If You've Been Waiting... It's Time
Editor's note: Today, we're continuing our special Digest holiday series with an excerpt from one of the year's most noteworthy issues of Dr. David Eifrig's Retirement Millionaire advisory. (And of course, you can always keep up with the latest market action with the Stansberry NewsWire.)
In this essay – originally published in October – "Doc" explains why he's now urging his readers to buy more gold for the first time in years...
If You've Been Waiting... It's Time
I never thought I'd get stranded in one of the richest and most developed cities in the world, but I did.
And now, the experience has me ready to buy up an investment I haven't recommended in years.
Two weeks ago, I was flying west from Baltimore, heading to the San Francisco airport. My vineyard grapes had matured for the year, and I was heading to Calistoga to pick the fruit for my 2018 vintage.
No worries, though. This happens a lot. Usually when I get in late, I'll spend the evening at a hotel near the airport and set out early in the morning. But the plane was scheduled to land late in the evening, and I wasn't relishing the 2.5-hour drive that would still lie ahead of me.
But this time, pulling up my favorite sites for hotel and travel reservations produced... nothing. Everything was booked: The Hilton Garden Inn San Francisco Airport North, sold out... the Hilton San Francisco Airport Bayfront, sold out... DoubleTree, sold out... Homewood Suites, sold out.
I'm not just talking about my favorite hotels or the closest ones. I expanded my search farther and farther from the airport. Sold out. Sold out. Everything was 100% booked. I'd never seen anything like it.
Finally, I found a room all the way downtown. The Hilton San Francisco in the Financial District could take me... for $1,040 a night.
Of course, San Francisco is one of the most expensive cities in the country. But expanding my search all the way out to Oakland didn't do much better. I could stay at a Hampton Inn for $600.
No thanks. The waffles are good, but not that good.
Ultimately, I decided to stay in Baltimore and fly out first thing in the morning.
The point of this story isn't to complain. It's a signal from one of my favorite real-world economic gauges...
When airports and hotels are booked up, it's a clear sign the economy is churning along at peak capacity. (It's another version of my "Cabbie Index.")
And right now, things have gotten good. They are approaching too good.
You can't get a hotel room. You can't hire a contractor to show up within months. No one can find employees (at least not for the wages they are willing to pay). Amazon just gave raises that by my estimate will cost it $3 million per hour, minimum.
From my office in Baltimore, I can spy multiple construction cranes... And my window faces north toward the bad sections of Baltimore. Look south toward the ever-growing Inner Harbor, and construction is everywhere.
Here at Stansberry Research, many of us just returned from our annual Alliance Meeting in Las Vegas. Everything from the flights, to the restaurants, to the gaming floor at the Bellagio hotel bustled at max capacity.
Right now, all of my gauges – both real-world ones and more traditional economic measures – tell me the economy is cooking. It couldn't really be performing much better... And when things can't get any better, that's when you need to prepare for them to get worse.
So this month, I want to review what my favorite economic indicators are showing and how we need to adjust our portfolios to protect ourselves for...
When Boom Turns to Bust
It's inevitable. But right now, things look about as good as they can get.
You can measure this with "potential GDP," a measure of what the economy would produce if all its assets were put to productive use. In 2014, we used this measure to point out that the economy had not yet recovered from the financial crisis and still had plenty of room to grow.
Well, the gap between potential and actual output just closed.
An economy has momentum. Spending helps create jobs and raise wages. That gives people more money to spend... which creates more jobs and higher wagers. This can run along for a while.
But it can't run on forever. Long-term success requires you to plan for the downturn during the upturn and vice versa. The human mind always gets this wrong. We convince ourselves the good times will never end. Then, when things go bad, we can't see any possible way out.
That's why I'm reminding you to prepare today.
Because while an economy has momentum, boom times eventually choke themselves off through inflation.
Rising prices can come from rising costs (known as "cost-push inflation") or rising demand (known as "demand-pull inflation").
Today, for the first time in my lifetime, we see both.
The prices for raw commodities have stepped up and consumers are out buying, flying, staying in hotels, and spending money like burning wildfire.
Higher labor costs contribute on both ends. Higher wages create consumers who spend, leading to demand-pull inflation, and they raise costs, leading to cost-push inflation.
We just got a jobs report early this week... And it was good. The economy added 134,000 jobs last month, despite possible effects from Hurricane Florence. The unemployment rate hit its lowest since 1969.
And workers got paid more. While we haven't seen a major breakout in wages, hourly workers see pay 2.8% higher than last year and weekly earnings have risen 3.4% (meaning workers got a few more hours on average).
Inflation is coming.
And we haven't even mentioned how high stock prices have gotten or the growing levels of government and corporate debt.
Put it all together, and it's clear what you need to do with your portfolio today...
