Why Wall Street Should Encourage Clients to Own Physical Gold

(Editor’s note: Here is an article  from Drew Mason at ConstitutionalSilver.com)

It is prudent to diversify your portfolio and invest in physical gold because your debts will weigh on equity multiples, cash values, real estate and real bond returns.

Would you agree that the world’s financial system is in desperate trouble due to irresponsible debts?

If you have been paying any attention whatsoever to global markets over the last couple of years, it is likely you agree.  After all, if there were an easy solution to the global debt crisis don’t you think it would have been tried by a host of governments by now?  Yet despite our problems Wall Street continues to talk down the benefits of physical gold to its clients, indicating that “client first” attitudes are as ephemeral as risk management to these behemoths.  Here is how your investment bank should be framing a wealth management conversation with you.  (Credit for this perspective belongs to Barry Kitt, retired hedge fund manager.  This is the classic case of hearing something that is so insightful that you ask, “Why didn’t I think of that?”)If an investor allocates 10% of his net worth to gold at $1,600, there are a plethora of reasons to see it going higher.  How much higher?  Let’s give consideration to the investors who have called the cycle right so far instead of looking to Wall Street for target price guidance since the Street has missed the cycle so far.  Some of those investors include James Turk with an $8,000 target, and Marc Faber with a $10,000 target.   In the first scenario let’s give those investors the benefit of the doubt that they continue to see things correctly, and let’s say that gold goes to $8,000.   If one invests 10% of a portfolio into gold today at $1,600 per ounce and gold goes to $8,000, then the 10% of your net worth in gold today would expand to 50% of your current net worth.

If these investors who have been prescient in seeing the cycle so far are right and gold goes to $8,000, then the 90% of your current wealth that you didn’t invest in gold will probably decrease in value to maybe 50%, given the stresses that will be manifest. Under that scenario, with just 10% of one’s current net worth diversified into gold at $1,600, an investor will have maintained 100% of his current net worth.

Now let’s consider the opposite scenario and that the gold price falls by 50% from $1600 to $800. This would put gold down to its fully loaded extraction costs when financing, government compliance, mine closures, etc. are included.

If gold moves from $1,600 to $800 investors would lose 5% of their current net worth …but that will mean that something wonderful has happened in the world. Under such a scenario it is likely conservative to believe that the 90% of one’s wealth not invested in gold would probably appreciate by at least 25% from today’s levels.  Using that potential framework, the net portfolio will have appreciated in value by 20% despite gold’s theoretical 50% haircut.

As a rational investor, you buy home insurance, auto insurance, health insurance and life insurance each year, even though the statistical tables tell you that you’ll have nothing to show for it at year’s end!  On the flip side, the statistical tables tell you that it is critical to diversify some of your wealth into gold and silver today because our debts will weigh on equity multiples, cash values, real estate and real bond returns.   And if neither of these two extremes occur, you probably will still look back on your decision to diversify into gold as prudent, if not profitable, given the problems that face us today.

2 comments to Why Wall Street Should Encourage Clients to Own Physical Gold

  • Ed_B

    “Would you agree that the world’s financial system is in desperate trouble due to irresponsible debts?”

    Yes, I would agree with that. The current political paradigm in the world allows politicians to receive great credit for making promises that others must then keep. This is not only irrational, it is completely unsustainable. That it will fail is not up for debate. The only question is when.

    “Some of those investors include James Turk with an $8,000 target, and Marc Faber with a $10,000 target.”

    I cannot find fault with the reasoning either of these gentlemen. After all, what has happened in the past can surely happen again. Remember when gold was around $250 an oz back in 1999, a mere 13 years ago? Since then, gold has gone up to $1570 today. This is more than a 600% increase. If gold were to repeat that performance during the next 13 years, we would see a price of $9860 an oz. The only things that can stop gold from this kind of price rise would be if the US, Europe, and Japan were to suddenly stop their excessive spending, implement a plan to pay down their debts, significantly cut back on their entitlement programs, accept a lower standard of living for their citizens, and print a lot less money. Do any of these seem likely? How about ALL of them because that’s what it would take to prevent gold from rising another 500-600% in the next dozen or so years.

    • lastmanstanding

      not one chance on this beautiful planet of world govt thrift happening.

      Like you said…the only question is when?

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