Karim Rahemtulla

Two years ago I made fun of gold and those who held the precious metals at a conference in New Orleans.

Since then the price of gold has risen 25 percent. Not bad, I say, and better than most financial indexes. I still think those who hold the metal in bullion form are playing with less than a full deck.

I am, however, all for holding proxies for precious metals in a portfolio. These proxies can be in the form of gold/precious metals shares or options. In fact, my readers have been invested in the metals for more than a year now. (I must admit I am the furthest from a gold bug as far as investing goes, but do I do believe in the concept of a strong currency backed by strong fiscal and monetary policy.)

Pretending to be a doomsayer would be too easy. Pretending to know when gold will reach that next magical plateau of $500, if ever, would be crazy. I am a pragmatist. What I do know is that the value of my currency, the dollar, is being eroded daily with no end in sight.

I could blame the politicians or the Federal Reserve for taking the dollar down the low road, but they are only doing what many of my countrymen are doing, borrowing today and hoping to pay back tomorrow. Now if I were a foreigner, that might not be such a bad deal. I could borrow dollars today at very low rates and pay them back later with even cheaper dollars. Now that's a good trade.

But for my fellow countrymen the weak dollar is nothing to be proud of and certainly nothing to continue to cheer about. As long as we want handouts, the dollar will fall. As long as we are at war, the dollar will fall. As long as we mismanage our personal savings, the dollar will fall.

So you see the strength of the dollar is in our control to a large extent. The multitrillion U.S. deficit may seem passé, but it is quite real. The continuous deficit spending that adds to that debt is real. Yet we sit back, like the proverbial deer in the headlights waiting to get slammed by a fast-moving semi that has a leaky hydraulic braking system.

As a country we can't let go of entitlements that were once reserved for the poorest and least fortunate in this country. We look to the government, an extension of ourselves, to bail out every failing institution. Yet the government complies only after being given permission by you and me. We tend to overlook the fact that we are the government and the government is we.

Take the overburdened corporate pension system that was created when the U.S. manufacturing base was 100 times stronger than today, when foreigners could not compete, when the regulatory environment was put in place to guarantee high profits. Today competition is rife: Foreigners sell us goods that we want and wholeheartedly embrace at our local Wal-Mart at cheaper prices, and we cry about it.

The Pension Benefit Guaranty Corporation is running a deficit of $10 billion, and just last week two major airlines, United and USAirways, declared that they would stop funding the pensions of employees. Who will make up the difference? The PBGC, of course. How so? How can a bankrupt government agency bail out a bankrupt private organization? Easily -- it will borrow more money from a bankrupt government. So it is possible for money to be created from thin air after all.

The PBGC problem is the first of many that we will see in the next decade. Next will be Social Security, created as a safety net for the poor but seen now as an entitlement for everyone -- whether at the wheel of a rusted-out Chevy or behind the wheel of a Maybach. Next come Medicare liabilities.
The borrowing has just begun.

This continuous bailout process will not end in my lifetime unless we 1) magically transform into a nation of savers, 2) magically transform into a nation of taxpayers with marginal rates of 50-70 percent, or 3) come to our senses and realize that supporting government bailouts is the same as reducing our standard of living.
I bet that none of the above will occur. When you are fat and lazy, even reaching for the remote is an ordeal.

If you believe as I do that our currency is being debased, our deficits are not shrinking, and only we are to blame for the problems, then you need to adjust your financial plan. You must be able to invest in ideas that outpace the loss of your purchasing power -- not the 1 percent annual CPI increase that we are all told to believe but the 40 percent increase in fuel costs (in dollar terms), the 11.2 percent annual increase in health insurance premiums, the 10 percent annual increase in college tuition, and the constant increases in those luxuries that we need, like auto insurance, home insurance, property tax payments, etc.

Of course, you could soften the impact of the increases in a different way -- you could buy two cars and get a multi-car discount!

It has been far too easy to ignore the writing on the walls of government. We the people are going to make "us the people" suffer. It is high time for those of us who realize this inevitable crisis -- whether it comes for us or for our children or grandchildren -- to take some steps to act on a strategy that can counter a trend that is defined and gaining momentum.

This does not mean selling all your stocks and hiding in a cave surrounded by dead presidents. It means taking the time to re-evaluate your portfolio and engage in alternative investing.

Alternative investments usually don't come cheap. They require education and cost you time. But the rewards from understanding strategies that could invigorate your portfolio are more important today than ever before.

To me, alternative investing is not about buying a "weird" security but adopting a mindset that allows me to invest in different sectors, using different strategies without feeling lost. Don't look to your broker for this type of direction; it doesn't have a symbol or a commission.

The first step is figure out how much of a contra-dollar asset you need in your portfolio. I am not recommending euros or yen or Malaysian ringgits or even renminbis here. As far as I can tell, there are just as many deficits-in-waiting abroad as there are here.
The answer is to accumulate shares in high-quality resource companies that will benefit from higher commodity prices. There will be ups and there will be downs, but in the end the tangible asset will overcome losses from the asset is little more than faith and hot air.

It is nothing short of common sense to protect and insure yourself from financial calamity. It is also common sense not to take a view that there is only one outcome. It may be different 10 years from now -- I truly hope so. But that would take monumental sacrifice and changes in our fiscal and monetary system, not a likely outcome. Waiting for the bell ringer to announce that a crisis is here is not the answer. The answer is to prepare for a variety of outcomes, including that which may result in a weaker currency and weaker economy.

With an endless supply of dollars and the endless demand from U.S. consumers for disposable, instantly gratifying products, there will be hell to pay at some point. If you don't plan now, that hell will look like this: a lower pension, a smaller check from Social Security -- if you get one at all -- a higher deductible for Medicare, a smaller home, a smaller car and a less-fruitful retirement.

Karim Rahemtulla is the former investment director of the Oxford Club and runs two successful proprietary trading systems: The Income Trader, a covered call strategy, and The LEAPS Options Trader. He is also editor of The Smart Options Report, a free, twice-weekly e-mail newsletter.