Forget My 'Outlook'... Focus on Doing This Instead
Why you should hold gold and silver... A concept as old as money itself... Gold vs. the U.S. dollar since 1971... Warren Buffett is no fool... Clueless hordes vs. seasoned professionals... The investment pros are worried... A sign of high risk in the markets today... Forget my 'outlook' – focus on doing this instead...
'What's your outlook for gold and silver?'
A Stansberry Alliance member asked me (Dan Ferris) that question earlier this week. Another way of phrasing it might be, "Please tell me if you think gold and silver will keep going up. And if so, for how long?"
It's not uncommon for even the best and brightest investors in the world to think this way...
Most folks want to buy an asset on Monday... and sit back and watch its price rise every day from Tuesday through eternity. As the asset's price goes up, they feel good. And after it has gone up a lot – like gold and silver this year – they start asking where its price will go next.
But as we all know, investing doesn't work that way...
We must pose a different question to ourselves. The real question to ask today is, "Should I keep holding gold and silver even though both have gone up a bunch this year?"
And the answer is... Absolutely yes.
This question comes down to why you should hold gold and silver at all... Once you understand why that's critical, you'll never worry about short-term price outlooks again.
You see, holding physical gold and silver is not a speculation on higher metals prices. They're not compounding vehicles like stocks. Nor do they make for good trading vehicles.
As we've stressed time and time again at Stansberry Research, you want to hold physical gold and silver as an insurance policy against monetary mayhem, particularly inflation.
The concept of inflation is as old as money itself...
Medieval philosopher Nicholas Oresme wrote the first treatise on inflation way back in the 14th century. It's also the first known treatise on any type of economic problem, according to German economist Jörg Guido Hülsmann. That makes perfect sense...
After all, inflation is perhaps the ultimate economic problem. And I'll bet anything that the first person to use gold as money was also the first person to debase it... by mixing the gold with other metals so he could have more purchasing power than his neighbors.
More than 600 years ago, Oresme wrote about the immorality of a government monopoly on money and the bad social effects of the debasement of coins. Today, inflation doesn't happen through coin debasement. But all these years later, the basic idea is identical...
As long as governments are in charge of money, they will always manage it poorly. They simply have too many incentives to do it... and zero political gain for refusing to do it.
You should probably own gold and silver simply because they've been in demand as money longer than anything else. We've valued both metals consistently for at least 6,000 years.
If you're looking for more proof, look no further than our own government...
The most meaningful modern example of gold's ability to preserve purchasing power and insure you against monetary mayhem started right here in the U.S. nearly 50 years ago.
I'm talking about the metal's incredible rise in value in U.S. dollar terms since President Richard Nixon took the U.S. off the gold standard in August 1971.
At that time, the government's gold price equaled $35 per ounce. But as Digest readers know, gold recently eclipsed $2,000 per ounce – an all-time high. That's a 57-bagger.
Meanwhile, one U.S. dollar in 1971 is equal to about $6.40 worth of buying power today.
In other words, gold has outperformed the degradation in the U.S. dollar by roughly nine times since its price was set free of government interference nearly five decades ago.
So far, so good.
Don't ask about short-term moves in the price of gold and silver...
Instead, ask if you believe it'll continue to serve as insurance against monetary mayhem for another 6,000 years.
That question answers itself... The simple fact that gold and silver have already been in demand for 6,000 years makes it more likely that they'll be around for another several thousand years. It's a classic example of the "Lindy effect" in action.
Of course, the gold price in terms of U.S. dollars will continue to be volatile...
That's because politicians will continue to resort to currency debasement to pay for their schemes to maintain political power. Leave your political-party affiliations at the door... They're all spendthrifts and money-printers. Eventually, they all believe in borrowing and spending... both ultimately supported by printing more money.
But there's something deeper in this question about the outlook for gold and silver...
Too many investors don't understand the point of holding a diversified portfolio.
You don't hold a well-chosen, balanced portfolio of assets because you believe they're all going to rise in value every week through eternity.
You hold a diversified portfolio because government spending, borrowing, and printing of trillions of dollars creates too much risk of monetary mayhem.
You diversify precisely because you know some assets tend to perform well under certain conditions... while other assets tend to perform well under other conditions.
For example, when the stock market crashes like it did in March, holding plenty of cash allows you to sleep soundly at night. You know that your cash is rising in value relative to the downward movement in stock prices.
In other words, your equity purchasing power in dollars rises in a stock market crash.
It's the same situation with gold and silver... When gold rises from $1,500 to $2,000 per ounce – like it did from mid-March through earlier this month – it means gold's purchasing power relative to U.S. dollars has risen 33%.
That's a huge move in a short period of time... And it indicates that investors and savers perceive a high risk of currency debasement.
We're likely in the early innings of an extended stretch of excessive currency debasement... I suspect this period will last five to 10 years at least.
