The Gold Market Has Not Lost Its Luster Yet

March 21 2019

Even though despite disappointing economic growth in the U.S., increasing worries about Brexit and the effects of recent public policies gold prices have fallen, insiders are seeing positive signs for precious metals in 2019 and, therefore, for gold. At the PDAC Convention in Toronto last week, the importance of diversifying a portfolio by including precious metals was, among other things, widely stressed.

Rick Rule, CEO of Sprott U.S. Holdings Inc., an investment firm specializing in commodities, once again emphasized in a recent interview with Kitco News the importance of holding gold. He was asked to respond to a statement of investor icon and director of Berkshire Hathaway, Warren Buffett, who views gold as having practically no investment value. “The magic metal did not fit American courage.” Buffett referred to the investment potential and the rate of return of gold relative to, for instance, stocks or agricultural land.

Rick Rule’s response, who before anything else praised Buffett extensively and noted that he was a shareholder of Berkshire Hathaway, was striking.

“Unfortunately, there is only one Buffett. For the rest of us, who are mortal, the insurance offered up by gold is critical. (...) Buffett has pointed out, and I have experienced this, that four or five times in his stewardship the price of Berkshire Hathaway has fallen by 50% in an 18-month timeframe. (...) If you're a mortal ..., you can survive a 50% decline, but it is decidedly unpleasant.”

The Expert versus the Average Investor

Rule pointed at the generally greater skills of market experts versus the more limited skills of the ‘ordinary’ investor, who is more affected by the market cycle. And Rule makes a well-justified argument here.

Whereas for experts such as Buffett it is quite possible to earn attractive returns on a consistent basis, an investor who – for example – invested in a major stock index such as the Dutch AEX in December 2000, almost 19 years ago, would still be down 15%. Over the same period, gold prices rose over 480%. Rule goes on to show that gold is not only extremely useful as a component of a diversified portfolio, but also that it is rather difficult for a smaller investor to earn returns as attractive as Buffett’s. As Rule argues: you are your own worst enemy. As soon as markets move, your emotions tend to move along. Keeping those emotions in check is even for the most experienced investor a continuous challenge.

Final Remarks

The past few months we enjoyed a splendid rise of the gold price. For the moment, both the confidence in the Fed’s decisions and a possible trade deal between the U.S. and China are leading to optimism in markets. Optimism that, at any rate, seems to outweigh the fear of a new recession among traders. A fear that typically produces a flight into precious metals, which would be good news for the gold market.

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