This article is a review of how gold has performed over the years, the gold market currently, what to expect beyond 2020 and how best to achieve your financial goals.
Gold Has Performed Well Over the Years
Gold had a good year in 2019, rising about 18%. Since 2000, gold has averaged 11% annually in the major currencies, with 9.7% in USD and 8.8% in Canadian.
Average North American Pension Returns vs. Gold
According to the OECD, the average annual 15-year pension returns were 6.6% in Canada and 2.6% in the U.S. and an allocation to gold would have improved returns and reduced volatility. Unfortunately, only three global pension funds have any gold and most have no allocation to REITs.
The Next Correction Will Be Worse Than 2008
This is the first time during the 40 years I have been in business that a simultaneous triple bubble in equities, bonds and real estate has occurred.
There is a direct correlation to the amount of liquidity central banks are injecting into the system on a daily basis and these inflated asset prices.
Many economists and financial analysts believe the next correction will be worse than 2008, and some think worse than 1929.
- In 2008, the total U.S. debt was $8 trillion; today it is $23 trillion.
- The 2008 crisis was precipitated by the Lehman collapse, but today a Deutsche Bank collapse would be 10 times the size. At $48 trillion, it has one of the largest derivatives books in the world.
- Margin debt in the U.S. has increased by 223% since 2008.
- U.S. equities have increased 480% since the 2008 crisis.
- As you can see below, a simple reversion to the bear market average for the S&P 500 would indicate a 46% decline. However, most recent bear market declines overshoot the bear market average.
All the factors mentioned above will contribute to making the next correction much worse than 2008.
Historic Bull and Bear Markets (S&P 500) from 1928 to 2019
Whereas the 2008 crisis was largely due to changing perceptions of the quality of $1.2 trillion of sub-prime mortgage debt, today,
- student loan debt is $1.6 trillion,
- global pension funds are estimated to have about $78 trillion in unfunded liabilities and, in addition,
- the largest 25 companies in the S&P 500 have unfunded pension liabilities of $151 billion,
- public pensions and Medicare are underfunded by $120 trillion, or the equivalent or $367,000/person,
- public sector unfunded liabilities in Canada are $2.2 trillion, or $243,000 per person,
- companies listed on the TSX 100 have $100 million in unfunded liabilities…
What the Future Holds
In the near future, it will only take a small percentage of the $350 trillion in financial assets reallocating to gold to cause an exponential rise in price.
- Mine production and new discoveries are in decline,
- Central banks are setting records in gold purchases.
- There is only about $1.9 trillion of above-ground investment-grade gold bullion available.
- Since most of it is already held by the world’s wealthiest families, it is unlikely that it will come onto the market at any price.
- Unlike paper securities, which can be created without limit, gold supply is known, limited, and can only increase with actual mining production.
When it becomes obvious to market participants that the next correction is upon us, it will become difficult for pension funds to achieve a meaningful percentage allocation without driving the price to multiples of today’s price.
Allocation Of Gold In a Portfolio
During times of market instability, gold serves its primary purpose of preserving wealth better than any other asset class and it is during market downturns that gold transfers wealth.
From a long-term strategic viewpoint, a 20% portfolio allocation to gold will reduce portfolio volatility and improve returns…
Editor’s Note: The above excerpts from the original article by Nick Barisheff have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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