The only way for politicians to pay for all the government spending happening today – and gaining more and more political support every day – is to print money. Nobody has cared about inflation for decades, and they're not about to start now... So we'll have inflation.
Gold has outperformed all major fiat currencies since 1900. No reason to expect that to change.
By the way, Berkshire Hathaway (BRK-A) Chairman and CEO Warren Buffett knows everything I just told you...
I'm sure that's why Berkshire just bought a stake in gold-mining giant Barrick Gold (GOLD).
Buffett is likely on the leading edge of a whole new class of institutional investors, none of whom were previously interested in gold. Now that one of the greatest equity investors of all time has bought shares of a giant gold miner, you better believe many of those institutions are now rethinking the role of gold and gold stocks in their clients' portfolios.
I initially thought Buffett was late to the gold party. But now, I realize that he's early. After all, as Buffett once said, "What the wise do in the beginning, fools do in the end."
Although Buffett isn't always right, he's no fool.
Stay tuned... We'll soon see more gigantic institutional investors getting interested in gold.
Regardless, please don't ask me where I think the price of gold and silver in terms of U.S. dollars will go over a short period of time. Instead, simply ask if I believe gold and silver will continue to protect us against monetary mayhem as they have done for thousands of years.
Again... absolutely yes.
Buy some gold and silver, forget you own them, and hope you never truly need them.
That's what diversification is all about. That's the real reason you should continue to hold gold and silver in your portfolio... or buy some today if you haven't done so already.
Like cash, gold can also protect you when stocks descend into a bear market...
During the bear market from 2000 to 2002, the benchmark S&P 500 Index fell 49% from peak to trough. Meanwhile, the price of gold climbed roughly 13% over that span.
And it was a similar story from 2007 to 2009... The S&P 500 plunged 57% from top to bottom, while the value of an ounce of gold rose about 24% over the same period.
I suspect we would see a similar situation play out if another equity bear market were to begin today.
And the odds are higher than you might think that a new, steep bear market in stocks will begin soon...
Right now, with the S&P 500 hitting a new all-time high this week, nobody believes stocks will do poorly. Nobody, that is, except the most successful professionals in the world.
My friend Chris Pavese, president and chief investment officer at Broyhill Asset Management in North Carolina, recently published his midyear letter for clients. In it, he included a list of headlines to highlight the collective bullishness of most investors... and the bearishness of the pros. Take a look (bold emphasis mine)...
Needless to say, what we are seeing in the market today is anything but healthy behavior and, consequently, we are more worried than ever about the implications of how this unwinds. Take a moment to consider the following headlines:
Now compare them to those below:
Some of these articles were published a few months ago. Stocks are even more expensive now. And still, the clueless hordes are bullish... and the seasoned professionals are bearish.
The third headline of the second group ("Fund that called the last two crashes starts to short global stock markets") is about legendary investor Jeremy Grantham. The 81-year-old England native is the co-founder of Boston-based asset-management firm GMO.
Grantham once completed a study of asset bubbles, so he knows one when he sees it...
And in June, he said that with the stock market right now, we're currently in the fourth "real McCoy" asset bubble of his career. The others were Japan's asset-price bubble in 1989, the dot-com bubble in 2000, and the housing crisis in 2008.
Buffett, another seasoned pro, has been quoted so many times that it's easy to ignore the profundity of his insights. In particular, one quote seems to pop up more than others...
So given the pandemic we're all living through today, I thought you might enjoy reading the whole paragraph from Buffett's 1986 letter to his Berkshire shareholders that ends with this ultra-famous quote (with my bold emphasis added). Take a look...
What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
A super-contagious disease in humans today was briefly met with fear from everyday investors... But it has now led to a super-contagious outbreak of greed among them.
The only fearful investors right now are the professionals who've seen this movie before and know how it ends. They're the guys from Broyhill's second group of headlines – Buffett, Jim Chanos, Grantham, David Tepper, and Stanley Druckenmiller – as well as Pavese and a few other friends of mine who manage somewhat smaller funds than those five.
Just like my reply to the question about the outlook on gold and silver, Buffett and the other pros "never try to anticipate the arrival or departure" of bull market manias or bear markets.
The investment pros all know worrying about short-term price movements is a waste of time. They also know how to recognize, understand, and control risk... And most important, these investment professionals all see plenty of risk in the stock market today.
I know what many investors – including some of my Stansberry Research colleagues – will say...
They'll tell me that a breakout to new all-time highs is bullish, not bearish.
I believe it's wrong to state that in the present tense, though. It has tended to be true in the past... Most breakouts to new highs have been followed by further gains. But we don't know what the future holds... And those previous times haven't usually indicated high risk.
This time, we're also seeing a breakout to new valuation highs – a sign of high risk.
The S&P 500 hit an all-time valuation high of 2.41 times sales back in February. Today, it's at 2.4 times sales. So as you can see, we're again approaching never-before-seen territory.
