The 2020 Gold Rush

My kids love board games. Even before the COVID shutdowns, but even more so now. Old games like Monopoly and Life. Newish games like Catan and Jumanji. Although, recently for whatever reason my kids have really taken to Monopoly. Of course, I tried to use this as an opportunity to share with them about investing. As I’ve tried a few times before. The idea of stocks and bonds is hard for my nine-year-old (let alone my seven-year-old) to grasp. He has a good grasp of paper money and coins. He keeps his hoard of money from gifts and chores split between three categories they taught him at school: charity, savings, and spending. It’s easier for him to understand when we play Monopoly. My son quickly learned he can’t win the game by hoarding that $200 salary every time you pass Go. If you want to really get ahead you have to use that cash to invest in Pennsylvania Avenue or Boardwalk. As you can tell by the property names my kids and I play the original version of the game. In the 2020 version of Monopoly all the properties are owned by Facebook, Apple, Amazon, Netflix, and Google (FAANG); they debit rent and a $100 Prime subscription fee from your account every time you pass Go. It’s all automated but not very fun.

Outside of Monopoly there are more than just real estate people can invest in. Apriem, of course, focuses on stocks and bonds. As we’ve discussed, stocks have been surprisingly resilient. Much of that is thanks to the dominance of those FAANG stocks I mentioned earlier; they pulled the S&P 500 out of the dark this year. Despite their brilliance, another shiny object has caught the attention of investors: gold.

Nothing quite holds the allure of bright shiny gold. The soft rock has gotten a lot of attention recently as prices have risen to over $2000 a troy ounce. Most gold investors will give you two main reasons that they believe gold is a great hedge: inflation risk and protection against a falling dollar. Many people are worried about inflation because global central banks are printing money. Every time the Fed does something all the gold bugs come out. Unfortunately, the gold story hasn’t worked. Inflation remained tepid after the Global Financial Crisis. If you look even further back, when inflation did surface, gold didn’t perform. Since 1980, inflation has been modest, averaging a little over 3% a year. During that time gold has returned -0.4% (annually) while stocks did almost 8% and bonds did 6%, after adjusting for inflation. By those numbers, gold is probably not the best inflation hedge. Even when (not if) inflation does pick up in a meaningful and sustainable way, surely the Fed would come in to raise interest rates. That would have to quell rampant inflation. Congress has mandated the Fed to do just two things, and fighting inflation is one of them.

Some people are buying gold to protect against a falling U.S. Dollar. That makes a bit more sense. The U.S. Dollar has been getting hit versus the Euro and the Yen this year. If U.S. Dollars, Euros and Yen aren’t paying any interest, why not gold? It doesn’t pay any interest either. Maybe gold is a better storage of wealth than cash, but gold and cash aren’t interchangeable. Cash, at least in major economies, doesn’t rise or fall by 5% in a single day like gold can. The benefit of cash isn’t just the yield it generates, it’s the stability it offers.

For either reason it seems that gold would be highly sensitive to rising interest rates and thus the current economic malaise. Rising rates may not be a concern today with yields anchored to zero. But how about over the next few quarters or years? I don’t know how long it will take for all these pharmaceutical companies to come up with a vaccine for the coronavirus, but surely it will be in the next few quarters, not years from now. We believe Americans and the American economy are extremely resilient and this will pass.

It’s hard to conceive that gold or bitcoin would be good stores of wealth right now. I think this whole gold and bitcoin thing is about people gambling on COVID and maybe the election. If the world collapses, then maybe. Until then, I’m not a fan. Not to say that there isn’t a place in the world for gold and bitcoin as there is still a use for them. I think bitcoin can be a useful means of transporting capital, but everything has already made a huge rally. Gold is at an all-time high. Bitcoin has doubled and is near its 2019 peak. These are terrible entry points.

The primary way Apriem protects portfolios from a falling dollar is through diversification by not having all our eggs in a domestic U.S. basket. We feel our allocation to developed international and emerging market equity index funds offer us a compelling value. Plus, they benefit from a weakening U.S. dollar. The dollar diversification is not the only reason why overseas equities are attractive. Slow growth economies like Europe and Japan offer compelling valuations, while emerging markets are faster growing. On top of that both positions offer a modest dividend yield. Not Boardwalk, but not Baltic Avenue either. Still, definitely more than gold.

As always, please don’t hesitate to reach out with any questions or concerns you may have. And if you haven’t already, please sign up for part 4 of our Portfolio Construction series titled, Bringing it All Together, on August 12th. Please see below for the two available sessions:

Session 1: 11 AM – 12 PM

Session 2: 4 PM – 5 PM

/Ben