Despite the unsettling events of the past few years — a global pandemic, a war in Europe, the worst inflation in four decades — gold has yet to see the kind of explosive rally one might expect.
Last week, SMI's executive editor Mark Biller talked about why gold has yet to break out — and what the future might hold for gold — on Faith & Finance.
Mark and host Rob West also fielded listener questions about:
How much of one's portfolio should be in gold;
Concerns that the U.S. government could confiscate physical gold; and
Whether gold might be an alternative for buying/selling for those uneasy about a possible government-created "digital dollar."
Click the arrow below to listen. Scroll down for the transcript.
Faith & Finance airs weekday mornings on American Family Radio. A different version airs each weekday afternoon on Moody Radio.
(For more radio appearances by members of the SMI team, visit our Resources page.)
Transcript
Rob West:
Charles Dickens is credited with coining the phrase as good as gold, but how good is gold really?
Mark Biller joins us today to give us his point of view and then it's on to your calls at 800-525-7000. This is Faith & Finance on American Family Radio, biblical wisdom for your financial decisions. (theme music ends)
Well, the inimitable Mark Biller is executive editor at Sound Mind Investing, an underwriter of this program. Folks have tried to imitate him but — so far — unsuccessful!
Mark, welcome back.
Mark Biller:
Well, that is quite an intro. Thanks, Rob. I'm glad to be back.
Rob West:
We're delighted to have you. Mark, of course, the latest issue of the SMI newsletter does a deep dive on gold. Listeners can go to soundmindinvesting.org and read that article. It's titled Checking Up on Gold. But why don't you set the stage for us, explaining why a lot of gold watchers expected gold prices to be halfway to the moon by now and why that hasn't happened.
Mark Biller:
Yeah, absolutely. So when investors think about gold and what drives its price up and down, there are a handful of things that typically stand out. You've got inflation, government spending, wars, and other types of fear episodes, and so on. And so when we think back over the last three years, what have we had? Well, we started with a global pandemic and all the fear that went along with that. Then we had massive monetary and fiscal stimulus and response, which led to the most significant inflation spike in 40 years. Then we had a major war break out in Europe. And since then, we've had continued huge government deficit spending and tons of market uncertainty. So when you add all of that up, it would seem like this would've been the perfect storm to drive gold's price massively higher, but that really hasn't happened.
If we look back, gold peaked in August of 2020 at around $2,070 an ounce. Then it fell about 20% down to almost $1,600 by last November. Now we've had a nice bounce back towards the $2,000-an-ounce level since then. But the point I'm trying to make, Rob, is that gold is actually cheaper today than it was in the summer of 2020, despite all that's happened since then.
Rob West:
Yeah, that's a really helpful background. What you just described, though, has perplexed a lot of folks, Mark. So what do you attribute that to?
Mark Biller:
Well, one of the main points that we make in the article is that gold isn't just one thing. And what I mean by that is gold is an inflation hedge, but it's not just an inflation hedge. It is a hedge against war and other types of fear episodes, but it isn't just that either. Gold responds to a lot of different factors, so expecting it to move up and down perfectly relative to any one of these factors often leads investors to be confused and disappointed.
Now, ironically, the one factor that probably correlates the best to gold's performance, at least recently, is one that most people don't really think about at all, and that's interest rates. Now, when you think about it that way, the past couple of years make a little more sense.
So in the summer of 2020 when gold was peaking, interest rates were at rock-bottom levels. And what's happened since? Well, interest rates are up significantly since then. So the Fed funds rate, for example, was less than one-quarter of 1% then. Now it's almost 5½%. So that huge move higher in interest rates has really played a significant role in keeping the price of gold from soaring like a lot of people expected.
We make a pretty strong case in the article, actually, that based on what interest rates have done over the last few years, we would actually normally expect gold to be significantly lower than it is today.
Rob West:
The number to call is 800-525-7000. We've got some lines open. Mark Biller [is] here to answer your investing-related questions. Again, 800-525-7000. You can call right now.
Mark, you were talking about, among other things, that interest rates are one of the key drivers of the price of gold. Share with us a bit more as to why that is.
