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The Six Keys to Successful Gold and Silver Ownership
The who, what, when, where, why, and how of precious metals investing
“I keep six honest serving-men (They taught me all I knew);
Their names are What and Why and When And How and Where and Who.”
– Rudyard Kipling –
1. Who invests in gold?
Private individuals invest in gold…
There is a misconception, often perpetrated by the mainstream media that individuals who own gold are somehow outside the mainstream. Nothing could be further from the truth. The people we have helped become gold owners are among those we rely upon most in our daily lives – our physicians and dentists, nurses and teachers, plumbers, carpenters, building contractors, business owners, attorneys, engineers, and university professors (to name a few.) In other words, gold ownership is pretty much a Main Street endeavor.
In a recent Bankrate survey, one in seven investors (14%) chose gold as the best place to park money they wouldn’t need for more than ten years – making it the fourth most popular choice. To put that number into perspective, 28% chose stocks (an asset garnering considerable attention of late). In comparison, 26% chose real estate (the old mainstay), and 4% chose bonds (often touted as gold’s chief competitor for safe-haven purposes). Another 18% said they would simply bank the money. Similarly, a 2020 Gallup poll found that 17% of American investors rated gold the best investment “regardless of gender, age, income or party ID. . .” The World Gold Council, we might add, recently reported global retail investment demand running at a record pace as investors adjusted their portfolios to weather the economic and financial ill-effects of the pandemic.
Bankrate Survey of Investors
Chart courtesy of BankRate.com • • • Click to enlarge
Institutions and hedge funds invest in gold…
Funds and institutions, so-called professional investors, have poured enormous amounts of capital into gold over the last few years through ETFs, paper ownership in futures and options, and outright physical ownership in the form of bullion. In fact, institutional involvement may be unprecedented at this juncture. It is not just the high-profile gold advocates who are buying gold, but hundreds of funds and institutions from one end of the globe to the other. Due to the constraints and logistical problems associated with outright ownership of large physical positions, the most significant funds and institutions with the most extensive commitments do most of their investing through gold ETFs. The chart on gold ETFs’ growth (shown below through 2020) offers ample evidence of growing institutional interest in gold ownership, including the record-breaking stockpiles’ surge in 2020. “Investment demand,” says ETF Trends in a recent report titled, An In-Depth Look into Gold ETF’s Resurgence and Sustainability, “remains robust as an increasing number of institutional investors, sovereign wealth funds, and central banks seek gold as a potential source of return and diversification to traditional stock and bond portfolios.”
Chart courtesy of GoldChartsRUs • • • Click to enlarge
Central banks invest in gold…
The World Gold Council reports, “The past decade has seen a fundamental shift in central banks’ behavior with respect to gold, prompted by a reappraisal of its role and relevance after the 2008 financial crisis. Emerging market central banks have increased their official gold purchasing, while European banks have ceased selling, and the sector now represents a significant source of annual demand for gold.” Central Banks sold 7,853 tonnes of gold from 1987 to 2009. From 2011 through the third quarter of 2020, they bought over 5000 metric tonnes. Most media coverage on central bank involvement in the gold market concentrates on purchases. Still, the bigger story may very well be their withdrawal from the market as sellers. The nearly complete stoppage in sales since 2009 is the result of public pressure from citizen groups and a realization among central bankers since the 2008 crisis that gold is an important asset of last resort for national reserves.
Robert Rekasi, who heads up foreign exchange reserves management for the Central Bank of Hungary, explains in a Central Banking magazine interview why central banks take an interest in gold:
“It was a long-term national and economic policy strategy decision to increase the size of our gold holdings. The decision was driven by stability objectives; there were no investment considerations behind holding gold reserves. In normal circumstances, gold has a confidence-building feature, so it may play a stabilizing role and act as a major line of defense under extreme market conditions, in times of structural changes in the international financial system, or during deep geopolitical crises. The central bank also decided to repatriate overseas gold holdings. Holding precious metals within the country is consistent with international trends, enhances financial stability, and may strengthen market confidence in the Hungarian economy.”
