor might want to reduce the portion suggested for
stocks and bonds and increase the allocations to gold, silver, land, etc.
The key to success with this portfolio is diversification, nimbleness
with occasional allocation shifts, and patience. Investors who see
this period through and dont run with the herd will emerge in the
end with the greatest wealth preservation and the opportunity to
grow in the world that follows.

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