Geopolitical Journey: Europe, the Glorious and the Banal

By George Friedman

We flew into Lisbon and immediately rented a car to drive to the edge of the Earth and the beginning of the world. This edge has a name: Cabo de Sao Vicente. A small cape jutting into the Atlantic Ocean, it is the bitter end of Europe. Beyond this point, the world was once unknown to Europeans, becoming a realm inhabited by legends of sea monsters and fantastic civilizations. Cabo de Sao Vicente still makes you feel these fantasies are more than realistic. Even on a bright sunny day, the sea is forbidding and the wind howls at you, while on a gloomy day you peer into the abyss.

Just 3 miles west of Cabo de Sao Vicente at the base of the Ponta de Sagres lies Sagres, a pleasant little town of small villas and apartments. For the most part, these are summer homes, many owned by Germans and British, judging from the flags flying. It was here in 1410 that Prince Henry the Navigator founded a school for navigators. If Cabo de Sao Vicente is where the Earth ended for the Europeans, Ponta de Sagres became the place where the world began.
The Making of the Modern World

Prince Henry was the second son of Portuguese King John I. As a member of the royal class, he had the means to finance his ambitions. Those who attended his school included Vasco da Gama, who made the first voyage from Europe to India, and Magellan, whose expedition first circumnavigated the globe. Columbus was once shipwrecked and rescued off the coast, subsequently learning many of his later nautical skills in Portugal. This school gave rise to the most extraordinary alumni association imaginable.

How prosaic business opportunities generate the most risky and grandiose undertakings has come to interest me. This school arose with the specific goal of training sailors to go farther and farther south along the African coast in search of a sea route to India. The Portuguese sought this route to cut out the middleman in the spice trade. Spices were wealth in Europe; they preserved and seasoned food, and were considered medicinal and even aphrodisiacs. But they were fiendishly expensive, since they came to Europe via the Silk Road through Muslim-controlled territory, with each merchant along the way increasing their price.

Henry didn't just train seamen, he also financed explorations. During the 15th century, year after year, ships went out. Many, even most, never returned, but all of them pushed just a bit further south. Each voyage produced logs that Henry collected, collated, studied and relied on when planning future expeditions.

The more I learn more about Henry, the more his program reminds me of NASA and of Tom Wolfe's classic, The Right Stuff, about America's space program. Like NASA, each mission built on the last, trying out new methods in an incremental fashion. Henry didn't try to shoot for the moon, as they say. He was no Columbus, risking everything for glory, but rather a methodical engineer, pushing the limits a little at a time and collecting data.

His school has long since disappeared along with his palace. Only a single round marker on the ground remains, perhaps 30 feet wide, segmented in equidistant lines emanating outward to a circle. There is speculation that this is a sundial or a wind gauge of some sort. It could also be nothing; scholars never find an object that isn't filled with meaning, oftentimes religious. Of course, the physical remains of his school don't mean much. History was made here.

It was the place where Europe discovered the world, not only in the physical sense, but also in the direct encounters over time with the myriad cultures that made up the world. Europe wasn't kind to the world it discovered. But over time it did force each culture to become aware of all the others; after centuries, a Mongol student might learn about the Aztecs. Instead of a number of isolated worlds, each believing itself to be the center of the Earth, each new discovery fed the concept of a single world.

The Buccaneering Spirit

On this cape, early in the 15th century, well before Columbus sailed, Henry planned Europe's assault on the world. In the process, he laid the foundation of the modern world and modern Europe. Standing on the cliffs overlooking the Atlantic, even on this cheerful day, it is possible to imagine the courage it took to sail into probable death. I can't help but think of the voyages of astronauts and cosmonauts, one part dispassionate engineering and science, one part pure hubris.

The Americans and Russians, not the Europeans, undertook space programs. Europe got in late and never launched a manned flight. There are those who say that we can explore space with unmanned rockets. That may be true, but we cannot own space, we cannot claim it that way. If Henry created his school solely for knowledge, then perhaps sending messages in a bottle and waiting for a reply would have done that. But Henry, the prince who became a monk, also acted for wealth, God's glory and to claim his place in history.

Today, we have entered a phase of history where the buccaneering spirit has left us. The desire for knowledge has separated itself from the hunger we have for wealth and glory. Glory is not big today, cool is. Cool does not challenge the gates of heaven, it accepts what is and conforms to it. This is a passing phase, however. Humans will return to space to own it, discover unknown wealth and bring glory.

