Which Uncertainty Is More Uncertain?

You may have a long term, Warren Buffet type, optimistic view about the direction of society and the world's economy, that suggests, over time, quality businesses in the right market segments, will survive and indeed thrive, over time.

But, let's face it: even the highest quality equities have enormous short term exposure, let alone at least the possibility of longterm risk. Every stock reports quarterly earnings and has periodic, important news events, that can wreck havoc on a price. And of course, stocks do not live in a vacuum. When the market is off 400 points, it is often the case that almost every stock is down even if it's fundamentals are totally independent of the catalysts for the decline. That all spells U N C E R T A I N T Y to me. Yes, I am a believer and investor in equities, but it is not easy.

Now let's think about gold. As I have noted in many posts and in my e-book, gold's world supply is about 158 million ounces, including recycling. Increasing production is a challenge due to the difficulty in finding new discoveries, getting permitting, getting financing, managing production. Yes, gold supply does increase every year, but at a slower pace than the increase in the world's money supply. So what is certain here? That the rate of growth in gold supply is known, as is the nature of increases in the world's money supply, and depreciation of the world's currencies, both from incremental supply, and inflation. 

If someone said to me, "Rick, if you needed to put your money into a currency, for 30 years, what currency would you choose?" I would answer, certainly, gold. Yes, I view gold as a currency, and in fact if the choice was simply to hold a currency in the form of cash, I think most would agree with me. There is a high degree of certainty of success around maintaining purchasing power by holding gold, proven, throughout history.

If the choice was in fact, to allow purchase of financial instruments, starting with a 30 year bond in deutschmarks, at negative interest rates, to me at least, there is a certainty that the principal value of that deutschmark bond will be worth far less in purchasing power 30 years from now than it is today. Gold on the other hand would at a minimum, keep pace with purchasing power. Gold wins again.

How about the alternative of buying a 30 year, US Treasury bond today at a 2% rate, relative to gold? Well, at the very best, that 30 year bond, with its 2% coupon, would maintain its purchasing power, versus say a historical 2% inflation rate. But do I really want to own such a long duration instrument, at all time highs, that is hugely exposed to price erosion, if indeed, interest rates rise above their current, historically low levels? Wouldn't I prefer to hold gold, whose cost of carry is as low today, given the level of short term rates, as it has ever been? The likelihood of winning with gold instead of a long Treasury bond is a bet I would readily take.

Sure, I do believe that a smartly selected equity portfolio, over time, continues to be a very important part of any portfolio's attempt to maintain purchasing power. Indeed, there is an argument for not only well managed accounts, but for index funds, since Warren Buffet's long term bets on the increasing welfare of society, have proven to be sound, so far. But even here, gold is another way of attacking the challenge of keeping pace with inflation and currency erosion, that has a historical steadiness that gives me comfort and confidence.

Now, let's add one other ingredient... the entry point. In my view, gold is dramatically under-owned, relative to stocks, but more importantly, relative to the certainty of its historical performance as a store of value. What I am suggesting is that for many reasons, gold today is mis-priced and undervalued, and even if we agree that a portfolio should own stocks and gold, gold has significantly underperformed stocks for years. I believe the "catch-up" process is now underway. 

We can also get into a discussion about rational markets, where theoretically, markets incorporate all known knowledge at any given moment. While over time there is an argument supporting rational markets under long horizons, I think it is hard to support the thesis looking at short term market behavior. And yes, I do believe that stocks are better understood, than gold. The key to this statement simply should be that a rational observer would logically conclude that 250 billion of annual gold supply is not enough to keep pace with increasing money supply and inflation, suggesting higher gold prices and decreases in the relative value of fiat currency.

This same argument, in different forms, applies to silver and certainly to the platinum group metals, comprised of platinum, palladium, rhodium, iridium, ruthenium and osmium, all of which have tiny supplies and are critically needed in modern society.



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