The Pros and Cons of an Investment in Gold
Precious metals are on the rise again.
With the price of gold hovering around $1,300/ounce, we are getting a fair amount of inquiries about investing in it (and other precious metals). Generally, these questions arise when these asset classes are on the rise or when there is a lot of global uncertainty. These days we have a bit of both, so it’s a great time for some clarity on the question.
Let’s start with the Pros and Cons of investing in the gold (and other precious metal) asset class.
- Perhaps the biggest Pro of buying gold is to hedge against deflation, while also helping a portfolio fight potential inflation. There are studies that show gold historically grows with inflation, with the 1970s often given as a prime example. Investors, rather than parking a large sum of money in a bank account that will generally grow less than inflation, will purchase gold to maintain one’s buying power. Subsequently, during deflationary times when consumers lose faith in government and the economy, they flock to a proven store of value in gold (e.g. the Great Depression).
- Gold is generally viewed as a safe haven investment because of the days where the US dollar was fully backed by gold. During times of extreme market uncertainty, a huge influx of money flows into gold (which tends to lead to appreciation or “supply equals demand”). Although there is substantially more US currency than gold these days, the old mentality as a safe haven remains.
- Gold is a tangible investment which generally holds its intrinsic value. The notion is: if the global economy collapses, gold (and other metals) will hold their value.
- Gold is another way to diversify a portfolio and act as an equity hedge.
- In the doomsday scenario of a global economic and currency collapse, who is to say metals will be the default currency? What if “value” is determined by bitcoin or barter? This is the common doomsday rationale of heavy metal investors.
- Investing in gold will not produce any income (such as interest from bonds or dividends from stocks).
- As a stand-alone investment, it is highly inefficient. The long-term expected return of gold is right about at inflation. But, it comes with a disproportionate amount of risk.
- For the return, gold has a high amount of volatility. Usually, for the conservative investor, this is tough to stomach. It’s very common to see a 10-15% swing in either direction.
Diversified has a high concentration of 50+ year old clients. We often find their needs and goals lead away from investing in gold. Our philosophy has always been to diversify. Risk is managed depending on each client’s specific needs, goals, and tolerance. In our experience, the needs of an investor as they approach and live through a prolonged retirement extend beyond an asset class like gold.
We fully believe that there are ways to hedge against equities that yield better long-term growth potential and provide investment income with a lower amount of risk. This is not to say that the benefits of owning physical gold listed earlier aren’t valid, but we feel there are more efficient and less volatile ways to accomplish those objectives.
Here’s Why Bitcoin Won’t Replace Gold So Easily
What a week it was.
First and foremost, I’d like to acknowledge the horrific mass shooting that occurred in Las Vegas, the deadliest in modern American history. On behalf of everyone at U.S. Global Investors, I extend my sincerest and most heartfelt condolences to the victims and their families.
The memory of the shooting was still fresh in people’s minds during last Tuesday’s Hollywood premiere of Blade Runner 2049, which nixed the usual red carpet and other glitz in light of the tragedy. Before the film, producers shared poignant words, saying that in times such as these, the arts are crucial now more than ever.
I had the distinct privilege to attend the premiere. My good friend Frank Giustra, whose production company Thunderbird Entertainment owns a stake in the Blade Runner franchise, was kind enough to invite me along. Despite the somber mood—a pivotal scene in the film even takes place in an irradiated Las Vegas—I thought Blade Runner 2049 was spectacular. Even if you’re not a fan of the original 1982 film, it’s still worth experiencing in theaters. Hans Zimmer and Benjamin Wallfisch’s synth-heavy score is especially haunting.
CNET recently published an interesting piece examining the accuracy of future tech as depicted in the original Blade Runner, from androids to flying cars to off-world travel read the article here.
Still in the Early Innings of Cryptocurrencies
Speaking of the future, I spoke on the topic of the blockchain last week at the Subscriber Investment Summit in Vancouver. My presentation focused on the future of mining—not just of gold and precious metals but also cryptocurrencies.
Believe it or not, there are upwards of 2,100 digital currencies being traded in the world right now, with a combined market cap of nearly $150 billion, according to Coinranking.com.