The Wright brothers made bicycles, in those days not cool and certainly not glorious. Their heirs "touched the face of God," as John Gillespie Magee put it in his poem High Flight. Scholars do not regard Magee as a serious poet. Perhaps they are right, but he still captured something lesser poets of the inner neuroses fail to capture: a way to speak of glory.

Out in West Texas and other desolate places, private companies – privateers – are reinventing the space program. They are searching for what Henry sought: namely, wealth and glory. Like the pioneers of flight or Columbus, they might be a little mad, much too hungry and filled with hubris. But like Henry's explorers, they will take a government program and transform the world while making themselves and their country rich.

These are extreme thoughts, but Sagres makes you wild if you let it. What was done here staggers the imagination and causes me to hunger for more. Certainly, European imperialism brought misery to the world. But the world was making itself miserable before, and has since: One group of people has always been stealing land from other groups in a constant flow of history. What culture did not live on land stolen from another culture, either annihilated or absorbed? Ours has always been a brutal world. And the Europe Henry founded did not merely oppress and exploit, although it surely did those things. It also left as its legacy something extraordinary: a world that knew itself and all of its parts.

The European Legacy

It is odd to be thinking of Europe's legacy while sitting here in Portugal. Only the dead leave legacies, and Europe is not dead. Yet something in it has died. The swagger and confidence of a great civilization is simply not there, at least not on the European peninsula. Instead, there is caution and fear. You get the sense in Europe – and here I think of conversations I had on previous trips in the last year or so – of a fear that any decisive action will tear the place apart. Eastern Europeans are wondering what happened to the European Union and NATO, their twin guarantees of never having to worry about anything again. Western Europeans are worrying about how to return to the smug satisfaction of a prosperity that has disappeared.

There is a great deal of discussion about Europe's economic crisis and finding a way to return to the lost promise of the European Union. But what was that promise? It was a promise of comfort and security and what they called "soft power," which is power without taking risks or making anyone dislike you. The European search for comfort and safety is not trivial, not after the horrors of the 20th century. The British and French have given up empires, Russia has given up communism, Germany and Italy have given up fascism and racism. The world is better off without these things. But what follows, what is left?

I am not talking here of the economic crisis that is gripping Europe, leaving Portugal with 17 percent unemployment and Spain with 26 percent. These are agonizing realities for those living through them. But Europeans have lived through more and worse. Instead, I am speaking of a crisis in the European soul, the death of hubris and of risk-taking. Yes, these resulted in the Europeans trying to convert the world to Christianity and commerce, in Russia trying to create a new man and in Germany becoming willing to annihilate what it thought of as inferior men. The Europeans are content to put all that behind them. Their great search for the holy grail is now reduced to finding a way to resume the comforts of the unexceptional. There is something to be said for the unexceptional life. But it cannot be all there is.

Looking out a window at the cape on which Henry's school was built, it is difficult to connect today's Europe with his. His was poorer, more diseased, more unjust than this one. Life was harder and bleaker than we can imagine. As someone closer to the harder and bleaker side of Europe than to its glories, I can understand not wanting Europe to go there again. But there is no one without guilt, especially those who carefully catalogue the guilt of others. It is also impossible to imagine a truly human life without the hunger hidden inside the princely monk Henry.

We humans are caught between the hunger for glory and the price you pay and the crimes you commit in pursuing it. To me, the tension between the hunger for ordinary comforts and the need for transcendence seems to lie at the heart of the human condition. Europe has chosen comfort, and now has lost it. It sought transcendence and tore itself apart. The latter might have been Henry's legacy, but ah, to have gone to his school with da Gama and Magellan.

Pimco's El-Erian: Global Economy Could End in Financial Turmoil Due to 'Hyperactive' Central Banks

Tuesday, 14 May 2013 11:19 AM

Pacific Investment Management Co., home to the world’s biggest fixed-income fund, is shying away from risky assets as it sees a growing disconnect between the performances of financial markets and the global economy.

“Especially with ever-elevated prices, and absent a favorable growth shift, we will continue to bring down risk postures of portfolios,” said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pimco, outlining the company’s investment strategy over the next three to five years.

In a report posted Tuesday on Pimco’s website, El-Erian said the world economy is undergoing a “stable disequilibrium” that could end in financial turmoil, greater social tensions and beggar-thy-neighbor national policies. Egged on by “hyperactive” central banks, investors are playing down the dangers and pushing financial markets higher,

He warned of a risk of “severe air pockets” in financial markets if economic growth proves disappointing and said investors should be prepared for more restructurings of corporate and sovereign bonds.

