Asset Strategy, Market Insights

What Do Financial Investors Think About Gold?

Gold Alliance disclaimer

Last week, I discussed some of the main reasons why gold is used by professional investors, hedge funds, and central banks as a key diversifying asset in their portfolio. Yet, I would bet that most of you who deal with a financial advisor have never heard them recommend gold. Even if you brought to their attention that you are looking to diversify just a portion of your portfolio with gold and silver and didn’t hear a categorical “no,” your financial advisor would rarely recommend  allocating more than 10% to precious metals. And most financial advisors will treat you as if you were mad. Why is that?

So, let’s start with one fact: gold saw an average annual return of over 28.9% over the last 20 years. Yes, you heard it right, over 28.9% on average every year, beating your typical stock and bond portfolio’s gains over the same time by over 300%. Look at the chart below comparing the gains in gold (orange) compared to the gains in the Dow Jones Index (blue).

Over the past 20 years, gold has outperformed the Dow Jones by 300 per cent.

No one can dispute this fact. Then, why would financial advisors object to you owning just enough gold as an investment to properly diversify? 

Financial advisors are not necessarily financial investors

When you have a retirement account, you are in essence a financial investor. You make money when your investments in the financial markets gain in value. So, the first thing you need to do is look at what financial investors do.

Financial advisors are held to be experts on the financial markets, like the stock and bond markets. But some financial investors are widely accepted as the leading experts in the field, so let’s look at the recent actions of the most successful expert. His name is Ray Dalio, and he is the founder of Bridgewater Associates, the world’s largest hedge fund. Hedge funds are investment pools that protect investors from risks and try to beat the markets. That makes him the leading financial expert on risk and growth. 

Dalio’s company manages $140 billion in assets for governments, pension funds, and large institutions as well as private individuals, and he is considered by the financial industry as the most successful financial investor of all time. As an investor, Dalio views assets without any bias. He manages money and is judged on the yearly return on investment he brings his clients. As a hedge fund, he can invest in any asset he wants. He is not limited to stocks and bonds.

Ray Dalio’s actions regarding gold

In 2018, Dalio stunned Wall Street and the financial industry by releasing a letter to his company’s clients recommending they add 5–10% in gold to their accounts beyond their investments in his firm’s products. Dalio explained that gold should be added due to currency and geopolitical risks.

Wall Street wasn’t too happy about that—how can a market leader in the financial industry recommend an asset that doesn’t enrich Wall Street?! Dalio didn’t care, and his clients who listened to him didn’t care either. Anyone who followed his advice gained more than 50% in two years on their investment in gold (from an average of $1,263/oz then to $1,900/oz today).

This year, Dalio upped the ante. For the first time in his long career, his company holds a stunning 20% in gold (according to their latest quarterly statement).

In a world of ongoing pressure for policymakers across the globe to print and spend, zero interest rates, tectonic shifts in where global power lies, and conflict, gold has a unique role in protecting portfolios. It’s wise to hold some of what central banks can’t create more of.
– Bridgewater Associates, September 2020

Dalio would tell you that they are using gold to hedge against currency risk due to our Federal Reserve’s massive money printing, and he would say that gold is the best tool to do so. He also spoke about his concerns regarding the US–China relations. Considering the options available to him to invest in—from stocks and bonds to direct investments in commodities, private companies, and government treasuries—the high percentage invested in gold reflects the high level of risk Dalio sees in today’s markets, the US economy, the dollar, and our world order. 

The entire hedge fund industry followed Dalio’s move, and numerous hedge funds have increased their gold holdings. So, if the most sophisticated financial investors choose gold, and if you are a financial investor….see where I’m going with this?

Don’t limit yourself to paper assets

While your financial advisor may know a lot about stocks and bonds, their firm is limited in their choices, unlike Dalio. They don’t offer physical gold, or understand it, so they don’t recommend it. Can you imagine walking into a Buick dealership and be told by the salesperson that he believes you should drive a Chevrolet?

You should definitely own stocks and bonds within your retirement account. I do so myself. But you should be diversified, not just within stocks and bonds but also outside of them. In today’s uncertain world, having a portion of your wealth in assets that are outside of Wall Street and the banking system and in your hands is a benefit. After all, isn’t the goal of an investment to give you maximum control? What asset gives you more control?

On the one hand, you have stocks or bonds, which are traded electronically and depend on the actions of the company who’s paper you are holding. These also require you to pay heavy management fees to your advisors. On the other hand, you have gold and silver that you wholly own and can hold in your hands with no management fees. Only when you hold gold in your hands, you can truly understand the feeling of wealth. 

May you be healthy and safe during these uncertain times.