Market Commentary – January 2020
Investment Commentary: Gold
“People say keeping it real is a hard thing to do. Keeping it real is easy. Being fake and being soft is hard to do” – Trick Daddy
Words of wisdom right there from Trick Daddy – “Keeping it real is easy”, especially in an age where just about anything can be bundled up into an ETF structure to gain investment access! All kidding aside, one of the themes that we have gravitated towards over the last 9 months or so has been the idea/belief we need to include more “Real Assets” into our client portfolios. Back in July of 2019, we discussed our inclusion of Commercial Real Estate via Private Placement REITs as part of our Real Asset Strategy. This installment will discuss our rationale for inclusion of an allocation to Gold which we started adding to client portfolios between February and May of 2019.
When looking at investing in real assets an investor has more choices than ever due to the plethora of investment securities one can use to access commodities, real estate and precious metals. Adding real assets to a conventional stock and bond portfolio can deliver greater risk management/diversification via the negative or non-correlation provided by these assets. Simply put these assets can rise when the balance of your portfolio is going nowhere or heading south. Over the years our practice has had the best overall experience utilizing Real Estate and Gold to provide this diversification/risk management for our portfolios.
When considering the use of precious metals as part of a portfolio allocation – investors have a few different ways they can play this genre. First off there are a number of precious metals to choose from – Gold, Silver and Platinum. In addition to the Physical Metals, there are also the companies that mine for and produce those various metals for the global economy. At Koa, we believe in trying to keep our exposure simple which is why we stick with Gold Bullion. We do not dabble with Silver and Platinum for a couple of reasons 1) They can be more affected by economic conditions as they are also used for industrial purposes 2) Silver and Platinum are not generally purchased and held by Central Banks around the world. We also avoid investing in the stocks of companies mining for precious metals as there are a number of operational/management/geo-political issues that can sink a mining stock. You could also potentially see mining stocks move lower with the overall direction of the stock market in a major sell-off even at a time when the underlying metal that they produce is moving higher.
So, what are the factors that generally cause gold prices to rise? There are multiple reasons, which generally means no one REALLY knows exactly what can cause gold to rise… but here are a few conditions that when positive tend to cause gold prices to rally. Geo-Political Tensions – I call this one the “Sentiment Indicator”, when investors are worried about terrorism, war, or any other event that would cause fear/uncertainty in global markets, Gold has been used as a safe haven asset.
Inflation/Deflation – I view this angle similarly to Geo-Political Tensions, investors will seek allocation to Gold when they believe their economic stress that would be caused by hyper-inflation or deflation (Ala Great Depression). Technically we tend to observe Gold’s rise when Real Interest Rates/Yields are falling along with the value of the US Dollar. It’s this final reason that has gotten us “Long” of gold for the first time in client portfolios in last 6 years. With an aging economic cycle that may require the Central Bank/Federal Govt. to stimulate the economy, combined with elevated Geo-Political tensions with Iran, China and North Korea and a really tight US Labor market which could cause inflation to rise and growth to slow (Stagflation)… we like having gold as a hedge in the event our Stock and Bond investments have a much tougher year here in 2020 than they did in 2019.
Koa Wealth Management
11260 El Camino Real, Unit 220, San Diego, CA 92130