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Sometimes, product and service sellers will resort to what I consider to be the inappropriate exploitation of humans’ fear and greed instincts. Sad to say, there’s no shortage of fear-based and greed-based marketing campaigns in the precious metals industry.
Although I do not agree with those campaigns, it’s not difficult to understand why such marketing strategies are employed with precious metals. Through history, gold and silver have strengthened in a wide variety of economically and geopolitically adverse conditions. As a result, they’ve gained a reputation as crisis or “doom and gloom” assets – ones that people should turn to when things look bad.
Along the same lines, metals also tend to be the subject of head-turning, wildly optimistic price predictions justified on the basis of a projected calamity. I suppose it’s human nature to resort to messages like those, but I’ve landed squarely on the opinion that we should avoid that kind of motivation as a seller of products and services. For one thing, we don’t have to. Gold and silver stand on their own honest merits.
I’m not going to point fingers at what I consider to be examples of “bad actors” in the industry that are engaged in fear-based and greed-based practices. Instead, I want to accomplish two objectives in this article. First, I want to make you aware that there is such a thing as a bad reason to buy gold and silver. Second, I want to spend some time discussing what I see as three of the more prominent bad narratives frequently used to pitch precious metals:
My guess is that you’re acquainted with at least one, probably two and perhaps all three of these reasons to buy precious metals. Maybe you even bought gold and silver on one or more of these bases in the past. If so, don’t beat yourself up too badly. The good news is that there ARE sound reasons to consider adding precious metals to your asset base. But, in my view, these aren’t them.
The gist of this sketchy marketing narrative is that the money you keep on deposit at the bank could be snatched by the institution and used to recapitalize it in a crisis. The narrative’s punchline is that you should steer clear of banks altogether and keep your money in physical precious metals to eliminate the risk of such a frightening eventuality befalling you.
Here’s the basis for this pitch, in a nutshell:
As the dust began to settle on the 2008 financial crisis, government officials in Washington D.C. set about the task of reforming the domestic financial system. One of the goals of the reform effort was to create a new mechanism for the future rescue of systemically important banks – a mechanism that does not include taxpayer bailouts.
To that end, the Dodd–Frank Wall Street Reform and Consumer Protection Act included a special provision in Title II.1 This provision allows for the “resolution” of certain failing financial institutions in a future crisis through the use of bail-ins that rely on – among other resources – unsecured creditor monies.
As you may know, bank depositors are, technically, unsecured creditors of the institutions in which they deposit their money. It’s this use of the term “unsecured creditor” in Dodd-Frank that apparently has allowed some metals firms to feel comfortable weaving a rather provocative “what-if” tale.
Ultimately, only you can decide how much weight you want to give the risk that your bank deposits could be commandeered in another financial crisis. For my part, I believe the chances of it happening are statistically insignificant, at best.
And I further believe the chances of it happening to average retail depositors who enjoy FDIC protection is effectively zero. Given this, I think any pitch to buy gold and silver centered on the possibility the bank could grab your money is merely a disingenuous marketing ploy.
This is a popular justification for buying precious metals. It’s made up of two components: (1) the belief that a long-running bull market is due to correct – or even crash – at any given moment, and (2) the reality that gold and silver have at times strengthened sharply in the face of significant drops among financial markets. The promoted marketing strategy encourages the replacement of equities with precious metals before the anticipated disaster strikes. By doing this, you’re told, you’ll not only be spared the portfolio effects of crashing markets but you’ll actually make money from the positive reaction of your metals.
To be honest, statistics have shown that over a period of many years, gold has been fundamentally uncorrelated with popular asset classes such as equities and real estate.2 Those same statistics also demonstrate a minimal correlation between gold and almost every other key asset class.
But that doesn’t mean gold and silver will always increase in value when other assets are tanking. Or that gold and silver are always uncorrelated with popular mainstream assets. For example, the Federal Reserve monetary policy tactic of quantitative easing (QE) has shown the capacity to fuel both financial markets and precious metals at the same time. Metals frequently react well to the dollar-debasing potential of QE.
And the low interest rates that result from QE can benefit financial markets in two principal ways: Investors who otherwise might prefer to be in safer interest-bearing assets decide to flee those to hopefully find better returns in equities. And extremely low interest rates mean businesses can borrow for practically nothing to expand operations – something investors like to see.
