Landscape mode is recommended for mobile phone viewing.
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 –
by Michael J. Kosares
1. Who invests in gold?
In the first of our Six Keys to Successful Gold Ownership, we challenge the misconception that individuals who own gold are somehow outside the mainstream. Nothing, as you are about to read, could be further from the truth. In fact, a study of history tells us that quite the opposite is true. For thousands of years, gold has stood steadfast as an enduring means of wealth preservation and generational wealth transfer. One of the keys to becoming a successful gold investor is to understand the long-term nature of the investment, i.e., the reasons why funds, institutions, central banks, and individuals around the world choose to own it.
Private individuals invest in gold…
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. Another 4% chose bonds, while 26% chose real estate, 28% chose stocks and 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. . .”
Bankrate Survey of Investors
Chart courtesy of BankRate.com • • • Click to enlarge
“Potential investors are put off,” says the World Gold Council in a recent report, “by the feeling that they don’t know enough about buying gold. In both countries {the U.S. and Canada], 7 in 10 of those investors who have never bought gold but are now open to it said they lacked the necessary know-how.” That said, gold still ranks in the top five commonly-owned investments among Americans.
At USAGOLD, we have always prided ourselves in educating first-time investors – taking the time and providing the means for would-be owners to learn about the investment and find their comfort level. Our monthly newsletter (published consistently since the mid-1980s) and the USAGOLD website (since 1997) are testaments to that commitment, as are the three editions of The ABCs of Gold Investing, one of the original “how-tos” on physical gold ownership published in 1996. You will find us just as dedicated to that standard now should you contact us to discuss your needs and concerns. We have thousands of clients – some stretching back to the 1970s – and a long history of efficiently and economically serving their investment needs. We invite you to become a client of the firm.
Family Offices invest in gold…
At present, according to JP Morgan, an average of 3.3% of family office asset allocations are in gold (primarily via gold ETFs). Still, over the past year, those allocations have begun to increase. According to the UBS Global Family Office Report 2020 released on July 16, “Between March and May, 55% of family offices rebalanced their portfolios. As many as 65% of its family office clients traded up to 15% of their portfolios, signaling that they are biting into the market opportunities presented by the pandemic. On average, family offices increased their allocations to cash by 25% and gold or other precious metals by 21%. As a result, 76% of family offices reported that their portfolios performed in line with or above their target benchmarks from January to May.”
Lisa Shalett, Chief Investment Officer and Wealth Management at Morgan Stanley, noted the same trend amongst Family Offices in a June interview with Reuters: “Now some are channeling up to 10% of their clients’ portfolios into the yellow metal as the massive central bank stimulus reduces bond yields – making non-yielding gold more attractive – and raises the risk of inflation that would devalue other assets and currencies. While gold prices have already risen 14% since the start of the year to $1,730 an ounce, many private bankers bet that gold – a hedge for both inflation and deflation – has further to run. Our view is that the weight of monetary supply, expansion, is going to ultimately be debasing to the dollar, and the Fed commitments, which (are) anchoring real rates, make the case for gold pretty sturdy.”
Institutions and hedge funds invest in gold…
Funds and institutions, so-called professional investors, have poured large amounts of capital into gold over the last few years through ETFs, straight-up physical ownership in the form of bullion, and paper ownership in futures and options. In fact, institutional involvement may be unprecedented at this juncture. It is not just the high-profile gold advocates who appear regularly in media interviews pumping capital into the market, but hundreds of funds and institutions from one end of the globe to the other. For example, this past year, the Ohio Police and Fire Pension fund allocated 5% of its $150 billion portfolio to gold investments.
According to Australia’s Macquarie Bank, almost 3000 tonnes of gold in physical form sit on the balance sheets of Chinese commercial banks and financial institutions – a surprising revelation. In the West, inventories at gold ETFs, the favored gold ownership vehicle for professional investors, have gone from 2050 tonnes in late 2015 to approaching 2800 tonnes now.
“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.”
Central banks invest in gold…
The World Gold Council reports that “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 of the media coverage on central bank involvement in the gold market concentrates on purchases, but the bigger story, in my view, is their withdrawal from the market as sellers. The nearly full 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.
“It was a long-term national and economic policy strategy decision to increase the size of our gold holdings,” says Robert Rekasi, who heads up foreign exchange reserves management for the Central Bank of Hungary, In a Central Banking magazine interview. “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.”
Central banks, in short, hold gold for the very same reasons private individuals do. Rekasi says central banks do not buy gold through ETFs but via over-the-counter transactions or through purchases from domestic producers. In other words, they buy the metal itself (not paper representations) for strategic safe-haven purposes and are not making a price bet. In the interview linked above, Rekasi skillfully outlines the rationale for gold ownership in the contemporary financial environment for individuals, funds and institutions alike. He ends the interview by saying that “Gold is a good hedge against inflation; it is the ultimate store of value. Even if economic fundamentals evolve, and requirements can vary from advanced to emerging economies, gold’s strengths remain.”