Billionaires invest in gold…
Billionaires have been particularly vocal about their attachment to gold in recent years. That group includes Leon Copperman, Ray Dalio, Sam Zell, Jimmy Rogers, Thomas Kaplan, Mohammed El-Erian, John Paulson, Jeff Gundlach, David Einhorn, Frank Giustra, Naguib Sawiris, Jacob Rothschild, and Paul Tudor Jones – to name a few. Each has expressed concern about future economic uncertainty, central bank money printing policies, and the dollar’s future value. Each, in turn, has publicly advocated gold ownership as a portfolio countermeasure. One billionaire advocate of gold ownership, Ray Dalio (who also heads up the world’s largest hedge fund, Bridgewater Associates), spoke for many in the billionaire class when he succinctly said: “There’s no sensible ” reason not to own gold…If you don’t own 10% – if you don’t have that – then there’s no sensible reason other than you don’t know history and you don’t know the economics of it.”
Last year, Bridgewater issued a full report expanding on the firm’s thinking on gold, “Some Perspective on Gold in the New Paradigm. “We’ve had a few such periods of extraordinary stimulus over the past century,” it reads, “all in times of economic depression, conflict, or both – and in all of them, gold saw triple-digit rallies that dwarf its recent run-up…In the era of fiat money, even without the explicit need to devalue against gold, the effect of reflationary policies is to devalue paper currencies relative to store holds of wealth.”
2. What is gold’s role in the investment portfolio?
The following is an excerpt from The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold. It is a timeless story about gold’s ultimate value. Investors use gold for varying purposes in the investment portfolio. However, they are all secondary to its role as the final means of payment and an enduring store of value under even the most adverse economic conditions.
The incident is one of the most memorable of my career. Never before or since has the value of gold in preserving assets been made so abundantly clear to me. It was the mid-1970s. The United States was finally extricating itself from the conflict in South Vietnam. Thousands of South Vietnamese had fled their embattled homeland rather than face the vengeance of the rapidly advancing Communist forces.
A couple from South Vietnam who had been part of that exodus sat across from me in my Denver office. They had come to sell their gold. In broken English, the man told me the story of how he and his wife had escaped the fall of Saigon and certain reprisal by North Vietnamese troops. They got out with nothing more than a few personal belongings and the small cache of gold he now spread before me on my desk. His eyes widened as he explained why they were lucky to have survived those last fearful days of the South Vietnamese Republic. They had scrambled onto a fishing boat and had sailed into the South China Sea, where the U.S. Navy rescued them. These were Vietnamese “boat people,” survivors of the final chapter in the tragedy of Indochina. Now they were about to redeem their life savings in gold so that they could start a new business in the United States.
Their gold wrapped in rice paper was a type called Kim Thanh. These are the commonly traded units in Hong Kong and throughout the Far East. Kim Thanh weigh about 1.2 troy ounces, or a tael, as it is called in the Orient. They look like thick gold leaf rectangles 3 to 4 inches long, 11⁄2 to 2 inches wide, and a few millimeters deep. Kim Thanh are embossed with Oriental characters describing weight and purity. As a gesture to the Occident, they are stamped in the center with the words OR PUR, “pure gold.”
It wasn’t much gold—about 30 ounces—but it might as well have been a ton. The couple considered themselves very fortunate to have escaped with this small hoard of gold. They thanked me profusely for buying it. As we talked about Vietnam and their future in the United States, I couldn’t help but become caught up in their enthusiasm for the future. These resilient, hardworking, thrifty people now had a new lease on life. When they left my office that day, there was little doubt in my mind that they would be successful in their new life. It was rewarding to know that gold could do this for them. It was satisfying to know that I had helped them in this small way.
