Trending
Written by: Michael Joseph, CFA | Stansberry Asset Management
Should I still own gold?
It’s the #1 question we’ve gotten from clients over the past several months. Some have big gains and wonder if they should cash in. Others are lured by the big run up in price but worry they’ve missed it.
The way we see it, a lot of investors are thinking about gold the wrong way.
Was owning gold a trade? Were you hoping to cash in on momentum? Geopolitical uncertainty? The so-called debasement trade?
If so, congratulations! If you bought gold at nearly any point over the past few years, you’re probably thrilled with your returns. But as a trade, you should have already established the when and/or why of selling the position when you entered it to begin with.
Look, we at Stansberry Asset Management (SAM) are fans of gold. We even have a strategy dedicated to it. But when any asset has a run up in price like gold has had, whether it’s a stock, real estate, crypto, tulips, you fill in the blank, it is bound to attract attention from people that like the idea of making a quick buck.
Is it possible? Of course. But it isn’t the game we like to play. The price of gold is largely sentiment driven. And investors have a way of being… well… fickle. That makes timing short-term price movements (never an easy endeavor) particularly difficult when it comes to gold. And we prefer to invest in themes that we can be reasonably sure about.
So, what are we feeling confident about as it relates to gold? That the U.S. Dollar (and all other fiat currencies for that matter) will lose their purchasing power over time. History suggests there may be something to this idea. Take a look.
Source: U.S. Bureau of Labor Statistics
With few exceptions, the dollar buys less and less over time. Recurring federal budget deficits in the neighborhood of $2 trillion every year suggest that the US national debt (currently over $38 trillion) will continue to grow.
Here are options to reduce the debt:
Cut spending (not politically expedient)
Raise taxes (debatable effectiveness and also not particularly popular)
Grow out of it (nice thought, but that is A LOT to grow your way out of)
If those seem unlikely and/or uncomfortable, there’s always the kick the can approach – continue to finance fiscal shortfalls with increased debt which is purchased by the Federal Reserve. Where’s the money come from? It’s literally created out of thin air, pumping more and more money into supply and devaluing the currency in the process.
If this is all sounding a bit mad (and it should), you now understand why we believe in owning gold. Not as a growth engine. Not as a way to make a quick buck. But to preserve your wealth and purchasing power. As you can see below, over time the price of gold and M2 money supply are highly correlated.
Source: FactSet
Returning to the original question: Should I still own gold?
For investors that care about preserving their wealth, our answer is an emphatic: YES!
But what does owning gold really mean? Mining stocks? ETFs? Burying coins in the backyard at night so the neighbors don’t get wise?
The way we approach it is to divide the investable gold universe into four main areas:
Gold Bullion – Owing the actual metal has its perks. You avoid the myriad risks that miners face. There are plenty of options, including direct ownership, depository companies, and physical-backed ETFs. Plus, the physical metal tends to outperform gold miners in most years.
Major Gold Miners – If bullion is so great, why own miners at all? Simply put, when they outperform, they can outperform big time. The reason is operational leverage. Many mining costs are fixed. That means when the price of gold soars, that mostly drops to the bottom line as pure profit. Suddenly these miners look highly profitable, are able to pay off debt, and look like incredible businesses. When we say major miners, we’re referring to those with several operating mines that are typically producing over 1 million ounces or more per year.
Emerging Gold Miners – These range from miners on the cusp of becoming major producers to those with literally no operations (or revenue) but in possession of ‘pounds in the ground’. These behave like the majors but with an extra kick. When miners are up, these (as a group) tend to be up even more. Unfortunately, the same is true to the downside.
Gold Royalty Companies – These companies don’t mine anything. Instead, they provide financing to mining companies for their exploration and production projects. In exchange the royalty companies receive a royalty on the gold production of the mine. These companies avoid a lot of the headaches that miners deal with, can be extremely profitable, and simply put, they have smoked most other gold investments over the past few decades.
However…
There is a best and worst time to own all these categories. While we like having exposure to all of them, our Gold strategy is an active one where we will shift allocations depending on how favorable the environment is to each type of investment.
We’ve been thrilled with the results of this approach, and in fact have been a PSN Top Guns award-recipient for quarterly, one-year and three-year performance for the SAM Gold strategy. This strategy is available on Turnkey asset management programs (TAMPs) like SMArtX and Advyzon.
To learn more about how SAM thinks about gold, we encourage you to download our whitepaper here.
Michael Joseph, CFA serves as Depuy Chief Investment Officer and Portfolio Manager at Stansberry Asset Management (SAM), a multi-asset class registered investment advisor with $1.3B+ in assets under management. He is widely recognized as an industry thought leader through several published articles and as the author of A Dollar for Fifty Cents: Proven Strategies to Outperform the Market with Closed-End Funds. Learn more here.
Stansberry Asset Management ("SAM") is a Registered Investment Advisor with the United States Securities and Exchange Commission. File number: 801-107061. Such registration does not imply any level of skill or training. Past performance does not guarantee future results.
Related: U.S. Earnings: What’s Changed, What’s Driving Growth, and Where to Look