Gold is not dead.
Just ask Germany.
The Bundesbank of Germany announced recently that it had completed its $13 billion transfer in gold bars. These bars were stored in vaults below Lower Manhattan. This will allow the metal to be brought home again. In 2013, the country began repatriating its gold with the aim of storing half of its remaining reserves in Frankfurt.
Germany will have disposed of all its gold in Paris after the transfer. It left behind 13% of its London reserves and about one-third in New York.
The rise of digital cash such as Bitcoin and other cryptocurrencies has led to a steady decline in physical cash usage, making it feel archaic.
Gold has a special status. It is stronger than the couple of twenties you have in your wallet. It offers security and safety. It is trusted more than any government-issued currency.
Look at the euro, a currency that represents a union of nations that is on the verge of collapse. (Germany is sure to feel better having its gold back home.
Or the U.S. Dollar – a currency that is backed by approximately $20 trillion of debt.
Gold is alive and well, but it also needs to be an important part of your portfolio…
Let me start by saying that I am not a gold bug.
First and foremost, I am a trader. I usually have a very short target time. I was raised to appreciate the flexibility of options and quick trades that can bring in nice profits. It doesn’t matter if the market is range-bound or bear. If you know where to look, there’s always a way for you to make a profit.
But gold can be tricky.
The metal doesn’t pay any dividends so there is an opportunity cost.
Gold shines in times of uncertainty, weak economic growth, or geopolitical discord. Investors will turn to gold when stocks are falling apart. This is because they can store their greenbacks in safe places rather than just convert them to cash and stash it under their beds.
Based on the trading activity of gold, it seems that many investors aren’t sure what to make of this market rally.
The Hedge
The price of gold rose more than 8% in 2016, almost keeping up with the stock markets, while the S&P 500 gained 9.5%.
The World Gold Council actually reported that gold demand increased 2% to 4,309 tonnes in 2016, a new three-year high.
We have already doubled our gold gain in less than two months, surpassing the S&P’s gain by 5%. This is quite remarkable.
Stocks are strong when investors believe the market will rally and they are willing to trade gold for higher-flying stocks with better returns.
The S&P 500 rose by more than 200% during the dot-com bubble. It rose from January 1995 to September 2000. During the same period, gold fell 27%.
You can also look at the rally in the market from October 2012 to January 2016, when S&P 500 gained 37% while the yellow metal fell 35%
Short summary: When times are good, gold can be the forgotten child, left in time-out, until he can play well with other assets.
Gold is the prodigal child of security and protection when times are difficult.
If the stock market is at record highs and is setting new records every day, then why is gold still a favorite?
There are many potential stumbling stones in the financial market that could cause everything to tumble sharply lower. Let’s take a look at some of these potential pitfalls:
- Stocks are too expensive. Stocks are overvalued according to conventional measures. We are preparing for a return to the mean.
- Washington is in chaos. The new president has made a series of drastic moves that could have serious repercussions on the U.S. and global markets. This could include a sharp slowdown in earnings.
- The next European exit. The EU and the U.K. are struggling to navigate Brexit and major upcoming elections, such as those in Italy, Germany, and France. Many investors have not paid attention to Europe’s potential growth and it could be the next hot trade as the drama in the U.S.
- The derivatives crisis. The U.S. faces a collapse similar to the one that occurred in the housing sector. America’s top five banks are now investing heavily in derivatives linked to interest rates.
- The Fed wild card. According to the Federal Open Market Committee, the Federal Reserve intends to raise interest rates “fairly quickly”. As it is more expensive to service our debt, higher interest rates will drain money from the economy. Stock rallies are also affected by higher interest rates.
These issues are being closely watched by investors, who wait for the right stock to be taken off their current tracks.
Your Disaster Insurance
This doesn’t necessarily mean that the market will fall off a cliff any time soon.
The one thing that I believe every speculator should remember is “The market can remain rational for longer than you can stay solvent.”
A stock or index that has reached all-time highs does not necessarily mean it cannot go higher.
It doesn’t hurt if you have a hedge to protect yourself from the worst.
The perfect hedge is gold: it’s your insurance against Washington, Washington, reckless bankers, Europe, and even the black swan, which hasn’t yet hit our radar. Investors know that gold is a reliable safe haven even in the midst of record stock market gains.
Instead of investing in paper gold, physical gold is the best choice.
It doesn’t matter how physical gold is added to your portfolio. The important thing is that it exists and is available to you as a safe haven in case everything goes wrong.
