With corporate earnings still being clouded by the availability of cheap money from the government, and the nation’s GDP barely chugging along, investors are in a bind. Desperate for some kind of a return, they’ve driven bond yields into the ground, and bid up the price of dividend-paying stocks. Valuations on dividend funds are getting so ridiculous that some funds are actually closing down new investment. The only commodity in abundance in markets today is uncertainty, and the main beneficiary these days is gold.
That same uncertainty is also driving investors to pull money out of the European Union and the UK in the wake of the Brexit vote. To counter the outflow, Britain’s central bank is pouring so much money into the economy that some analysts have used the term “sledgehammer easing” to describe the sudden rush of cash. Uncertainty is driving down yields on almost any relatively safe investment.
The level of risk, coupled with the weakness in returns, is pushing investors into a defensive mindset. Now the polarizing election in the U.S. is the last straw for many large investors. When the market goes defensive, watch for gold prices to skyrocket—and that’s exactly what we’re seeing.
In his 2021 year-end letter, Baupost's Seth Klarman looked at the year in review and how COVID-19 swept through every part of our lives. He blamed much of the ills of the pandemic on those who choose not to get vaccinated while also expressing a dislike for the social division COVID-19 has caused. Q4 2021 Read More
Gold Prices Soar
Gold’s up nearly thirty percent so far this year and big investors are still piling in. The precious metal is within striking distance of $1,400 an ounce, which may turn out to be only a minor speed bump on the way to even higher prices. Precious metals are caught in a near-perfect storm of demand. With central banks undermining currency and bond valuations, the drive by investors large and small to convert cash to a liquid hard asset with intrinsic value has turned into a mad dash.
The Preservation Strategy
For the wealthy staying invested for a slim margin just isn’t worth the downside (more on this later). It doesn’t take much uncertainty and risk to outweigh a meager two- or three-percent annual return. Market crashes are a routine part of our world and anyone alive in 2009 remembers the pain of watching thirty and forty percent of his or her paper wealth vaporize. Wealthy investors are saying no to the market in a big way and opting for preservation over paltry, high-risk gains.
Not Just Equities Threatened
We’re in a peculiar place when it comes to economic risk. Central banks seem to be caught in a headlong sprint toward chaos and they’re dragging us all along for the ride. Not only are the returns on paper wealth jeopardized, but your cash savings are threatened by nearly constant dilution. In the old days that circumstance would spur massive inflation. These days the threat is deflation, eroding prices for goods and services which is in many ways worse than inflation.
Hopefully you were been listening months ago when we were suggesting that small investors skim profits from the stock market and convert those to liquid hard assets, like gold and silver coins, from the U.S. Mint. If you did, you made a lot of money. If you haven’t been converting equity profits into gold, it’s not too late to start. Experts have predicted prices going to $1,900 and beyond – but for smart gold investors that’s just gravy.
As mentioned earlier, when risk spikes, the wealthy grab their chips and go home – why? Because they know the most crucial portion of the investing puzzle, and—not surprisingly—the one “experts” and salesmen downplay, is not gains. It’s preventing losses. Sure gold’s gone up, and in this ominous investing climate it’s likely to keep climbing. But what’s most important for the long term is that it preserves wealth. Money put into gold holds its buying power over decades, something stocks and cash can’t claim.
Don’t Forget Silver
While gold’s performance has been impressive, silver has outperformed both gold and the S&P 500. Silver prices have gained nearly fifty percent and the price is flirting with $20 an ounce. Silver’s dual role as both a precious metal and an in-demand industrial metal for solar manufacturing and consumer electronics give it a unique composition as a liquid hard asset.
Cash is really not king in our current economy. Hard assets will be the only true protection you have going forward. Once again we could see paper wealth vanish in the fires of a global economic meltdown and, with no safe investments yielding a decent return, there’s no margin in paper right now.