Financial reporters are calling it a “flash crash.”
Take a look…
Gold trades around the world. And as markets opened in Asia today, it plunged as much as 4.5%. Then, mostly before markets opened in Europe, it bounced 3.5%.
As I (Chris Lowe) type, it’s up 2.3% from its flash-crash lows.
We don’t spend too much time thinking about short-term gyrations like this… or the technical reasons they happen. But the long-term picture for gold is also troubling…
Even with the recovery, gold is down 15% over the past 12 months.
And it’s down 16% since its all-time high of $2,063 in July of last year.
So today, we’ll look at why gold has been doing so poorly. And I’ll show you why it’s still worth holding as a special type of portfolio protection.
Each week, thousands of people subscribe to one of the 20 paid investment advisories we put out at Legacy Research.
It’s the publishing alliance behind Teeka Tiwari, Jeff Brown, Dave Forest, and Jason Bodner.
Our mission at the Cut is to make sure you never miss one of their big moneymaking, or wealth-protection, ideas.
I don’t mean the kind of ideas you come across on CNBC or in The Wall Street Journal.
At Legacy, we don’t do mainstream. We believe the best opportunities are found in the disconnect between the mainstream narrative and what’s really going on.
This was in August 2018 – right after we created the Cut for all paid-up Legacy subscribers.
Gold sentiment was in the ditch. The price of an ounce of gold was down 38% from its all-time high at the time.
And gold stocks were beaten down even further.
Things had gotten so bad The Vanguard Group, one of the world’s largest asset managers, shuttered its flagship precious metals mining fund.
Mom-and-pop investors didn’t want to touch gold… or gold stocks.
But as we showed you, beaten-down extremes like this are when you want go against the crowd and buy.
That turned out to be a good call…
Gold is up 47% since then. And gold mining stocks, tracked by the VanEck Vectors Gold Miners ETF (GDX), are up 79%.
And the timing of that move has left a lot of folks scratching their heads.
We’ve seen consumer price inflation in the U.S. surge about 5% over the same time. And investors widely view gold as an inflation “hedge” – something that will offset the loss of buying power inflation brings.
There are two reason for this…
First, gold is a hard asset. It’s hard to produce more of relative to existing supply.
Each year, we dig up the equivalent of about 2% of the world’s above-ground gold supply.
Second, there’s only a fixed amount of gold on Earth – about one ounce per person alive today.
Gold is chemically indestructible. So it’s one of the few assets that can preserve buying power over hundreds… even thousands… of years.
And as gold aficionados are fond of pointing out, an ounce of gold bought you a top-of-the-line toga in ancient Rome…
It also buys you a high-quality men’s suit today.
In August 1971, President Nixon took the U.S. dollar off the gold standard.
He abolished the fixed exchange rate of $35 per ounce of gold that existed since the 1944 Bretton Woods currency agreement.
That’s when the fiat-money era began… and the folks in Washington started inflating the currency without worrying about backing new dollars with gold.
Since then, the price of gold has risen at an annualized rate of 8.2%. (That’s how much it went up if you spread the gains evenly across each year.)
But the S&P 500 has done even better. It’s risen at an annualized rate of 11.2% over the same time.
And in any 5-year or 10-year period… you can see drops of 25% or more in the value of your gold.
But it’s important to understand something about gold that you don’t often hear about in the mainstream… Inflation hedging isn’t the only reason to own it.
He’s a former investment banker who heads up our Tom’s Portfolio advisory.
His main focus there is gold and gold mining stocks.
And Tom has skin in the game. In 2018, he liquidated his dollar savings – about $1 million worth – and used it to buy gold.
Here he is on the gold and inflation conundrum…
It’s true that gold is a hedge against inflation. But that’s a very narrow and unsatisfying way of looking at gold. And it doesn’t give credit to the other protections it offers.
I prefer to see gold ownership as a shelter from general financial mayhem and discord. And given the situation we find ourselves in – a gigantic credit bubble – that may be more important than gold’s role as an inflation hedge.
Said another way, gold helps preserve the buying power of your savings in all sorts of turmoil, not just inflation. And I think that’s a very important distinction to recognize.
Here’s how I put it back in August 2018…
One reason you own gold and other hard assets is as “disaster insurance.”
They tend to rise in price when folks are worried about rising political and economic risks. And if the world goes to hell in a handbasket, these will be the last assets left standing.
Unlike stocks, bonds, options, and other financial assets, gold’s value doesn’t depend on someone else’s promise to pay.
That makes it crisis-proof in a way these other financial assets are not.
You’ll probably remember the 2008 crash. It took the S&P 500 down as much as 57% peak to trough. And it kicked off the global financial crisis.
Gold initially fell along with stocks as traders sold their gold to satisfy margin calls.
Then, over the next three years, it rocketed from $724 an ounce to more than $1,900 an ounce.
That’s a 162% gain – a near triple in price.
Gold did what it was supposed to do: It disaster-proofed your portfolio.
So unless you think there’ll never be another crash, don’t give up on your gold.
And if you don’t already own some gold, now is a good time to pick up some disaster insurance on the cheap.
An easy way to get started is with 1-ounce bullion coins.
These are different from collectible – or “numismatic” – coins, which carry higher premiums over the quoted gold price.
Stick with 1-ounce South African Krugerrands, Canadian Maple Leafs, and American Eagles.
These are easy to store. They’re highly portable. And they’re widely recognized around the world.
More important, when the next crisis hits, they’ll help shield your wealth from financial turmoil.
And just like in the summer of 2018, now is a great time to buy. Mainstream investors have little interest in gold right now.
To us, that spells opportunity…
Regards,
Chris Lowe
August 9, 2021
Dublin, Ireland