Welcome to our regular Friday mailbag edition of The Daily Cut.
This is where you get to put your most pressing questions to your favorite analysts… and have them respond in print.
And this week… I (Chris) will answer what’s, for my money, the most important question we’ve gotten all year.
It’s from a Legacy subscriber I met at last year’s Legacy Investment Summit in Carlsbad, California.
It brings up a “huge fork in the road” between some of the analysts’ opinions here at Legacy.
But before we get to that, let’s turn to one of the hottest topics in the Legacy Research mailbag lately – gold.
As you may know, our globetrotting contrarian analyst Tom Dyson has made a $1 million personal bet on gold. And he’s crafted a unique way to take advantage of it (including a small, highly speculative position in what I’d call “moonshot” gold stocks).
Tom discussed it all in his urgent gold briefing on Wednesday night.
And it’s prompted a flood of questions. For example, this one on the best way to own gold stocks. Fortunately, it’s something former hedge fund manager Teeka Tiwari addressed over at his free daily newsletter, Palm Beach Daily…
Reader question: I’m sure the question has been asked before. But with regards to gold, if you had to make one choice, is it better to own physical gold or gold stocks? In other words, what are the advantages and disadvantages of owning one over the other?
– Edward W.
Teeka’s answer: For the first time since 1999, I’m buying sizable quantities of gold for my personal account.
As you may know, my publisher doesn’t allow me to own stocks I recommend to you. It’s an important policy that prevents conflicts of interest.
So instead of buying my three favorite gold stocks, I’ve decided to buy SPDR Gold Shares (GLD) for my own account. I think I’ll at least double my money over the next 18 months.
While that’s a great return, it’s nothing compared to how much I think you can make from my top gold stock ideas.
During a gold bull market, the real magic happens when you choose to own gold stocks instead of physical gold. It all has to do with leverage. When gold prices go up, gold stocks go up much, much more than physical gold prices.
Here’s why that happens…
Let’s say gold rises from $1,500 to $2,000 per ounce. If you own physical gold, you’re up 33.3% at this point.
Now, let’s say it costs a gold miner $1,000 per ounce to mine the gold from the ground. At $1,500 per ounce, the miner is making $500 per ounce ($1,500 minus $1,000).
But if gold rises to $2,000, that miner is now making $1,000 per ounce. It does not cost the miner any more money to pull the gold from the ground. So a mere 33.3% increase in gold’s price leads to a 100% rise in operating profits.
We saw this leverage at work from 2000 to 2007, when real interest rates declined 65%. This sparked the next huge bull market in gold.
I started buying gold in 1999, when it was as low as $252 per ounce. By 2011, prices were as high as $1,895 – a 652% gain. But gold stocks such as SSR Mining (SSRM), Eldorado Gold (EGO), and Iamgold (IAG) surged an average of 1,540%.
And during the 2008-2011 bull market, gold stormed 166% higher. But as measured by the MVIS Global Junior Gold Miners Index (MVGDXJ), the average gold stock surged as much as 611% higher.
Now, back to that all-important question I mentioned up top…
Reader question: Hi Chris, I met you briefly in Carlsbad at the summit. My new friend, Ed (a naval officer), and I talked to you at breakfast and complimented you on your handling of the group sessions.
I have a question for you and the Legacy family of experts. With all of the knowledgeable staff, and all of the expert analysis, I find myself feeling like my financial future is in jeopardy if I choose the wrong path.
The summit was awesome. Learned a ton. However, with the current state of affairs at hand, I feel like there is a huge fork in the road between the experts.
For example, Jeff Brown and Jason Bodner are looking for great things in the second half of 2020 with their stock picks. Bill Bonner and Dan Denning are predicting the end of the dollar, and just looking at the stock market could cause blindness! One word, GOLD.
Teeka Tiwari I put on the gold side of things with his crypto, yet he’s also got a few different stock opportunities. He is a microcosm of the entire Legacy family.
The $64,000 question: Who’s right?
Right now, I feel the architects at Legacy are building separate structures. I’d like to know which blueprint to follow for my best chance at sustaining, and possibly obtaining more, wealth until we see how this unfolds.
