Sunday , November 17 2019
Home / Jay Taylor Media / You’re Probably Underinvested in Gold

You’re Probably Underinvested in Gold

Summary:
The U.S. was founded 243 years ago, and in that time it’s amassed some trillion in debt and counting. As massive as this number is, it’s still less than half what Elizabeth Warren says her government-run “Medicare-for-all” program would cost… over only 10 years. The Massachusetts senator and presidential contender made the announcement this morning, responding to critics who’ve demanded to see some details on her proposal. According to her campaign, the price tag to provide Medicare-style health care to every American would be “just under trillion.” To put things in perspective, that’s close to one-fifth of the total wealth in the entire world, which Credit Suisse estimated to stand at 0 trillion in 2017. The trillion is just the nominal price tag. It doesn’t take into

Topics:
Frank Holmes considers the following as important: , , , , , ,

This could be interesting, too:

Peak Prosperity writes Why The Risk Of A Correction Is So High Right Now

Peak Prosperity writes The Federal Reserve Is Directly Monetizing US Debt

Mises Institute writes The West Was Never Really an Enemy of Soviet Communism

Charles Hugh Smith writes Medicare-for-All “Socialism” Is Just Another Racket

The U.S. was founded 243 years ago, and in that time it’s amassed some $23 trillion in debt and counting. As massive as this number is, it’s still less than half what Elizabeth Warren says her government-run “Medicare-for-all” program would cost… over only 10 years.

The Massachusetts senator and presidential contender made the announcement this morning, responding to critics who’ve demanded to see some details on her proposal. According to her campaign, the price tag to provide Medicare-style health care to every American would be “just under $52 trillion.”

To put things in perspective, that’s close to one-fifth of the total wealth in the entire world, which Credit Suisse estimated to stand at $280 trillion in 2017.

The $52 trillion is just the nominal price tag. It doesn’t take into account incidental costs, such as what to do about the estimated 2 million Americans who would lose their jobs should private insurance be eliminated. And because the plan would be covered in part by tax hikes on employers, the ultra-wealthy and financial transactions, companies may be less inclined to hire, and people may be less inclined to invest.

The 2020 election is only 12 months away. Early signs point to another term for Donald Trump, according to Moody’s Analytics presidential election model, which has a near-perfect record at predicting outcomes. But impeachment risks are mounting, and Warren is leading the Democratic polls.

I urge investors to prepare for market volatility and currency devaluation. Gold and gold stocks have historically been excellent diversifiers in such times, but new research from the World Gold Council (WGC) shows that most investors are radically underexposed to the yellow metal, even when they believe otherwise.

Gold: Efficient, Effective and Under-Represented

I talked briefly about the WGC’s research about a month ago. The gist of the study is that investors may assume they have adequate exposure to gold because they’re invested in a fund that tracks a broad-based commodity index. The problem with this assumption is that most major commodity indices have a relatively small weighting in gold, and so their gold exposure is much smaller than they realized.

Gold Is Under-Represented in Major Commodities Indices
S&P GSCI Bloomberg Commodity Index
Energy 63% Energy 34%
Agriculture 15% Grains 20%
Livestock 7% Industrial Metals 18%
Industrial Metals 11% Precious Metals 16%
Precious Metals 4% Gold 12%
Gold 3.37% Softs 6%
Livestock 6%

Weights as of January 2019. Gold weighting is a sub weight of precious metals
Source: S&P Global , WGC, U.S. Global Investors

Weights as of June 2019. Gold weighting is a sub weight of precious metals
Source: Bloomberg , WGC, U.S. Global Investors

Take a look at the tables above. The S&P GSCI, which tracks 24 commodities, has only a 3.37 percent weighting in gold. The Bloomberg Commodity Index is slightly better, with a weighting of 12 percent. These percentages shrink even more when you consider that commodities in general represent a small portion of most investors’ portfolios.

“If you are buy-and-hold investor, if you are trying to create long-term strategies, the evidence overwhelmingly shows that gold is a more effective strategic asset than commodities alone,” explains the WGC’s director of investment research, Juan Carlos Artigas, who I had the opportunity to chat with recently.

To illustrate Juan Carlos’ point, look at the following chart. In the 20-year, 10-year and five-year periods through June 2019, gold outperformed all other commodities, including energy, industrial metals and precious metals. Despite this, gold may still be under-represented in some investors’ portfolios.

You’re Probably Underinvested in Gold

“The optimal weight for gold, or the amount of gold that can help investors get better risk-adjusted returns, is between 2 percent and 10 percent,” Juan Carlos says.