Mark Biller:
Yeah, so the simplest way to think about it, Rob, is just to recognize that gold doesn't pay investors any type of yield, whereas most other safety assets do. So the types of things that typically compete with gold for investor attention and money would be things like savings accounts, bonds, other traditionally safe places to park money. All of those things have been offering higher and higher yields over the last couple of years — certainly, the last year as interest rates have risen so much. And that makes those assets more attractive relative to gold, which doesn't pay any type of yield.
So, as a result of that, when you look back over history, you usually see gold moving up and down in response to rates. It will usually do well when interest rates are falling, and then gold struggles when interest rates are rising, which they certainly have been lately.
Rob West:
Well, that's a great overview. Now, how do you at SMI recommend that investors typically approach owning gold and other precious metals. There's, of course, a difference between owning the physical gold and then trading gold, if you will, through mutual funds and ETFs.
Mark Biller:
Yeah, there certainly is, and they both have pros and cons. So owning the physical metal obviously has a lot of advantages. You've got it right there in your hands if things ever really get bad. There's no counterparty risk where you're relying on a bank or some other company to make good on the gold that you own through a fund or ETF or some other product. So there's a lot to like about owning physical gold or other metals directly, but there are also some downsides.
One of those is buying and selling physical metal is typically pretty expensive, so most people can't reasonably dollar-cost average or make frequent purchases of physical gold. And then you've got the safety issue. Beyond a pretty minimal dollar amount of physical gold, you've really got to start thinking carefully about the safety of how you're going to store it. If you're going to have it at your home, that's not great. If you don't have it at your home, then you're kind of getting into storage costs and all of the downsides of not having it right there in your hands.
So the way SMI typically breaks it down is this. We think that having a small allocation of physical gold or metals is a great idea, but we kind of encourage people to think of that as a "forever" allocation — something that, ideally, you'll never need to sell. What we're really trying to get at is you don't want to be transacting in and out of the physical metals because it's just so expensive.
Then on top of that physical forever allocation — which for most people is probably not going to be more than about 5% of their total portfolio just realistically because of those issues I just shared — then on top of that, the physical allocation, we'll use the gold ETFs to supplement that allocation as conditions warrant.
So these ETFs trade just like any other stock or mutual fund, which makes them really easy to buy and sell — unlike physical gold. So we have a particular SMI strategy that provides signals to us when it's a particularly good time or bad time to have a higher allocation to gold. So our ETF allocation to gold will move up and down.
So when we put those two together, most of our members at SMI have a small constant allocation of physical gold, then they have this variable allocation to gold ETFs.
Rob West:
Yeah, that's so helpful, Mark, and I think it gives a really good way to think about their gold ownership in those two buckets.
Well, we're going to continue this conversation, of course, but let's take some phone calls. We've got two lines open. Your questions for Mark Biller today on gold, precious metals, or just investing-related topics at 800-525-7000.
Let's head to Georgia. Gail, you'll be our first caller. Go ahead.
Caller:
Hello. I was listening to Mark and I wonder if he can give us a recommendation on the percentage of our total portfolio that we may consider safe to invest in precious metals to hedge against economic downturns.
Rob West:
Yeah, very good. He just alluded to that, but let's get more specific to your situation, Gail, and have him weigh in on that. Just give us a quick rundown of your age, stage of life, and what investible assets you have currently.
Caller:
Okay. My husband and I are in our early 70s. We're both retired from professional careers. We have saved in the financial markets primarily through stocks, mutual funds, annuities. We have rental property and we have land as well, and it's all free and clear. We have no debt.
Rob West:
Very good, and are you living off of an income from any of those investments?
Caller:
Mainly Social security and a pension.
Rob West:
Okay, so you have a modest lifestyle and most of your investible assets just continue to grow. Mark, your thoughts on that?
Mark Biller:
Yeah, Gail, I think that the key to understanding gold and other precious metals is that you really ought to be thinking about those more as a store of value rather than something that's going to increase your purchasing power. And that becomes pretty important because what it means is somebody who has all of their expenses currently met and really doesn't need to be increasing their purchasing power in the future — they just need to maintain their purchasing power — for those folks, maybe a little bit more precious metals could make sense, especially if they have some concerns as many people do about the economy, the dollar, those sorts of things.
