The majority of my articles are about uranium. My second biggest position is, even if I do not write a lot about it, in physical precious metals and the miners. Owning precious metals after August 2020 has been frustrating to say the least. Why do I still hold these positions when they are underperforming?
To defend an allocation to the physical gold and silver positions, we have to understand that all investments are not for maximizing the upside. Our allocation to physical should be considered more of an insurance. Something you only want for protection against a negative event like a currency devaluation. (The situation in Venezuela comes to mind). Investments in the miners are more for speculation and participating in the upside.
Inflation protection
Many people own precious metals as a hedge against inflation. In that environment, veteran investors will be quick to tell you that investments in energy and other commodities perform even better than precious metals. (A good reason to hold uranium, oil and other commodities).
The other benefit you get by owning precious metals is for diversification, and that it still performs in a deflationary environment. Let us compare the S&P 500 to the performance of gold during the financial crisis of 2008.
Gold during the 2008 Financial Crisis
During the 2008 financial crisis the stock market fell by more than 50% after the housing bubble popped.
From the top og $1549 in October 2007 it took about 16 months before the S&P 500 bottomed out at $735 in February 2009, down 52,5% from the 2007 top. From there, it would take another 49 months before the S&P 500 got back to break even in March 2013. In total, the S&P 500 spent more than 5 years underwater before it managed to get back above its 2007 highs.
The price of gold during the same time told a completely different story. From the S&P 500 top in October 2007, to the bottom in February 2007, gold went up 27%. By the time the S&P 500 was back at break even in March 2013, gold had gone up by more than 120%.
This is not an example to show how much you could have made if you rode the gold bull market perfectly. This is how part of your portfolio could have performed (not inflation adjusted) during the time of the financial crisis if you were diversified into physical gold. Owning an asset that protects you like this can make a big difference if you want to protect your wealth.
Caveat – Gold stocks are still stocks
It is important to emphasize that physical gold performed well as a hedge, not gold mining stocks. The gold stocks performed very similarly to the general stock market, they just fell even more. (On the positive side, they bottomed out and got back to break even earlier than the general market). Gold stocks were not a good hedge during the financial crisis.
What I am doing
Markets do not move when we want them to. I have a position in physical gold and silver for protection, and in the miners for upside. (I look to add to this, and to my cash position in 2022). Many talk about scaling out of some of their commodity positions, and into gold and silver miners later. I do not know if the market will be there for them when that time comes. I therefore have some exposure to gold and silver at all times.
My portfolio is a mix of physical and Sprott’s gold or silver trusts. In addition I own some miners. For miners the big ETFs are where most of the funds have gone. I also have some select companies who have jockeys with a track record for making money for their shareholders. (Rick Rule has mentioned some of these jockeys in earlier interviews). Like everything else, you can get these companies at reasonable valuations if you buy them during weakness in the market.
