We are in a dangerous period of economic transition.
The Fed is shrinking its balance sheet and raising rates after a decade of stimulus. The dollar is losing its ground. Bonds are at risk after a 30-year rally.
Not to mention record-high valuations in the stock market and the return of volatility.
Bottom line: risk is everywhere, and there seems to be no place to hide.
But as you’ll learn below, there’s one asset class that top money managers turn to as the ultimate hedge.
Below are highlights from SIC 2018 with quotes from some of the best investors in the world about gold and its role in your portfolio.
Even if you are not into gold, don’t let it put you off. This update will give you a lot of valuable insights into the current state of our economy and the markets from people who know it best.
At the SIC, Mark Yusko, CIO and CEO of Morgan Creek Capital Management, gave an emotional speech comparing the Fed to a dictator that robs the nation.
He pointed out that despite $20 trillion being injected into the US economy through quantitative easing since 2008, the results haven’t matched the effort...
Everybody's all excited about QE. Everybody's all excited about the Fed, but you realize that in the last 10 years, we had the worst growth in the history of America. Let that sink in for a second... 1.4% real growth for the last 10 years. And we have indebted our future to the tune of $20 trillion for nothing.
This increased money supply, he said, resulted in currency devaluation. “This is what dictators do. They systematically acquire the assets, and then they devalue the currency and boost the price of assets.”
He showed a chart that plots the S&P 500 price in nominal terms (blue line) and in gold (pink line).
“Gold is money,” he commented. “It's real money. For 5,000 years, an ounce of gold has bought a fine man's suit. So you can see in 2007, we had the housing bubble in nominal terms, but... the value [of the S&P 500] in gold fell. Today, we don't have a bubble. We have a bubble in nominal prices, so this is what dictators do.”
Put simply, he said, record-high valuations in equity markets are the result of a devalued currency and monetary measures that the Fed pursues: “The purchasing power of the currency is being destroyed right before your eyes, and you're just not paying attention.”
Jeff Gundlach, CEO of Doubleline Capital, provided a more technical forecast for gold. Given the situation in the markets, he thinks it’s only a matter of time before the price of gold breaks out:
We're at a juncture in gold, not surprisingly, because it is negatively correlated with the dollar... Now we see a massive base building in gold. Massive. It's a four-year, five-year base in gold. If we break above this resistance line, one can expect gold to go up by, like, a thousand dollars.
Gundlach was reluctant to predict the probability and timing of this massive gold rally, but he thinks that investing in gold at this price is a no-brainer: “It’s a great time to be buying gold... because one way or the other, this baby’s got to break in a big way.”
Louis Gave is the co-founder and CEO of Gavekal Research. The main theme in his keynote speech this year was a once-in-a-generation shift from a deflationary boom to the inflationary boom that we see today.
Below is a four-quadrant framework that Gave uses to determine where we are in the cycle:
According to Gave, these shifts occur every 30–40 years, usually as a result of policy errors.
As a method to determine where we are in the cycle, Gave suggested using the gold/bond ratio: “My starting point is always that... over a four-year period, bonds should always outperform gold... When they don't, when bonds underperform gold, that's the market giving you a very important signal.”
He pointed out that gold has been outperforming bonds for the past four years now. “This, to me... means we are moving to an inflationary boom and bust period.”
If that’s the case, Gave told the SIC attendees, the investing environment will radically change.
He suggested that investors reconstruct their portfolios and get out of bonds as a diversification tool because they are not a good diversifier in periods of inflationary booms.
To prove his point, Gave showed a chart of the performance of gold, cash, and US Treasuries as hedges during inflationary booms (see below).
In the last inflationary boom, from 1966 to 1980, Treasuries were a horrible choice for your portfolio. Meanwhile, gold and cash shined.
Another positive trend for gold that Louis Gave sees is the growth of emerging markets (EM). That’s because higher purchasing power in EMs tends to translate into higher gold demand: “...for me [gold] is a good proxy for emerging market growth. When people get rich in an emerging market, they buy gold. And the reality is today people are getting rich in emerging markets at an accelerating pace.”
He said that growth in emerging markets combined with rising inflation and a weak dollar creates a perfect setup for a gold rally in the coming years: “I think the time indeed has come for having gold in your portfolios.”
Grant Williams, author of Things That Make You Go Hmmm..., warned investors about the dangerous implications of a shift in US monetary policy—another good reason to invest in gold now.
According to Williams, for the last 40 years, US monetary policy has been built on constant injections of stimulus. Since Paul Volcker’s tenure in the early 1980s, every Fed chair has pushed interest rates lower.
Now QE is officially over and is to be reversed. Williams thinks that this marks a monetary shift, which spells trouble for equities.