But for somebody like, say, earlier in their career who's saving towards retirement — most people as they're accumulating towards retirement, they really need more than just a store of value, something that isn't going to decline in purchasing power. They actually are hoping that their savings are going to increase their purchasing power over time. And that's why financial professionals typically steer people in that accumulation phase towards assets like stocks, which can actually grow that purchasing power.
Gold and precious metals — there's the old saying about how "an ounce of gold would buy a fine man's suit" from way back in Shakespeare's time all the way till today. Well, that's wonderful as long as you've already got all the purchasing power that you need. But most people, as their saving, they don't. So they really don't want to over-allocate to precious metals.
Like I was saying, 5% is a starting point — with maybe a flexible allocation that takes that up more towards 10% — is probably going to be appropriate for most people most of the time.
Rob West:
Very good. Gail, thanks for your call. I hope that's helpful.
More with Mark Biller just around the corner. 800-525-7000. We'll be right back. Don't go anywhere.
Rob West:
We're going to head back to the phones here in just a moment. But first, Mark, you were saying that, of course, there are pros and cons to owning the physical metal versus more of an ETF or a fund that allows you to trade gold, so to speak. For that portion that is in an ETF or a fund, you said one of the potential downsides is the counterparty risk, where you're relying on a bank or a company to make good on the gold you own.
How big of a risk is that? And is there truly enough gold behind all of these funds and ETFs to make good on all of the investors that are actually in them?
Mark Biller:
That's a great question, Rob. And for a lot of people, it's really the million-dollar question because so much of the physical gold marketing really revolves around stirring up concern over the potential inability of the ETFs — the so-called "paper gold" — to make good on their promises, and the promises that they have physical gold backing all of the shares of the ETFs. The providers get audited on a regular basis, and supposedly, that gold is there.
Now, as an individual, of course, we're always having to take somebody's word for it if it's not in our hands. We're trusting those auditors, we're trusting those companies. We've written a little bit over the last couple of years about why we prefer certain gold ETFs over other ones on that basis, just because we feel a little bit more comfortable with those claims at certain ones.
But the big question is, "Can we trust any of the ETFs?" We think that we can or we wouldn't invest in them. But, of course, that is a little bit of an open question, and that is why some people prefer to have the physical gold.
Now again, that kind of gets into a question of, "How much are we talking about?" If you're talking about a really small allocation of your portfolio, I would say go for it: own the physical gold. There are times at SMI when we'll take our people's gold allocation up to 15% or more, and that's just too much for people to be trading in and out of — because six months later, a year later, we might say, "Okay, we're taking that back down." So we need that flexibility of the ETF.
We feel like the risks involved and the safeguards that are around those ETFs are sufficient, but not everyone's going to draw that same conclusion. And for those folks, they're going to have to figure out how does that translate to a reasonable physical metal allocation that they can store safely, that doesn't put them at risk by having too much in their home, that kind of thing.
Rob West:
Yeah, that's really helpful. We're going to head to the phones here in just a second. Terrell and Mark coming your way.
First, though, Frida called — she wasn't able to hold — so I'd love for you just to weigh in on her question. She was asking about the possibility — she had heard — of the government actually confiscating your gold. Do you want to weigh in on that one?
Mark Biller:
Yeah, it's a great point. I mean, we can't rule it out because it's happened before, back in the 1930s under FDR. He actually did sign an order that required, by law, all U.S. citizens to turn in their physical gold holdings. So anytime we see the government has done something like that in the past, we can't rule out that possibility.
Now, I would say there are several differences that make that pretty unlikely today, even though we can't rule it out. First and foremost, when that happened in the '30s, the United States was on a gold standard, which meant that its currency, the dollar, was convertible for gold. They were interchangeable.
And so there are a lot of problems [for the government] with the gold standard — we don't want to go into all of that — but because of those challenges for the government, the government wanted to move away from that. And so they needed to in that era when, one, gold was convertible to the dollar directly, and two, pretty much everybody was using physical currency coins and bills — unlike today when we use physical currency very, very little — they needed to make that gold less accessible so that people would rely on the dollar because there was a real problem there with people preferring the gold over the dollar.
Today, so few people own any gold and nobody uses it as currency at all, so the need or the desire for the government to do something like that — it's just an apples and oranges comparison. There's really no reason why they would do that.