I kept those golden Kim Thanh for many years. They became something of a symbol for me—a reminder of the power and importance of gold. Today, when economic and financial problems have begun to signal deeper, more fundamental concerns for the United States, I still remember that Vietnamese couple and how important gold can be to a family’s future. Had the couple escaped with South Vietnamese paper money instead of gold, I could have done nothing for them. There was no exchange rate for the South Vietnamese currency because there was no longer a South Vietnam! Wisely, they had converted their savings to gold long before the helicopters lifted U.S. diplomats off the roof of the American Embassy in 1975.
Over the years, I have come to understand and appreciate the many important uses of gold—artistic, cultural, economic, and industrial. Gold is unsurpassed for jewelry and as a high-tech conductor of electricity. Gold has medical applications in dentistry and in treating diseases from arthritis to cancer. Gold plating is used in computers and in many other information-age technologies. In nanotechnology, it is used in a variety of cutting-edge medical diagnostic devices. As for its engineering uses, gold can be found in automobile anti-pollution devices, in jet engines, in architectural glass, and in a number of space applications. All of these pale, though, compared to gold’s ancient function as money, as an asset of last resort and an unequaled store of value.
– Michael J. Kosares
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Panics, manias, crashes, and collapses are as familiar to financial history as thunderstorms to placid summer afternoons. They tend to show up suddenly, wreak more than their fair share of havoc, and recede into the history books only after endless discussion as to their causes and cures. Whether brought on by popular delusion, unscrupulous market operators, misguided governments and/or central banks, or some random, unforeseen shock, black swan events are part and parcel of the human experience. They are just as permanent a fixture in our collective history as wars, pandemics, and natural disasters.
Seneca, the Roman stoic philosopher, almost two thousand years ago, admonished his fellow citizens about their complacency: “You say: ‘I did not think it would happen.’ Do you think there is anything that will not happen when you know that it is possible to happen when you see that it has already happened?” These are not the thoughts of a pessimist but a realist. When it comes to times of financial stress, market breakdown, and general societal upheaval, the fact of the matter is that we do not know when the worst of the ill effects will take hold. Therefore it is impossible to prepare for it thoroughly. In the end, gold is not an investment at all, though we commonly refer to it as such, but a form of wealth insurance. The time to buy it is when you come to the realization that you need it.
‘Gold is the one asset that’s outside of the banking system that’s a form of wealth that can be liquefied immediately, within 24 hours — no exceptions to that, for whatever reason,” writes long-time gold market analyst John Hathaway (Sprott Asset Management) If you have some percentage of your wealth in effect insured by a position in physical metal, you really shouldn’t care about the day-to-day price fluctuations measured by one currency or another. What you know is you have a secure asset so that when some opportunity comes along — let’s say the S&Ps are trading at three times earnings, for whatever reason — and you want to back up the truck, gold would be a way to do that, and there’s probably nothing else that you can say that about. That’s the real reason to own gold. Too many investors think of it as a way to make money. I’m not saying that that’s completely wrong, but it really isn’t the fundamental reason for owning gold.”
(Please see BlackSwansYellowGold for a critical in-depth review of gold’s historical record as a hedge against inflation, deflation, stagflation, disinflation, and hyperinflation.)
4. Where to invest in gold
The Fed has a long history of papering over busts to create booms and stifling booms to create busts, never through it all managing the economy half as well as Adam Smith’s invisible hand. Right now, it’s in stifling mode, but that could change at the first signs of real economic distress. “The Fed,” says long-time gold market analyst John Hathaway in a Sprott Insights interview,” doesn’t have a dial. It’s an either on or off switch. They’re either switching off the economy and crashing financial assets and the economy, or their crying uncle and caving in, which will likely open the door to more inflation. I think either outcome is positive for gold.”
