Gold

Below are some of the reasons why I believe having gold in your portfolio is just as important as having those dividends work for you day in and day out. But please, I am not a financial adviser and make sure to do your own due diligence before investing. Everything below is just my own beliefs and strategy that I use.

Why Gold In Your Portfolio?

Although our main focus is geared towards dividends in your portfolio, I am a strong advocate on having gold in your portfolio. Gold has always been a store of value for thousands of years. I don’t see it as really an investment but as an insurance policy to your portfolio. Right now the world economies and their central banks are printing money or rather punching numbers into their computers at a record rate. I love the United States but one thing that we’re doing right now is running up our national debt. The Fed is not helping either as they’re driving up their balance sheets and pretending to raise interest rates.

History has shown time and time again that when a nation or civilization prints more than it can produce, it’s currencies becomes far less valuable and eventually lead to a currency collapse. With all the recent bad economic data and the Fed’s decision based on data dependency, we are going to have some serious implications in the future. Instead of a rate hike, now there are whispers and rumors about another quantitative easing (QE4) in the near future. This might drive stock prices up in the very short term but it won’t be good when the rest of the world realizes that the United States is not credible anymore. I think that there will be a massive flight from the dollar and into gold. Not many people trust the main stream media these days and they look for alternative news or they just go out in the streets and see the economy for themselves. Do you really think that we were in a real recovery in the last 7 years? I sure don’t.

You might think that this could never happen to the United States since the dollar is the world’s reserve currency but there is data out there that suggest otherwise. Recently, China and the rest of the world have already started dumping their U.S. dollar holdings at a fast rate. According to Wall Street Journal:

“China, the biggest foreign owner of Treasury securities, owned $1.241 trillion Treasury debt at the end of July, down from a record of $1.317 trillion in November 2013, according to the latest data available from the Treasury. China isn’t alone. Russia’s holdings of all U.S. Treasury debt fell by $32.8 billion in the year ended in July, according to the latest data available from the U.S. Treasury. Taiwan’s holdings dropped by $6.8 billion. Norway, a developed nation hit by the oil-price decline, reduced its Treasury holdings by $18.3 billion.”

I see this as the other nation’s of the world using their reserves (U.S. dollar) to keep their currencies from falling. As they dump the dollar, who will buy this flooding of U.S. Treasuries? Will the Fed have to step in and start buying again? This is the very reason that the world hoarded the dollar up to this point so that they can use it in times of turmoil (commodities crashing such as oil, agriculture, etc..). As the world is running up the debt in every other currencies especially the United States, it’s starting to become a game of musical chairs involving a currency war. Not to mention that new wars have recently been stirred up in the Middle East and Eastern Europe and possibly of a new cold war involving Russia. In times of trouble and war, its always good for gold and I believe that the recent crash of commodities that took gold down is the perfect opportunity to buy.

Some people would insist that gold’s returns have been terrible the past 20 years but that is not why you buy gold. Do you buy insurance in order to get the best returns for your money? Absolutely not. Its more of a peace of mind and to hedge in case of a deflationary or inflationary period. Not to mention that one should diversify their portfolio and gold would be the best for diversification. Remember the old adage, don’t put all your eggs in one basket!

Different Types of Gold Investments

One form of gold that I really like is physical bullion. I like bullion because it’s a tangible asset that you can actually hold in your hands. If for any reason in the future and the dollar collapses you sure don’t want to have your gold stored at a local bank. There would be chaos in the streets with long lines to get to the bank (if it is even open) but if you’ve stored it somewhere safe that is easily accessible, you wont have to worry and instead focus on preparing for other things like food and safety.

The only form of gold that I have in my portfolio are gold mining stocks such as ABX (Barrick Gold Corporation), GG (Goldcorp Inc). I also own some GDX and SIL ETFs. SIL’s portfolio contains mainly silver miners but I think silver is great as well since it is an industrial metal and highly consumed. Silver is also seen as an alternative to money and don’t forget the saying that wherever gold goes silver follows.

However, I’m not an advocate of GLD or other gold stocks that supposedly store physicals for you. I think that gold physical stocks such as GLD have too many shares tied to each ounce of physical gold. Because of this, I believe that the markets have abused and manipulated these types of gold stocks. When people in the future want to take delivery of their gold, they’ll find out that there isn’t enough to go around for everyone who owns a share of it.

Going back to gold miners, their price fluctuates based on the price of gold and recently gold has made its way back up. I strongly believe that it will continue to go up and while some days it will see some bad movements as the markets gets a head fake from the Fed pretending to raise interest rates, ultimately it will move up. How can we ever pay the interest on our debt of trillions of dollars if the Fed even raises .25%? In history the average interest rates dating back to the Roman Empire has always been 6%-7%. Imagine if interest rates would rise to 7% right now. We would see the biggest stock market crash of our life time. Ultimately the Fed can’t keep interest rates near zero forever. Sooner or later the markets will force the rates to go up and when that happens most stocks would come crashing back down. I don’t have a crystal ball to tell you the percentage that it’ll go down or when it will happen but I’d want to be positioned with gold to offset my losses.

How much gold?

Some people will say that they only need 5% to 10% for their portfolio but I disagree. I think that a good healthy portfolio should have at least 25% of their holdings in gold. I currently have 30% of my portfolio in gold mining stocks and ETFs. For example if the stock market drops another 30% to 40%, my share prices on each of my dividend stocks could seriously take a huge dive but at the same time my gold holdings would sky rocket to offset my portfolio’s losses. If you have too little in gold then the offset would be a lot smaller against your overall value of your portfolio.

Sure we dividend seekers don’t care about the overall dollar price of our portfolios but that’s not what I’m getting at. You see the gold prices would sky rocket in terms of dollars and while all the big blue chip dividend stocks seriously takes a nose dive, I now have a lot of cash at hand to buy on the huge dips! If your mining shares skyrockets by 500% to 600%, you can sell it and then buy any dividend stocks at a significant discount! I believe this to be my main tactic at least in the next few years to give me a huge leg up on my dividend investing. Here’s an interesting chart that shows the biggest gold miner at that time’s stock prices (Homestake Mining) during the great market crash of 1929 compared against the Dow Jones.

Investment Vehicle Investment Date Amount Investment Value @Dec. 1935
DJIA Oct – 1929 $10,000 $3,600
DJUA Oct – 1929 $10,000 $2,100
Homestake Mining Oct – 1929 $10,000 $62,000

Not only is gold mining stocks have taken a major beating the last few years, gold prices to gold miners ratio is at the highest it’s been in years! Once that gap narrows, you’ll see an explosion of gold mining prices! This type of opportunity only comes knocking once in a life time!

Gold mining ratio

Increasing Demand for Gold Industrial Applications

Recently there have been an increase in demand for gold nano-particles used in medical applications and electronics. The metal’s conductivity and corrosion resistance makes it an ideal material for producing high specification components. Here is a quote from market analysis:

“With constant innovation and increasing demand for smaller, versatile and smarter devices the global electronics industry is expected to be one of the fastest growing gold nanoparticle markets. There has been a surge in demand for this technology, especially gold nanoparticle inks for storage devices, hard disks and microchips among others. These inks have also found applications in thin film transistors and photovoltaic, photo-sensors and detectors.”

These are the main reasons that I own gold in my portfolio. I believe it will be one of the most sought out materials in the next decades to come. People will want it for industrial usages for high tech components, jewelry, store of value, and as insurance in investor’s portfolios.

Advertisements

3 thoughts on “Gold

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s