Mark Biller is executive editor at Sound Mind Investing, an underwriter of this program. The latest issue of Sound Mind Investing’s newsletter featured a deep dive on gold, an article titled, “<a href="https://soundmindinvesting.com/articles/checking-up-on-gold">Checking Up On Gold</a>.” A lot of gold watchers expected gold prices to be halfway to the moon by now, but that hasn’t happened. THE RECENT PERFORMANCE OF GOLDWell, when investors think about gold and what drives its price, there are a handful of things that stand out: inflation, government spending, wars, and other “fear events,” and so on.When you think back over the last three years, what have we had, we had a global pandemic and all the fear that went along with that. Then we had massive monetary and fiscal stimulus, which led to the most significant inflation spike in 40 years. Then we had a major war break out in Europe! Since then we’ve had continued huge government deficit spending and tons of market uncertainty.Add it all up, and it would seem like this would have been the perfect storm to drive gold’s price massively higher. But that really hasn’t happened. Gold peaked in August of 2020 at around two-thousand-seventy dollars per ounce, then fell over 20% to nearly sixteen-hundred by last November. We’ve seen a nice bounce back toward the two-thousand level since then, but the point is gold is actually cheaper today than it was in the summer of 2020, despite all that has happened since then. WHY HASN’T GOLD PERFORMED BETTER IN RECENT YEARS?Mark Biller notes that gold isn’t just one thing. Gold IS an inflation hedge, but it’s not just an inflation hedge. It IS a hedge against war and other “fearful periods,” but it isn’t just that either. Gold responds to a lot of different factors, so expecting it to trade perfectly relative to any one single factor often leads to confusion and disappointment.Ironically, the one factor that probably correlates the best to gold’s performance is one most people don’t think about at all, and that’s interest rates. When you think about that, the past couple of years make more sense. In the summer of 2020, interest rates were at rock bottom levels and have climbed significantly since then. The Fed Funds rate, for example, was less than one-quarter of one percent then, and today is nearly five-and-a-half percent. That big move higher in interest rates has played a significant role in keeping the price of gold from soaring like many people expected.In fact, there’s a strong case to be made that based on what interest rates have done lately, we would normally expect gold to be significantly lower than it is today. Rather than be disappointed that it isn’t higher, Biller says he’s impressed it’s held up as well as it has. THE IMPACT OF INTEREST RATES ON GOLDThe simplest way to think about that is to recognize that gold doesn’t pay any type of yield, whereas most other “safety assets” do. Any type of savings account, bond, or traditionally safe place to park money has been offering higher and higher yields as interest rates have risen over the past two years. That makes those assets more attractive relative to gold, which doesn’t pay a yield. So we typically see gold rise in price as interest rates fall, and vice versa when rates rise. WHAT’S THE RIGHT APPROACH TO INVESTING IN GOLDThere’s a difference between physical gold and “trading” gold in ETFs, and both have pros and cons. Owning physical metal obviously has a lot of advantages — you have it right there in your hands if things ever get really bad, there’s no “counterparty” risk where you’re relying on a bank or company to make good on the gold you own through a fund or ETF. So there’s a lot to like about owning physical gold directly.However, owning physical metals also has downsides. Buying and selling is typically quite expensive, so most people can’t reasonably dollar-cost-average or make frequent purchases of physical gold. And beyond a pretty minimal dollar amount of physical gold, people need to start thinking carefully about the safety of storing it at home, and if not at home, then you’re looking at storage costs and the downsides of not having it physically present where you can get to it easily.So SMI typically breaks it down this way. They think having a small allocation of physical gold is a great idea. But they encourage people to think of that as a “forever allocation” — ideally you’ll never need to sell this, you’ll likely leave it to family members or heirs. Of course, you could sell it in a pinch, but the point is to put this mostly off limits in a person’s mind, so the high transaction costs aren’t an issue. For most people, thinking about it this way probably means their allocation to physical gold is going