Historically, the Fed has opted for monetary inflation as its baseline policy because the alternative – an economic depression – is something no central banker wants to add to their resume. That is why, despite seven recessions, the dollar has lost 86% of its purchasing power since the world went off the gold standard in 1971. We are reminded, in this context, of an observation from former Fed chair Paul Volcker, the central banker who broke the back of the last runaway inflation in the late 1970s-early 1980s:
“We sometimes forget that central banking, as we know it today, is, in fact, largely an invention of the past hundred years or so, even though a few central banks can trace their ancestry back to the early nineteenth century or before. It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.” (From Deane and Pringle’s The Central Banks, 1995)
Zoltan Pozsar, the widely-followed Credit Suisse analyst, believes we are now witnessing the birth of a new world monetary order. “Do you see what I see? Do you see inflation in the West written all over this like I do?” he asks in a recent analysis. “This crisis is not like anything we have seen since President Nixon took the U.S. dollar off gold in 1971 – the end of the era of commodity-based money. When this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities. From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-Hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities). After this war is over, ‘money’ will never be the same again…”
The goal, of course, is to get to the other side of this rapidly evolving monetary revolution with one’s assets reasonably intact. Better than any long dissertation, these charts argue in favor of gold ownership as a means to that end.
Gold Annual Returns
(Year over year)
Data courtesy of MacroTrends.net
The chart above shows the annual returns on gold since 2001. A $100,000 investment in 2001 would be worth over $700,000 today. Though the overall returns have been significant, more importantly, gold owners managed to preserve their wealth during some tumultuous times, including the financial crisis of 2008 and the pandemic-induced economic crisis. The three down and flat years of 2013 through 2015 followed eleven consecutive years of positive returns. Over the past two years, gold registered an 18.4% gain in 2019 and a 23.8% gain in 2020.
Gold’s average annual price since 1971
Data courtesy of MacroTrends.net
At USAGOLD, we have always emphasized gold’s long-term, safe-haven attributes. The mainstream media often characterize gold as a volatile investment – so volatile, they say, that ordinary investors should avoid it. On the contrary, this chart demonstrates gold’s long-term stability from year to year, along with its potential as a vehicle for long-term asset preservation. “The average annual price,” says Austria’s Incrementum AG, “shows the benefit of a regular accumulation plan as a long-term strategy.”
This chart shows the real rate of return on gold when measured against the inflation rate as measured by consumer prices. (The real rate of return is the space between the tops of the black bars and the tops of the gold bars.) Gold has shown a positive real return fourteen for the last twenty years. In twelve of those years, gold’s appreciation significantly outstripped the inflation rate, including 2020. We hear much these days about the real rate of return on assets, or better put, the lack of a real return in a sub-zero rate environment. As a result, gold is receiving considerable attention among professional investors as a worthy alternative to bonds. This chart reveals why.
Gold’s and the U.S. federal debt
Chart courtesy of TradingView.com
Please keep in mind that the long-term trends of rising national debt and the price of gold are still in place today – nothing has changed fundamentally. As long as that is the case, we can assume gold will continue to attract capital as a long-term portfolio hedge, just as it has done, to varying degrees, through the first 49 years of the fiat money system.
Gold and the purchasing power of the U.S. dollar
Chart courtesy of TradingView.com
This long-term chart shows the direct correlation between the dollar’s debasement and appreciation in the gold price. Since 1971, the dollar has lost nearly 86% of its purchasing power. Gold over the period is up 4460%. Silver, as an aside, is up 1524%, and the Dow 3250%.
Monetary eras 1915 to 2020
This chart, more than any other, we feel, is central to understanding why gold continues to make sense as a long-term portfolio holding. The fiat money era began when the United States abandoned the gold standard in 1971 and freed currencies to float against the dollar. We are still in that era today. This chart shows gold’s performance from the early 1900s to 1971, when gold backed the dollar and the era from 1971 to the present when it did not. Of course, gold has had its ups and downs since 1971, but clearly, over the long run, in the absence of an official gold standard, individual investors have been well-served by putting themselves on a private gold standard.
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