Wall Street's Secret: History Endorses Gold In The Modern Era

As we emerge from summer today, you are going to find this statement difficult to believe:

As long as gold has been allowed to trade freely in the US, its performance has exceeded that of equities.

The rhetoric that has been drilled into your head from business school, Wall Street, and financial consultants has been largely uniform: The performance of gold vs. stocks is pathetic for the metal whose lore pre-dates the fall of Adam & Eve. (That's Genesis Chapter Two in case you would like to check that reference.)

Gold for the Long Run focused on how much better gold has fared vs. perceptions since the 1800's, particularly vs. dollar cash. It attempted to make the case that diversification away from 100% dollar exposure of your cash with some physical gold cash is simply the most remedial risk management strategy and should be de rigueur instead of obsolete in American financial planning. The divergent track records of the two assets, their inverse correlation and their contrasting fundamentals strongly support physical gold exposure.

At least weekly since that note was published however investment professionals have argued to me that in modern times gold's performance has been pitiful and they quickly pull out charts to support their case. Before agreeing with such a conclusion however consider that gold's price was fixed for much of American history making the comparison to equities and bonds biased.

As of last month however we now have over 39 years of data to compare the returns of equities vs. gold. The starting date is August 15, 1971 which was the day when Nixon reversed the last vestiges of our Constitutional mandate for gold and silver. On August 15, 1971, the value proposition that led your grandfather to save his money in dollar currency at the bank was obliterated. Tragically for the middle class in America, the paramount import of this transformation was never broadly communicated in the media or from financial consultants who to this day treat gold and silver like a third rail.

So how has gold performed since it began to trade freely? To the surprise of most, the return for the S&P over this period was 9.9x as the index rose from 99 to 1079. By comparison gold returned 34x rising from $35 to $1,226. During this period silver also outperformed the S&P returning 13x on its move from $1.31 to $18.25.

Perhaps even more amazing is the result if we cut the data off 12/31/99. As you recall that was the all time year-ending high for the equity markets and represented the apex of internet euphoria. Equally significant was the moment also captured the peak of political euphoria. Markets believed the global conquest of capitalism was playing out before our eyes, and that gold's raison d'être was over. That equity peak coincided within 10% of gold's year-end cyclical low. Against such a bullish backdrop for paper assets, one would expect the risks of equity ownership would have trumped gold but just the opposite is again manifest. From the date gold began trading freely through 12/31/99 the S&P's return vs. gold was still less than 2:1 when the S&P closed at 1469 vs. gold's $288.

While this data comes as a surprise to most, I fully expect the reaction to be ongoing vociferous arguments against gold led by the bears' perennial favorite: "Gold has had such a run, it is bound to underperform other assets – If I ever was going to buy I would wait until gold has had a meaningful pullback."

Certainly, gold could underperform and have a notable pullback. But the lesson that shouts from history is not to sell all of your assets and move 100% of your net worth into gold as a trade … but what are you doing America? Americans' exposure to gold on a personal level remains essentially 0%. Let's hope Ron Paul's fears the American government has secretly sold all of our gold at Fort Knox prove unfounded. If he is right we could essentially have no gold at a national level either. Americans are upside down in allocating "safe money" to risky assets and no money to timeless metals.

If you have missed gold's run so far, it is probably because you have mistakenly characterized gold as a goofy commodity. Gold is not a commodity but a currency that has been accepted globally for thousands of years. Be sure to discount that in the last several decades it has been less accepted for day to day exchange of value – recent years are the anomaly. The precedent to weigh is that for thousands of years gold has been currency. The world is coming back to this realization too as the global central banks are buying gold and decreasing their exposure to debased dollar cash. The central banks are voting with their well informed and deep pockets that whatever the currency of the future will be, gold will be involved. In a bizarre turn that only history could fabricate, the oldest store of value has an element of PayPal circa 1999 to it these days – giving confidence and clarity to transactions and commerce when so much is in flux.

The obliviousness of the America public to the benefits of a metals currency position was well expressed by Frank Williams. Speaking on the program Mejanomics, Williams postulated that the divergence between gold at $1235 and silver at $19 suggests that central banks (banks buy gold, not silver) understand what the middle class does not: Fiat currencies are losing their luster and the middle class (who historically has bought silver because it could not afford gold) is about to get fleeced while holding trillions in dollar cash that ironically has no intrinsic value anymore. Alexander Hamilton defined the dollar as having tangible value of 24 ¾ grains of gold – Today no one knows what the value of a dollar is. Williams and his colleagues recalled the quote uttered by John F Kennedy as they believe it is on the verge of becoming prophetic:

"The complacent and self-indulgent are about to be swept away with the debris of history."

Complacency also exists on the institutional level where biases remain strongly positioned against metals. This is manifest by the difficulty mutual funds have in owning the physical, how most trusts are still not able to able to own it for beneficiaries even in separate accounts, and as allocations are still virtually nonexistent with financial planners. All of this of course is bullish for the longevity of this precious metals cycle.

People who think that gold bulls will only fare well in Armageddon are missing the very bright albeit different future for commerce - We stand at the dawn of an exciting new era in investing. If you don't share the optimism or are stressed about preserving your wealth then in all likelihood you have not had exposure to gold and silver. The good news is that just as investors who missed the first few innings of the watershed internet evolution were able to still profit from the real companies that emerged as leaders, savers who have neglected diversifying into gold and silver can still take advantage of the open window. Gold is far from expensive by numerous metrics. How can I say that? Consider that fully allocated costs to mine gold are in most cases north of $800 and increasing. Consider that since gold has begun freely trading the US money supply has exploded from $600 billion to over $8 trillion, a 13 fold increase. Foreign money supplies have likewise ballooned. Gold supply globally has only grown from 80,000 tons to approximately 165,000 tons. And while there is no reason to believe we have to get back to a prior peak, it is worth noting that gold would need to increase fourfold from current levels just to reach its prior peak on a real basis. The opportunity cost of owning gold is also as cheap as we may ever see with savings rates essentially 0% and most bond rates below cost of living increases.

For those who don't want to hold it personally it has never been more convenient to own physical gold either. For a fee of just 1% today, services such as ours allow gold owners to directly purchase the species of their choice, transport it to an insured vault, store it in a segregated cage, insure it; and either take delivery at maturity or sell their bullion. The service can even be tailored to automatically deposit quarterly income into the accounts of those living off of their investments and allows bond holders to protect their wealth during periods of inflation. Historically people have viewed paper gold as more convenient than holding it personally but ETFs and other forms are still just derivates subject to counterparty risk in a highly levered environment that the government still is grappling to get its arms around. In contrast the "effortless bullion storage" innovation titles the physical to the holder, deliverable at any time, and no one else has a claim on it.

Armageddon is not the main reason to buy metals as bears claim – Simply benefitting from gold's protection and enjoying the massive wealth transfer underway out of paper assets and into physical assets is at the top of the list. What will you buy with your gold – Ocean front property, rural tracts of land or perhaps entire businesses? As one of the few who will have real capital, the choices will be enthralling.

Drew Mason 

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