Loyal readers know this is mostly in line with my own recommendation of a 10 percent weighting in gold, with 5 percent in bullion, the other 5 percent in high-quality gold mining stocks.

Gold-Backed ETFs at All-Time Highs

At the same time that gold is largely under-represented in many investors’ portfolios, those “in the know” have been buying at a healthy clip. In fact, since the start of the most recent gold price rally, holdings in gold-backed ETFs have climbed to an all-time high. Holdings as of September stood at more than 2,855 tonnes, surpassing the previous high of 2,839 tonnes in November 2012.

You’re Probably Underinvested in Gold

With bond yields at historic lows at the moment, “gold may become an attractive and more effective diversifier than bonds, justifying a higher portfolio allocation than historical performance suggests,” the WGC writes in its latest report, “It may be time to replace bonds with gold.”

Follow the Smart Money

Speaking of gold ETFs, our webcast with my longtime friend and mentor, Pierre Lassonde, was held this week, and by all measures, it was a huge success. I’ve participated in a number of webcasts over the years, but never one with so many registrants and attendees.

I expected no less from the cofounder of gold royalty company Franco-Nevada, whose stock is up more than 473 percent since its IPO in December 2007. That’s enough to beat Warren Buffett’s Berkshire Hathaway by a multiple of nearly four.

You’re Probably Underinvested in Gold

Buffett, as you probably know, is famously not a fan of gold, saying at one point that “it doesn’t do anything but sit there and look at you.”

His low opinion on the yellow metal is in stark contrast to other big-name investors, including Ray Dalio, Stanley Druckenmiller, Jeffrey Gundlach, Paul Tudor Jones, Bill Gross, Sam Zell, Mark Mobius and many other billionaires who have embraced the yellow metal.

With all due respect to Buffett, maybe he should reconsider gold. After all, he changed his mind about airlines. Years after quipping that a “farsighted capitalist” should have shot down Orville Wright at Kitty Hawk and “done his successors a huge favor,” the Oracle of Omaha now owns millions of shares in all four of the major domestic airlines.

“Warren Buffett loves franchises,” Pierre said during the webcast, “and there’s no greater franchise in the world than Franco-Nevada.”

Franco-Nevada investors would no doubt agree. In the past 10 years, the company’s average dividends per share (DPS) growth rate was nearly 20 percent per year.

As Pierre put it, “We could send everyone at Franco-Nevada to Hawaii for 30 years and still be able to afford to continue raising our dividends.”

If you weren’t able to listen in, you can still get the replay by emailing us at [email protected]!

Gold Market

This week spot gold closed at $1,514.40, up $9.85 per ounce, or 0.65 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 1.03 percent. The S&P/TSX Venture Index came in off just 0.91 percent. The U.S. Trade-Weighted Dollar fell 0.61 percent.

Date Event Survey Actual Prior
Oct-29 Conf. Board Consumer Confidence 128.0 125.9 126.3
Oct-30 ADP Employment Change 110k 125k 93k
Oct-30 GDP Annualized QoQ 1.6% 1.9% 2.0%
Oct-30 Germany CPI YoY 1.0% 1.1% 1.2%
Oct-30 FOMC Rate Decision (Upper Bound) 1.75% 1.75% 2.00%
Oct-31 Eurozone CPI Core YoY 1.0% 1.1% 1.0%
Oct-31 Initial Jobless Claims 215k 218k 213k
Oct-31 Caixin China PMI Mfg 51.0 51.7 51.4
Nov-1 Change in Nonfarm Payrolls 85k 128k 180k
Nov-1 ISM Manufacturing 48.9 48.3 47.8
Nov-4 Durable Goods Orders -1.1% -1.1%
Nov-7 Initial Jobless Claims 215k 218k

Strengths

  • The best performing metal this week was platinum, up 2.61 percent, followed closely by palladium, up 2.39 percent. Both platinum and palladium experienced strong demand as hedge funds pushed their net-long positions to five and three-week highs, respectively. Gold traders and analysts were mostly bullish in the weekly Bloomberg survey due to renewed concerns over a trade deal between the U.S. and China. The latest rate cut by the Fed helped remove a negative characteristic of gold – that it doesn’t pay any interest. With real yields now negative, the yellow metal is comparatively attractive.
  • Gold saw its fifth monthly gain in October after benefitting from haven buying amid increased geopolitical tensions. Turkey’s official gold reserves rose $72 million from the previous week to now total $26.5 billion. According to central bank data, Turkish gold reserves are up 42 percent year-over-year. American Eagle gold-coin sales from the U.S. Mint more than doubled in October, versus September and were the highest since March, with total sales of 11,500 ounces.
  • The yellow metal initially fell after the Fed cut rates for the third time on Wednesday, but then quickly regained those loses despite policy makers hinting they might put further cuts on hold. Bloomberg reports that the Fed looks prepared to stop cuts in order to assess the impact on the economy of their reductions over the past three meetings. Dan Pavilonis, senior market strategist at RJ O’Brien & Associates LLC, said “there’s a lot of moving parts now that are creating a theme to be bullish on gold.”