Seeking to craft a medium-term outlook that will guide Pimco’s investments, El-Erian said U.S. growth will remain limited to “not much greater than 2 percent on average” while Japan will face challenges in sustaining an initial surge in activity on the back of an “historical” policy-regime change.

Europe’s ‘Zombification’

In Europe, the immediate threat is what El-Erian called “zombification” where companies and banks continue to operate without adding much to the economy.

China is projected by Pimco to expand an average 6 percent to 7.5 percent annually.

As for global inflation, the money manager tilts toward the possibility that it will be “higher and less stable” over the next three to five years, he said.

Pimco’s co-founder Bill Gross, who serves as co-chief investment officer alongside El-Erian, has already been advising investors to sell riskier assets and buy government debt, including inflation-linked securities and nominal Treasurys as central banks pursue unprecedented stimulus measures.

Gross raised holdings of Treasurys in his flagship fund in April to the highest level since July 2010. In Europe, Andrew Balls, the company’s head of European portfolio management, said April 24 that Pimco had been scaling back exposure to Spain and Italy as part of a reduction in credit risk.

Rising Stocks

El-Erian’s report summarizes three days of internal discussions last week on the global economy and financial markets. Former World Bank President Robert Zoellick, former Spanish Finance Minister Elena Salgado and Adam Posen, president of the Peterson Institute for International Economics in Washington, took part in the talks.

The annual strategy session came against a backdrop of rising global equity prices and stepped-up stimulus from the world’s central banks. Since the start of the year, Japan’s Nikkei 225 Stock Average has risen by more than 40 percent, while the Standard & Poor’s 500 Index has climbed almost 15 percent.

“Investors are enticed to take more and more risk at ever more elevated prices,” El-Erian said. “But if growth fails to materialize over time, reality will snatch back the returns from investors in the period ahead.”

Rate Cuts

Four years after the deepest recession since World War II, central banks are still combatting sluggish economies with interest-rate cuts and asset purchases. So far this month, monetary authorities overseeing a quarter of global gross domestic product have lowered rates, including those of the euro-area, Australia and Israel.

The central banks “have inserted a remarkable wedge, a disconnect, between market prices and underlying economic and financial fundamentals,” El-Erian said. Yet they “are still unable to deliver sufficiently robust growth and jobs.”

He predicted central banks would keep experimenting in their efforts to bolster their economies. More will follow the Federal Reserve in targeting growth and jobs more explicitly and may also try to support small and medium-sized enterprises or broaden the set of assets they buy, he said. Their actions, though, “are likely to become less effective” over time as the risk of collateral damage mounts, according to the executive.

He said investors should be wary of holding too much of the currencies of those central banks that are easing, yet lack the reserve currency status of the U.S. Portfolios also should be hedged against the risk of catastrophic outcomes, he wrote.

Pimco is now looking “more intensely” for opportunities in areas not so affected by the wave of liquidity provided by central banks, El-Erian said. Revolutions in shale energy and digitalization provided some “exciting investible stories,” he wrote.

El-Erian, who popularized the phrase “new normal” to describe an era of lackluster growth, said economies are nearing a fork “where the current road eventually ends, giving way to one of two contrasting outcomes,” a fast, sustainable expansion or a slowing world economy with countries “competing for a smaller

May 13, 2013

Grind of Euro Crisis Wears Down Support for Union, Poll Finds


BRUSSELS — Europeans have never been wild about the European Union. With the region sapped by the euro crisis, confidence in the institution and the benefits it was supposed to provide is flagging faster and further than ever before, according to an influential opinion survey released Monday.

The results of an annual survey by the Pew Research Center, a nonpartisan organization based in Washington, show a deepening disillusionment with the union in major member countries.

The results of the survey suggest that more citizens than ever could end up opposing the transfer of more power to European Union institutions that may be vital for transforming the euro into a viable currency over the long term.

“The effort over the past half-century to create a more united Europe is now the principal casualty of the euro crisis,” according to a report that Pew published with the survey results. The title of the report summed it up: “The New Sick Man of Europe: the European Union.”

The poll pointedly noted that, “No European country is becoming more dispirited and disillusioned faster than France.” Last year, 60 percent of the French surveyed said they had a favorable impression of the European Union. This year only 41 percent did, a decline of 19 percentage points that was the biggest annual drop among the countries surveyed.