[It's] much more likely if the government — if you want to go down the conspiracy thinking trail — much more likely that they would try to manipulate the gold price and make it seem as if gold wasn't as valuable, to send signals to people through the markets that way. Because people just don't use gold as money. And that's the big difference between now and the '30s when people did use physical coinage and gold coins and that sort of thing and could convert their gold directly to currency.
So some really big differences there, Rob. I would not overweight that concern — while also saying you can never rule it out. If a government gets desperate, they're going to do what they have to do.
Rob West:
Yeah, very good. That's helpful.
Mark, we've covered a lot of ground here. This article at soundmindinvesting.org, it really does a more deep dive than even we've been able to cover today, right?
Mark Biller:
Yeah, for sure. It absolutely does, and probably most importantly, it gets into kind of what we see as the outlook for gold. So all of this backward-looking stuff is great, but what people are really interested in is, "What should we expect going forward?" And we spend a lot of time in the article on that.
Rob West:
Yeah, that's great. You can find it at soundmindinvesting.org. It's title is Checking Up on Gold. soundmindinvesting.org.
When we come back, Terrell wants to talk about gold as a hedge against digital currency, and Mark wants to talk about protecting assets by moving them into physical gold.
Back with much more. Stay with us.
Rob West:
Let's get to as many calls as we can here in the next couple of segments. We'll go to Tennessee. Terrell, thanks for your patience. Go ahead, sir.
Caller:
Good morning, gentlemen. I appreciate the great information that you're giving.
Rob West:
Thank you.
Caller:
And I've got a question about gold.
Caller:
Yes, sir.
Caller:
Looking at the digital dollar, is it possible that gold or any other precious metal would be an alternative to those who don't want to deal with a digital dollar?
Rob West:
Great question. Mark, your thoughts?
Mark Biller:
Yeah, it is a great question, Terrell. Those are uncomfortable questions because we just really don't know how a lot of that is likely to play out. You would certainly think that if, at some point down the road, some kind of a digital currency is introduced, that the government is probably going to try to push that pretty heavily. And it could get to a place where that is the bulk of people's transacting. And so if that is the case for those trying to transact outside the system, they would need to have some way to do that. And, of course, it's very natural for your first thought to be, "Well, what about gold and other precious metals?"
There are so many possibilities in that that it's hard to give any kind of definitive answer. But it certainly is worth thinking about — and worth thinking about, in that type of situation, if you're going to have some kind of a small physical metals allocation, is it advantageous maybe to have some diversification even within that meaning smaller incremental pieces?
So, for example, one thing you can do — on the silver side — is dealers will sell things called "junk bags" or bags of junk silver, which are just simply dimes, quarters, and half dollars from before 1965 when those coins actually contained actual silver. Now, what's the advantage of that? Well, simply that you would have a lot of smaller coinage that —if you were ever actually needing to trade with that — could come in handy. So that would be one possible application of that idea, as opposed to having, say, one-ounce gold coins where you've locked up a lot of value in a very small number of coins.
So I wish there was more that I could give you that was solid on that, Terrell. It's just such a hard question because we just don't know at what speed that would be coming. Hopefully, we'll have a long period where, even if that is introduced, it's introduced as an option as opposed to something that we all have to transition to right away really quickly.
So hope that helps. Rob, do you have any other thoughts on that?
Rob West:
No, I think that's great. Just be careful with the fearmongering that typically goes on around this topic, and recognize what Mark said is that's still likely a long way off. It is going to require an act of Congress. Congress is deeply divided over this topic — for good reason because of the loss of privacy, namely. But we appreciate you calling today, Terrell.
To Kentucky. Hi, Mark. How can we help you?
Caller:
Hey, Mark! This is Mark. Appreciate you taking my call.
Mark Biller:
Hey, Mark.
Caller:
Yeah, this — man, I tell you what — this whole thing. I don't know, where do I begin? Where do I end? I'll say this. When you look focused on the financial side of things and the instability, the concerns about digital currency and yada yada, yada, it's like — okay, my wife and I did go out and I think we put about 10 grand in physical silver. So we're not preppers, but we're conscientious and observant about what's going on.
Other than the debt of the home, we don't have debt. We do use credit cards, but we pay them off each month. We do have some investments. And what I'm considering, the company called Beverly Hills — I don't really like the name of their company, Beverly Hills Precious Metals — but anyway, they're in Beverly Hills, and their accounts [are] backed by physical gold.
