The Solid Reasons for Gold in an Investment Portfolio

The Solid Reasons for Gold in an Investment Portfolio

The Solid Reasons for Gold in an Investment Portfolio

$GLD,  $SLV,  $ABX,  $EXCFF,  $SLW, $SPY

Gold got crushed in The Trump Election rally post election, but a little over 5 months into Y 2017, the yellow metal is up 10.5%—making it one of the best-performing assets of the year so far.

While the outlook for the US economy is more positive than it was a year ago, and still the big picture is not rosy.

Gold has historically done well in times of uncertainty, and with the 7 signs of worry listed below, there is likely more ahead.

  • 1: Interest Rates Near Record Lows

Source: St. Louis Fed

In the wake of the financial crisis, the Fed lowered the federal funds rate—the main determinate of interest rates—to 0%. That zero-interest-rate-policy (ZIRP) has had wide-ranging implications for conservative investors.

And even though the Fed has been hiking rates recently, rates are still nowhere near a range that would provide savers and income investors the healthy 4–6% yields they saw before the 2008 Financial Crisis.

Which brings us to…

  • 2: Bonds Offer Measly Returns

Source: St. Louis Fed

A direct consequence of the Fed’s ZIRP is that bond yields have collapsed.

Although the benchmark US 10-year Treasury yield is up around 60% from its July 2016 lows, that is way below its 40-year average.

Meager returns on offer have pushed investors into riskier assets in search of yield. That includes the Aristocrat dividend stocks, which have seen a huge influx of capital.

  • 3: Dividend Stocks are not what they “usta was”

Source: multpl

As ZIRP sent bond yields south, investors piled into dividend-paying stocks as a way to generate returns. A direct consequence of this is that dividend yields on S&P 500 stocks have fallen to 1.91% and are now 32% below their long-term average.

Along with falling yields, investors who want to buy income-producing stocks these days are facing rich valuations.

The data reveals that the average price-to-earnings ratio of the S&P 500 Dividend Aristocrats ETF (NOBL) is 21.1—higher than that of the broader S&P 500 index. An ETF tracking that index, SPDR S&P 500 ETF (SPY), has an average P/E ratio of 18.7.

That number is high, which reinforces the point that dividend-paying stocks have reached unsustainable valuation marks.

As such, dividend stocks are richly valued and a poor alternative to bonds today, especially as they are reliant on economic growth.

  • Economic Growth is Weak

Source: St. Louis Fed

Between 1967 and 2007, the US economy grew at an average nominal rate of 7.3% per annum. However, in the last nine years, GDP growth has averaged just 2.8%.

President Trump said he can get the economy growing again. But, the nation faces a huge debt burden

And it looks like he will have to face the fact that US economic growth is losing its momentum. Q-2 GDP growth projections were lowered by Wall Street analysts and the Fed forecasting arms too, Atlanta Fed lowered to 2.9% Monday, off from 3.4% on Friday, off from 3.5% last Monday.

Morgan Stanley revised its Q-2 Y 2017 GDP forecast to 2.5%.

Whether President Trump can reverse this trend is yet to be seen, it is an uphill battle.

  • 5: The Federal Debt Has Exploded

Source: St. Louis Fed

From George (1), to George (43), the federal debt went from $0 to $9.2-T.

Since Y 2008, US government debt has risen to $19.85-T, that friends is a 116% increase in just 8 years.

 The non-partisan Congressional Budget Office (CBO) projects $10-T will be added to the federal debt over the next decade and estimates the cost of servicing the debt will 3X over the next 10 years. That would bring interest payments alone to over $600-B per annum.

That is more than the total Y 2016 outlays for the Department of Defense and Education combined.

  • 6: The USD has lost 87% of its value aka purchasing power.

Source: St. Louis Fed

The USD may be rising Vs other fiat (paper) currencies like the EUR and JPY, but its purchasing power has fallen 86.5% in 50 years, I remember in the 1960’s when my 1st RR and Ferrari cars were $12 and $10-K respectively, our home was $55-K, today those cars are $420 and $310-K and the same house recently sold for $3-M

The USD’s decline has slowed some in the last 10 years. But, with the Fed doing its best to create inflation, you can be sure it will continue.

Hang on, there is something that may not continue for much longer

  • 7: We Are Overdue For A Bear Market

Source: S&P Global

In on 9 March, the Bull market in common stocks celebrated its 8th birthday, making it the 2nd longest of its kind in US history. With the current Bull run having exceeded the average length by 3+ years, remember you never get poor taking a profit, so it may be time to take money off the table.

The Big Q: How can savers and investors protect their wealth from any negative consequences that could arise from these unhealthy trends?

The Big A: With the meager returns offered by bonds, this overextended Bull market, and this weak economic outlook, adding Gold to in investment portfolio is prudent.

Gold bullion has proven to be a store of value and a reliable wealth preservation tool for centuries, unlike USD. In the event of a stock selloff, it serves as  insurance.  as the money rotates to hard assets like Gold and Silver

Even if markets continue to rise in the interim, Gold looks  do well. Since late Y 2015, the precious Yellow metal has outperformed the S&P 500 by 30%.

The experts say place 5%–10% of portfolio assets in Gold bullion to protect wealth in a crisis, this pattern is setting up for such a Key reversal, so guarding against the pain is prudent.

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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