I’d like to see a “starter plan for asset allocation” for Legacy members. That would be good way to begin and not feel like I don’t have enough to put in everyone’s recommendations, while learning all about the fantastic choices Legacy affords me.
– John M.
My answer: Hi, John. Good to hear from you. I remember chatting with you in California.
Like I mentioned up top, for my money, this is the most important question we’ve gotten all year. Because it speaks to an important truth about investing – no matter how hard we try, we never know for sure what’s coming down the pike.
You’re right. Each of the analysts at Legacy has his own view on what’s coming. Bill and Dan are worried the U.S. stock market is overvalued and due to fall. Jeff and Jason are looking forward to a strong second half of 2020. We can’t know yet who’ll be proven right. And that can be frustrating.
But you should never base your investing on the idea that you can correctly predict the future. We can make educated guesses about the future. We can “connect the dots,” as Bill likes to say. But we can never be sure ahead of time if we’re right. That’s why Bill’s motto is, “Sometimes right. Sometimes wrong. Always in doubt.”
You hint at the solution in your question. It’s following a simple asset allocation plan. This is just a fancy way of saying you split your wealth into different allocations, which are like “buckets.” Each bucket contains a different asset. You never put all your wealth into one bucket.
Your job as an investor isn’t trying to know the future in advance. That’s impossible. So you never bet the farm on any one outcome.
Instead, you put some of your nest egg in stocks… some in crypto and other speculations… some in bonds… some in cash… some in gold… some in real estate… some in collectibles.
If you find Bill and Dan’s bearish case convincing, now is a great time to take profits on some of your stocks and up your allocations to gold and cash. These are great defensive assets.
You don’t have to sweat the details. Studies of different asset allocations show that it’s not so much the exact allocations you choose that help you build and preserve wealth… it’s simply following an asset allocation strategy. Because this helps protect you through whatever the market throws at you.
The important thing is that you never go “all in” or “all out” in your portfolio. You never put 100% of your wealth in stocks, crypto, or other risky investments. Similarly, you never go 100% into cash or gold.
If you do the former, you leave yourself exposed to what Bill calls a “ruinous loss” – one you never recover from.
If you do the latter, you pull the plug on the part of your portfolio that tends to generate the best long-term returns.
If you’re looking for a starter asset allocation guide, I recommend you read the first chapter of our Coronavirus Crisis Playbook. It’s a free special report we put together for you and your fellow Legacy readers to help you through the coronavirus panic.
Teeka wrote it. It distills his thinking on what the best approach is and why the typical mainstream recommendation is wrong. He breaks it down into eight asset classes. He even gives recommended allocation ranges. You can find it along with our other free special reports in the Legacy Lockdown Library.
Finally, kudos to paid-up International Speculator readers who acted on Dave Forest’s recommendation and bought Canadian gold stock Pure Gold Mining (PGM.V).
Dave added PGM.V to the model portfolio last August. Here’s the good news he sent out to his readers on Tuesday…
I wanted to alert you to one of our positions that’s having an absolutely spectacular run: Pure Gold Mining (PGM.V or LRTNF).
Over the past week, Pure Gold is up almost 50%. That includes a massive 39% spike in the last two trading sessions alone.
Investors are flocking to the gold space over concerns about rampant global stimulus and flagging economic growth. As I suspected, Pure Gold has been a go-to for incoming buyers.
PGM.V is now up 103% since Dave’s recommendation. Over the same time, gold bullion is up 16%.
It’s a classic example of gold stocks smashing the returns of physical gold due to leverage… as Teeka described earlier.
That’s not even the best-performing precious metal mining stock Dave has recommended. The top three gainers are up 190%, 285%, and 409%.
Tom intends to profit from exactly this kind of explosive power in his new gold-investing advisory, Tom’s Portfolio.
Here’s that link again to hear from him on the moonshot gold stocks he’s been tracking.
And if you already joined Tom’s advisory this week, congratulations. You made a great choice. You’ll have full access to his portfolio on the password-protected site here.
Do you have questions about gold for Tom or the other analysts here at Legacy? Do you follow a sensible asset allocation plan in your own portfolio?
Let us know at [email protected].
Regards,
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Chris Lowe
May 22, 2020
County Wicklow, Ireland
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