Editor's note: Your goal during a bear market is, first and foremost, not to lose anything.

But in a complex world of paper currencies and constant devaluations engineered by central banks... where is there any permanent value? What's the safest form of cash available today?

In this weekend's Masters Series – excerpted from a May special report in The Defensive Portfolio – portfolio manager Austin Root attempts to answer that critical question...

The No. 1 Reason You Want to Own Gold During a Crisis

By Austin Root, portfolio manager, The Defensive Portfolio

Unless you have a substantial amount of cash, it will be difficult (or impossible) for you to act on the other strategies you will want to pursue during a bear market.

Therefore, the most important thing you must do to survive a bear market is raise a substantial amount of cash.

To protect the purchasing power of these savings, we also recommend holding at least 15% of your portfolio in gold. We believe gold is absolutely critical. It's the only way to protect yourself from the near-certain actions of central bankers, who will try to devalue the dollar as a means of easing the ongoing debt liquidation.

As you'll see, gold is the "other side of the coin" in our cash strategy.

So let's start with a clear explanation of what "cash" means, why it's critical to have during a bear market (or an economic crisis), and why gold is the "other side of the coin" to your cash holdings...

What Is 'Cash'?

Simply put, cash is the most commonly used means of exchange in any economy.

In the United States, "cash" means the U.S. dollar. The dollar is a "fiat currency." That means it is not backed by any firm value. It's not exchangeable for gold or any other reserve asset. It's money only because the government says so – legal tender. It's the kind of money that you must use to pay your taxes and your debts.

We recognize that the dollar (and every other fiat currency) is deeply flawed and inherently unstable. Our research firm has published an entire book about the dollar's ultimate collapse. It's entirely possible that the current debt debacle is the beginning of the dollar's demise. But even so, during a bear market you need to hold plenty of dollars. Why? Because by definition, a bear market is the rising value of the dollar relative to financial assets.

Most investors (including Warren Buffett) simply don't understand gold or its real purpose in your portfolio. So, let's address that right now...

Why Gold?

Gold isn't an investment. (Buying gold stocks, on the other hand, is an investment.)

Throughout history, gold has been the most secure, least volatile, most international, and least political form of money. It continues to offer us the same utility today. Gold is a perfect currency because:

It's rare: All of the gold that has ever been mined could fit under the Eiffel Tower.

It's not consumed: Gold has zero large-scale industrial uses. Virtually all of the gold ever mined still exists in the form of bullion, bars, coins, and jewelry.

It's unchanging: Gold never tarnishes. You could bury a bar in your backyard today, and 100 years from now it would still shine. (We don't recommend doing this, by the way.) Even gold coins left on the seafloor for hundreds of years can be cleaned to a brilliant shine.

It's universally accepted and acknowledged: Every major culture in the world reveres gold and uses it as a private form of money and savings.

It isn't anyone else's liability: Even in a world of collapsing credit standards, failing banks, and bankrupt bonds, gold never defaults. It is nature's "triple A" asset.

It's portable: Sure, diamonds might be more portable... but putting $20 million worth of rare coins in a suitcase isn't difficult. In a crisis, having a few million dollars in gold is going to be a lot easier to handle than trying to manage the same value in silver.

It holds its value: This is gold's most important feature, and the one that's the least understood. Gold is a kind of financial scale. Its value doesn't change. The amount of gold in existence increases by less than 1% a year. People talk about trading gold – that's just nuts. Gold's value isn't going to budge. It's the other assets that are moving around gold.

Think of gold as the scale... Its value is the closest thing we have to permanent in this world.

That's the No. 1 reason you want to own gold during a crisis. Whether you're worried about inflation or a deflationary debt collapse... gold will remain unchanged in value. Sure, the price of gold might change, but its value won't. Remember, price is a ratio, in this case comparing gold with dollars. So when the price of gold changes, what's really happening is that the value of the dollar is changing. Just remember: Gold is the scale. Its value won't change.

Our firm has been working for investors for more than 20 years... and one of our favorite things to do is to introduce people to gold. If you've never seen gold coins up close or never held a few in your hand, do yourself a favor – go to a gold coin show or call up a local dealer. Go buy a coin or two. Hold them in your hand.

It feels great. That's "real money" you're holding, not the paper junk we use today.

When you're holding gold in your hand, you'll understand immediately why human beings have revered it for all of history... and you'll see how debauched our fiat currency has become. You'll see the difference in quality between a beautiful Saint-Gaudens $20 gold piece and the garbage we carry in our pockets today.

All right, that's enough about the definitions. You now know what we're talking about when we recommend holding a large portion of your portfolio in cash and at least 15% in gold. But how can you do that safely?

In tomorrow's essay, I'll share exactly how to do just that...

Regards,

Austin Root

Editor's note: Gold is a "chaos hedge" – a way to protect your wealth during times of uncertainty in the economy and stock market. If you don't own any yet, we strongly encourage you to buy some. And if you're interested in making outsized gains as gold prices rise, you'll want to watch this presentation that our colleague and gold-stock expert John Doody recently put together. In it, he shares his latest predictions about gold... and offers an incredible guarantee. Tune in here.