Gold: Underperformer or Prime-Time Performer?

  • The COVID-19 pandemic and ensuing market sell-off have shown that gold is still viable after 5,000 years.
  • Today, our friends Michael Checkan and Van Simmons explain why gold is an important asset for wealth builders and how you can add it to your portfolio if you haven’t already.

Editor’s Note: Today’s article comes from our friends Michael Checkan, the chairman and CEO of Asset Strategies International, and Van Simmons, president and partner of David Hall Rare Coins. As we continue to see the effects of COVID-19 on the markets, their thoughts on the importance and viability of gold couldn’t come at a better time.

In fact, Chief Investment Strategist Alexander Green tells me that he’s always happy to recommend Michael and Van. They’re longtime friends of The Oxford Club, so you can trust their service and expertise are of the highest quality.

– Christina Greives, Senior Managing Editor

Over the past few weeks, the worldwide spread of COVID-19 has panicked investors, roiled markets and demonstrated why gold is totally viable after 5,000 years.

But, despite gold’s history, many investors still do not understand it.

So, neither me nor my co-author, Van Simmons, were surprised to hear gold’s performance over the past couple of weeks and over the past five to 10 years described as both weak and incredible.

The two of us have a combined 100 years of experience with gold. To us, it comes down to proper expectations. If you expect a screw to perform like a nail, you will be disappointed. If you expect gold to perform like a stock, you will be equally disappointed.

But if you expect gold to store purchasing power, with high liquidity, for a potential financial crisis you hope to never have, we think you’ll agree gold has been a prime-time performer.

What’s Been Going On?

To catch you up…

  • There are currently more than 204,000 cases of COVID-19 and over 8,200 fatalities in 170 countries and territories.
  • Spooked investors began a major sell-off.
  • Since February 24, the Dow Jones Industrial Average is down 31%, the S&P 500 is down 29%, the Nasdaq is down 30%, and gold is down less than 9%.
  • The U.S. Federal Reserve has cut interest rates to zero.
  • All stock gains for the year are gone, while gold is up nearly 15% over the past year.

Investors are unsettled. Markets are volatile. A lot of that occurred in three trading days!

Two Key Takeaways

First, although it was clear the Federal Reserve wanted to act quickly to show its resolve in the form of an emergency 50-basis-point rate cut, the strategy seems to have backfired. Rather than appearing to be decisive, the Fed came across as desperate.

Second, gold shined again in crisis… by initially selling off.

Yes, you read that correctly.

Many stock market investors have leveraged accounts. They take on some risk by borrowing against their investments in order to increase their returns on investment. And this is wonderful for the investor as long as the stock market is going up in value.

However, when there is a significant short-term sell-off in the stock market, the value of the investments (which is in fact the collateral on the leverage or loan) falls below the loan amount. As a result, the investor needs to inject cash into the account to cover the margin call.

Where do investors find cash quickly and reliably in such conditions? You guessed it. They sell highly liquid gold, which has been sitting on the sidelines preserving purchasing power, to raise the cash to bail out their upside-down loan.

Then, gold recovers very quickly as bargain hunters swoop in to buy gold cheaper than it ought to be.

We saw this play out before our eyes during the financial crisis of 2008 to 2009. And we just saw it play out again February 28 through March 3, 2020.

Gold is a prime-time performer!

What’s Next?

The two of us expect higher prices for gold from here.

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