The results corresponded to some degree to the health of a nation’s economy. Only Greeks and Italians professed less belief in the benefits of economic union than the French, according to Pew. In Germany, 60 percent held a favorable impression of the union.

That could have everything to do with the listless economy in France, which is on the verge of joining much of Southern Europe in recession and has an unemployment rate of 11 percent. The German economy has fared better and has a relatively low unemployment rate of 5.4 percent.

“French and the Germans differ so greatly over the challenges facing their economies that they look as if they live on different continents, not within a single European market,” the authors of the Pew report wrote. As a result, the “French look less like Germans and a lot more like the Spanish, the Italians and the Greeks.”

The gloomy view is understandable given the economic crisis in Europe.

“The limits of the European Union institutional architecture are perceived more directly by the citizens now,” said Enzo Moavero Milanesi, Italy’s minister for European affairs, in an interview. “They have always been known, but citizens expected a more rapid and efficient response to the crisis and ended up complaining about the lengthy procedures, the many meetings, the difficult discussions.

“But it’s a paradox,” said Mr. Milanesi. “The E.U. has made great steps toward further integration and a strengthened monetary union. We even started discussing forms of possible political union, but people are still disappointed.”

One of the smallest declines in sentiment — two percentage points, to 43 percent — was in Britain. But the economic union has never been popular there.

“We should try and renegotiate our relationship with the European Union,” said William Drake, co-founder of the investment advisory firm Lord North Street in London, expressing an opinion shared by many in his country. He added that many regulations were “not being properly discussed and debated by our own democratically elected Parliament. It sort of feels like we don’t rule our own country anymore.”

The polls were conducted during March in Germany, Britain, France, Italy, Spain, Greece, Poland and the Czech Republic, by telephone or in person, with between 700 and 1,100 adults in each country. Each poll has a margin of sampling error of either three or four percentage points.

In France, where voters eight years ago rejected a constitutional treaty meant to streamline decision-making in the European Union and lay out a blueprint for its future, 77 percent of Pew survey respondents said this year that European economic integration had made things worse for their country. That was an increase of 14 percentage points from the previous poll.

Many opinions in Greece and Italy were harsher. One Italian interviewed Monday, Anna Nardi, said her country’s high debt and economic recession indicated that Italy had “lost out” so far as a member of the union.

“But now there are no alternatives,” said Ms. Nardi, who is co-chief executive, with her sister, of an outdoor furniture factory in Vicenza, which exports more than half of its goods to other countries in the union. The trouble, she said, was her own country’s poor track record in sticking to laws and rules agreed to in Brussels.

“The E.U. says do ‘X’ and you’ve got Germany, which applies it 1,000 percent, while countries like Italy or Spain try to find loopholes so that they can get around the issue,” she said. “These discrepancies have to be overcome.”

Among the French, the Pew survey found a reluctance to provide financial assistance to other member states in trouble.

“Since the euro, everything has all just gotten more expensive,” Eric Holenreith, a 37-year-old maintenance worker for the city of Paris, said Monday in an interview.

“We were already overtaxed and now we are sending all this money to Brussels and to help the people in Greece or Spain or wherever,” Mr. Holenreith said. “But now these people have no work because of the crisis and they are coming here looking for jobs. It has me worried because there are already not enough jobs for the French.”

Sylvia Maucuer, 55, who owns a pharmacy in Paris, said the spate of economic rescue packages for France’s neighbors had exposed wide gaps in governments’ fiscal discipline. “Everyone is not making the same effort,” she said.

One surprise in the Pew findings is that the German public might not be as opposed to providing financial aid to other European countries as the country’s policy makers often suggest.

Since the Greek debt crisis exploded three years ago, lawmakers in creditor nations like Germany have warned that their own taxpayers will not accept the mounting costs of bailouts. But among the richer nations surveyed, the Germans were most likely to be willing to extend such aid, though it was with the support of only 52 percent of the Pew respondents.

And only in Germany among the countries surveyed did at least half the public say they supported giving more power to Brussels to deal with the economic crisis. The survey “contradicts oft-repeated narratives about the Germans: that they are paranoid about inflation, disinclined to bail out their fellow Europeans and debt-obsessed,” the report said.

That result could buoy some Europeans’ hopes that after national elections in Germany in September the government could move more swiftly to adopt policies letting the country share more financial risks with other Union members, a step that many economists regard as the only way to overcome the crisis.

