The typical portfolio is loaded up primarily with a combination of stocks and some form of fixed income investments, like bonds. Alternative investments, such as gold, are far less common. But that needs to change. There are 10 reasons why gold is a more valuable portfolio holding than ever before.
1. GOLD ADDS A PHYSICAL ASSET TO A PORTFOLIO FULL OF PAPER
Let’s face it, most portfolios large and small are filled with paper assets. That includes stocks, bonds, mutual funds, exchange traded funds (ETFs), certificates of deposit and government securities. All represent asset values, but none are actually assets in and of themselves.
Gold has the advantage of being an actual asset. It’s not merely a piece of paper that indicates ownership of the underlying asset. That could be a major advantage in the type of financial environment where paper assets are being unloaded, due to lack of confidence in the values behind them.
That’s exactly the type of situation that developed during the Financial Meltdown from 2007 – 2009. Investors began to question the collateral behind bonds in particular. The value of many securities collapsed in that situation.
Given that few if any of the financial imbalances that existed during that time have been properly remedied, a similar loss of confidence could happen once again.
2. GOLD IS THE ONLY INVESTMENT ASSET THAT CAN BE BARTERED
Along with the fact that gold is an actual asset, is the fact that it can be traded for everyday goods and services. That doesn’t mean that you can take some gold down to the local grocery store and exchange it for food. But in a panicked financial environment, physical assets could become accepted forms of alternative currency, and perhaps even preferred to paper assets.
3. GOLD IS THE ULTIMATE COUNTER-CYCLICAL INVESTMENT
This is one of the factors that makes gold unique among investment assets. Most other assets track the general economy. When the economy rises, those assets also rise in value. But when the economy sinks, it takes asset values down with it.
Gold does not track the economy in a similar fashion. For example, on balance the price of gold rose steadily throughout the economic turbulence of the decade of the 1970s. It also tracked higher during the Financial Meltdown, reaching its all-time price peak in 2011, while the world was still sorting out the after-effects of the Meltdown.
At a minimum, some gold should be held in a portfolio as insurance against economic declines and other countercyclical events.
What are some of the factors that might cause a counter-cycle to arise?
4. THE TOPPLING OF THE GOVERNMENT OF SAUDI ARABIA
The Middle East has been a cauldron of nervous political and economic activity for decades. That situation persists to this very day, despite the virtual permanent US military presence in the region. While many of the countries in the area are inherently unstable, Saudi Arabia has been in the news in recent days, and for good reason.
On November 6, Saudi Arabia initiated a purge of highly placed officials, including members of the Saudi royal family. In addition, the government has ushered in new taxes, cut subsidies, and lifted a controversial ban on women driving.
Even if these changes are meant to ultimately improve the fortunes of the country, Saudi Arabia is a nation steeped in entrenched mindsets and ancient traditions. Dramatic changes can instigate an uprising among more conservative and radical elements of the country.
Saudi Arabia is singularly the most important oil-producing country, since it exports more oil than any other country in the world. Any disruption of that oil flow, whether to foreign invaders or domestic disturbances ,could be the death knell of Western economies.
5. THE NULLIFICATION OF THE TRUMP ADMINISTRATION
Virtually since the election of Donald Trump, the administration has been under attack from the opposition. Whether you agree with that assault or not, it has potential negative ramifications for the US economy, as well as the stability of the US dollar.
A presidential administration under perpetual attack can become ineffective. That can leave the US with a power vacuum. Even in times of crisis, the administration may be unable to deal with the nation’s problems in a definitive way. That can leave the US without workable policy, and effectively crippled.
At least part of what caused the spectacular rise in the price of gold during the 1970s were the twin presidential crises of the decade. The first was the forced resignation of Richard Nixon in the face of the Watergate scandal. The second was the loss of credibility by the administration of President Jimmy Carter, particularly in the aftermath of the Iran hostage crisis in 1978, and the Soviet invasion of Afghanistan in 1979.
Any perception that the US is effectively without leadership can cause a lack of confidence in US supremacy, and the price of gold to rocket higher. There’s more than a slight possibility of that outcome right now.
6. A FAILED MILITARY VENTURE
The entire global economic and financial situation depends on the assumption of US military supremacy. A failed military venture could bring the curtain down on that perception. And there’s plenty of potential conflicts where that could play out.
North Korea is the most obvious potential military crisis at the moment. The threat of nuclear warfare is real, and any miscalculation by the US could result in destruction and casualties that would reverberate across the world.
But beyond North Korea, the US faces potential military conflict with Iran, China and a resurgent Russia. A failed military exchange on any front could change the entire economic and financial order of the world.
7. A COLLAPSE IN THE BOND MARKET
This is an event that is considered entirely unlikely. But that’s also a major reason why it could have such a dramatic impact on the price of gold. There is a tremendous amount of debt across the world, including public, private and corporate debt. Debt levels are high and rising, making it increasingly unlikely that it will all be repaid.
Even in a very low interest rate environment, debt payments eventually become unsustainable. This will become particularly acute in the next recession. At that point, what’s expected to be a “routine” recession could decline into something much uglier. This could cause debt defaults that will make investors question the safety of paper assets entirely.
8. A SOVEREIGN DEBT DEFAULT BY A MAJOR COUNTRY
Modern governments have become so accustomed to operating in deficit that most have built up enormous levels of public debt. Where governments once borrowed only during times of crisis, like war and depression, it’s now common even in the best of economic circumstances.
Major countries, such as Japan (234.7%), Greece (181.6%), Italy (132.5%), and Portugal (126.2%), have public debt burdens that exceed the size of their national economic output. That means that even if they were to convert 100% of their gross domestic product (GDP) into tax revenue, they still couldn’t pay off their government debt.
Even while these five countries represent the most extremely indebted nations, most other major nations are not far behind. Canada, France, Spain and the United Kingdom have public debt levels running close to 100% of total economic output. A recession could easily push any or all of those countries into debt levels that are larger than their respective economies.
Though the point isn’t emphasized in the financial media, US public debt also exceeds 100% of GDP. The US GDP for the third quarter of 2017 has been reported at $19.5 trillion. However, the cumulative federal debt is now sitting at $20.5 trillion, or roughly 105% of GDP.
9. THE COLLAPSE OF THE US ECONOMY
It’s increasingly obvious that the US economy is supported on a large foundation of debt. There is significant evidence of decades long wage stagnation that’s straining the middle class to the breaking point. A recession or a significant rise in interest rates could be the trigger that topples the house of cards. That’s because any major increase in debt service, or decline in the economy, will make private-sector debt unsustainable.
That can translate to the corporate and public sectors as well. This is particularly true since the country is also facing a gathering – but largely ignored – pension crisis. The US simply has too many untended problems, and they could blow up all at once.
10. THE LOSS OF RESERVE CURRENCY STATUS BY THE US DOLLAR
Any of the above situations could result in the loss of reserve currency status by the US dollar. And since, more than anything else, the price of gold runs counter to the US dollar, this could be the ultimate force driving the gold price higher. In the absence of a suitable replacement for the US dollar to settle international obligations, the world could very well revert to the centuries long practice of using gold to settle obligations.
That all seems like the stuff of economic nightmares, but any of it is possible given the tentative nature of the world’s economic and financial circumstances. Gold represents the best preparation for these problems. That alone makes it a must-hold in virtually every investment portfolio.
Contact TreasuryVault and let us show you the ways that you can add at least some gold to your portfolio.