Invest In Gold…46 Trillion Reasons Why

Analyst Robert Guy published an interesting article in Barron’s, entitled: “Buy Gold – 46 Trillion Reasons To Buy”, which is worthy of everyone’s consideration.

Gold’s 200-day moving average again proved to be a barrier for the precious metal, which in late Asian trading was around $1,250 an ounce. It had traded as high as $1,258 an ounce overnight.

Gold in USD 1 Year – GoldCore.com

But the pullback is unlikely to dent the faith of gold bulls who remain convinced that the yellow metal’s worth will be proved over coming years as the Fed attempts to normalize U.S. interest rates.

One bull is Trey Reik, a senior portfolio manager with Sprott Asset Management. In a new commentary, he’s convinced that gold’s value as protector of portfolios will become apparent as the Fed hikes rates at a time of low quality U.S. growth and high valuations on financial assets. Here’s his take:

“We maintain high confidence that the eroding quality of U.S. economic growth guarantees that U.S. financial asset prices will eventually reflect their true eroding intrinsic value, to gold’s significant benefit. Along the way, such as during the S&P 500 Index declines of 2000-2002 (50%) and 2007-2009 (57%), gold has provided unparalleled portfolio protection as over-exuberant faith in U.S. financial assets has been punished.”

He points out that since the first quarter of 2009, U.S. household net worth has increased $38.016 trillion – from $54.790 trillion to $92.805 trillion – compared to a $4.766 trillion increase in nominal GDP (from $14.090 trillion to $18.856 trillion). That means U.S. household net worth has grown at eight times the rate of underlying GDP growth.

U.S. household net worth ($92.805 trillion) is now 492% of GDP, which is 40% higher than the 353% average during the five decades prior to the Greenspan/Bernanke/Yellen era. That’s a pace of growth viewed as unsustainable.

Here’s Reik in his own words:

“Given the poor savings and growth rates of the past 16 years, our model suggests it would not be unreasonable for the ratio of HHNW-to-GDP to clear somewhere between 250% and 300%, implying a decline of between $36 trillion and $46 trillion in the aggregate value of the three major U.S. asset classes (stocks, bonds and real estate).”

The other issue that may play in gold’s favor is the pressure that may be brought to bear on corporate debt if the Fed raises rates as expected:

“Should the Fed’s recent shift in rate-hike urgency prove to be motivated by concern for stretched valuations of U.S. financial assets, as we suspect, it will be interesting to see just how far the Fed will go to press its message. We have long suggested the Fed’s reticence to raise rates has reflected concern for the instability of excessive U.S. debt loads, and now the Fed may finally be forced to raise rates out of concern for the instability of excessive U.S. equity valuations. Our long-term expectation of a “rock and a hard place” may be the immediate reality in which the Fed now finds itself.

If so, gold’s role as productive portfolio diversifier is about to reassume center stage.”

Full Barron’s Asia article here