Over at Bloomberg.com, economics professor Tim Duy makes one of the best cases for investing in gold that I’ve read in a while at a mainstream financial media outlet. It’s perfect, really; and the funny thing is, the article doesn’t mention gold at all. Or even precious metals. The article has nothing – and everything – to do with investing in precious metals.
At the heart of Duy’s article, “Recessions Are Getting Tougher to Predict,” is his description of why weakness in the economy may not necessarily signal that a recession is at hand. He writes that if observers of the economy and markets are to see things accurately, they have to view the relevant data with a more discerning eye and recognize that low growth may be a new normal.
So what does that have to do with investing in gold?
If lower growth is the new normal, then the reliability of mainstream-market assets – primarily equities – to move portfolios over the long term could be diminished. And, if THAT is the case, then it’s important for investors to ensure exposure to alternative assets uncorrelated with stocks, which means they have a demonstrated potential to strengthen during weaker economies – assets such as physical gold and silver.
Low-Growth Economic Environments Encourage Gold Investment
Although the alarm will always sound when the markets and underlying economy are heading toward a troubling period and many investors traditionally move to precious metals only after the alarm is sounded, I believe investors are better served by maintaining a permanent allocation to precious metals to ensure they are protected.
In Duy’s discussion of the fact that recessions may become harder to predict, he indirectly builds a case for maintaining precious metals in a portfolio as part of a multi-asset strategy, rather than trying to anticipate weak or volatile economic periods and then running out to buy them.
First, Duy’s comments indicate that in a low-growth environment it may not be possible to predict a downturn that would normally inspire precious metals investment under traditional criteria. He mentions, for example, that the Federal Reserve Bank of Atlanta believes the economy will grow by an anemic 0.3% in the first quarter of this year. A number like that could prompt many to wonder if a recession is at hand, but Duy warns against jumping to that conclusion. He points out that “the first quarter has been the weakest quarter in four of the past five years and six of the past nine years.” It’s not enough to justify a spur-of-the-moment investment in gold or silver.
But it’s really Duy’s second, broader point that’s even more revealing. He says a trend toward lower growth and more statistical variability of growth centered around that trend means it is no longer uncommon to see negative growth quarters during periods of overall expansion. He identifies the first and third quarters of 2011 and the first quarter of 2014 as examples of negative growth quarters.
So, not only is the economy trending toward lower growth now, but even during periods when it is demonstrably expanding there can be quarters of actual negative growth that don’t necessarily mean a recession is looming. That makes it doubly hard to predict when it might be time to invest in alternative assets. It may be better to install precious metals into your portfolio over a longer term, so you’ll be ready for anything.
A look at the performance of gold, silver and equities since 2000 is revealing in this context. Since the beginning of this century, which came at the conclusion of a near-20-year period of unprecedented growth in the stock market, the economy has been beset by a variety of obstacles, and overall performance of the stock market has been modest. The S&P 500 has gained 90% since January 2000, while silver and gold each have moved higher by roughly 180% and 340%, respectively.
Performance of Gold, Silver and S&P 500 – January 2000 to Present
(Chart Courtesy of Stockcharts.com)
This chart suggests that in a longer-term climate of lower growth and more subdued stock market returns, precious metals may prove to be not only tremendous assets during periods of great distress, such as during the 2008 global financial crisis, but over the long haul as well.
Investors Should Rethink Precious Metals Role in Portfolios
This long-term viability of precious metals speaks to one of the challenges stock-oriented investors struggle with when it comes to gold and silver: seeing precious metals as having value outside of their well-documented defensive role during tremendous volatility.
Duy’s article is a great look at why it is going to be especially important going forward for investors to rethink their view of precious metals and see them as an asset that could complement their equities and help protect their overall portfolios during low-growth periods. And, as the chart above illustrates, gold and silver already have been putting in a lot of work as long-term capital appreciation assets. In both cases (protection and capital appreciation), investors have to be willing to both see the data and then make the move to allocate into metals in order to benefit from these returns.
There are a number of compelling reasons why you might choose to add physical precious metals as a mainstay asset of your portfolio, and economist Tim Duy presents a couple of important ones even though his article never actually references gold or silver. If you’re someone who has had difficulty viewing metals as something other than a niche asset, I invite you to call Augusta Precious Metals at 855-242-4121 and chat with one of our knowledgeable gold and silver professionals. Ask us, too, about how you can further maximize the benefits of investing in physical gold and silver by owning them inside of an IRA.