A few days ago, I received a call from one of our customers. He was very concerned about declining precious metals prices.
Mr. F. is a very smart high-net-worth investor, not someone you’d expect to worry about temporary trends. But I understand—none of us like to see red ink on our monthly statements.
Whether it’s precious metals or any other investment, it is always good to re-evaluate our investment thesis for buying and holding that asset.
In this case, we should ask ourselves: Why are we invested in precious metals? Does our thesis still hold or is there a good reason to sell now?
My short response to Mr. F. was that the recent capitulation in the precious metals market, while disturbing, is just common investor behavior. Most investors will buy assets when prices rise to the highs. But the moment an investment takes a more serious downturn, investors will get out.
When the stock market collapsed in 2008, few of us were willing to back up the truck and buy equities. We wish we bough then, but fear held us back.
In fact, many investors at that time sold off their portfolio at exactly the wrong time.
Today is the exact opposite. We are now only two months away from entering the longest bull market in modern history. Yet most investors are piling into speculative stocks, expecting this bull market will continue forever.
Just like in the late 1990s, people bought into the idea of a “New Economy” where traditional market valuation metrics no longer matter. Investors buy companies with three-digit P/Es—or even worse, companies with no real prospects of having any earnings.
Look at Tesla, Amazon, or Netflix. Their present valuations defy reason. Almost every other week, I hear about new IPOs of some fundamentally marginal companies. Some of them don’t earn any income or sales. And yet, investors pour billions of dollars into them.
Do you remember 2000? That was the time when AOL bought Time Warner. What about the perfectly timed Palm Inc. IPO? Both companies were the holy grails of that time. Where are they today?
Meanwhile, nobody is interested in precious metals or mining stocks today because they have been in a bear market since 2011. Their price is not attractive in the context of Amazon, Tesla, or whatever tech stock you can think of.
But we don’t invest in precious metals to profit from short-term price swings. We invest in precious metals because they are a time-tested hedge against a recession or any other crisis. It’s like insurance for your wealth.
And bubbly stock prices are not the only thing you should be hedging today.
Today, all economies across the world are vastly indebted. This is the direct result of reckless monetary policies and a decade of artificially low interest rates.
The 2008 crisis was caused by excess personal debt. Today, our personal debt is back to pre-crisis levels. However, government and corporate debt has more than doubled. Companies now are more leveraged than they were in 2008, which is a recipe for disaster.
Not only that, we are facing serious demographic headwinds as populations grow older. This will eventually culminate in a pension crisis that no politician can tackle.
Now add in social tensions, a looming full-scale global trade war, and potential geopolitical conflicts…
As my partner and friend John Mauldin wrote, the 2020s might be the worst decade in US history. As such, we have to prepare our portfolios for the worst. And history shows that there’s no better hedge against volatile times than gold.
Think about it.
In December 2007, right before the last financial crisis, you could have sold 100 shares of SPY (an S&P 500 index ETF) and bought 16 ounces of gold for your shares. A year later, your gold would have bought back over 210 shares of SPY.
That is crisis insurance at work!
Today, gold is even more undervalued. It’s cheaper than it was in late 2007. You can get over 20 ounces by selling 100 shares of SPY. Meanwhile, the stock market will soon mark the longest bull rally in history!
Don’t give in to this stock market craze. It is definitely not the time to sell your gold and silver. Just the opposite—it’s time to add to your positions while precious metals are on sale.
That is what I am doing myself and I am confident it will pay off big time.
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