It won’t take long for gold to climb much, much higher…
The financial media likes to label precious metal investors as gloom-and-doomers… goldbugs… and doomsday preppers.
At least until gold starts heating up – and the economy looks dangerous.
That’s when gold investors start to hear from friends and family. For example, a few questions I’ve been asked in recent weeks:
“Should I be selling stocks and buying gold?”
“How do I buy gold? And… what should I buy?”
“Do you think gold will keep going up?”
Normally this level of interest might give me pause. After all, I’ve known these folks for years – and they never seemed to care about my thoughts on gold before. Could the trade be getting overheated? Is this a “sell” signal?
My bet is no. Not even close.
If you’ve been investing for long, you’ve probably heard plenty from gold’s detractors. The arguments are always the same… Gold doesn’t pay interest or dividends. It just sits there. It’s a “barbarous relic,” as legendary investor Warren Buffett has put it in the past, that has no place in today’s world. As Buffett said in a speech at Harvard in 1998…
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
So the finance world was shocked to learn last month that Buffett’s holding company Berkshire Hathaway plowed more than $500 million into gold miner Barrick Gold (GOLD).
The news made headlines across the industry, even though it’s a relatively small position for Berkshire’s overall portfolio. And it came just days after the price of gold broke through $2,000 per ounce for the first time.
Suddenly, everyone is interested in gold. And while there are still plenty of staunch gold skeptics, my guess is that most folks fall into the same category as my friends and family. That is, they understand that gold holds some sort of importance but may not understand why.
That’s what I’d like to explain in brief today…
Biggest Transfer Of Wealth In U.S. History Has Begun
A Maryland multimillionaire says the biggest legal transfer of wealth in American history has just gotten underway. Here’s #1 step you must take…
What Gold Really Means
The most important thing to realize about gold is that it’s the only real money. By that, I mean it’s the only currency that isn’t someone else’s liability. It stands on its own.
Gold has been used as a medium of exchange for more than 5,000 years. Meanwhile, every single fiat (paper) currency in the history of the world has failed. Governments simply cannot resist printing more and more of it until it becomes so watered down that it’s worthless.
Gold’s value comes from its scarcity. And it takes an intense amount of capital, labor, and time to dig it out of the ground and process it.
But governments can’t print gold. That’s why they hate it as a form of currency. Gold’s value comes from its scarcity. And it takes an intense amount of capital, labor, and time to dig it out of the ground and process it.
Historically, during times of financial crisis or political uncertainty, gold has proven its value as a “safe-haven” asset. That’s why today – perhaps more than ever – it’s critical that your portfolio has some exposure to gold.
The economic fallout from the COVID-19 pandemic and ensuing lockdowns is incalculable. But the Federal Reserve and the U.S. government are doing everything they can to prop up the markets. That means the printing presses are running hot. Already, the Fed has pumped $3 trillion into the markets, on top of the $2.2 trillion stimulus package from Congress that sent $1,200 checks to most adults. Both political parties (and the Fed) have signaled a “whatever it takes” approach to fend off an economic crisis.
Of course, none of this money is real. It wasn’t earned… It was created.
That doesn’t bode well for the value of the dollar. But it will be great for gold. That’s why it’s more important than ever to place a portion of your investment portfolio in gold… and soon.
How to Buy Gold
There are essentially two ways to invest in gold…
The first is simply buying physical gold. By that, I mean gold bullion and gold coins.
This is the ultimate form of crisis insurance. Gold is a way to store your wealth and preserve your purchasing power. If we do experience a complete economic collapse, gold will still serve as a medium of exchange.
Nobody likes to pay for insurance. We don’t ever expect our houses to burn down. But we buy fire insurance just in case… and hope that we’ll never need to use it. Physical gold works the same way.
Try to buy a small amount of physical gold (and silver) each year and stow it someplace safe. Then forget about it. Don’t watch the price and don’t sell it unless you must. Trust me, you will sleep better at night knowing that you have this financial insurance.
If taking physical ownership isn’t a viable option for you, consider buying a gold bullion-backed exchange-traded fund (“ETF”). There are several out there, so make sure you understand exactly what you’re buying.
The other primary way to invest in gold is to buy gold stocks. This could be gold miners, precious metals streaming and royalty companies, or various gold-stock ETFs.
