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The Allure of Gold

“I think that the 5-year bear market in gold is over and that we’re in the beginning of a new bull market and I’m very, very sure about that…” – Pierre Lassonde, Chairman, Franco-Nevada*

Gold is a polarizing asset.  Investors either love it or hate it, but rarely does the opinion lie in the middle.  No matter what your view on gold, we find the investment case for the yellow metal particularly interesting at this juncture in the economic cycle. 

Our astute clients and readers might point out that Pure Portfolios does not own commodities.  However, we do not classify gold as a commodity (i.e. oil, natural gas, or cattle).  We consider gold to look, act, and behave like currency. 

Why is Gold a Currency?

Gold is highly liquid.  The price of gold will fluctuate relative to other currencies (i.e. U.S. Dollar, Euro, and Japanese Yen).  While gold is not used as a direct medium of exchange, it can be readily converted into fiat (paper) currency. 

Gold is priced in real-time and trades on the COMEX (Commodity Exchange) and eCBOT (Chicago Board of Trade).  

The Case for Gold

Historically, gold performs well during times of stress or when confidence in government fiscal/monetary policy is damaged.  In our opinion, gold is the perfect asset class to hedge geopolitical risk (uncertainty in Washington, populist uprising in Europe, North Korea, Syria Civil War, etc.). 

The above chart shows U.S. public debt (orange line) and the price of gold in dollars (blue line).  As developed countries get more fiscally reckless, gold provides a steady store of value.  More importantly, central banks cannot manipulate the price of gold by devaluing or debasing the currency.  We like to say an ounce of gold could purchase a nice suit in the 1960's, 1970's, & 1980's. That's still true in 2017 (although we prefer to pay much less for our business attire).  

This chart overlays the price of gold (blue) vs. S&P 500 (1998 - present). Historically, gold moves in the opposite direction of U.S. Equities.  Notice the large divergence during the financial crisis in 2008.  In investment speak, we refer to gold an uncorrelated asset class.  What good is it owning different asset classes if they all act the same way during times of market stress?

13D Research published a great piece “Fourteen Reasons Why Gold Should be in Every Portfolio.”Among the many valid reasons to own gold, 13D highlights that gold is under-owned and misunderstood in the United States: 

“Few Americans own any gold, which is strange given the long depreciation of the dollar since the creation of the Federal Reserve.  Europeans, Indians and Chinese all own gold because they know in their DNA that paper money always loses its value.”

One Drawback

Gold doesn’t pay income.  That goes against our income bias.  We want to own assets that pay income in the current low interest rate environment.  If interest rates begin to move higher, which is not our near-term expectation, we may reconsider our position in gold.

We are not pounding the table for a “doomsday” allocation to gold.  In a diversified portfolio, a gold position of 3-5% seems reasonable.  At this point in the economic cycle, it is prudent to add asset classes that act completely different than equities.

Disclosure: Pure Portfolios has a strategic position in Gold through an ETF.

*Pierre Lassonde’s opinion on gold should be viewed with considerable respect.  The stock of Franco-Nevada hit an all-time high on March 16, 2016, after handily out-performing every goldmining index during the past bear market.  Lassonde hoarded and raised cash during the long bear market and invested more than $2 billion in long-lived premier mining assets during the late stage of gold’s bear market.  Source: 13D Research.

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