500-Year-Old Law is Gold Investor’s BFF

Thomas Gresham and the case for gold investment

Bullion.Directory precious metals analysis 27 February, 2023
By Peter Reagan
Financial Market Strategist at Birch Gold Group

Bad money drives out the good.

See, back in the 16th century, money was still “sound” — gold and silver were still money. But dating back another 1,200 years from Gresham’s time, all the way back to ancient Rome, governments were always tempted to issue lower-purity gold and silver coins any time they wanted to elevate spending. This “debasement” literally meant, “adding non-precious (or ‘base’) metal content to coins.”

As you’d expect, as soon as the public caught on, they’d hoard the older coinage (“the good”) and spend the newer, debased money (“bad money”).

For our purposes, what’s “bad money” exactly? I think it’s interesting to apply Gresham’s law more broadly to asset categories, including currencies. The separation between bad and good is very clear! Few prudent savers would hoard U.S. dollars rather than physical gold and silver. Precious metals are easily exchanged for currency, after all – and tend to gain, rather than steadily lose purchasing power over time.

And when it comes time to liquidate savings, in retirement, for example, are you more likely to sell paper-backed assets or gold American eagles? Given the choice, I expect you’d begin applying Gresham’s law within your savings…

Gold is just about the only investment Nouriel Roubini has confidence in

Nouriel Roubini has some hits and some misses. His forecast of the 2008 financial crash was accurate. His crypto-to-zero forecast after 2017… well, not so much. One thing that can be said is that he never fails to be bearish.

This time around, he’s calling for doom in stocks and bonds based on some projections that are difficult to argue with. Roubini expects inflation to stay near 6% despite the Federal Reserve’s efforts. When we take into account disputes over the accuracy of inflation gauges… and then add expectations of quantitative easing after this hiking schedule? This might end up being a conservative estimate.

Either way, Roubini says 6% or higher inflation rate will cause major trouble for both stocks and bonds. This isn’t much of a forecast: the S&P 500 lost 20% last year and the bond market is in a full-fledged crisis.

Furthermore, Morgan Stanley’s forecast of a 26% plunge in stocks this year is reasonably close to Roubini’s expected 30% drop. (They may both be understating the case… According to the Shiller PE ratio, stocks are currently overvalued by 45% compared to their historical median.)

Gold is one of the very few assets Roubini recommends, even to investors with little capital to work with. On the opposite end, we have many examples of billionaire investors including John Paulson and Stanley Druckenmiller who own hoards of physical gold. This article, by the way, is called Invest Like the Elite: One Investment They All Hoard.

Guess they’re familiar with Gresham’s law!

2023 is looking to be an even more volatile year than we thought

We find ourselves in some pretty strange times. Inflation is such a big problem on its own that everyone seems to have forgotten about trouble elsewhere. After all, what’s worse than purchasing power disappearing before our eyes – significantly faster than our wages are rising?

Nonetheless, the latest editorial by Global Banking & Finance Review asks: we forgotten about portfolio diversification, and will make a comeback?

Here are the main takeaways:

• There are substantial fears in the investment markets that volatility could return in 2023
• Inflation, disrupted supply chains, and a potential recession all inform these fears
• Diversification holds the key to making gains and protecting investment as experts encourage international diversification

Some numbers: a recent survey showed that 48% of Americans expect a stock market crash this year. That’s a significant percentage, especially considering that equities had a really rough 2022. The S&P 500 was down 20% for the year.

As you might expect, people are even more concerned about inflation and high interest rates.

Pairing those two is likewise strange, for high interest rates are the only thing preventing hyperinflation right now. The moment interest rates start to turn loose is probably the moment every warning about free-floating currencies becoming obsolete starts to materialize. Well, the still-existing ones, to be more specific.

The editorial notes nobody seems to be able to make an accurate forecast due to the amount of volatility and general uncertainty. The World Bank did go ahead and try by calling for a recession this year. One thing that analysts can agree on, though, is that portfolio diversification is more important now than it has been in a while.

The diversifying assets tend to opposite extremes. On one hand, we have higher-volatility assets like foreign currencies and emerging-market stocks. Risk-on, anyone?

On the other, gold is listed among other assets. Even though gold’s stability helps minimize risk and likely maximizing long-term returns, as well.

Gold’s historical track record makes a much more compelling case than anything I can say about the benefits of diversification…

This article was originally published here

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