Nothing Has Changed
Posted Aug 5, 2015
Warning: This article does not predict where the price of gold is headed next… because it really doesn’t matter.
Every day, media headlines and market commentary tell us where the financial world is heading. Reporters, commentators, technical analysts, economists; everyone has a headline. But most days, it feels like the headlines are on ‘repeat’ from days, months and years past.
“Gold going to $(blank)”.
“Gold hits (blank)-month (blank)”.
“Fed announces (blank)”.
“(Blank) defaults on loan.”
After ten years of selling precious metals professionally, I’m beginning to lose interest in the headlines, in fact, I’m beginning to tune them out completely.
That’s because nothing has changed. Whether an ounce of gold costs 1,100 x $1 US dollar bills today, or 700 x $1 US dollar bills tomorrow, it doesn’t really matter. Fundamentally, the decision to buy gold should not be based on the current spot price at all, because gold is not a traditional investment i.e. it should not be purchased in the hope of earning income or a profit. It should be purchased (and sold) based on your overall net worth at any given point in time.
That’s because gold is actually wealth insurance. It’s a hedge against the performance of other assets that you own and hold in your portfolio, most of which have a negative correlation to the shiny stuff.
The 2008 Financial Crisis is a perfect example of why gold is the ultimate insurer of wealth, an example I often use when speaking to clients about why they should own the yellow metal. From 2008 thru 2011, real estate values plummeted and the stock markets performed horribly. In Canada, most people lost 25-30% of their net worth and in the United States, the damage was even worse. During the same period of time gold increased in value by 160%, offsetting potentially huge losses for those who had bought it prior to the crisis.
Owning gold as wealth insurance, is no different in concept than having insurance for other assets or valuables you own, except that it’s much better because the money you hand over to your insurance company is gone the moment you hand it over and is only of benefit to you if a terrible incident occurs. Gold, while retaining value, protects you against volatile market swings and times of crisis. The advice is to simply buy it and store it securely in the hopes that you’ll never have to cash it in. But if and when you do have to cash it in, yousure are glad you owned it in the first place (recall, 2008 Financial Crisis).
Traditionally, financial professionals advise their clients to hold 5-10% of their portfolio in precious metals, for exactly the reason mentioned above. Personally I think this is too little because the financial world is simply a more dangerous place right now than it has been in some time. Using the 2008 Financial Crisis as a baseline, an investor that has a $100,000 portfolio pre-crisis stands to lose approx. $35,000 in value if a similar crisis were to occur again. To insure entirely against this loss, the investor will need to own approximately $22,000 in gold pre-crisis (based on a 160% increase in value during the same time period), or approximately 22% of their net worth.
So the question becomes, when do I buy (i.e. increase) or sell (i.e. decrease) my wealth insurance holdings? That’s easy. Since we’ve now determined that your golden wealth insurance must be maintained at approximately 22% of your portfolio value to properly insure you against a financial crisis, you can adjust it as frequently as you like. Personally I would recommend you do this quarterly, or if your net worth increases or decreases sharply. For example, if your current portfolio is valued at $100,000 and you then inherit another $100,000, you would double your level of wealth insurance to cover your new found wealth. And vice versa, if your net worth decreases, you can sell a portion of your gold holdings to compensate accordingly.
This simple approach is used by many, including one very famous running shoe mogul that I am aware of (hint: Just Do It!). Not only does it remove the price element from the equation, it also removes the emotional aspect of trying to pick bottoms, which can be harmful to your health.
So give yourself a break and ignore the headlines for a while. Instead, sharpen your pencil, get out your calculator, do some simple math. Buy (or sell) gold for what it does best; providing you with the ultimate wealth insurance.
Mark Yaxley is the head of Operations & Client Services for Strategic Wealth Preservation (SWP). He first began working with gold and silver at the age of 26, when he joined Kitco Metals. There, he specialized in product development and served as Kitco’s Product Marketing Manager. A decade later, he joined SWP, a Cayman-based precious metals storage company that specializes in the storage of gold and silver bullion, graded and rare coins. Mark can be reached for comment at firstname.lastname@example.org.