If looks and feel have anything to do with it, rare gold coins would beat stocks every time. They’re charming, beautiful, have a nice heft to them and, because they’ve been around for a while, represent an intriguing chunk of history.
But there are other reasons, timely reasons, to add more gold coins than stocks to your portfolio today…although making an assertion like that can come perilously close to blasphemy to traditional stock investors. Ignore the available clues at your own peril, though. For instance…
Clue #1:Call Options Point to Higher Gold. This analysis is from Prieur du Plessis and Adrian Douglas. In short, these two men observed that the December 2007 gold call option contracts were sizeable indeed, currently numbering some 122,000. What’s more, they outnumbered the puts 2 to 1.
Based on this “positive gold surge,” both du Plessis and Douglas believe gold is on the threshold of a big price jump. It’s not the first time Douglas believed this way. In November 2005, he predicted a surge in the gold price from its $460 level, based on a similar build-up of gold call options. Two months later, gold was $100 higher. Next…
Clue #2:Gold Demand is Still Heading Higher; Gold Supply is Still Heading Lower. The situation here has only worsened. According to a recent World Gold Council report, world gold demand is running 30% above a year ago while supply continues to head south. The world’s largest gold producer, South Africa, hit an 84-year low despite gold’s soaring prices. And the world’s top gold producers witnessed nearly a 20% reduction in output since 2001.
Needless to say, higher demand and lower supply leads to higher prices.
Clue #3:”Triple Threat” from the Housing Dilemma. Harvard economist Martin Feldstein warned that we face a triple threat from the housing downturn. According to Bloomberg’s September 2nd reporting of his Jackson Hole speech, “Feldstein outlined a “triple threat” from housing: a “sharp decline” in home prices and construction; higher borrowing costs and a “freeze” in credit markets stemming from sub-prime mortgage losses; and fewer home-equity loans and refinanced mortgages, leading to less consumer spending.
The overall effect will, needless to say, have scary consequences. “The economy could suffer a very serious downturn,” he added. More reason to diversify into the shiny stuff.
Clue #4:America’s Going the Way of the Roman Empire-Comptroller General, David Walker. Yikes. 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 is suffering from “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.” He’s so serious that he even refused to sign off on the government’s “books.” Yikes again.
How does this relate to gold and stocks? When high profile members of our own government come right 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 off and running. We know that every time we fill 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, not surprisingly, rooted in fact. According to the Federal Reserve Bank of Dallas, “nine of the ten post-World-War-II recessions were preceded by sharply rising oil prices.”
With the Fed rushing to defer a recession by cutting rates, we also know, somewhere in our psyches, that the dollar will only be further weakened, maybe dangerously so, from it’s current historical weakness with each of these cuts. And the bottom-line of all of this change is inflation. We’ll be needing more dollars to buy what yesterday’s dollars used to buy.
You’ve undoubtedly heard the adage, “In 1911, an ounce of gold could buy a very nice suit. Today, it still can.” That’s by way of saying that gold keeps abreast of inflation. It did so in 1911. It still does now, almost a hundred years later. Which is what makes gold the weapon of choice for fighting inflation.
But Why Just Stay on the Defensive with Gold?
In 1995, a Penn State economist, Dr. Raymond Lombra, did a study he presented to Congress. This 40-page report “proved” that rare coins, including rare gold coins, were among the top 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 that by reducing volatility while providing improved returns.
Lombra’s most recent 2003 study found much the same situation, From 1979 to 2003, rare coins, like rare gold, earned the highest average annual rate of return and beat gold bullion as an investment and inflation hedge.
But whether you prefer taking a more aggressive position with rare gold coins over stocks or simply want a proven financial haven, the timing may be right for gold. And that may be an understatement.