I was recently invited to visit Wall Street, to hear from some of the world’s top economists, attend the closing bell ceremonies at the NYSE, and discover what future trends are developing in the world of high finance. Since the invitation came with first class travel, accommodations, and dining arrangements (including Delmonicos – oldest fine steakhouse in the USA) it was hard to resist. What we learned there, served only to reinforce what we have been telling you here at the U.S. Gold Bureau, and what we had written previously in “The 7.0% Solution”. Bonds are not the safe haven they used to be, and stocks are expensive relative to earnings. Gold and silver are currently recognized as acceptable “alternative assets” by economists that normally discuss only stocks and bonds. Stocks, bonds, alternative assets (precious metals, real estate, commodities), and cash, are generally accepted as the 4 places investors can allocate capital.
As we have written about previously, the prospects going forward favor precious metals, due to the relative value of each in the market place. We heard from Nobel Prize winning economists, who developed broadly used indexing strategies, and are quoted often on Wall Street. Some of them discussed the need for a new asset class, namely a special type of insured annuity, to reduce the risks that currently exist in the stock and bond markets. This type of annuity is designed to insure principal against losses, while participating in the gains of the markets, when available. We covered this new asset class, along with gold and silver, in “The 7.0% Solution”. While not a replacement for precious metals, they can perform a similar role in certain circumstances, where ongoing income might be needed.
But what happens when we compare the financial products created by the sharpest minds on Wall Street, to the performance of gold and silver? First, let’s compare to popular unmanaged stock indexes. We wrote about this in detail in September, comparing the performance of stocks to gold and silver, over various time periods. Clearly, we can change the specific time periods analyzed, and discover results that slightly favor the stock markets over gold. But the point is, we can get similar results with fewer expenses, less stress, and fewer meetings and updates, which correlates to less time involved. The combined amount of time spent managing and making adjustments to a portfolio of stocks, could perhaps be better spent earning additional funds, while gold quietly performs over time, without input or changes from the owners thereof.
As we discussed in the above mentioned article, often the gains realized in the stock market are offset by the reduction in the value of the Dollar. When the stock market gains 2500% over time, it is not helpful when the Dollar loses 2700% of purchasing power over the same period. To be sure, there are short periods of time when stocks outperform both a declining Dollar and gold, but only if you guess well about when to buy and sell. Most people do not. According to Dalbar studies, many average a negative return even in a positive market, due in part to entering and exiting the market at the wrong times. When someone purchases gold and puts it in a vault or a safe, they tend to not focus on the day-to-day fluctuations in price. When bad economic news, or geopolitical storms make the headlines, it tends to provide comfort, knowing that they own an asset that is usually bolstered by troubling times.
But what about this new “asset class”, that the economists spoke about? How will it compare to gold? Even though this asset class is relatively new, compared to stocks, bonds, and gold, it is still possible to have a good idea about how it will perform, relative to gold. This is because it is a concoction of products which we are already familiar with. The new asset class is referred to as an uncapped fixed-indexed annuity, or FIA. Extensive financial research indicates that the principal protection of the FIA, combined with the interest credits earned, are expected to perform better than bonds, but not as well as stocks, in many environments. It is looked at as a higher-yielding bond alternative, with less earnings potential than stocks. Since we already know that stocks often outperform bonds over time, and the FIA is not designed to outperform stocks, our comparison of gold to stocks is still useful.
Depending on the indices being tracked, the uncapped FIA’s available today can average between 5-8% per year return, without risk of principal loss. But this comes with expenses, limited liquidity, and a lot of fancy financial footwork between the securities and insurance industries. This type of asset can work well in certain scenarios, such as part of a retirement income plan. But as has been mentioned before, and in previous articles discussing stocks, the return earned is often reduced over time, due to the effects of a devaluing currency. And what happens if someone needs to tap more funds than just the income amount available from the FIA? The person can pay a surrender penalty on the excess funds withdrawn, thereby negating the earnings advantage previously enjoyed.
Even the greatest minds on Wall Street, when working together, cannot equal the simplicity, the liquidity, the transparency, and the low costs associated with owning gold and silver. While it makes sense to stay diversified in any financial environment, too many Americans are overexposed to paper assets. As the economists on Wall Street acknowledged, paper assets often move in tandem – even when they are supposed to “balance” one another. To really be diversified, we have to own something real. What other asset is fully liquid (can be sold any time without penalty)? What other asset needs no adjustments, able to provide return and protection while sitting in a box? What other asset is able to increase in value each year without ongoing taxation? What other asset provides growth and protection without management expenses? What other asset, in over 5,000 years of history, has never gone bankrupt, or been worthless? In all of Wall Street; in all the world, there is nothing like gold and silver…