I have found over the span of my 45-year business career that very few axioms remain unchanged over time. What may have been considered as undeniable truths in one decade are often seen as pure folly in the next.
One axiom that does not change, however, is that the future is unknowable. No one can predict the future.
This reality places everyone in a difficult position. If we cannot predict the future, how can we possibly know how to best position our investment portfolios in order to get us through an uncertain future?
The only way I know how to achieve this aim is by acquiring what we determine to be undervalued assets and hold them until they become overvalued. They should then be sold, with the proceeds being placed in assets that at that time are undervalued.
Note that I am speaking here about value. I mentioned nothing about price. These two words are not interchangeable, but are often misused that way and are therefore frequently misunderstood.
An asset can appear overpriced while actually being good value if the currency being used to establish the price is itself losing purchasing power and overvalued. To restate this point another way, economic calculation requires sound money, which is one axiom that does remain unchanged over time. Without sound money, we will reach inaccurate conclusions about an asset’s value.
Using two mathematical formulas – my Fear Index and the Gold Money Index – I have repeatedly made the case that the US dollar is overvalued and gold and silver are good value. Since their unprecedented drop in price that began last week, I've been looking for fundamental reasons to change my analysis, and thus alter my bullish forecast for the precious metals. I discussed this effort on Monday in an interview on King World News.
Since then I still haven’t found any reason to change to change my bullish outlook. Given their lower price, in my view gold and silver are simply better value than they were a week ago, and the dollar more overvalued.
Perhaps more importantly, the underlying and most fundamental usefulness of the precious metals remains unchanged. They are money outside the banking system. The risks of depositing money in a bank are clear from the events of Cyprus, and before that debacle, Lehman Brothers, Northern Rock and countless other bank collapses that litter the landscape of monetary history. Banks and the national currencies they use have real risks.
Because physical gold and silver are tangible assets, they do not have counterparty risk. Their value is not based on any bank or central bank’s promise, but rather, on those individuals who appreciate their 5,000-year history as sound money and usefulness in economic calculation.
So for now, my recommendation for gold and silver remains unchanged. They should continue to be accumulated. View them as your savings, which everyone needs whether planning for retirement, purchasing some consumer good or just being prudent for a “rainy day”. It does not make sense to save national currency because the interest income they offer is insufficient to offset the risks of holding these currencies. These risks are real and threatening because countries around the globe are going through another of the recurring financial busts that periodically convulse national currencies, banks and more generally, the economy.
We can expect more turmoil given that the interrelated sovereign debt and bank insolvency problems have not been resolved. Until they are, I therefore will continue to rely on physical gold and silver for safety. They are the ultimate safe-haven and therefore an important diversifier in everyone’s portfolio.
Lastly, will gold have another price decline like we just experienced? Again, no one knows the future, but here is how a Chartered Financial Analyst at the Chicago Board Options Exchange describes gold’s price drop:
“For simplicity sake let’s call it a five standard deviation move. Statistically we get a five standard deviation move approximately once every 4,776 years. So we should not expect another move like this out of the price of gold until May 17, 6789.”
Of course statistics are one thing, and markets are something completely different. No one can predict what will happen in the future, but gold’s 5,000-year history as money provides a lot of comfort to everyone seeking prudent ways to get through the monetary upheaval that is rocking the world today.