Almost nobody on Wall Street has noticed the full price surge for actual gold bars and coins. That’s because financial traders mostly just deal in paper “contracts” for gold. Those are basically gold IOUs a mere promise to deliver gold if the buyer ever wants.
Thomas McCarthy, a financial planner at McCarthy & Cox, a firm that specializes in retirement planning and estates, says putting some of your retirement portfolio into gold isn’t crazy. “Gold can be a hedge against fear and holding a small 5% position of gold is not a bad hedge,” he says. “For clients looking to do so, we use a gold exchange-traded fund (ETF) as opposed to actually buying the physical gold because its significantly less costly and easier to trade.”
But, he warns, “Investors in gold need to remember that gold doesn’t pay interest, doesn’t earn dividends and you make money only if the demand pushes the price higher. Many gold bugs who invested heavily in gold at its peak are still waiting many years later just to break even.”
Gold requires faith.
The good news? In this crisis you don’t have to choose one side definitely. You can be agnostic and keep your options open.
The events of the past month have upended the financial system. The Federal Reserve and central banks overseas have promised to print as much money as is needed to keep economies alive. The U.S. government has agreed to spend $2 trillion propping up the economy, and unless the crisis dissipates quickly that may not be the end of it.
Expensive Treasury Bonds
Ordinarily, investors who wanted to protect their accounts from the twin perils of depression and inflation would look to appropriate Treasury bonds. But they are already extremely expensive by any historic measure, so they may offer limited protection. So-called “nominal” or regular Treasury bonds, the type most people own, now sport minuscule interest rates. Even the longest dated, 30 year Treasurys, yield just 1.4%. That is below most expected rates of inflation. Meanwhile Treasury inflation-protected securities or TIPS, a type of Treasury bond that is designed specifically to protect your money against any rise in consumer prices, now offer inflation-adjusted yields that are actually slightly negative. In other words, you’re almost guaranteed to lose a small amount of purchasing power over the life of the bond.
In these circumstances, gold ceases to look quite so crazy as portfolio insurance. There is genuine debate about whether gold offers a “long term hedge” against inflation. And no one actually knows what gold is “really” worth, if it is “really” worth anything. Intelligent, sane financial experts can make plausible cases for a range of values from a few hundred dollars an ounce to many thousands.
But gold makes more sense when viewed, not as an investment, but as a type of currency. It doesn’t produce anything, but it can be used as a medium of exchange. And history strongly suggests that it has a low correlation with other assets. In other words, it tends to “zig” when everything else zags.
It’s certainly done that under the current administration. Gold has risen by 38% since Donald Trump’s inauguration. Meanwhile the S&P 500 SPX index of large U.S. companies is up 13%, and the Russell 2000 RUT index of small U.S. companies is down 8%.
“The case for gold is simple,” says Strauss. “You want to own gold in times of financial dislocation and or inflation. And that’s been the case since time immemorial. And gold behaves well in those cases. In those cases stocks behave poorly. It’s a great portfolio hedge. Gold does poorly when you’ve got strong economic growth and low inflation. Tell me when that’s going to happen. Gold held its value during 2008 and after all that money printing it tripled over the next three years.”
Strauss recommends Sprott Physical Gold, an exchange-traded fund where shares are matched to actual bullion in a vault. He says he holds 25% of his personal wealth in gold. For those who are agnostics? “I think it’s criminal to go below 10%,” he joked, “but start with 5%.”
source: Sprott Physical Gold (ETF) brought to you by MarketWatch