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Over the past few weeks, we’ve been featuring guest essays from investing expert, Eric Fry, editor of Fry’s Investment Report and The Speculator. In last week’s essay, Eric discussed “brown bag stocks” — companies that don’t look all that great based on their fundamentals … but when investors realize those bad fundamentals belong to companies with beloved, iconic brands, those same investors would not be able to bring themselves to bet against such stocks. Of course, that can be very dangerous. In today’s essay, Eric discusses an asset you want in your portfolio when the markets turn. That’s because it tends to move up when stock prices move down. It zigs when stocks zag. That quality is valuable when stocks are performing poorly … like they did during the “lost decade” of the early 2000s. Whenever this great bull market runs out of steam and stocks begin falling, you’ll be glad to have today’s asset in your portfolio. Enjoy. Jeff Remsburg |
The Golden Buy That Can Help Your Portfolio
The past few times I’ve written in the Digest, we’ve been talking about wealth insurance — that is, preparing for a bear market.
Wealth insurance is more like health insurance than fire insurance. You definitely will need it at some point. You just don’t know exactly when — and you don’t know how extreme the need might be.
You hope you use your health insurance to pay for a routine doctor’s visit, rather than open-heart surgery.
But in either case, you’re happy to have it. It provides peace of mind.
To be clear, I think the probability of a financial apocalypse is very low. The world just has a way of not hurtling toward a crisis when the “doom and gloom” crowd expects it to.
But bear markets and turbulent times are inevitable.
So that’s why — as I outline in my Bear Market 2020: The Survival Blueprint — the following move is one of my key tactics …
Golden Buy
Put a small portion of your capital in gold bullion.
That step will go a long way toward protecting you and your family against financial distress.
Historically, gold has tended to move up when stock prices move down. It zigs when stocks zag. That quality is valuable when stocks are performing poorly … like they did during the “lost decade” of the early 2000s.
Many investors may not realize that the S&P 500 produced a loss during the 11-year span from August 2000 to August 2011. Based on price, this blue-chip index slumped more than 25% during that decade-plus. Even after adding in dividends, the S&P 500 produced a loss of 8% during those fruitless years.
But gold shined brightly. Its priced soared nearly 600%.
Even now, after gold has spent the last six years drifting sideways, an investor would have fared much better buying gold in the summer of 2000 than buying stocks. The S&P 500 produced a total return of 156% from August 2000 through the beginning of 2019, while gold racked up a gain of 376%.
This rearview mirror analysis does not mean investors should dump all their capital into gold. It simply shows that gold can thrive when stocks don’t.
But despite its remarkable wealth insurance properties, most investors shun gold as an irrelevant has-been. It is a forgotten asset class. But now, investors might begin to remember gold once again. That’s because 2019 is looking an awful lot like the early 2000s.
Back then, the dollar was close to its highest level of the preceding 15 years, U.S. Treasury securities had reached their highest prices (and lowest yields) of the previous 30 years, and American stock valuations had reached their highest levels of the previous 70 years.
In other words, to borrow a term from the brilliant financial writer Jim Grant, most American financial assets were “priced for perfection.”
However, in 2000 America wasn’t perfect. Only its securities were.
Gradually, therefore, this “perfection” trade unwound. Bit by bit, investors reduced their exposure to U.S. financial assets. They sold Treasurys and stocks.
Again, 2019 looks a lot like that period. “Perfection” pricing has returned to our financial markets.
As I write this, the U.S. dollar is still close to the 13-year high it reached in 2017. The prices of most Treasurys are still close to their multidecade highs (that is, yields are close to multidecade lows), and the stock market is trading near all-time highs.
To be sure, this pricing could become even more perfect, but that’s the low-probability bet. The high-probability bet is that investors will reduce their exposure to high-flying U.S. assets and seek other opportunities.
In other words, it is a good time to stock up on this form of wealth insurance.
Millennia-Long History — and Still Unrivaled
As a Bear Market Survival Tactic, no other “insurance policy” is like gold.
Like most insurance policies, gold just “sits there” most of the time. It doesn’t do much of anything. This apparent shortcoming is actually its supreme virtue.
It just sits there … until you need it to do something.
And the funny thing about gold is that it usually starts to “do something” at the precise moment when most investors have given it up for dead. That’s what happened 20 years ago. Back in 1999, the price of gold was so sickly that no one knew for sure if it would be able to get out of bed in the morning.
