The Doomsday Clock keeps ticking…
First created in 1947, the Doomsday Clock is meant to symbolise the risk of man-made global catastrophe.
The clock ticks forward or backward based on how close scientists believe we are to a global catastrophe (represented as midnight).
At just 2 minutes and 30 seconds to midnight, the clock hasn’t been this close to midnight since 1953, when the Soviet Union tested its first hydrogen bomb.
And with the threat of a fast-nuclearising North Korea … the clock seems to be edging closer and closer to midnight.
(Uncertainty in the U.S. White House, a weak U.S. dollar, and a string of recent terrorist attacks further underscore the high levels of uncertainty of recent months that are threatening to become a “new normal”.)
Now, I don’t believe Armageddon is imminent. I’m not stashing bottled water and canned goods in an underground bunker. But today’s uncertain times have me thinking about risk – and how investors should position themselves.
One of the best assets to own during times like these is gold… and though you may have heard it before, it bears repeating.
Gold is a safe haven
History has proven time and again that gold is one of the best ways to hedge your portfolio – that is, to protect it when stock markets everywhere fall.
That’s because gold and stock markets are negatively correlated assets.
Correlation is the relationship between two or more assets. It measures what happens to the price of one asset when the price of a different asset changes. When they are negatively correlated, their prices move in opposite directions. This evens out your overall performance when things get bumpy.
The table below shows the correlation between gold and major Asian equity market indices. Over the past ten years, returns on gold have exhibited a negative correlation with stock returns. That means when equity markets go down, gold usually goes up – and when gold goes down, equity markets tend to go higher.
For example, over the past 10 years, the correlation between the S&P 500 and the MSCI Asia ex Japan index has been 0.78… and between the U.S. index and the Singapore stock market index, it’s been 0.96. This means that there’s a close correlation of both of these indices with the S&P 500.
But the correlation between the price of gold and the S&P 500 is close to zero. That means that their prices move with virtually no relationship to each other at all. Of the indices below, the price of gold moves most closely to the STI – and even then, it’s only a correlation of 0.29.
How does this work in practice?
During the financial crisis of 2008-2009, the world’s stock markets fell an average of about 50 percent peak to trough. Around the world, more than US$34 trillion in value was wiped out. That’s more than the 2008 economic output of the U.S., European Union and Japan combined. It was the biggest crash since the Great Depression in the 1920s.
But anyone who held gold during that period was better able to withstand the market volatility because they knew they had “insurance”.
As shown in the graph below, from June 2007 (when the financial crisis first broke) to the bottom in March 2009, the price of gold rose from about US$670 to US$938 an ounce, a gain of about 40 percent. Over the same period, the S&P 500 dropped about 65 percent. Many markets across the world were down more.
But gold’s bull run didn’t end in March 2009. Fear and uncertainty remained at extreme levels until August 2011, when global central banks opened the floodgates of money for more than two years. Eventually, confidence slowly returned to the global economy. By that time, gold had risen to over US$1,900. From the onset of the financial crisis to the start of global easing, gold prices appreciated more than 150 percent.
As the crisis came to an end, investors who had diversified with gold avoided gut wrenching portfolio losses and panic selling... and they were positioned to take advantage of the many value-priced investment opportunities in the post-crisis world.
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Unlike paper money, gold is a permanent store of value
People have used gold as a currency or medium of exchange for thousands of years. Meanwhile, other forms of money – livestock, shells, enormous stones and tulips – have come and gone.
Gold has withstood history and maintained its inherent value. It’s durable, easy to transport, looks the same everywhere, is easy to weigh and grade [is it?]… it’s the perfect store of value.
Unlike gold, which is finite, the supply of cash is infinite. Every form of paper money (U.S. dollars, euros, yen, etc.) has a potentially unlimited supply. All central banks have to do – and they’ve been doing this madly for years – is to turn on the printing press.
Paper money can be printed and printed until it’s worthless. It’s legal tender backed by nothing more than faith in the government that prints it. Governments are free to print money as they want.
However, if a government prints too much money, its currency will lose eventually lose value. In a worst-case scenario, a country’s paper money can become worthless. It has happened in France, China and Germany. It happened much more recently in Zimbabwe. And in Venezuela today, the Bolivar is as good as worthless.
But governments can’t print gold. Gold isn’t based on government promises – it’s a real asset that holds real value. That is why gold is an attractive storage of wealth.
Proponents of the gold standard (which the U.S. abandoned in 1971) think that money printing by central banks is out of control and will end in disaster. The gold standard is never coming back. The world doesn't have enough gold, and it would deeply disrupt the entire global economic system.
But as a store of value, gold will continue to trump paper. And the more money the world’s central banks print, the more valuable gold will become.
In short, gold is insurance against financial calamity.
By owning it, you’re simply protecting your wealth if (or when) things fall apart. And with geopolitical uncertainty… a weakening U.S. dollar… and massive money printing, everyone should own a little gold today.
So how can you own some?
Some people have gold bars or coins that they can hold in their hands or hide under the floorboards of their house.
But stick to buying gold from a firm that sets your metal bars in a high-security vault, where you can verify that your gold is segregated and safe.
And obviously, storing your gold bullion with a firm in a politically stable country is preferable to holding it with one on the verge of a coup.
My preferred dealer for gold coins (and other precious metals) is a U.S.-based firm called Asset Strategies International. They’re scrupulously honest and fair (by no means a common thing in this corner of the investment world). And they’ll give you a good price.
My number one recommendation for physical gold purchase and storage is a firm called Silver Bullion. Despite its name, the Singapore-based company provides segregated ownership of gold, silver and platinum.
(Just so you know… we don’t have any commercial relationship with either of these two firms. I personally know the founders of both, and I’ve referred friends and family to them any number of times. I’m recommending them only because I know they’ll give you great service at a great price.)
Exchange traded funds (ETFs)
One of the easiest ways to get exposure to gold is through a gold ETF like the SPDR Gold Shares ETF (New York Stock Exchange; ticker: GLD, Singapore Stock Exchange; ticker: O87 or Hong Kong Stock Exchange; ticker: 2840), which tracks the price of gold. It’s the largest physical gold ETF in the world.
Investors who want to own gold but don’t want the hassle and expense of physical ownership can choose to own GLD.
GLD isn’t the same as owning gold, though. You can’t decide you want a few gold bars instead of your shares and cash them in.
The SPDR Gold Shares ETF asserts that every share of the ETF is backed by a bar of gold held in a vault that’s completely separate from the custodian bank’s own stash of gold.
If you want to bet aggressively on the price of gold rising, buying gold stocks will likely produce more bang for your buck. But maintain stop loss levels – because if gold tanks, gold stocks will do much worse.
If you can stomach the volatility, my preferred way to invest in gold stocks is through a gold-mining ETF like the Sprott Gold Miners Fund (New York Stock Exchange; ticker: SGDM). The portfolio of gold stocks in an ETF offers diversification from betting on one or two companies. The Sprott Gold Miners Fund holds the 25 large and mid-cap mining stocks most correlated with the price of gold. SGDM also bases each stock's weighting on fundamental attractiveness, such as growth and strong balance sheets.
No matter how you choose to own gold, just make sure you stock up on a little now. It will help protect your wealth no matter what happens in the future.