If looks have anything to do with it, rare gold coins would always outperform stocks. They are charming, beautiful, have a nice weight to them, and because they have been around for a while, they represent an intriguing part of history.
But there are other reasons, timely reasons, to add more gold coins than stocks to your portfolio today…although making a claim like that can come perilously close to blasphemy for traditional stock investors. However, ignore the available hints at your own risk. For example…
Hint #1: Call options point to higher gold. This analysis is from Prieur du Plessis and Adrian Douglas. In summary, these two men noted that the December 2007 gold call option contracts were indeed sizeable, currently numbering about 122,000. What’s more, they outnumbered the puts 2 to 1.
Based on this “positive rise in gold,” both du Plessis and Douglas believe that gold is on the verge of a big jump in price. It is not the first time that Douglas believes this way. In November 2005, he predicted a rise in the price of gold from its $460 level, based on a similar accumulation of gold call options. Two months later, gold was $100 higher. Next…
Clue #2: Gold Demand Keeps Rising; The supply of gold continues to decline. The situation here has only worsened. According to a recent report by the World Gold Council, global gold demand is 30% higher than a year ago, while supply continues to head south. The world’s largest gold producer, South Africa, hit an 84-year low despite high gold prices. And the world’s top gold producers have seen a nearly 20% reduction in production since 2001.
It goes without saying that higher demand and lower supply lead to higher prices.
Clue #3: “Triple Threat” from the Housing Dilemma. Harvard economist Martin Feldstein warned that we face a triple threat from the housing recession. According to the Sept. 2 Bloomberg report on his Jackson Hole speech, “Feldstein described a “triple threat” to housing: a “deep drop” in housing and construction prices; higher borrowing costs and a “freeze” in credit markets stemming from sub-prime mortgage losses, and fewer home equity loans and refinanced mortgages, leading to lower consumer spending.
The overall effect, needless to say, will be one of terrifying consequences. “The economy could go into a very serious recession,” he added. More reasons to branch out into shiny things.
Clue #4: The United States Goes the Way of the Roman Empire – Comptroller General David Walker. Oh! You know you’re in trouble when the guy in charge of government accountability finds “striking similarities” between the US and the Roman Empire. The end of the Roman Empire. Among his comments, the US suffers from “declining moral values and political civility at home, an overly confident and overextended military in foreign lands, and fiscal irresponsibility on the part of the central government.” He is so serious that he even refused to approve the government “books”. Whoops again.
How does this relate to gold and stocks? When high-profile members of our own government come out and warn us of the coming “economic tsunami,” it’s time to find refuge in gold.
Clue #5: Inflation, Inflation and More Inflation. Despite all the government statistics in the world, we all know that inflation is working. We know that every time we fill our tanks. And somewhere in the back of our minds, we know that rising energy prices have to be bad for the economy, affecting everyone and anyone who sells anything. That intuition is, unsurprisingly, rooted in fact. According to the Federal Reserve Bank of Dallas, “nine of the ten post-World War II recessions were preceded by a sharp rise in oil prices.”
With the Fed rushing to stave off a recession by cutting rates, we also know, somewhere in our psyches, that the dollar will only weaken further, perhaps dangerously, due to its current historical weakness with each of these cuts. And the end result of all this change is inflation. We are going to need more dollars to buy what yesterday’s dollars used to buy.
You’ve no doubt heard the adage: “In 1911, an ounce of gold could buy a very nice suit. Today, it still can.” That is to say that gold keeps up with inflation. She did it in 1911. She’s still doing it now, almost a hundred years later. Which is what makes gold the weapon of choice to combat inflation.
But why stay defensive with gold?
In 1995, a Penn State economist, Dr. Raymond Lombra, did a study that he presented to Congress. This 40-page report “proved” that rare coins, including rare gold coins, were among the top-performing assets in the last 25 years (and that included stocks). He also reported that “rare coins dominate gold bullion as a diversifying asset.” These “numismatic coins” do this by reducing volatility while providing better returns.
Lombra’s most recent study from 2003 found the same situation. From 1979 to 2003, rare coins such as rare gold earned the highest average annual rate of return and outperformed gold bullion as an investment and hedge against inflation.
But whether you prefer to take a more aggressive stance with rare gold coins over stocks or simply want a proven financial haven, the time may be right for gold. And that may be an understatement.