(The price-to-sales ratio has historically correlated negatively with ensuing 10- and 12-year returns. And it's a superior valuation for the overall market than the price-to-earnings ratio.)
While valuation is a terrible timing mechanism for short-term traders, it's as powerful and irresistible as the force of gravity for almost every other type of financial market participant.
If it's too high, returns will be low. Plain and simple. After all, it's virtually impossible for you to make great long-term returns when you're paying the price of all-time high valuations.
Economist and asset manager John Hussman of Hussman Funds has done the best job of tracking the relationship between the S&P 500's valuation and subsequent 10- and 12-year returns. Here's his latest observations, from earlier this month (bold emphasis mine)...
On Wednesday July 29, the U.S. financial markets quietly made history, as our projection of 12-year nominal total returns for a conventional passive portfolio mix (60% S&P 500, 30% Treasury bonds, 10% Treasury bills) fell to -0.45%, the lowest level in history. While 10-year Treasury bond yields are at just 0.6%, we estimate that the 12-year average annual total return of the S&P 500 will fall short of that level by about 2%, producing a very long, but likely interesting, trip to zero or negative returns for more than a decade.
Again, Hussman is not worried about the short-term "outlook" for securities prices. Instead, he's focused on the immutable relationship between valuations and long-term returns. The more you pay, the less you make... And at some high-enough valuation, you'll lose money.
Before I wrap up today, I have one quibble about Hussman's analysis...
He suggests that the S&P 500 is headed on a "very long" trip that will culminate in zero or negative returns for 10 years or more.
But if you look throughout history, bear markets rarely last much more than a year or two.
In other words, I believe the correction back to an S&P 500 priced for adequate returns (roughly 60% less than its current level) could be over fairly quickly. Stocks take the stairs up... and the elevator down (or sometimes, the elevator breaks and they plunge even quicker all the way to the basement).
That's why I still recommend holding plenty of cash today...
Cash is the ultimate diversifier for an equity portfolio. The lower your equity portfolio falls, the more equity you can buy with your cash as prices move into bargain territory.
Now, of course, I'm sure some folks reading today's Digest will say it's stupid to be bearish because the Federal Reserve is doing everything it can to support the financial markets.
But I would argue that nobody who knows history would ever say that the Fed has ever demonstrated any ability to support the stock market for very long. And if investor sentiment gets bad enough, Fed policy won't matter one bit, as Hussman points out...
It's worth repeating that the Fed eased aggressively and persistently throughout the 2000-2002 and 2007-2009 collapses. The psychology of investors can either amplify the effect of monetary policy, or render it practically useless.
Look, I understand where the Alliance member who asked me that question was coming from...
Everyone loves to ask about "outlooks" for gold, silver, stocks... and any asset whose price movements can make you richer or poorer. It's human nature to let these things get under your skin.
But to do investing right, you must learn to focus beyond the short-term price movements.
You must understand why it's good to hold gold and silver... and at what valuation stocks are just too risky for new money. I hope I've helped you realize that with today's Digest.
On this week's episode of the Stansberry Investor Hour podcast, I interviewed high-yield bond guru Marty Fridson. When we were finished, I asked him for one final thought...
Fridson told our listeners that they should maintain a long-term perspective. They shouldn't get too caught up in short-term price movements, no matter how scary they might seem.
That's great advice... Anyone who asks about the short-term "outlook" for almost any asset should hear that.
If you can separate yourself from the great herd of twitchy day traders... focus on the long term instead of worrying about short-term price movements... and be mindful of why you're holding gold, silver, stocks, cash, bitcoin, or whatever else... you stand a good chance of making money over the next few years, even if everyone else around you is losing it.
New 52-week highs (as of 8/20/20): Booz Allen Hamilton (BAH), Alphabet (GOOGL), Innovative Industrial Properties (IIPR), JD.com (JD), Midas Gold (MAX.TO), Palo Alto Networks (PANW), Procter & Gamble (PG), ProShares Ultra Technology Fund (ROM), Sea Limited (SE), Sabina Gold & Silver (SGSVF), Scotts Miracle-Gro (SMG), S&P Global (SPGI), and Victoria Gold (VGCX.TO/VITFF).
In today's mailbag, more feedback on the health care "fix" debate. Do you have a question or comment? Send it to us at feedback@stansberryresearch.com.
"Dr. David B. does not go far enough. The best way to fix our nation's broken 'health care system' would be to outlaw health insurance altogether. If people had to spend their own money for health care, they'd spend it much more wisely. That would include getting rid of Medicare as well so that if people at the end of their lives wanted to spend hundreds of thousands of dollars to prolong their lives by a few weeks, they'd be spending their own dollars.
"If you need a real-life example of that, check out the uninsured areas of health care like plastic surgery and Lasik eye surgery. Procedures have continually improved and prices have been falling for decades because providers have to compete to earn customers' dollars." – Paid-up subscriber Kurt H.
Good investing,
Dan Ferris
Vancouver, Washington
August 21, 2020
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