to be 5% or less of their total portfolio allocation.Then, on top of that physical “forever” gold allocation, they use the gold ETFs to supplement that allocation as conditions warrant. These ETFs trade just like any other stock or mutual fund, which makes them very easy to buy and sell, unlike physical gold. They have a particular SMI strategy that provides signals as to when it’s a particularly good time or bad time to have a higher allocation to gold.Putting those two ideas together, most SMI members have a small constant allocation to physical gold, and then they also have a variable allocation to gold ETFs that goes up and down as gold moves in and out of favor. OTHER WAYS TO INVEST IN PRECIOUS METALSFor most people, SMI suggests they think about precious metals as two groups: actual gold in one group, and everything else in the other group.So what’s in the other group? For starters, there are other metals, like silver and platinum. These can be great at certain times in the economic cycle, but they lack the foundational “gold is money” stability. So they’re generally a lot more volatile and speculative than gold.Another more speculative play on gold is buying gold mining stocks, either directly or through mining stock ETFs. Similar cautions apply there — when markets get wild, these are ultimately stocks, not gold. So sometimes you’ll see the gold price stay flat or even rise while the mining stocks are getting beat up. But of course, the reason people buy them is when you get the timing right, they can offer considerable leverage to the gold price, meaning a 10% increase in the price of gold might cause gold stocks to go up 50%. That sounds great, but owning precious metals stocks is about as wild a ride as there is in markets, so tread carefully! WHAT’S THE FUTURE OUTLOOK FOR GOLD PRICES?SMI believes the long-term outlook for gold is strong. That’s largely based, unfortunately, on the observation that government spending has really taken off since the COVID crisis and there is no indication of that changing, regardless of who is in power. On top of that, SMI still believes a recession is likely sometime within the next year, and government spending always soars during recessions. So all that government spending probably means we’ll be fighting inflation off and on for a number of years.That’s a good long-term backdrop for a higher gold price. As more people realize this government spending wasn’t just a one-time COVID thing and the government is going to keep debasing their purchasing power, the interest in gold and precious metals is likely to climb.But while the long-term outlook is pretty bright for gold, SMI offers one significant warning, which is simply that if we do slip into a recession, history indicates there’s a decent chance there will be some sort of market panic associated with that. And normally when investors panic, liquid investments — like gold — get sold off along with everything else. If you look back at 2008 and 2020, the gold price fell hard as those panics unfolded. Gold went on to rally significantly from there in both cases, but the initial move was down. So for those thinking about loading up on gold now, it might not be a terrible idea to keep some powder dry with the intention to buy into a panic selloff if we get one, rather than loading the boat today.Get more sound investing advice online at <a href="https://soundmindinvesting.org/">SoundMindInvesting.org</a>. On today’s program, Rob also answers listener questions: <ul><li>How soon would it be advisable to cash out of I-bonds? </li><li>How can a single working mom begin to get ahead financially? </li></ul>Remember, you can call in to ask your questions most days at (800) 525-7000. Faith & Finance is also available on the <a href="https://www.moodyradio.org/programs/faith-and-finance/">Moody Radio Network</a> as well as <a href="https://afr.net/podcasts/faith-finance/">American Family Radio</a>. Visit our website at <a href="https://www.faithfi.com/">FaithFi.com</a>where you can join the FaithFi Community, <a href="https://faithfi.netviewshop.com/donate2">and give</a> as we expand our outreach.

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Faith & Finance is a daily radio ministry hosted by Rob West. The program offers a practical, biblical and good-natured approach to managing your time, talents and resources.

Faith & Finance with Rob West

Inflation and several bank failures have a lot of folks thinking about buying gold and other precious metals these days. Investing expert Mark Biller joins us with his point of view, today on Faith and Finance.

Checking Up On Gold With Mark Biller

FaithFi: Faith & Finance | Aug 30, 2023

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