In Germany, support for the euro remains strong, in part because the single currency helps Germany’s export-oriented economy. But there is also concern about the cost of the euro zone crisis and the lack of a strong system to ensure fiscal discipline among euro zone countries.

“I am in favor of the euro if we get to fix its problems,” Ulf Mark Schneider, chief executive of Fresenius, a health care company listed on Germany’s blue-chip DAX index, said Monday by e-mail. “Ever larger bailouts or lower interest rates will not get the job done, structural reforms are needed. The core problem of the euro is that monetary policy is fully harmonized and fiscal policy is not.”

Mr. Schneider said the euro zone needed a better system for making decisions, rather than the ad hoc crisis management that existed now.

Reporting was contributed by Nicola Clark and David Jolly from Paris, Jack Ewing from Frankfurt, Julia Werdigier from London, Gaia Piangiani from Rome, Elisabetta Povoledo from Milan and Raphael Minder from Madrid.

Gangster State America — Paul Craig Roberts
There are many signs of gangster state America. One is the collusion between federal authorities and banksters in a criminal conspiracy to rig the markets for gold and silver.

My explanation that the sudden appearance of an unprecedented 400 ton short sale of gold on the COMEX in April was a manipulation designed to protect the dollar from the Federal Reserve’s quantitative easing policy has found acceptance among gold investors and hedge fund managers.

The sale was a naked short. The seller had no gold to sell. COMEX reported having gold only equal to about half of the short sale in its vaults, and not all of that was available for delivery. No one but the Federal Reserve could have placed such an order, and the order came from one of the Fed’s bullion banks, one of the entities “too big to fail.”

Bill Kaye of the Greater Asian Hedge Fund in Hong Kong and Dave Kranzler of Golden Returns Capital have filled in the details of how the manipulation worked. Being sophisticated investors of many years of experience, both Kaye and Kranzler understand that the financial press runs with the authorized story planted to serve the agenda that has been put into play.

Institutional investors who have bullion in their portfolio do not want the expense associated with storing it securely. Instead, they buy into Exchange Traded Funds (ETF) and hold their bullion in the form of a paper claim. The largest, the SPDR Gold Trust or GLD, trades on the New York Stock Exchange. The trustee and custodian is a bankster, and only other banksters are able to turn investments into delivery of physical bullion. Only shares in the amount of 100,000 can be redeemed in gold.

The price of bullion is not set in the physical market where individuals take delivery of bullion purchases. It is set in the paper futures market where short selling can drive down the price even if the demand for physical possession is rising. The paper gold market is also the market in which people speculate and leverage their positions, place stop-loss orders, and are subject to margin calls.
When the enormous naked shorts hit the COMEX, stop-loss orders were triggered adding to the sales, and margin calls forced more sales. Investors who were not in on the manipulation lost a lot of money.

The sales of GLD shares are accumulated by the banksters in 100,000 lots and presented to GLD for redemption in gold acquired at the driven down price.

The short sale is leveraged by the stop-loss triggers and margin calls, and results in a profit for the banksters who placed the short sell order. The banksters then profit again as they sell the released gold into the physical market, especially in Asia, where demand has been stimulated by the sharp drop in bullion price and by the loss of confidence in fiat currency. Asian prices are usually at a higher premium above the spot prices in New York-London.

Some readers have said “don’t bet against the Federal Reserve; the manipulation can go on forever.” But can it? As the ETFs such as GLD are drained of gold, their ability to cover any of their obligations to investors diminishes. In my opinion, these ETFs are like a fractional reserve banking system. The claims on gold exceed the amount of gold in the trusts. When the ETFs are looted of their gold by the banksters, the gold price will explode, as the claims on gold will greatly exceed the supply.

Kranzler reports that the current June futures contracts are 12.5 times the amount of deliverable gold. If more than 8 percent of these trades were to demand delivery, COMEX would default. That such a situation is possible indicates the total failure of federal financial regulation.
What the Federal Reserve has done in order to maintain its short-run policy of protecting the “banks too big too fail” is to make the inevitable reckoning more costly for the US economy.

Another irony is the benefactors of the banksters sale of the gold leeched from the gold ETFs. Asia is the beneficiary, especially India and China. The “get out of gold line” of the US financial press enables China to unload its excess supply of dollars, accumulated from the offshored US economy, into the gold market at a suppressed price of gold.