I'm thinking just to transition all of those investments that — just different 401(k), whatever the different — see, this is how ignorant I am, I don't know what kind of vehicles they are, but I know they're things that are pre-tax dollars that I can't touch. We're in our 60s, so I don't have the penalty. So all I got to do is pay income tax on it, I guess, if I transfer it over to these other kinds of accounts that are backed by physical gold in a physical fault somewhere.
Rob West:
Yeah. Let's get Mark to weigh in on this. Mark, as you look through a biblical worldview and consider all that Mark's thinking, how might you counsel him?
Mark Biller:
Yeah, a lot of things there, Mark, and I certainly understand a lot of the concerns. I think the biggest thing that I would suggest is just to be careful about and maybe resist a little bit, kind of an "all or none" kind of way of thinking about precious metals and investments.
So, unfortunately, we can look back through history and see periods where a couple of decades go by and the gold price does nothing and just declines. And that's where I was getting into the idea that, at best, really all we can expect is gold to be a store of value. And so as we're looking at long periods of time, even a 20-or-more-year retirement, we kind of need to have that purchasing power at least keeping up if not growing over that time.
I understand the concerns around the dollar, all of those types of things, but I would just caution not to put all our eggs in one basket. And diversification is a theme that we come back to over and over again on this program and in the SMI newsletter. It's a biblical principle for investing, and it's really important here because if you load up on gold and all your eggs are in that basket, if it doesn't pan out and you never really need it for why you're buying it, then you've missed some other opportunities.
So you really have to weigh that carefully and prayerfully. But I wish you the best on that, Mark. Hope that that helps you.
Rob West:
I appreciate your call, Mark, and you sharing transparently what you and your wife are thinking and praying about.
Back with our final segment with Mark Biller just after this. Stay with us.
Rob West:
I'm so thankful to have you with us today on Faith & Finance here on American Family Radio. I'm Rob West. With me today: Mark Biller, executive editor at Sound Mind Investing. We're talking about a recent article in the SMI newsletter. It's called Checking Up on Gold — a deep dive into gold, its performance, and how you should think about it for your portfolio. You can check it out today. It's soundmindinvesting.org.
Back to the phones to Texas. Jay, go right ahead.
Caller:
Couple of questions for Mark. One is how about diversification in precious metals into something like platinum and palladium? Also, what do you think about rare coins as an investment?
Rob West:
Very good. Mark?
Mark Biller:
So let's tackle the rare coins first. So rare coins are more like collectibles, so that's a little bit more of a specialty area. If you're primarily wanting to invest in precious metals for the reasons we've been talking about on this program today, then I would suggest to most people that they avoid — "numismatic" is what they call it, or those rare coins — because you do need some specialty knowledge, expertise. All of the things around transacting, those costs just go up quite a bit when you're talking about rare coins. So that's not to say they're bad. They're just something different. That's kind of like talking about almost like a whole different investing class that's really more collectible type stuff.
As far as diversifying into other metals, I kind of look at precious metals as being gold, and then everything else. So I would treat my gold investments as the ones that are going to be the most stable — that are going to react as a monetary metal — and then everything else.
And that really includes silver, also. Those are going to be a little bit more like industrial-type metals, and things that are going to probably be impacted more by what's going on in the economy and the economic strength or weakness going on. And so again, that's not to say they're bad, they're just different. And so to recognize that difference.
With the outlook for a recession ahead, I would be kind of cautious about silver and the other metals on this side of an approaching potential recession because if they are impacted by the economy more and the economy is weak ahead, then that would not be good for those — for silver, for platinum, palladium, the other metals.
So that's kind of how I would size it up, Jay. Not to say you shouldn't. Just be careful — know what the drivers are. And with gold, those drivers tend to be more monetary issues. With the others, they tend to be more economic industrial-type issues. So some pretty big distinctions there.
Rob West:
Yeah, very good. Jay, thank you for your call.
You mentioned at the top of the broadcast that gold prices, despite the uncertainty, despite the looming recession, despite the rise in interest rates, have been somewhat disappointing. What is your outlook [for] gold there at SMI?