Billionaires invest in gold…
“If you don’t own gold…there is no sensible reason other than you don’t know
history or you don’t know the economics of it.”
Ray Dalio, Bridgewater Securities
Billionaires have been particularly vocal about their attachment to gold in recent years. That group at this writing 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 the dollar’s future value and publicly advocated gold ownership as a portfolio countermeasure. The wealthiest among us, it seems, are also the most vocal and proactive about the dangers they see dead ahead. A long-list of the best and brightest in the financial world have issued their warnings, and it has become increasingly apparent that the super-rich are hoarding gold bullion. Meanwhile, the unschooled masses utilize online investment portals from Robinhood to Schwab to dash headlong into the most wildly overvalued stock market in history.
In a recent MarketWatch interview, Charlie Munger, another billionaire, called the current stock market frenzy “the most dramatic thing that’s almost ever happened in the entire world history of finance.” He believes that “we’re in very uncharted waters. Nobody has gotten by with the kind of money printing now for a very extended period without some kind of trouble. We’re very near the edge of playing with fire.” Last year, Berkshire Hathaway, the fund Munger manages along with Warren Buffett, purchased a major stake in Barrick Gold, the world’s largest gold mining company.
Ray Dalio, who heads up the world’s largest hedge fund (Bridgewater Associates) and another billionaire, believes that the world is likely to change in “shocking ways” over the next five years, including a loss of faith in the U.S. dollar: “Within the next five years you could see a situation in which foreigners who have been lending money to the United States won’t want to.” Bridgewater, the world’s largest hedge fund, is headed up by Ray Dalio, a billionaire investor who has been a vocal advocate of gold ownership for some time now.
That said, it is not just the dollar that billionaires are worried about. “We’ve had a few such periods of extraordinary stimulus over the past century,” says Bridgewater Associates in a report released late last year, “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.”
“In brief,” says Bridgewater, “in a world of ongoing pressure for policymakers across the globe to print and spend, zero interest rates, tectonic shifts in where global power lies, and conflict, gold has a unique role in protecting portfolios. The move we’ve seen in gold this year is quite modest relative to what we’ve seen in past reflationary periods, and given still depressed levels of activity globally, the need to keep reflationary policies in place will persist for some time. While gold offers no known yield, no known yield can be quite attractive when the yields on other assets are known to be terrible.” Gold rose sharply in the top six global currencies in 2020 – Indian rupee (+27.8%); Chinese yuan (+17.3%); British pound (+21.2%); European euro (+14.4%), and Japanese yen (+18.6%). In short, it does not make sense to flee the dollar in favor of some other currency when they are all, for the most part, depreciating against gold. The price of gold in dollars, by the way, rose 23.8% in 2020.
2. What is gold’s role in the investment portfolio?
In the second of our Six Keys to Successful Gold Ownership, we tell a timeless story about gold’s ultimate value. “The possession of gold,” Thomas Bailey Aldrich once wrote, “has ruined fewer men than the lack of it.” Though investors use gold for varying purposes in the investment portfolio, 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 following is an excerpt from my book – The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold.
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.
|
If you are looking for in-depth, cutting-edge coverage of the gold and silver markets, our monthly newsletter might be just what you are looking for. A contemporary web-based client letter with a distinctively old-school feel. |
In the third of our Six Keys to Successful Gold Ownership, we tell why the best time to buy gold is when you have concluded that you need it.
Panics, manias, crashes, and collapses are as common 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.
Almost two thousand years ago, Seneca, the Roman stoic philosopher, 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 fully. 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 an important in-depth review of the historical record on gold as a hedge against inflation, deflation, stagflation, disinflation, and hyperinflation.)
The following chart study records how gold has done so far in protecting and building wealth in the fiat money era. If history is a teacher, there is much to be learned from the group of charts you are about to review in terms of gold’s resilience as a long-term means of asset preservation.
Chart 1
Gold Annual Returns
(Year over year)
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.
Chart 2
Gold’s average annual price since 1971
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.”
Chart 3
Gold’s real rate of return since 1970
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 gold bars.) Gold has shown a positive real return fourteen of 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. Gold is receiving considerable attention among professional investors as a worthy alternative to bonds. This chart reveals why.
Chart 4
Gold’s and the U.S. federal debt
|
|
Please keep in mind that the long-term trends of both the rising national debt and 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.
Chart 5
Gold and the U.S. Dollar Index
1970-2019 (Discontinued)
|
Gold and the Dollar Index |
As you can see in these charts, since 1971, the dollar has been in a long-term downtrend against the major currencies, and gold has been in a long-term uptrend. The direct inverse correlation between the U.S. dollar and gold is a matter of much discussion. Still, few investors are aware of the longer-term trend, which favors gold ownership as the ultimate currency hedge.
Chart 6
Gold and the purchasing power of the U.S. dollar
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 an astonishing nearly 86% of its purchasing power. Gold has appreciated by nearly 60 times over the same period.
|
|
4. Where to invest in gold
Save as PDF