He gave a brief rundown on the effects that the Fed’s three rounds of QE had: “Stocks soared. The S&P doubled under the Fed's various QE programs. Gold fared really well because of fears of inflationary effects of money printing. The dollar eventually eked out a small gain. And the yield on the [10-Year] Treasury fell 1.6%.”
The key message for investors is, Williams said, that after nine years of one long, pleasant, ride in equities, we've reached the point where the main driver of equity prices is about to reverse.
In the best case scenario, he thinks quantitative tightening will reverse the effect of the Fed’s stimulus measures on the stock market. However, he doesn’t rule out a much bigger sell-off.
Asked what investors should do, Williams joked, “Long the Zambian kwacha versus the US dollar. Ah, who the hell am I kidding—it's gold! Of course, it's gold!”
The reason is that all the trends are pointing to rising inflation, he said. “Gold performs best in a rising inflationary environment, not a high inflation environment. So, we're kind of moving into that sweet spot.”
Williams likens today’s situation to the period leading up to the 1970’s recession where a shift from equities and cash to gold could happen unexpectedly fast.
What happened with that late-cycle stimulus that Johnson put in, and what happened to equity markets, bond yields, wage prices, CPI, and gold, going into the late ‘60s into the early ‘70s, we saw these things take off. And these things are cyclical. So to me, if this inflation story gets some traction, then I think you're going to see money move to gold reasonably quickly.
Further, Williams suggested, in periods of quantitative tightening, equities eventually crash. Since gold is inversely correlated to the stock market, this is another reason gold should rise in the coming years.
In fact, history shows that gold has rallied in the last five out of seven recessions.
Yet another speaker who praised gold was David Rosenberg of Gluskin Sheff. The biggest reason for Rosenberg’s bullishness on gold is the United States’ protectionism, which he thinks will inevitably push the dollar down: “We'll get a countertrend rally in the US dollar, maybe three to four percent, and then it's going to go right back down again. Because you have a protectionist government, and part of that protectionism, what is a better tariff than just depreciate your currency?”
Rosenberg suggested buying gold as hedge against a weak dollar: “Gold is perfectly inversely correlated with the US dollar. If you want to hedge against the US dollar as opposed to inflation... you have to have some gold in your portfolio.”
Now that you’ve heard from our notable SIC speakers, we’ll share the Mauldin Economics perspective on gold.
Physical gold is not for speculation. You don’t buy gold to get rich quickly. It’s a long-term investment. More importantly, gold is an ideal hedge against currency devaluation, a financial crisis, or a black swan event.
Most investors are underweight gold and won’t move to correct their mistake until it’s too late. In some ways, we are lucky today—gold ’s price is a relative value compared to where it will be in the coming years. You still have time to hedge your portfolio against the financial headwinds that are already looming on the horizon.
But perhaps not much time. Tech stocks like Facebook and Amazon have led the market’s gains over the past several years. Today, they no longer look invincible.
In this increasingly volatile environment, allocating some of your liquid assets to gold is a prudent move.
Still, most investors stumble when it comes to acting on the recommendation. How do I buy gold? Should I buy gold bullion or collectibles? Is it better to get coins or bars? Where do I store it? And why even bother with physical gold when there is an ETF for everything?
Thankfully, our friends at the Hard Assets Alliance (of which Mauldin Economics is a proud member) have put together a quick-read ebook titled, Investing in Precious Metals 101—Everything You Need to Know About Buying and Storing Physical Gold and Silver.
You can download it right here. Simply enter your email address and become the best-informed precious metals investor you know.
Once you get your free copy of the ebook, you’ll also receive a welcome letter from Olivier Garret, who does double duty as CEO of Mauldin Economics and the Hard Assets Alliance.
Mauldin Economics and its principals all hold precious metal accounts with the Hard Assets Alliance, and have for years. Some of us are principals in the business.
The Hard Assets Alliance itself offers the most transparent, easy-to-use, and secure online bullion trading platform we know of.
It works with the most reputable bullion dealers, which bid on your business, therefore ensuring competitive pricing.
It sells only investment-grade precious metals—no grossly marked-up collectibles or semi-numismatics.
It offers low-cost storage in six ultra-secure, non-bank vaults (two in the US and four abroad) run by first-class storage companies like Brinks or Loomis.
Your precious metals are fully allocated. You aren’t buying a “piece of a bar.” Your metal is owned by you, directly.
You can sell or take delivery of your metals at any time, all through an easy-to-use online account.
These are only a few of the many features that make the Hard Assets Alliance special.
The ebook, Investing in Precious Metals 101, will answer most of your questions on the subject. It’s one of the best resources available on how to invest in physical precious metals.
Best of all, it’s free. Do yourself a favor and get up to speed on the most valuable hedge you can add to your portfolio.
We hope this SIC update, along with the e-book, will help you make informed investment decisions that will bring you prosperity and peace of mind.
Visit the Hard Assets Alliance and get a complimentary copy of Investing in Precious Metals 101 today.