Kranzler points out that not only does the Fed’s manipulation permit Asia to offload US dollars for gold at low prices, but the obvious lack of confidence in the dollar that the manipulation demonstrates has caused wealthy European families to demand delivery of their gold holdings at bullion banks (the bullion banks are essentially the “banks too big to fail”). Kranzler notes that since January 1, more than 400 tons of gold have been drained from COMEX and gold ETF holdings in order to satisfy world demand for physical possession of bullion.

Again we see that institutions of the US government are acting 100% against the interests of US citizens. Just who does the US government represent?

A strong stomach and a tremendous amount of patience are required if your invested in gold stocks these days, as miners have been exhibiting their typical volatility pattern.

That's why I often say to anticipate before you participate, because gold stocks are historically twice as volatile as U.S. stocks. As of March 31, 2013, using 10-year data, the NYSE Arca Gold BUGS Index (HUI) had a rolling one-year standard deviation of nearly 35 percent. The S&P 500's was just under 15 percent.

I believe the drivers for the yellow metal remain intact, so for investors who can tolerate the ups and downs, gold stocks are a compelling buy. Here are three reasons:

1. Gold Companies are Cheap.

According to research from RBC Capital Markets, Tier I and Tier II producers are inexpensive on historical measures. Based on a price-to-earnings basis, RBC finds that "shares are currently trading not far from the recent trough valuations observed during the 2008 global financial crisis."

And on a price-to-cash-flow basis, gold stocks are trading at bargain basement prices. The chart below shows that average annual cash flow multiples for North American Tier I gold companies have fallen to lows we haven't seen in years. Since January 2000, forward price-to-cash-flow multiples have climbed as high as 26 times. This year, we see multiples at the high end that are less than half of that.

On the low end, today's price-to-cash-flow of 6.5 times hasn't been seen since 2001.

Gold Stocks
Tier I and Tier II companies "offer investors an attractive entry point from an absolute valuation perspective with respect to the broader market," says RBC.

2. Gold companies are increasing their dividends.

With the Federal Reserve suppressing interest rates, investors have had to adapt and reallocate investments to generate more income.

That's where gold companies come in. I have discussed how miners have become much more sensitive toward the needs of their investors as they compete directly with bullion-backed ETFs and bar and coin buying programs.

In response to shareholders' desire to get paid while they wait for capital appreciation, gold companies have rolled out dividend programs and increased payouts. "The growth in dividend payout has been spectacular when looking at the industry as a whole," says my friend Barry Cooper from CIBC World Markets.

His data shows that over the past 15 years, the world's top 20 gold companies have increased their dividends at a compound annual growth rate of 16 percent. By comparison, gold only rose 12 percent annually.

Gold Stocks
Not only are gold companies increasing their payouts, the yields offer a tremendous income value to investors compared to government bonds today. Whereas investors receive a 1.5 percent yield on a 10-year Treasury, the stocks in the Philadelphia Stock Exchange Gold and Silver Index (XAU) are paying a full percentage point more!

This is a significant change from the past: In April 2008, the Treasury yield was nearly 3 percent more than the dividend yield of the XAU.
In addition, the yields of gold stocks have been climbing over the past year while the 10-year Treasury remains low.

Gold Stocks

3. Enhanced returns in a diversified portfolio.

We have long advocated a conservative weighting of 5 to 10 percent in gold and gold stocks because of the inherent volatility you are seeing today. But despite the extreme moves, there's a way to use gold stocks to enhance your portfolio's returns without adding risk.

Take a look at the efficient frontier chart below, which creates an optimal portfolio allocation between gold stocks and the S&P 500, ranging from a 100 percent allocation to U.S. stocks and no allocation to gold stocks, and gradually increasing the share of gold stocks while decreasing the allocation to U.S. equities.

The blue dot shows that from September 1971 through March 2013, the S&P 500 averaged a decent annual return of 10.34 percent.

What happens when you add in gold stocks? Assuming an investor rebalanced annually, our research found that a portfolio holding an 85 percent of the S&P 500 and 15 percent in gold stocks increased the return with no additional risk. This portfolio averaged 10.96 percent over that same period, or an additional 0.62 percent per year, over holding the S&P 500 alone. Yet the average annual volatility was the same.

Gold Stocks
Although 0.62 percent doesn't seem like much, it adds up over time. Assuming the same average annual returns since 1971 and annual rebalancing every year, a hypothetical $100 investment in an S&P 500 portfolio with a 15 percent allocation in gold stocks would be worth about $7,899. This is greater than the $6,246 for the portfolio solely invested in the S&P 500 while adding virtually zero risk.