In Defense of Gold

By Rich Checkan

I’m convinced no other financial asset on the planet elicits the same visceral and emotional reaction as does gold. That’s unfortunate; because investing should be anything but emotional if you are to be effective at it.

As you may be aware, gold is up 20% since December… not a bad 2-month move. Of course, your brokerage statements make you equally aware the stock markets around the world are taking it on the chin during this same time period. The U.S. market is down 8%. Europe is down 10%. China is down 20%.

On cue, more gold-bashing articles than you could shake a stick at have come out of the woodwork. God forbid anyone begin to think gold is a worthwhile asset! Despite the naysayers’ claims to the contrary, gold is as relevant today as it was 5,000 years ago.

Case in point, I’d like to bring your attention to one such gold-bashing opinion article published last week by Brett Arends of MarketWatch. The article is titled, ‘Why gold has utterly failed as a ‘safe haven.’ If you missed it, you can read the full article here.

I won’t waste your time with a complete point-by-point dissection. Rather, I want to refute a couple points made in the article to cut through the bias. Then, I want to make two things clear…

1. There is a place for traditional paper assets AND gold in your portfolio.
2. Now is a good time to consider allocating to gold.

Don’t be fooled by the rhetoric

Right from the start, Mr. Arends takes the discussion to an emotional level. He suggests the only reason people consider gold in a portfolio is as a safe haven. This is the premise of his article. Although, to add fuel to his fire, he concedes two other uses for gold… privacy and money laundering.

This is a common tactic in these types of articles… getting the reader all worked up over a straw man argument. That’s the rhetoric. Don’t be fooled.

Further, this kind of thinking comes from some misguided and convoluted belief there is no room in a portfolio for BOTH gold and traditional paper assets. Of course, that’s preposterous. In fact, send me an email, and I’ll share with you a study suggesting the inclusion of around 10% of gold in a traditional portfolio actually enhances performance and decreases risk.

Personally, I see two reasons to own gold, neither of which is as a ‘safe haven.’

Insurance

I believe you should hold this allocation at all times… regardless of the price of gold.

In this capacity, gold is a store of value, in a liquid form for a potential financial crisis you hope you never have. If needed, you sell your gold immediately to meet the financial need. Once met, you start building your insurance position again.

If you never have a financial crisis, pass the asset on to your heirs to give them a start in life.

Profit

From time to time, there will be opportunities to profit from owning gold as an investment. I do not believe this additional allocation to gold (or silver, platinum and palladium for that matter) is always advisable. But, when the stars align, it can prove to be quite lucrative.

Unlike gold for insurance, this position, once taken, needs to be revisited and rebalanced as with any ‘for-profit’ allocation in your portfolio. And, if the circumstances change, consider eliminating this allocation.

Don’t be fooled by cherry-picked data points

If you read further in Mr. Arends’ article, you see he suggests owning gold in the 1980’s and 1990’s was a bad idea. You would have lost money.

I agree. Buying any asset at the current all-time high is probably not the best recipe for success. Of course, there was no mention of the performance if you had bought gold in 1973 and had held it through late 1979. Nor was there any consideration given to buying gold in 2001 and holding it until September 2011.

I could be wrong, but buying stocks right before the Great Depression in 1929 or right before the Great Recession in 2008 would have been bad for a portfolio as well.

It’s easy to pan through historical data and pinpoint the exact moment the data helps your argument. But, what use is that to an investor unless they have access to a time machine?

A strategy to protect your portfolio from as yet unknown future events is much more useful to us all as investors… at least until my crystal ball starts working consistently.

A diversified portfolio does well here. Again, the concept of traditional assets VERSUS gold and other alternatives is ludicrous. The protection, the ‘safe haven,’ comes from the diversity when dealing with the unknown and unforeseen future.

You will be hearing much more on this topic from us in the future… backed by data compiled to defeat our contention (as opposed to data cherry-picked to confirm our view).

Why is now a good time to own gold?

Right now, the stars appear to be aligning again for gold as insurance and an investment.

Now, there are no guarantees as to if or when, but you may consider owning some gold for profit, or as an insurance position, if you have not already taken care of it.

Why?

1. Negative or sustained low interest rates – The economy is not doing well enough to suggest much of an increase in interest rates for the foreseeable future. In fact, Janet Yellen recently suggested negative interest rates are ‘on the table’ for discussion. If putting your money in the bank means you will lose principal, gold starts to shine quite brightly as an alternative.
2. Stock market weakness – Despite Mr. Arends’ claims, economic and social unrest do lead to stock market jitters and safe haven flows. Hedging your bets with a small allocation to intrinsically valuable assets seems to be a very rational reaction to the emotional environment.
3. Treasuries – Flat yields are a fairly good indicator of impending economic weakness. Right now, yields are flat.
4. Gold/Silver ratio – We talked about this quite a bit last year. You can see one article on the subject here. Last August, it took 80 ounces of silver to buy one ounce of gold. If this two-decade trend continues, we may very well see an uptrend in precious metals materialize as early as this fall.

The best way I know to help you Keep What’s Yours is with a diversified portfolio in BOTH traditional paper AND alternative intrinsically valuable assets.

So, don’t be fooled by the rhetoric from the mainstream press. Don’t let anyone convince you investing is an emotional, zero-sum-gain proposition. Put diversity to work for you so you can sleep nights peacefully… even though you don’t have foreknowledge of a nice, tidy set of data points to guarantee your success.

Call us today at 800-831-0007, or email us to discuss how to take advantage of the current U.S. dollar strength while it lasts.