Obviously not all of these cryptos will survive. We’re still in the early innings. Last month I compared this exciting new digital world to the earliest days of the dotcom era, and just as there were winners and losers then, so too will there be winners and losers today. Although bitcoin and Ethereum appear to be the frontrunners right now, recall that only 20 years ago AOL and Yahoo! were poised to dominate the internet. How times have changed!
It will be interesting to see which coins emerge as the “Amazon” and “Google” of cryptocurrencies.
For now, Ethereum has some huge backers. The Enterprise Ethereum Alliance (EEA), according to its website, seeks to “learn from and build upon the only smart contract supporting blockchain currently running in real-world production—Ethereum.” The EEA includes several big-name financial and tech firms such as Credit Suisse, Intel, Microsoft and JPMorgan Chase, whose own CEO, Jamie Dimon, knocked cryptos a couple of weeks ago.
To learn more about the blockchain and cryptocurrencies, watch this engaging two-minute video.
Will Bitcoin Replace Gold?
Lately I’ve been seeing more and more headlines asking whether cryptos are “killing” gold. Would the gold price be higher today if massive amounts of money weren’t flowing into bitcoin? Both assets, after all, are sometimes favored as safe havens. They’re decentralized and accepted all over the world, 24 hours a day. Transactions are anonymous. Supply is limited.
But I don’t think for a second that cryptocurrencies will ever replace gold, for a number of reasons. For one, cryptos are strictly forms of currency, whereas gold has many other time-tested applications, from jewelry to dentistry to electronics.
Unlike cryptos, gold doesn’t require electricity to trade. This makes it especially useful in situations such as hurricane-ravished Puerto Rico, where 95 percent of people are reportedly still without power. Right now the island’s economy is cash-only. If you have gold jewelry or coins, they can be converted into cash—all without electricity or WiFi.
Finally, gold remains one of the most liquid assets, traded daily in well-established exchanges all around the globe. Every day, some £13.8 billion, or $18 billion, worth of physical gold are traded in London alone, according to the London Bullion Market Association (LBMA). The cryptocurrency market, although expanding rapidly, is not quite there yet.
I will admit, though, that bitcoin is energizing some investors, especially millennials, in ways that gold might have a hard time doing. The proof is all over the internet. You can find a number of TED Talks on bitcoin, cryptocurrencies and the blockchain, but to my knowledge, none is available on gold investing. YouTube is likewise bursting at the seams with videos on cryptos.
Bitcoin is up 350 percent for the year, Ethereum an unbelievable 3,600 percent. Gold, meanwhile, is up around 10 percent. Producers, as measured by the NYSE Arca Gold Miners Index, have gained 11.5 percent in 2017, 23 percent since its 52-week low in December 2016.
Look Past the Negativity to Find the Good News
The news is filled with negative headlines, and sometimes it’s challenging to stay positive. Take Friday’s jobs report. It showed that the U.S. lost 33,000 jobs in September, the first month in seven years that this happened. A weak report was expected because of Hurricane Irma, but no one could have guessed the losses would be this deep.
The jobs report wasn’t all bad news, however. For one, the decline is very likely temporary. Beyond that, a record 4.88 million Americans who were previously sitting out of the labor force found work last month. This helped the unemployment rate fall to 4.2 percent, a 16-year low.
There’s more that supports a stronger U.S. economy. As I shared with you last week, the Manufacturing ISM Purchasing Managers’ Index (PMI) rose to a 13-year high in September, indicating rapid expansion in the manufacturing industry. Factory orders were up during the month. Auto sales were up. Oil has stayed in the relatively low $50-a-barrel range, which is good for transportation and industrials, especially airlines. Small-cap stocks, as measured by the Russell 2000 Index, continue to climb above their 50-day and 200-day moving averages as excitement over tax reform intensifies.
These are among the reasons why I remain bullish.
One final note: Speaking on tax reform, Warren Buffett told CNBC last week that he’s waiting to sell assets until he knows the plan will go through. “I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million,” he said.
It’s a fair comment, and I imagine other like-minded, forward-thinking investors, buyers and sellers will also wait to make huge transactions if they can help it. Tax reform isn’t a done deal, but I think it has a much better chance of being signed into law than a health care overhaul.
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