You’re Probably Underinvested in Gold

Weaknesses

  • The worst performing metal this week was silver, with a slight gain of 0.44 percent, despite setting a five-week high on futures net long positions. The ISM Index rose in October by lower than estimates and signals a third straight month of contraction for U.S. manufacturing. The index rose to 48.3 from a 10-year low of 47.8 in September, compared with median projections of 48.9. Bloomberg reports that the low reading highlights challenges for manufacturers such as the ongoing trade war, slowing global growth and a strong dollar.
  • The Chicago PMI reading also missed estimates, posting the lowest reading since 2015 at 43.2 for the month of October. Bloomberg analysis shows that the index has never dipped this low out of a recessionary period except for the 2015-2016 oil and China growth scare. Market reactions to the reading were very negative, which makes sense given its recessionary prediction history.
  • The Perth Mint reported that gold coin and bar sales totaled 32,469 ounces in October, down from 46,837 ounces the month prior. Silver sales did increase at 1.39 million ounces, versus 1.35 in September. Gold consumption in China fell 9.6 year-over-year in the first nine months of 2019 at 768.31 tons, according to the China Gold Association. Demand in the world’s largest consuming country was hit by higher prices and downward pressure on the economy.

Opportunities

  • The worst performing metal this week was silver, with a slight gain of 0.44 percent, despite setting a five-week high on futures net long positions. The ISM Index rose in October by lower than estimates and signals a third straight month of contraction for U.S. manufacturing. The index rose to 48.3 from a 10-year low of 47.8 in September, compared with median projections of 48.9. Bloomberg reports that the low reading highlights challenges for manufacturers such as the ongoing trade war, slowing global growth and a strong dollar.
  • The Chicago PMI reading also missed estimates, posting the lowest reading since 2015 at 43.2 for the month of October. Bloomberg analysis shows that the index has never dipped this low out of a recessionary period except for the 2015-2016 oil and China growth scare. Market reactions to the reading were very negative, which makes sense given its recessionary prediction history.
  • The Perth Mint reported that gold coin and bar sales totaled 32,469 ounces in October, down from 46,837 ounces the month prior. Silver sales did increase at 1.39 million ounces, versus 1.35 in September. Gold consumption in China fell 9.6 year-over-year in the first nine months of 2019 at 768.31 tons, according to the China Gold Association. Demand in the world’s largest consuming country was hit by higher prices and downward pressure on the economy.

Threats

  • The market for bulletproof vehicles is skyrocketing and demand in the U.S. is higher than ever, according to a Bloomberg news story. Philip Nadjafov, whose family founded Isotrex, says business has risen in the last three years to fulfill UN and government contracts and that “people are investing in their security.” This is a troubling sign of the times and highlights the wealth gap of more consumers able to afford six-figure bullet proof personal vehicles. ArmorMax CEO Mark Burton says “people are worried about random acts of violence.”
  • Well-known hedge fund manager Paul Tudor Jones says that the S&P 500 will fall 25 percent if Democrat Elizabeth Warren wins the 2020 presidential election – one of many on Wall Street who are predicting doom if there’s a shakeup in the White House. However, just a few years ago strategists were predicting a big drop if Donald Trump was elected, which did not happen. Point being there will be many political risks from now until the 2020 election and no one can say for sure how the stock market will respond to anyone becoming elected, or re-elected.
  • The U.S.-China trade deal still seems unlikely after China is said to doubt that any long-term deal with President Trump will be possible. Another turn is that Chile cancelled an economic summit in a few weeks where the U.S. and China were meant to meet and sign phase 1 of a deal.

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 1.44 percent. The S&P 500 Stock Index rose 1.47 percent, while the Nasdaq Composite climbed 1.74 percent. The Russell 2000 small capitalization index gained 1.96 percent this week.
  • The Hang Seng Composite gained 1.53 percent this week; while Taiwan was up 0.92 and the KOSPI rose 0.59 percent.
  • The 10-year Treasury bond yield fell 7 basis points to 1.72 percent.

….

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

You can read the rest of the article at http://www.usfunds.com/investor-library/investor-alert/youre-probably-underinvested-in-gold/

Leave a Reply

Your email address will not be published. Required fields are marked *