Have you ever had a client in your office who wished he or she had bought a particular stock before it had its big break out? When studying stock charts that show dramatic performance, clients often forget that it would have been seen as an unpopular and maybe even laughable decision to invest in that stock at that time. Since many clients are driven by emotion to follow popular trends, they are often less interested in taking a risk on an investment like this, unless it is recommended by a skilled advisor.
Gold and silver are currently one of these break-out investments. Gold and silver are tied inversely to the ever-inflating stock market and real estate bubble and they continue to slide south as their unpopularity continues to grow, making them ripe to top the charts at any moment.
Backing up, we know that it takes a host of factors to be considered a wise break-out investment. An investment qualifies by falling under an umbrella of having a low price compared to other assets, as well as a reputable history and a limited number of current interest or buyers. Most important of all of these is the price in comparison to other assets or stocks, such as the S&P 500.
Can you think of another investment that might qualify as a wise break-out investment in our current financial environment?
Most recently, cryptocurrencies had a big break out, but they did not meet these same criteria. Even before their break out, cryptocurrencies were priced high compared to other assets. They also did not have a reputable history or backing, and the interest and number of buyers were soaring. The last two factors – interest and number of buyers – are what helped the price soar to their record highs, but being backed by nothing and unproven may be the reason they settled in at half the price months later.
Now let’s look again at gold and silver. Prices are very low right now – as I write this the spot price of gold is $1,230, which is 10% less than the start of the year. The spot price of silver is $15.63, down nearly 11% on the year. This means that gold and silver fulfill the first criterion for a break-out investment – they are definitely undervalued compared to other assets. Let’s compare it to the price of the S&P 500. In the beginning of 2009, the price of the S&P 500 was $985 per share and the price of gold was $1,130. At that time you could have bought one share and had money left to invest elsewhere. Today the price of the S&P 500 is $2,828 and the price of gold is $1,230. That same ounce of gold will not buy even a half of a share of the S&P 500. Both showed positive returns over this time frame but one is now significantly higher than the other. So, which is the better deal today?
Ticking the second box in the break-out investment criteria, gold and silver have a reputable history that goes back farther than the New York Stock Exchange, or probably any stock exchange, for that matter. For centuries it has been used around the world as a real store of value – real money – and has never been worth zero.
Finally, the interest and current buyers of gold and silver are low. In fact, annual sales of U.S. minted gold coins are at an 11-year low. Silver is trading for below mining costs right now and there are few interested buyers, which is resulting in the halting of mining, since the cost to excavate exceeds the current sale price.
With all of these factors in mind, it becomes clear that gold and silver are extremely undervalued and a great investment with a huge break-out opportunity, all for a low cost. Additionally, history tells us that the continued growth we are seeing in the stock market along with current interest rates is not economically sustainable. These bubbles will burst and gold and silver will rise as they always have to counterbalance the equity markets.
We suggest a minimum of 5-10% allocation for two reasons: first, this is a great allocation to take advantage of the significant break-out potential, and second yet most important, this allocation will double as wealth insurance to help protect the other 90% of your client’s portfolio.
Your clients need to know the great opportunity that gold and silver can provide, not only from a profit potential standpoint but also the security of wealth insurance. Do not let gold and silver be another investment that your client regrets missing at the right time. Instead, explain to them the protection and potential profitability that these metals offer – a perfect opportunity for the conservative and the fearless investor alike.