If appearance has anything to do with it, rare gold coins would always outperform stocks. They’re charming, beautiful, have a nice weight to them, and because they’ve been around for a while, they represent an intriguing part of the story.
But there are other reasons, timely reasons, to add more gold coins than stocks to your portfolio today… although making a claim like that can be dangerously close to blasphemy for traditional stock investors. However, ignore the available clues at your own risk. For example…
Hint #1: Call options point to higher gold. This analysis is by Prieur du Plessis and Adrian Douglas. In summary, these two men noted that the December 2007 gold call option contracts were indeed sizeable, currently numbering about 122,000. What’s more, they outnumbered the puts 2 to 1.
Based on this “positive rise in gold,” both du Plessis and Douglas believe that gold is on the threshold of a big price jump. It is not the first time that Douglas believes this way. In November 2005, he predicted a rise in the price of gold from its $460 level, based on a similar buildup of gold call options. Two months later, gold was $100 higher. Next…
Hint #2: Demand for gold continues to rise; The supply of gold continues to decline. The situation here has only gotten worse. According to a recent report from the World Gold Council, global demand for gold is 30% up from a year ago, while supply continues to head south. The world’s largest gold producer, South Africa, hit an 84-year low despite high gold prices. And the world’s top gold producers have seen a nearly 20% drop in production since 2001.
It goes without saying that higher demand and lower supply lead to higher prices.
Clue #3: “Triple Threats” from the Housing Dilemma. Harvard economist Martin Feldstein has warned that we face a triple threat from the housing recession. According to Bloomberg’s Sept. 2 report on his Jackson Hole speech, “Feldstein described a housing “triple threat”: a “deep drop” in home and construction prices; higher borrowing costs and a “freeze” in credit markets stemming from prime sub-losses, and fewer home equity loans and refinanced mortgages, leading to lower consumer spending.
The overall effect, needless to say, will have terrifying consequences. “The economy could suffer a very serious recession,” he added. All the more reasons to branch out into the shiny stuff.
Clue #4: The United States is going the way of the Roman Empire – Comptroller General, David Walker. Oh! You know you’re in trouble when the guy in charge of government accountability finds “striking similarities” between the US and the Roman Empire. The end of the Roman Empire. Among his comments, the US suffers from “declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility on the part of central government.” He is so serious that he even refused to approve the “books” of the government. Ugh again.
How does this relate to gold and stocks? When high-profile members of our own government come out and warn us of the coming “economic tsunami,” it’s time to find refuge in gold.
Clue #5: Inflation, Inflation and More Inflation. Despite all the government statistics in the world, we all know that inflation is working. We know that every time we fill up our tanks. And somewhere in the back of our minds, we know that rising energy prices have to be bad for the economy, that it affects everyone and anyone who sells anything. That intuition is, unsurprisingly, rooted in the facts. According to the Federal Reserve Bank of Dallas, “nine of the ten post-World War II recessions were preceded by a sharp rise in oil prices.”
With the Fed rushing to defer a recession by cutting rates, we also know, somewhere in our psyche, that the dollar will only weaken further, perhaps dangerously so, due to its current historical weakness with each of these rate cuts. And the end result of all this change is inflation. We are going to need more dollars to buy what yesterday’s dollars used to buy.
You’ve no doubt heard the adage: “In 1911, an ounce of gold could buy a very nice suit. Today, it still can.” That is to say that gold is keeping up with inflation. She did it in 1911. She’s still doing it now, almost a hundred years later. Which is what makes gold the weapon of choice for fighting inflation.
But why stay on the defensive with gold?
In 1995, a Penn State economist, Dr. Raymond Lombra, did a study that he presented to Congress. This 40 page report “proved” that rare coins, including rare gold coins, were among the highest performing assets over the last 25 years (and that included stocks). He also reported that “rare coins dominate gold bullion as a diversifying asset.” These “numismatic coins” do this by reducing volatility while providing better returns.
Lombra’s most recent study from 2003 found the same situation. From 1979 to 2003, rare coins, such as rare gold, earned the highest average annual rate of return and outperformed gold bullion as an investment and inflation hedge.
But whether you prefer to take a more aggressive position with rare gold coins rather than stocks or just want a proven financial safe haven, the time may be right for gold. And that may be an understatement.