This Is the Time to Own Gold
You can criticize gold as an investment for two reasons: Its price is volatile, and it doesn't pay any yield. I'm far from a gold bug. I've got a few collectible coins that I keep... mostly just because I like them.
But I've long maintained that part of your portfolio belongs in gold as protection for when things in the economy get really bad – as a "chaos hedge."
Today, "chaos" appears closer than it has been in a long time. And given the near-term prospects for gold prices, the hedge will be cheaper than it has been.
Three market conditions point to the times you want to own gold, and we're experiencing all of them today...
First, as noted above, inflation is on the rise. It's been running at 0% to 1% a year for several years, but now it's crossing into 2%. That's a reasonable rate. But if it approaches 4% or 5%, that could be disruptive (although still nothing like the hyperinflation of the 1970s).
You want to own gold during periods of inflation. In recent years, the price of gold hasn't been as closely correlated as it had been in the '70s, when the two moved in lockstep. But it still stands to reason that when the value of money declines (the essence of inflation), the value of a hard asset like gold will rise.
Second, you want to hold gold when interest rates are low. All asset classes compete with one another. As we said earlier, one of gold's big drawbacks is it doesn't pay a yield. When government bonds pay 1%, holding gold becomes more attractive. You don't give up much yield. But when government debt pays more – say, 5% – some investors would move from gold to bonds.
Today, bond yields have moved higher... But they're still historically low. The 3.2% yield that U.S. 10-year government notes pay wouldn't be considered generous at any time in history outside the past 10 years. Yields are far from rich, and gold can still earn its place.
Plus, the Federal Reserve will back off its plan to gradually hike rates quickly if it senses any stress in the economy or the stock market. A new regime of quantitative easing would send gold soaring.
Third, you want to own gold during market crashes. This one takes no explanation. Gold goes up when stocks crash and people get scared.
This next chart measures from the peak of the stock market to its lowest point. But if you held longer, gold continued to rally. Which would you prefer, to see your wealth chopped in half or to earn around 20%?
Even so, no one wants to own gold today...
Buying Near a Bottom
If you're a gold bug, it's been a tough couple of months for you. The price of gold is down roughly 10% since the start of 2018 and down about 40% since its 2011 peak...
No one is buying today. But forget buying... traders have actively jumped on bets that gold will go down...
Large speculators in gold futures have bigger bets against the price of gold (compared with the number of all gold futures bets) than any time over the past 17 years.
Right now, the level of bearishness on gold is at an extreme... We think it's become too bearish.
Traders have a couple reasons to be so pessimistic. The first reason is because of the U.S. dollar.
Since the gold standard ended in 1971, gold is no longer the anchor to the global money supply. So in that sense, it's now just another commodity.
But it's different from almost any other commodity. Other commodities' prices fluctuate based on their uses. For example, the price of crude oil could collapse if all cars one day become electric.
But gold doesn't have much real industrial use. It's just a globally accepted store of value. So gold's value depends on the currency it's valued in, which is the U.S. dollar.
When the dollar is strong in relation to other currencies, the price of gold goes down. And when the dollar weakens, the price of gold goes up.
You can see the inverse relationship in the graph below. As the dollar gets stronger against its primary competitor, the euro, the price of gold falls...
Since the start of 2018, the dollar has been getting stronger thanks to rising interest rates, the booming economy, and the Fed's decision to stop adding to the money supply.
As a result, gold investors have been getting hammered.
The other reason for the extreme bearishness in gold is because of rising interest rates. As we mentioned earlier, owning gold looks less attractive when you can earn higher yields on bonds.
And finally, we like to own gold during market crashes, but given the all-time highs in the stock market, investors are acting like we'll never suffer another downturn. They only see smooth sailing ahead. Of course, we know when the memory of falling stocks fade, they'll come and give you a swift reminder.
Get Protection Now for Cheap
If gold is insurance, remember you need to buy your policy before the disaster. If you wait until the disaster is at hand, your premiums tend to go up.
Let's recap... You want to own gold for safety... at least a little. It's a hedge for when the rest of your assets collapse.
The times that it comes in handy – inflation, fear, and low interest rates – all look to be in the offing.
Of course, gold isn't a productive asset and its performance can cause your portfolio to lag if you buy it at high prices.
But today, you can get gold about as cheap as it's been in two years and when it's hated by investors. That means you can put on your hedge for cheaper than usual. We think it's bound to rise whether the market gets a shakeup or not.
We normally recommend that your gold holdings as a chaos hedge make up about 5% of your portfolio. Today, we feel more comfortable raising that to 8%.
And if you'd like to earn a return on a trade that lasts three to nine months, buying gold now should pay off well.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig, MD, MBA
Editor's note: As part of our special holiday series, we're offering Digest readers a significant discount off the normal cost of some of our most popular research.
Right now, you can get 12 months of Doc's Retirement Millionaire advisory for just $19 – more than 95% less than the normal price. Click here for the details.