Gold: Underperformer or Prime-Time Performer?


By Michael Checkan, Liberty Through Wealth, Tuesday, March 24

Over the past few weeks, the worldwide spread of COVID-19 has panicked investors, roiled markets and demonstrated why gold is totally viable after 5,000 years.

But, despite gold’s history, many investors still do not understand it.

So, neither me nor my co-author, Van Simmons, were surprised to hear gold’s performance over the past couple of weeks and over the past five to 10 years described as both weak and incredible.

The two of us have a combined 100 years of experience with gold. To us, it comes down to proper expectations. If you expect a screw to perform like a nail, you will be disappointed. If you expect gold to perform like a stock, you will be equally disappointed.

But if you expect gold to store purchasing power, with high liquidity, for a potential financial crisis you hope to never have, we think you’ll agree gold has been a prime-time performer.

What’s Been Going On?

To catch you up…

  • There are currently more than 204,000 cases of COVID-19 and over 8,200 fatalities in 170 countries and territories.
  • Spooked investors began a major sell-off.
  • Since February 24, the Dow Jones Industrial Average is down 31%, the S&P 500 is down 29%, the Nasdaq is down 30%, and gold is down less than 9%.
  • The U.S. Federal Reserve has cut interest rates to zero.
  • All stock gains for the year are gone, while gold is up nearly 15% over the past year.

Investors are unsettled. Markets are volatile. A lot of that occurred in three trading days!

Two Key Takeaways

First, although it was clear the Federal Reserve wanted to act quickly to show its resolve in the form of an emergency 50-basis-point rate cut, the strategy seems to have backfired. Rather than appearing to be decisive, the Fed came across as desperate.

Second, gold shined again in crisis… by initially selling off.

Yes, you read that correctly.

Many stock market investors have leveraged accounts. They take on some risk by borrowing against their investments in order to increase their returns on investment. And this is wonderful for the investor as long as the stock market is going up in value.

However, when there is a significant short-term sell-off in the stock market, the value of the investments (which is in fact the collateral on the leverage or loan) falls below the loan amount. As a result, the investor needs to inject cash into the account to cover the margin call.

Where do investors find cash quickly and reliably in such conditions? You guessed it. They sell highly liquid gold, which has been sitting on the sidelines preserving purchasing power, to raise the cash to bail out their upside-down loan.

Then, gold recovers very quickly as bargain hunters swoop in to buy gold cheaper than it ought to be.

We saw this play out before our eyes during the financial crisis of 2008 to 2009. And we just saw it play out again February 28 through March 3, 2020.

Gold is a prime-time performer!

What’s Next?

The two of us expect higher prices for gold from here.

There are a number of reasons for this…

  1. Greed should give way to fear. Gold will emerge as a safe haven.
  2. Real assets should appreciate in terms of U.S. dollars (and all fiat currencies) as a result of quantitative easing.
  3. Artificially low interest rates will encourage the shift to gold. Real rates of return on term deposits will continue to be negative.
  4. Political and social unrest will continue to unsettle investors and markets.

As this unfolds, gold will perform well, as usual. Gold will store purchasing power, with high liquidity, for a potential financial crisis you hope to never have.

Gold isn’t a “get rich quick” scheme. Gold doesn’t generate interest and dividends. Gold is not expected to appreciate. But, long term, the price of gold will continue to rise as the value of the fiat currencies we measure it with fall in value.

And when the next crisis appears – whatever it may be – gold will be there to protect your wealth as it has for 5,000 years.

How Can You Own Some?

There are many different ways to own physical gold. Investor-grade bullion is available in bar, coin and certificate forms. You can buy products minted by governments as well as private mints. You can take delivery, store domestically or store overseas.

And you can own it in your IRA, whether it’s traditional, rollover, Roth, SEP, etc.

But there are currently two great ways to own gold… both real bargains.

The first gold bargain is in vintage U.S. $20 gold pieces. These almost 1-ounce coins (0.9675 ounces of gold) were minted and used for international trade between 1850 and 1933. They have always traded based on their premium price of cost above the gold bullion content “melt” value. In the 50-plus years we’ve been paying attention, the premium has typically been between 50% and 100%.

But lately, due to some hoards hitting the market, premiums have collapsed to all-time lows. In fact, you can buy almost uncirculated $20 Liberty heads circa 1878 to 1907 for just a few percentage points over the melt value. You can get a high-grade 1878 $20 gold piece for just about the price of the gold.

We feel it may turn out to be the gold coin bargain of the century!

The second gold coin bargain is in iconic gold coin rarities. During the past few years, rare coin prices have drifted a little lower as investors have paid more attention to the bull market in stocks. You can now buy the trophies of the rare gold coin market at somewhat discounted prices. So look for the “beachfront property” of the rare gold coin market, such as…

  • Brilliant proof gold
  • 1915 Panama-Pacific $50 gold “slugs”
  • 1907 “High Relief” $20 St. Gaudens.

These trophy collectibles are a great way to maintain, grow and transfer wealth.

Proper Expectations

We hope you appreciate how important gold is to your portfolio. When it comes to wealth insurance, gold is the right tool for the right job. It is a prime-time performer worth having on your bench.

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