Trading around $250 an ounce, gold was nowhere near the high of $850 it had reached 20 years earlier. Gold was a dead asset, and no one wanted anything to do with it, including Gordon Brown, then the United Kingdom’s Chancellor of the Exchequer. And so the treasury minister resolved to sell half of the U.K.’s gold reserves and use the proceeds to do something more intelligent.
Noble objective. Bad idea.
Picture the scene …
The stock market was flying high — and gold wasn’t. The dot-com mania was powering the stock market to spectacular heights, while also fostering all kinds of “new era” hogwash to justify the market’s sky-high valuations.
Meanwhile, gold had been in a secular bear market for almost two decades, declining steadily from its highs of 1980-’81. Popular economists had long written gold off as a go-nowhere, do-nothing asset. The public hated it. The media sounded the requiem for gold, and everyone marched along to it.
The “barbarous relic” appeared to have lost its luster for good.
Surveying the scene around him, Brown must have thought it was his time to shine. He plotted to lighten Her Majesty’s Treasury of about half its gold reserves. On May 7, 1999, at the Chancellor’s urging, the U.K. government announced something radical: It would auction off almost 400 tons of gold.
The price at the time of the announcement was $282.40 per ounce — close to a two-decade low. But gold prices would drift even lower. Gordon Brown made sure of that.
Thanks to his questionable decision to broadcast advance notice of the auctions, gold-holders worldwide decided to “front-run” his gold sales. At the same time, short sellers circled the gold market like sharks stalking a pod of hemophiliac dolphins, eagerly anticipating that first tasty drop of Brown’s blood.
By the time of the first auction, which was conducted on July 6, 1999, the price of gold had fallen another 10%. Its price would continue to decline in the coming days, eventually reaching its ultimate low on July 20, 1999.
The price: $252.80 per ounce.
The “strategy,” according to Brown, was to diversify Her Majesty’s Treasury’s holdings — to reinvest the proceeds from the auctions into foreign currency deposits in order to deal with gold’s “unacceptable” level of volatility. Her Majesty’s Treasury, under Brown’s stewardship, actually produced a series of reports forecasting “the overall volatility of the U.K.’s reserves could be reduced by 20% from the sale.”
In reality, Brown had chosen a generational low point in gold prices as the “ideal moment” to unload half his country’s gold reserves. Needless to say, that low has not been revisited since, nearly two decades after initiating his disastrous trade.
The sales, which took place across 17 auctions between 1999 and 2001, averaged out at roughly $275 per ounce and raised for the crown some $3.4 billion. Even today, with gold “languishing” around the mid-$1,300 range, it would cost nearly $17 billion to replace that very same yellow metal.
The monster gold rally of the early 2000s was not the only time the metal shined while stocks struggled. From late 1972 to late 1974, for example, U.S. stocks tumbled more than 40%, but gold tripled. It also posted gains during the stock market crash of 1987.
So, I would expect gold to shine once again the next time stocks stumble.
How to Buy Gold
Gold, as we’ve been discussing, can be a very handy asset to hold when stocks are performing poorly.
Historically, gold has tended to move up when stock prices move down. It zigs when stocks zag. That quality is valuable when stocks are performing poorly … like they did during the “lost decade” of the early 2000s.
We could be approaching one of those moments.
Of course, that does not mean investors should dump all their capital into gold. It simply shows that gold can thrive when stocks don’t.
Markets are forever and always cyclical. Booms lead to busts — and highs lead to lows. So we should not be surprised if the high-flying stock market takes a breather one of these days, while the slumbering gold market launches into a powerful new up-move.
But even if gold slumbers for a while longer, in Bear Market 2020, I lay out just how much gold you need to have an excellent insurance policy — and “debunk” a few other assets that are often promoted as forms of wealth insurance.
Of course, to participate in gold’s comeback, you don’t necessarily have to buy the physical metal. That’s why, in addition to Bear Market 2020, I’ve put together a special report on two particular gold stocks that I believe will thrive in any coming down market.
They aren’t your run-of-the-mill gold stocks, banking their future on one or two promising discoveries. Not at all.
In fact, these two companies don’t mine any gold at all. They simply skim gold and silver production from the companies that do mine these metals.
One is a major, established player in the gold market. The other is a frisky, young upstart.
Together, they provide a very compelling play on precious metals.
To find out how to get these recommendations, Bear Market 2020, and more, click here.
Is the next financial crisis around the corner? I don’t know the answer.
Nobody does.
But if you buy some wealth insurance in the form of gold — or gold stocks — you don’t need to know the answer.
You buy gold and hope you never need it to protect the rest of your portfolio.
Good investing,
Eric Fry