Mark Biller:
Yeah, well, we think that the outlook, the long-term outlook is very strong. And tying this back to what we were talking about originally with interest rates, we've seen interest rates go up so much now, if there is any type of recession or economic pullback in the future, typically the pattern is — what we've seen so far — you have interest rates going up before a recession, they come down quite a bit during a recession. Falling interest rates are good for gold. Also in recessions, typically governments spend to get out of recession, and so that kicks into the virtuous cycle for gold as well.
So there's a lot to like about the outlook for gold. We're allocated very heavily to it right now at SMI.
The one caveat that I would throw out there is that as the economy heads into recession — I'm not saying we will, but if we do — very often, that is accompanied by some kind of either mild or severe market turmoil. And when those periods of kind of "investor panic" hit, gold and precious metals tend to get hit right along with the market.
Part of that is people sell what they can rather than what they really want to, and gold is very liquid. So, usually, you see in those types of environments — like 2008, 2020 — you see gold take a big hit. It goes down before it then bounces and recovers very well.
So I would just caution folks who are thinking maybe I need to go out and increase my gold position quite a bit. You may not want to load the boat completely here, but maybe you hold back a little bit in anticipation that there may be a buying opportunity at some point on the horizon where you might be able to take advantage of that temporary hit when everything goes down, including gold, and then ride that recovery that gold usually does very, very well in. If you look back at the March to August run for gold in 2020, gold got hit in March with everything else — February and March — but then it recovered very, very strongly in the months following.
So that's kind of our short-term and long-term outlook for gold. Very strong long-term. Little bit of a caution short term. But hopefully, that's helpful, Rob.
Rob West:
Yeah, Mark, anything on the BRICS [Brazil, Russia, India, China, South Africa] announcement in July that they were going to use gold behind that digital currency?
Mark Biller:
No. There's so many things that have to happen before that would actually be any type of viable alternative to the dollar. There's a lot of desire on the part of those countries to move away from the dollar, but very little ability. They really have very little in common between those countries — other than their desire to kind of change the current system.
Now, the one thing that is relevant to gold there is those countries — and other countries — have been buying a lot of gold through their central banks to use as national reserves. And so that, I think — and we talk about this in the article we've been discussing — I think that has been a big reason why we haven't seen gold drop as much as we would expect given what's happened with interest rates. And I think that's because there's been that steady underlying bid from these national central banks gobbling up a lot of gold.
So I don't really think this gold-backed currency is really much of a thing for us to have to be concerned about or deal with right now. But the very fact that they're talking about it is kind of providing support for the gold price. So that's good for gold investors.
Rob West:
Mark, just 60 seconds left. Tie a bow on this for us — but looking through a biblical worldview, of course. A lot of talk about fear and uncertainty. Obviously, our trust needs to remain in the Lord.
Mark Biller:
Yeah, it absolutely does. There has always been uncertainty. There have always been issues and problems, and to be frank, gold has helped people through some of those in the past. But our salvation is never in that. Our security is never in that. Our security is in the Lord.
And we need to be asking prayerfully for the Lord's direction — how we interpret information like we've been discussing today and how we apply that to our savings and our investing.
Rob West:
Yeah, that's exactly right. Well, Mark, appreciate so much our partnership with you and the team at SMI. Thanks for your time today. We covered a lot of ground. It was really helpful and we'll look forward to having you back again real soon.
Mark Biller:
Thanks, Rob. Always my pleasure.
Rob West:
All right. That's Mark Biller, executive editor at Sound Mind Investing. You can read this article, Checking Up on Gold, at soundmindinvesting.org. No subscription required. It's there for your reading pleasure. soundmindinvesting.org.
Well, on behalf of my team today — Jim Henry, Robert Sutherland, Robert Youngblood, and Devin Patrick — I'm Rob West. So thankful that you were along with us today.
I hope what we shared was helpful and encouraging and perhaps gave you a different perspective on gold but ultimately pointed you back to a biblical worldview that God owns it all. We're stewards and we're brief sojourners here on this earth. So let's keep focused on the eternal.
Have a great rest of your day and come back and join us tomorrow. We'll see you then. Bye-bye!
Disclaimer:
The views and opinions expressed in this broadcast may not necessarily reflect those of the American Family Association or American Family Radio.
