|Forbes.com, Spring, 2016. This article was written with Jim Cahn, the Chief Investment Officer at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Forbes to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
The first several months of 2016 have been marked by a common occurrence: what did poorly last year is performing well this year.
Russian and Brazilian stocks and precious metals, all of which were crushed in 2015, are up significantly in 2016. While the three are among the best performing areas YTD, it should be noted that their struggles weren’t limited solely to 2015. Brazilian and Russian equities were down nearly 70% and 55%, respectively, from their peaks in 2010, and gold was off about 40% from its peak in 2012. These results can only be described as atrocious, especially when compared to how U.S. stocks performed during the same period. If you were looking to load up on these areas, it wasn’t exactly a crowded trade entering the year.
The Golden Bull Returns
Gold bullion is up 15% so far in 2016. This rise is particularly interesting when you consider that the derivatives of gold, such as gold and silver mining companies, have bounced off of even deeper lows than the metals far more aggressively. For instance, the NYSE ARCA Gold Bugs Index, a representation of the mining companies, is up over 80% YTD.
Conversations about gold often resemble an argument about religion with the believers and the non-believers rarely seeing eye to eye. Typically, the believers are so adamant that the non-believers are left with only one conclusion: being long gold is similar to joining a cult. And it certainly appeared that gold had reached cult-like status less than a decade ago when late-night infomercials started featuring gold coins with large markups and offered to trade you cash for your gold.
The non-believers argue that gold is good for absolutely nothing. They state that it doesn’t produce cash flow, that it’s hard to value and that it’s hard to transport significant amounts in a doomsday scenario or trade for every day goods. All of those statements are largely true, but none of them address the argument that gold has behaved as a currency for 6,000 years.
Is Gold an Adequate Hedge Against Government Overspending?
Gold’s believers may have the strongest case they’ve had in decades as to why someone should own gold. Gold is often said to be a hedge against government, and that argument has rarely been as compelling as it is today. We are currently witnessing heavily indebted nations throughout the developed world attempt to pull the proverbial rabbit out of their hat in attempt to stimulate growth via massive deficit spending.
It’s no secret that the United States, Europe and Japan have piled up enormous debt levels and are routinely creating new and interesting ways to manipulate their economies via monetary policy. Elsewhere, Finland, Switzerland and the Netherlands are each considering instituting a basic income plan as a means to revive their economies. Essentially this means they’d send a monthly check to every citizen with no strings attached, a policy that will likely be inflationary.
Larry Summers, the highly respected economist and former President of Harvard University, recently said that central bankers are not doing enough to pull the world economy out of the ditch. His contention is that the next iteration of stimulus should be a fiscal stimulus focused on infrastructure development.
This article is not intended to pass judgement on any of these ideas. It’s simply an observation that we are witnessing a plethora of measures that are experimental in nature, and while they are designed to jumpstart the global economy, they also carry a risk of eroding the purchasing power of the various global currencies. In other words, in a time of great uncertainty, gold just might offer the skittish investor absolute value.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.