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THE MAIN STORY: WHY BUY ELEMENT 79?

Overview

Is holding a stash of gold a good idea?

Or is It just a “barbarous relic” like John Maynard Keynes claimed?

Traditional value investors like Warren Buffett view it as an “unproductive” asset and see little to no value since it produces no cash flows.

On the other hand, Ray Dalio’s All Weather Portfolio moves beyond merely stocks and bonds and includes a 7.5% allocation to gold.

We’re not here to say which camp is right, but we want to provide an overview of why gold may be worth looking at and the best way to invest in it should you choose to do so.

We turned to Jeff Clark, a Senior Precious Metals Analyst at GoldSilver, for some insight.

What to know

Despite more than a decade having passed since the Great Recession, there’s still tremendous instability in the financial system. 

Volatile currency markets, soaring inflation, and slowing growth are all seemingly here to stay following the pandemic and ongoing conflict in Europe.

The argument is that owning gold insulates you from this chaos, given its role as a store of value across cultures for thousands of years.

An ounce of gold has certainly maintained its purchasing power across the last century. Whether a hundred years ago or today, a nice suit runs you about as much as an ounce of gold (roughly $1,700). At least, that’s the rule of thumb some people use.

Clark provides several reasons every investor should consider buying at least some gold for their portfolio.

And it’s important to note that you must buy physical gold coins and bars to capture these advantages. Paper proxies via ETFs and futures contracts carry risks that mitigate the thesis for buying gold in the first place (being able to possess it in a crisis).

Consequently, Clark suggests you stick to only buying physical gold.

Since the time of King Croesus in 550 B.C., people have valued the unique properties of element 79.

Let’s dive into five reasons people across the ages have desired physical gold.

Gold is money 

One of the functions of money is that it needs to serve as a long-term store of value. Gold has historically fulfilled this better than any government paper (fiat) currency.

All paper currency, by its nature, loses value over time. The dollars you save in a bank or brokerage account will continue to seep purchasing power like a slow drip in a hot water tank.

Even Charlie Munger has hypothesized that fiat currency is “going to zero” in the next hundred years.

Governments simply can’t help but spend more money over time, and as that threatens their solvency, if history is any guide, they rely on “printing” currency.

That, however, comes at your expense through the erosion of purchasing power — $1 today can’t buy nearly as much as it could even just a few decades ago.

To preserve purchasing power, you need to hold something that will retain its value. Physical gold meets that requirement.

Diversification 

One of the keys to effective diversification is finding investments that aren’t correlated with each other. Fortunately, gold has historically had a negative correlation to stocks.

Properly diversified investors can combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.

As Clark explains in this study, research shows that adding gold to a portfolio enhances overall returns, particularly during a market correction.

No counter-party risk 

If you hold physical gold, there’s no third party you must trust to fulfill a contractual obligation. That’s because gold is one of the few financial assets that is not simultaneously someone else’s liability.

In other words, the risk of an entity defaulting on promises or obligations is not an issue when you hold gold directly yourself.

According to Clark, if a bubble pops or a crisis causes contagion in the financial markets, “gold may be the last man standing.”

Gold is scarce 

The relative scarcity of gold also makes it attractive to investors. On average, the new supply of gold grows at just 1.5% per year, roughly the same as worldwide population growth.

If you compare gold’s growth to the (M2) money supply’s growth of dollars, which on average is 7.14%, it’s obvious which is being debased at a slower pace.

Gold’s core advantage is that central bankers or politicians can’t print it, thus remaining a scarce and desirable monetary good.

How to Buy Gold

As we previously mentioned, to capture all of the benefits of gold, you’ll want to make sure you buy physical bullion, bars, or coins.

You can do this through reputable online brokers or at your local coin shop. Pay attention to gold’s spot price — the current market price per ounce — as you are buying to make sure you’re buying at a fair rate.

And realize, you’ll pay a small premium above the spot price for both coins and bars.

Finally, be sure to properly secure gold purchases and avoid telling anyone about your holdings.

We recommend BullionMax for safe and secure online orders at a reasonable price.

Dive deeper

For a deeper discussion on investing in gold, check out Stig Brodersen’s interview with Lyn Alden here.

Let us know your thoughts. Is gold an investment you hold in your portfolio? If not, why?

SEE YOU NEXT TIME!

That’s it for today on We Study Markets!

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