During a bull market in precious metals like the one we’re in now, gold stocks can rise much higher and faster than the spot price of the metal. As the price of gold rises, the extra revenue goes straight to the company’s bottom line. So it gives an investor leverage to the price of gold.
My favorite way to own gold stocks is through streaming and royalty companies. These companies have a fantastic business model… You see, mining is an extremely risky business. It requires a ton of capital up front and miners are at the mercy of cyclical price fluctuations. That makes banks leery of lending them money.
That’s where streaming and royalty companies come in. They simply lend the miner money in exchange for a portion of future profits. A royalty is simply a small percentage (usually 1% to 3%) of overall sales. A stream is the option to purchase silver and gold produced at the mine for a deep discount from the spot price (as much as 75%). Streams are typical in mines where silver and gold are byproducts of base metal mining.
The best part is, after the initial capital is spent, these companies are done. They just sit back and collect checks for decades. That makes them very low-risk. Streaming and royalty companies often perform well, even during bear markets in precious metals. That makes them a great long-term, buy-and-hold hedge for your portfolio.
As a personal rule, I rarely make bold predictions on a price target for gold. But I am confident that the price of gold will reach $3,000 over the next 12 to 18 months.
Buying gold miner stocks takes a little bit more homework. But they can produce incredible gains during a bull market. I separate them into three categories…
1. Major gold producers are the safest mining stocks to buy. These include companies like Barrick Gold – the one that Buffett just bought. These “majors” produce millions of ounces of gold per year. They have large mines all over the world with decades worth of proven gold reserves. Given the size of their assets, they can survive cyclical gold booms and busts.
2. The next tier is intermediate producers. These are miners that might only have a few mines – or sometimes just one. Intermediate producers are riskier than majors, but can generate much better returns if you select the right ones. But it takes research and due diligence. It’s also important to understand the political risk these companies are exposed to in the jurisdictions where they operate. It’s also important to understand a company’s growth strategy and the quality of its management team.
3. Finally, there are junior miners… extremely risky stocks. If you are new to gold investing, you should stay away from these. Junior miners have no revenue. They are either exploring or developing new deposits. Thousands of these small companies trade on Canadian exchanges – which don’t share the same level of scrutiny as U.S. exchanges. Most of them trade for pennies and will never come close to opening a mine. The sector is full of speculators and scams. So be cautious.
Don’t get me wrong… If you do know what you’re doing in the gold sector, these stocks can absolutely soar if you pick the right one. But for me, I need to meet personally with management and ideally visit the projects before I’m comfortable recommending them.
So where does gold go from here?
The Fed Is Pushing Gold Higher
As a personal rule, I rarely make bold predictions on a price target for gold. But I am confident that the price of gold will reach $3,000 over the next 12 to 18 months. Here’s why…
When we look at gold prices across history, we typically use the “nominal” price. That’s simply the number of U.S. dollars it would take to purchase an ounce of gold at that specific point in time.
But we also know that the purchasing power of the dollar has been inflated away over time. A dollar today doesn’t purchase what a dollar could buy decades ago.
Meanwhile, the purchasing power of gold has remained relatively constant. For example, throughout the last several hundred years, the price of a custom-tailored men’s suit could be purchased for about an ounce of gold.
That’s why I prefer to look at gold by using the real price. That means using inflation-adjusted dollars (today’s dollars) to value gold through history.
So for example, in 1980 the nominal price of gold was $800 per ounce. But in today’s inflation-adjusted dollars, the price would be $2,800 per ounce. That means that gold still hasn’t hit its all-time high in real terms. It still needs to rise more than 40%.
And it’s going to…
Despite the Fed’s unprecedented amount of monetary debasement, inflation has mostly been kept in check. Last month, however, Jerome Powell announced the Fed would no longer lift rates to prevent inflation. In other words, the Fed wants inflation.
My bet is that we’ll get it. Good and hard.
And you’ll be glad you own gold.
Bill Shaw travels the globe searching for the best investment ideas in the commodities and natural resources space… As editor of two natural resource-focused newsletters, Commodity Supercycles and Stansberry Gold & Silver Investor, he focuses on oil & gas, base and precious metals, agriculture equities, and gold bullion.
