Posted 6/4/2019
A minority of the population understands that gold is a
monetary asset that should be held as wealth insurance. A larger percentage of
the population is confused about
gold because of mainstream sources of information many people consider gold a
risky investment.
It is important to understand the role of gold as money in
relation to Fiat currency. Fiat currency is money that is not backed by a physical
asset like Gold or Silver. It’s value is only worth what others are willing to
trade goods and services.
Governments and banks work hard to ensure that people remain
confident in their debt backed paper currencies - and the economy in general.
Financing is Wall Street's (America’s) lifeblood, so money will always seek a
productive means to be lent or borrowed. Consumer spending and bank lending is
what keeps the Fiat shell game - and our economy - going.
People do not borrow or spend when they
feel uncertain about their financial future. Think about after the 9/11 attacks
in 2001, and then in the 2007-2008 recession for a couple recent memory
time-frames. Were you very confident to
spend or borrow then?
There are three essential characteristics of money: (1) it must be a store of
value; (2) it must be accepted as a medium of exchange; (3) and it must be a
unit of account, meaning that it must be divisible in each unit and must be
equivalent.
Fiat currencies have failed
as a store of value in many countries, resulting in high inflation and a
depressed currency. Your Washington $1 and $100 Benjamins in your wallet have
no intrinsic value. How much does it cost to type and zeros on the computer
screen or onto a piece of Government paper?
Certainly much less than it does today to drill a mile into
the earth and extract and refine 2 grams of gold from a ton of rock. Gold is
rare. Just how rare? It’s estimated that all the Gold ever discovered and now
held above ground would fill just 2 Olympic swimming pools! Gold does not rust, it’s ductile
and malleable and fire-proof to 1,950 degrees. Plus, doesn’t it feel good when
you wear a fine piece of Gold jewelry?
The U.S. Federal Reserve was created in 1913. From its
creation through to this day, the U.S. dollar has lost approximately 98% of its
purchasing power due to inflation.
On the other hand, Gold has retained its
purchasing power rising from around $21 an ounce in 1913 to $1,325 today, a 4%
yearly increase. In Roman times, about 350 B.C., 1 ounce of gold would buy 400
loaves of bread. Today, that‘s about accurate for a $3.29 loaf at your favorite
grocer.
Using gold as a portfolio insurance plan
Gold is the closest most negatively correlated asset to
traditional financial assets such as stocks and bonds. Physical gold bullion
should be a significant part of the strategic long-term allocation within a
diversified portfolio. Wall Street pundits and the uneducated media regularly
dismiss Gold, and other commodities as speculation, not to be owned for most
investors.
Do they know – or have taken any time – to research Gold’s role in a
portfolio; to dig into the numbers? Or how it works in conjunction with other
assets in a diversified investment portfolio?
I have followed Gold and Silver for the past 40 years, from my teenage interest
in coin collecting in the 1970s. Using historical information, while Gold does not move in lock-step in the
opposite direction always to offset losses in stocks, it does show a very
reliable pattern to mitigate losses in bad stock market bear markets.
Your
particular assets in Gold should be your decision, based on your individual
needs with your money; income needs, withdrawal rates, capital gains, etc. May I
suggest a 5% to 10% allocation to start.
And don't be confused by owning gold mining companies as a
proxy for owning a pure play such as gold bullion or Gold content coins or gold
bullion-backed investments such as exchange traded funds that track directly
the move in Gold’s price. These funds hold ownership in Gold bars stored in vaults
in London and Switzerland.
Owning gold is a form
of wealth insurance, and will most often protect a portfolio during market
declines. You may even think of it as ‘disaster insurance’.
Gold’s History as a
Safe Haven for Stock Investors
Note Golds surge after then President Nixon took the U.S.A.
off the Gold Standard in 1971. Stocks were entering a bear market, losing 40% while Gold skyrocketed almost 4
times in price, from $40 to $160 in three years. (Gold reserves would no longer
be required to back the U.S. dollar; the dollar would transition to a FIAT currency).
Then a few years later, in 1978, we were hit with an Oil Embargo (remember gas
rationing during the Carter administration?). That started 4 years of high
prices (inflation), which hurt the U.S. Dollar’s purchasing power. From 1978
through 1981, inflation ramped up a combined 50%. Gold prices rose +135%.
Fast forward to the next major bear market, known as DOT
COM. This referred to the period at the turn of the century, 2000, where the
Internet funding craze ramped up to unprecedented levels. Initial Public Offerings in the technology sector were met with wide-open
pocketbooks with individual investors and institutions alike clamoring for
ginormous profits. In the five years ending in late 1999, when the DOT COM craze
finally ended, stocks gained 228%,
while Gold also rose 55%. Then when
stocks fell about 40% in 2000-2002,
Gold participated on the upside, rising 18%.
Gold then began a 10-year rally, with no losing years
starting in 2003, rising from $350 to $1,650 an ounce.
So far, it looks like Gold is helping a portfolio including stocks, especially
when the stock market is falling in bear markets?
The last period to measure is the 2007-2008 era real estate
/ banking led bear market in homes prices and financial assets, causing the
stock market to lose half its value in a short 17 months.
Gold had its best year in 2007 (up 30% to $835) since the
late 1970’s, as it rose perhaps in anticipation of / and on the fears of the
banking and lending fiasco that led up to the falling stock market during
2007-2009. Stocks lost 15% in those
3 years combined, while Gold gained $450
an ounce, or up 70%.
Granted, the record also should show Gold’s stagnant performance
the past 4 years. Is this cause for concern? We feel the lack of interest in in
Gold are due to super the roaring stock market, and decent bond yields – 2%
money funds beats Gold’s 0% yield. Owning Gold has been a drag on your returns
in a diversified portfolio – but remember – Gold’s role is to offset some
equity (stock) losses; so your stock gains were good events, right?
I threw a lot of numbers and data at you, so kick back some evening, pour a nice drink - and admire your karats of jewelry with this Gold history lesson.
Call or e-mail me with any questions please.
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