Black Swan Alert: Using Gold and Options for the Ultimate Inflation Hedge

NEW YORK (TheStreet) -- Last week the Federal Reserve published its aggregate reserves report, known as the H.3. On table 2 it shows the United States monetary system broke an ignominious record: The monetary base just barely topped the $4 trillion mark.

We crossed the $2 trillion mark back on Jan. 12, 2011. In just over three and a half years, the Federal Reserve has literally doubled the monetary base. Take a deep breath.

Granted, very little of this has entered circulation. Almost all of it is in excess reserves. Three and a half years ago, excess reserves had just crossed $1 trillion. They are now $2.6 trillion. That means, of the $2 trillion printed over the last 42 months, only $400 billion has entered circulation. That's about 20%. The rest has done nothing but pad megabank balance sheets.

What does this mean? More inflation. What can you do? I'll explain.

The Federal Reserve is now chaired by an avowed inflationist, Janet Yellen, who admitted in 2010 that if she could she would institute negative interest rates. This is quite a dangerous situation.

Eventually that money is going to come out, but no one can say when. When it does, price inflation will become extreme. In fact, price inflation is becoming more and more obvious to the mainstream, even while 80% of the new money remains locked up.

Prepare for the Black Swan

Investing in gold, silver, miners or other commodities as an inflation hedge is one thing, but if ever this money does come out in force, a true Black Swan, a la Nassim Taleb's bestseller, will be in play.

I am a precious metals investor and I have been since the Fed started printing post-2008. But buying gold exchange-traded funds, storing physical metal, or even buying gold stocks or other commodities will not completely insulate your portfolio. If there ever really is a true dollar collapse, something a little more extreme is needed.

The move I will suggest here is not at all recommended for large positions. Assuming a porfolio of $100,000, a 1% position is enough to provide more than adequate protection.

If you liked this article you might like

Intermediate Trade: VanEck Gold Miners ETF

Closing This Trade in the Gold Miners ETF

Playing the Gold Miners ETF

Here Comes Another Gold Rally