Don’t give up your gold

Gold is not dead.

Just ask Germany.

Germany’s Bundesbank recently announced it had completed the transfer of $13 billion worth of gold bars stored in vaults under Lower Manhattan and brought the metal back home. The country had begun repatriating its gold in 2013 with the aim of restoring 50% of its reserves to Frankfurt.

When the gold transfer is complete, Germany will have removed all the gold it had stored in Paris, only 13% of its reserves in London and about a third of its reserves in New York.

With the rise of cryptocurrencies – such as bitcoin – and digital money, such as PayPal, Apple Pay and other apps, there has been a steady decline in the use of physical money, making the yellow metal feel downright archaic.

But gold has a special status, stronger than even the few twenty that are currently in your wallet. The precious metal offers a blanket of safety and security. It is seen as more reliable than any government-issued currency.

Just look at the euro, a currency for a union of countries that is in danger of falling apart. (Germany certainly feels better to have its gold back home.)

Or even the US dollar – a currency backed by about $20 trillion in debt.

Gold is not only alive and kicking, it should also play an important role in your portfolio…

Let me start with this: I am not a gold bug.

I am primarily a trader and usually with a short time frame in mind. I grew up with the versatility of options and fast trading for big profits. I don’t care if the market is bull, bear or – chilling to think – range-bound. There is always a way to make a profit if you know where to look.

But gold is a tricky thing.

It does not pay a dividend, so there is an opportunity cost associated with the metal.

However, when there is market uncertainty, shaky economic growth or geopolitical discord, gold shines as a safe haven in the storm. When stocks are hammered, investors will run to gold as a safe way to store some of their dollars instead of just turning it into cash and tucking it under their mattresses.

And judging by the way gold trades, it seems that many investors are not so sure about this market rally.

The hedge

In 2016, the price of gold rose more than 8%, almost keeping pace with the stock market, while the S&P 500 gained 9.5%.

In fact, the World Gold Council reported that gold demand rose 2% in 2016 to 4,309 tons, a new three-year high.

And less than two months into the new year, we have gold up another 8%, beating the S&P gain of about 5% – which is remarkable.

When stocks are strong and investors believe in the market rally, they like to leave gold for high-flying stocks that promise much better returns.

For example, during the dot-com bubble, the S&P 500 rose more than 200% from January 1995 through September 2000. In contrast, gold stumbled 27% over the same period.

Or look at the market’s rally from October 2012 to January 2016, when the S&P 500 gained 37%, while the yellow metal plummeted 35%.

In short, in good times, gold is the forgotten child left in timeout until it can learn to play well with the other assets.

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And in bad times, gold is the prodigal son who offers safety and protection.

So if the stock market is trading at record highs and regularly setting new records, why does gold still shine as a favorite?

The financial market has a large number of potential stumbling blocks that could cause everything to tumble down sharply. Let’s see a short list:

  • Stocks are overvalued. We recently explained that equities are painfully overvalued by traditional standards and that we are gearing up for a return to average.

  • Washington in turmoil. Our new president has promised a series of extreme moves that could have significant implications for both the US and global markets, which could begin with a sharp earnings slowdown.

  • The next exit in Europe. The EU and the UK are struggling through Brexit and the upcoming major elections – Italy, Germany, the Netherlands and France. In addition, Europe’s growth has been largely overlooked by many investors and could become the next hot trade as they tire of the drama in the US

  • The nightmare of the derivatives. The US is facing a collapse that could rival the fallout from the housing sector debacle as America’s five largest banks have overindulged in derivatives tied to interest rates.

  • The Fed wild card. The latest transcripts from the Federal Open Market Committee meeting showed that the Federal Reserve wants to raise interest rates “quite soon.” Higher interest rates will suck money out of the economy because it costs more to pay off our mounting debts. Higher interest rates also tend to quell stock rallies.

Investors are watching these issues closely, waiting for one or more of them to kick the stock from its current price.

Your calamity insurance

Of course, this doesn’t mean the market will fall off a cliff tomorrow.

I think the one quote that will blow any speculator over the head is, “The market can remain irrational longer than you can remain solvent.”

Basically, just because a stock or index has risen to an all-time high doesn’t mean it can’t keep going higher, even if it doesn’t make sense to you and me.

But it doesn’t hurt to have a hedge to protect yourself when it all comes down.

Gold remains that perfect hedge: your insurance against the Fed, Washington, reckless banks, Europe and even that black swan that hasn’t even reached our radar yet. That’s why gold still shines as a favorite even during this year’s stock market highs – investors know they need a safe haven, just in case.

Physical gold is your best option instead of investing in “paper gold” such as exchange-traded funds.

No matter how you choose to add physical gold to your portfolio, the important thing is that it’s there, ready to be your safe haven when it all falls apart.