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Three Major Reasons for Gold in 2016

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Three Major Reasons for Gold in 2016

Three Major Reasons for Gold in 2016

Presented by: Advantage Gold

This year looks to be another one of increased volatility as the market see-saws in different directions. Here are three compelling reasons why 2016 may be the perfect time to add gold to your portfolio.

1: “Stay the Course”

Financial experts often mention that “buying and holding” stocks through good and bad times is the best way to guarantee returns.

Investors that bought equities before the Financial Crisis have had a 20.2% return up until January 25, 2016. They “stayed the course” and were rewarded with an eventual return.

However, those that held gold during that same time period until today have had a 48.6% return, which is more than double that of the general market. This is even true with gold declining roughly 40% from its peak since late 2011.

Does it make more sense to “stay the course” in 2016 with stocks, or gold?

2: Two-Term Presidents

The last four presidents to serve two terms have had stock markets rise significantly during their tenures.
However, the stock markets also suffered catastrophic losses in each of their final years as president.

For example, during George W. Bush’s tenure, the S&P 500 nearly doubled from a bottom of 801 during the Dotcom bust to a peak of 1,562. Then the Financial Crisis hit at the end of Bush’s second term and the market went down to 677 points.

Obama is now in his last year, and the market is up 178% from its bottom in 2009. Will the trend continue?

3: Oil vs. Gold

Oil and gold have a relatively strong historical relationship. They are hard assets that move similarly in inflationary environments.

However, gold and oil also have some major differences in how supply and demand tends to affect the price.

Oil: Every day the world consumes 93 million barrels of oil. However, over the last two years there has been an excess of supply coupled with weakening demand from China and a slowing world economy. This has led to oil falling from over $100 per barrel to $30. Despite this glut, OPEC continues to produce record amounts of oil to maintain market share. Oil is delivered and consumed, and these fundamentals of supply and demand closely apply. More supply + weakening demand = lower prices.

Gold: Meanwhile, gold miner production is expected to peak in 2015 or 2016, and to decrease from there. Since gold is mostly traded via paper markets and not delivered, the nearly five-year low price point for gold may not fully reflect its supply and demand fundamentals. Gold discoveries are rarer than ever, and the cost and risks to mine are very high. Yet, this declining output is not yet seen in the gold price.

Gold to Oil Ratio
Lastly, the ratio between these two goods helps to explain what is going on in the world. Gold represents a safe haven during times of financial stress, and oil represents the overall health of the economy and industry.

The gold to oil ratio is expressed in the amount of oil barrels that can be bought with 1 oz of gold. A lower ratio means that the economy is doing well. Meanwhile, history shows that whenever the ratio is above 20, there has been some type of market crisis.

Today, this ratio is higher than ever in history at 37.

Would you rather own oil or gold?

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Currency

Why Gold is Money: A Periodic Perspective

Gold has been used as money for millennia. People often attribute this to beauty, but there are basic physical properties for why gold is money.

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Why Gold is Money

The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money is an artifact of the past. In an era filled with cashless transactions and hundreds of cryptocurrencies, this statement seems truer today than in Keynes’ time.

However, gold also possesses elemental properties that has made it an ideal metal for money throughout history.

Sanat Kumar, a chemical engineer from Columbia University, broke down the periodic table to show why gold has been used as a monetary metal for thousands of years.

The Periodic Table

The periodic table organizes 118 elements in rows by increasing atomic number (periods) and columns (groups) with similar electron configurations.

Just as in today’s animation, let’s apply the process of elimination to the periodic table to see why gold is money:

  • Gases and Liquids
    Noble gases (such as argon and helium), as well as elements such as hydrogen, nitrogen, oxygen, fluorine and chlorine are gaseous at room temperature and standard pressure. Meanwhile, mercury and bromine are liquids. As a form of money, these are implausible and impractical.
  • Lanthanides and Actinides
    Next, lanthanides and actinides are both generally elements that can decay and become radioactive. If you were to carry these around in your pocket they could irradiate or poison you.
  • Alkali and Alkaline-Earth Metals
    Alkali and alkaline earth metals are located on the left-hand side of the periodic table, and are highly reactive at standard pressure and room temperature. Some can even burst into flames.
  • Transition, Post Transition Metals, and Metalloids
    There are about 30 elements that are solid, nonflammable, and nontoxic. For an element to be used as money it needs to be rare, but not too rare. Nickel and copper, for example, are found throughout the Earth’s crust in relative abundance.
  • Super Rare and Synthetic Elements
    Osmium only exists in the Earth’s crust from meteorites. Meanwhile, synthetic elements such as rutherfordium and nihonium must be created in a laboratory.

Once the above elements are eliminated, there are only five precious metals left: platinum, palladium, rhodium, silver and gold. People have used silver as money, but it tarnishes over time. Rhodium and palladium are more recent discoveries, with limited historical uses.

Platinum and gold are the remaining elements. Platinum’s extremely high melting point would require a furnace of the Gods to melt back in ancient times, making it impractical. This leaves us with gold. It melts at a lower temperature and is malleable, making it easy to work with.

Gold as Money

Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.

Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.

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Gold

Animation: How Billionaires are Preparing for the Next Bear Market

No one likes to lose money, even if you have billions to spare. See how the world’s most elite investors – like Ray Dalio – are protecting themselves.

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How Billionaires are Preparing for the Next Bear Market

No one likes to lose money, even if you have billions to spare.

It’s why the prospect of a bear market – a prolonged downturn which sees stock prices fall by at least 20% over two months or more – is something that keeps even the world’s most elite investors awake at night.

To hedge against this concern, the world’s billionaires use a variety of strategies and tactics to protect their wealth, including setting up their portfolios with specific asset allocations that can help soften any blow caused by an extended market downturn.

Protecting Wealth

Today’s animation comes to us from Sprott Physical Bullion Trusts and it highlights a strategy being used by billionaires ranging from Ray Dalio to John Tudor Jones II.

Because market sentiment can change so quickly in the market, these elite investors protect themselves by having diverse portfolios that include uncorrelated assets.

Correlated vs. Uncorrelated

While this sounds complicated, uncorrelated assets are simply investments that don’t move up or down in the same direction as the other asset classes in the portfolio. A small allocation to these uncorrelated items can help protect the value of a portfolio when market sentiment changes.

The King of Uncorrelated Assets

What kind of asset classes can be used for this kind of purpose?

While options like real estate, commodities, and cash can contribute to a more diversified portfolio beyond traditional stocks and bonds, many experts say that gold is the undisputed king of uncorrelated assets.

The price of gold doesn’t usually doesn’t move with the wider stock market – and often, because of its history, the yellow metal can even increase in price during the course of a bear market.

Here are some of the reasons billionaires turn towards an allocation in gold:

  • Gold has acted as a store of value for thousands of years
  • Gold can lower the volatility of a portfolio
  • Gold can act as a hedge against inflation in some scenarios
  • Gold is a traditional safe haven asset that investors flock to when the market goes astray

Billionaire Actions

To kick off 2019, a new billionaire jumped onto the gold bandwagon – along with previous advocates such as Ray Dalio, David Einhorn, John Paulson, and John Tudor Jones II.

The newest entry to the club is Sam Zell, the pioneer behind real estate investment trusts (REITs). He bought gold for the first time in January, citing that it is “a good hedge” and that “supply is shrinking” as new mine discoveries dries up.

With market volatility back in the fray, it’ll be interesting to see how many more of the world’s elite investors also jump on the bandwagon.

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