I’ve been telling investors to buy gold for months. I’m even more bullish now.
Last March, I recommended three precious metal positions in our Blend Portfolio. Two of those are gold related.
Here’s an excerpt of what I wrote then and why I urge you to consider dedicating at least a portion of your portfolio to gold:
[A]s award-winning financial researcher Michael A. Gayed said, “If you don’t hate a portion of your portfolio, you’re not diversified.”
What Gayed means is that if you love every part of your portfolio, your holdings are too correlated. They’re likely all moving up together.
But that’s not diversification. If the market turns sharply, your entire portfolio will drop as well.
That’s why it’s important to own gold. When things get crazy, investors tend to buy gold for the safe haven that it offers. That will cause the price of the metal to shoot up, which will reduce your portfolio’s losses from your other positions.
As the U.S. and other countries continue to face uncertainty around inflation and the banking system, gold is a must-own. Precious metals have been used as currency and a store of value for thousands of years. And, unlike paper money, precious metals hold their value.
All of the reasons above are still valid, and it remains a good time to buy gold. But there’s another factor that could be the strongest tailwind for the metal in the near future: central banks.
Central banks’ aggressive gold buying will likely continue.
In 2022, central banks globally accumulated gold reserves at a pace not seen since 1967, when the U.S. dollar was still backed by the metal.1
Central banks owning gold isn’t new. They’ve always held it as a long-term store of value and a portfolio diversifier. Recently, they’ve also turned to gold as an inflation hedge.
But now, non-traditional reasons are catalyzing the demand for gold, especially among emerging market/developing economies (EMDE).
The conflict in Ukraine shook the global financial order. Russian sanctions woke up non-Western nations to the vulnerability of their U.S. dollar reserves.
In a World Gold Council survey, 42% of banks expect the number of U.S. dollars held in reserve to drop. Russia and China aggressively bought gold, perhaps to help protect against foreign seizure. EMDE banks are seeking higher reserves of gold as a buffer against any payment crisis that may erupt from current or future sanctions.
Source: Sanford Mann, CEO ofAmerican Hartford Gold, in Forbes
With geopolitical tensions still high and de-globalization accelerating, central banks’ hunger for gold will likely remain strong. This demand is good news for individual investors.
Buy gold as an alternative to U.S. treasuries?
Otavio (Tavi) Costa, partner and macro strategist at Crescat Capital, even sees gold as a superior alternative to treasuries for central banks outside of the U.S.
They are significant buyers of gold while some have become major sellers of U.S. debt. Escalating geopolitical conflict has increased the importance of owning a neutral asset with no counterparty risk that also carries centuries of credible history as a haven. Gold is the only asset that qualifies.
Central banks have thus pivoted to being substantial buyers over the last several years leading to a rising percentage of gold ownership on their balance sheets. As a percentage of foreign reserves, if this measurement were to return to its historical average of 40%, all else equal, it would be an injection of approximately $3.2 trillion of new capital into the gold market. Price would have to be the reconciling factor in accommodating this demand.
Since $3.2 trillion is 25% of the total value of all above-ground gold, or essentially all the gold ever mined, which now stands at $13 trillion, a 25% upward adjustment in price would get the gold price to $2,500 an ounce, Crescat’s minimum one-year target.
More importantly, this dynamic is expected to prompt other major institutions and individual investors to follow suit, triggering an even greater influx of capital into the gold and precious metals markets.
Gold would need to increase 30% from its current price to hit Costa’s $2,500 price target. I don’t know if it’ll reach that within his one-year estimate, but that type of gain is more than doable.
Remember also that you don’t buy gold purely for the capital gains. It also serves as a diversifier and a hedge against multiple risks.
With so much uncertainty across the global financial landscape right now, it’s an excellent time to consider adding gold to your portfolio or even increasing your existing positions.
In last Saturday’s edition of Over the Weekend, I shared how you can gain exposure to gold through ETFs and physical assets.
In the upcoming issue of our Blend Portfolio, I’ll discuss another way to own gold that could also provide you with significant tax savings. To get access to that issue and all of the portfolio’s holdings, join our premium membership today.
