Precious metals provide investors with three major attributes: inflation protection, portfolio diversification and secular growth potential.
True Inflation Protection
Inflation erodes the value of your assets. Precious metals offer proven protection against inflation. In recent years, the money supply issued by central banks globally has been growing at an alarming rate. Inflation is always the result of too much money chasing too few goods. Intelligent investment decisions can’t be made without knowing if we are in a high or low inflation environment. In a 5 percent inflation environment, bonds paying 5 percent won’t lose money to inflation. But what if real inflation is running closer to13 percent, as many experts think? Then that 5 percent return bond is a guaranteed 8 percent loss. For a detailed comparison of holding bonds for income vs. taking systematic withdrawals from BMG Funds, please click here.
True Portfolio Diversification
Precious metals tend to rise when stocks, bonds, real estate and Treasury bills fall. In fact, no other investment reacts to market downturns as well as precious metals bullion.
Modern portfolio theory tells us that having the right mix of uncorrelated assets reduces risk and improves return. A 005 Ibbotson Associates study determined that precious metals are the most negatively correlated asset class to stocks and bonds. Yet few investors realize that three asset classes (stocks, bonds and cash) are not enough for true diversification protection.
Secular Growth Potential
The market trends into and out of secular (long term) bull and bear markets over approximately 25-year cycles. It is vital to rebalance your portfolio after major trend changes in order to maximize returns and reduce risk. Today, total financial assets exceed US$187 trillion. In contrast, total aboveground precious metals bullion is less than US$2 trillion. Clearly, hard assets are underpriced. The Dow:Gold Ratio, a vital measure of trend changes, supports the view that now is the time to rebalance into precious metals to take advantage of a new, secular, hard assets investment cycle.
The Dow:Gold Ratio
An excellent way to understand the investment cycle is to look at a chart showing 100-plus years of the relative values of the Dow versus gold. Called the Dow:Gold Ratio, this very reliable indicator measures how much gold it would take to ‘purchase’ one share of the Dow Jones Industrial Average at any given time.
Why is this important? If the ratio is increasing (the trend move is upwards), it is time to invest in financial assets. But today the ratio is declining, and it has been since 2000. This indicates that now is time to be overweight precious metals.