Might we see significant downturns in financial markets going forward? Certainly. But there’s no way to know for sure if or when that might happen, how severe the drops could be, or how precious metals will react to them.
Everyone would like to be able to protect their nest eggs from high-flying markets. But it might not be such a good idea to swap out the current assets in your portfolio for precious metals to do it. If you are contemplating any such move, please consult with your financial advisor before doing so.
Price predictions can be very exciting. Those that seem particularly compelling can cause even the most sophisticated investor to do a double take. And there’s no shortage of optimistic price predictions regarding gold and silver these days.
Here’s the problem: There’s a risk that hopeful investors will purchase an asset largely – or even solely – on the basis of a robust price prediction. And the more bullish that prediction, the more intoxicating it can be.
It’s not that price predictions are without value. They can be useful as one of many factors to evaluate when considering the purchase or sale of precious metals. However, there are a couple of features I think should characterize a prediction in order to help ensure it’s at least somewhat legitimate.
One of those is that a price projection should be scrutinized on an ongoing basis by the analyst who makes it. Responsible analysts constantly examine the large number – and variety of – influences on metals. If there are changes among those influences, it can be appropriate to see changes in the analysts’ price predictions, as well.
For example, back in April, Bank of America (BoA) raised its 2021 gold price target to $3,000 per ounce.3 However, last month, BoA revised that forecast downward to just above $2,000.4 They did so based on news of the imminent availability of COVID-19 vaccines and their anticipated beneficial effect on economic growth. To be clear, other respected analysts – including those at Citigroup – see next year’s environment differently and forecast gold rising to $2,500 in 2021.5 My bigger point, however, is that the most useful and reliable predictions are those subject to regular review by the analysts making them.
I also believe price predictions should be something less than extraordinary. There are well-known names in the precious metals community who say $50,000 – and even $100,000 – gold is in our future.6 Such predictions certainly are exciting. But I’ve found that the more extravagant the prediction, the flimsier the basis for it. And, consequently, the less credible it is.
I’d love to tell you that we’ve covered the full extent of the bad narratives either used to market gold and silver or simply thought of by retirement savers as sound bases for buying metals. Unfortunately, there are plenty of others. They include such disconcerting ideas as “precious metals are guaranteed to make money” and “gold and silver are suitable for short-term speculation.”
That said, as I noted at the outset of this piece, there are sound reasons to buy precious metals. They may not be the most exciting reasons. But they are sound.
For example, highly accommodative Federal Reserve monetary policy may seem like a “ho-hum” reason to buy precious metals compared to threats posed by desperate banks and prognostications of global economic calamity. But that “ho-hum” reason is seen generally as a principal catalyst of gold’s strong performance over the last couple of years. It is also the reason some responsible analysts project gold and silver will both set new all-time price highs next year.7
Another of the great classic reasons to buy precious metals is that they have intrinsic value, which means they have never been worth nothing. And their non-paper nature means you have greater control over your savings in many ways.
If you want to learn more of – and more about – the suspect reasons to buy precious metals, I invite you to review the video “Bad Reasons to Buy Gold & Silver” hosted by Devlyn Steele, Augusta Precious Metals’ director of education. In this informative presentation, Mr. Steele details his list of seven of the worst commonly cited justifications for buying precious metals.
1https:&bsol/www.fdic.gov/about/srac/2012/2012-01-25-legal-framework.pdf.
2https:&bsol/www.portfoliovisualizer.com/asset-class-correlations.
3https:&bsol/www.bloombergquint.com/business/bofa-raises-gold-target-to-3-000-as-fed-can-t-print-gold.
4https:&bsol/www.kitco.com/news/2020-11-24/Bank-of-American-neutral-on-gold-price-no-longer-holding-3-000-target.html.
5https:&bsol/www.cnbc.com/2020/11/24/gold-to-2500-two-etf-analysts-on-citis-bullish-call-for-2021.html.
6https:&bsol/medium.com/concoda/this-is-how-gold-will-reach-100-000-47ab9205f609.
7https:&bsol/www.kitco.com/news/2020-12-18/Why-gold-price-will-rally-to-new-record-highs-in-a-new-normal-analysts.html; https://www.home.saxo/content/articles/outrageous-predictions/sun-shines-on-silver-which-sizzles-on-solar-panel-demand-08122020.
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