Weatherproof Your Wealth: A Gold Investment Strategy for Every Season

Hello and thank you for joining us today. My name is Michael Joseph and I'm a Portfolio Manager and Deputy Chief Investment Officer for Stansberry Asset Management. Today we're going to be talking about gold, which has been in the news plenty this year. The presentation today is called Weatherproof Your Wealth, a Gold Investment Strategy for Every Season. And in this presentation, we'll be looking to answer a few questions, including is now a good time to invest in gold? Given that there's many different ways to invest in gold, if you do decide to invest, how should you do it? And given that there's a lot of drivers that determine how those different investment types do, how does SAM approach all of this? But before we get started, I wanted to talk a little bit about our firm. We have a lot of different types of investors joining us today. Some of them are SAM clients. Some of you are not yet SAM clients, but have been talking to us or following us a long time, And I know that some are brand new to the firm, So maybe you don't know a whole lot about us. So if you are new or just want a bit of a refresher to give you a little bit about us in a nutshell, SAM is an investment advisor. We manage money and develop holistic financial plans for a variety of different types of clients from individuals and their families to businesses and other institutions. We were founded in 2016. So coming up on our 10 year anniversary soon, though many folks at the firm have been in the business quite a bit longer than that. We manage over 1.2 billion dollars in assets at the moment across 10 different investment strategies, including our alternative strategies, which were first launched in 2023. We're headquartered in Texas and also have offices in New York, California and Washington. Now, on to gold. This is probably the number one question I've gotten all year, both in the run up through most of the year that gold has had, as well as probably even more so during the recent pullback when gold briefly traded under four thousand dollars an ounce. Given what's happened to the price of gold, is now the time to own gold? Let's talk about that. Usually when you see a chart like this is when people start asking, should I be invested? Gold has had a very impressive run and we're looking at roughly the last two years of gold spot price. And again, going from about two thousand dollars an ounce to over four thousand dollars an ounce today. It's been an impressive run and there's multiple reasons why we've seen this price appreciation in gold. We'll get to that. But before we do, I just want to point out there's no crystal ball here. We don't know the future, but we do have a very long history when it comes to gold prices. And this recent rally, it's important to keep in mind, is not unprecedented by any stretch. And on this slide, we're looking at some of the rallies that gold has had since the U.S. ended the gold standard to give you an idea of how this current rally looks historically. And, you know, so far, again, over the past couple of years, we've seen gold roughly double. That is really, both from a return standpoint and duration, not remarkable. In fact, if if the gold rally ended today, it would be, you know, pretty, pretty short and returns not spectacular compared to what we've seen historically. On average, since the 70s, the rallies that we've seen gold is been up over 300 percent and typical run is close to five years. Again, right now we're up 100 percent over roughly two years. So doesn't mean we're guaranteed that this rally continues. But historically, you would expect that there could be more room to run. Again, multiple drivers for this rally, but without question, a big, big driver for the price of gold has been central bank buying globally. And what we're looking at right now is China's official gold holdings as a percent of their foreign reserves. And looking at that gold line, you know, it's gone from roughly four percent to north of seven percent in a pretty quick amount of time. This is official holdings. We don't know what unofficially they might have. But even so, the official holdings tell the story that they are accumulating gold at a rapid rate. And the timing of this is notable. You know, they really started to ramp up towards the end of 2022. That's after the invasion of Ukraine. That's after the U.S. weaponized the dollar, if you will, by sanctions and freezing assets. So I think that, without question, part of this rally has been adversaries of the U.S. seeing that, hey, maybe we don't want to have so much exposure to that risk. Maybe we want to have less dollar denominated assets and move into gold. I think that's part of it. But it's not just China. It's not just our adversaries. This is really a global phenomenon of more and more central banks adding gold to their balance sheets. And in fact, the largest purchaser of gold this year has been one of our stablest allies in Poland. So this is a big driver and what it's done is pretty remarkable. We're looking at on this chart in blue, it's gold holdings as a percent of foreign reserves. The black line is U.S. treasuries. And what's recently happened is for the first time in about 30 years, the amount of gold has exceeded the amount of U.S. treasuries on foreign reserve balance sheets of foreign central banks. So this it's a milestone of sorts. If we knew which direction these lines were heading going forward, this would be a really easy prediction to make as far as the price of gold. Unfortunately, whether it's central bank buying, interest rate expectations, inflation expectations, these are all very difficult things to predict. And because of that, you get a chart that looks like this. This is the gold spot price. Again, going back to the U.S. exiting the gold standard. And what you'll see looking at this is gold can have some really remarkable runs, like the ones that we talked about at the beginning of this presentation. But it also has periods of decline and also very, very long periods sometimes of gold not doing much of anything. And anyone that was invested in gold in the 80s and 90s certainly remembers how that feels. It could be tough being patient over that sort of time frame. But it's part of investing in gold. So at the end of the day, investing in gold, we don't look at it as a short-term investment that we're trying to time. Again, the drivers of it are unpredictable. We instead look towards factors that we feel sure will continue, at least with a reasonable certainty. One of those is a decline in the purchasing power of the dollar. And this chart goes back over 100 years. And you can see that with few exceptions, the value of the dollar has declined over and over and over again. And we're feeling that today. Our dollars just feel like they're buying less and less even now. So as a preserver of wealth, we think that gold certainly warrants consideration. The reason that the dollar is devaluing as it is, is I hate to break it to you if you didn't know, but the U.S. government has a spending problem. This is the most recent federal budget. And to give you just kind of a summary of all the different categories we're looking at here, the U.S. brings in roughly about $5 trillion from taxes, which is a big number, except we spend $7 trillion. And that gives us a deficit of roughly $2 trillion a year right now. What's more is that a lot of that spending is considered mandatory spending. It's programs like Social Security and Medicare. And our politicians being, you know, typically self-serving and interested in being reelected. Nobody wants to be the politician that says it's time to tighten our belts and we're going to cut these programs. So we think it'll be a really hard thing to taper this spending. So what happens if you keep spending more than you bring in? Well, just like you and I, if we were to do the same thing, if we're spending too much, then our debt is going to increase. And that's certainly what's happened with the United States. You can see it's a pretty steady line and right now we're at roughly $38 trillion in debt. So what happens from here? It's possible to reduce this debt. And there's ways to do it. One is to cut spending. Like I said, we don't think that's likely to happen, both because there's mandatory spending that's highly unlikely to get cut. Even the spending that's not considered mandatory, like defense spending, is critically important and also a huge driver of jobs in a lot of places throughout the country. Not easy to cut back on that either. And then there's the interest rate component that almost assuredly will continue to grow as debt gets refinanced at higher rates. Cutting spending is a difficult one. Raising taxes. It's possible. Although they've done a lot of studies on this. And what they've found is that raising taxes on its own, frankly, doesn't do a lot to reduce debt. It does have a powerful effect when it's combined with spending cuts. But as mentioned, we don't think that politicians will have the will to do that. So that leaves us with growing out of it. And it's possible. President Trump certainly thinks it's possible. And he's talked about that. And I hope that he's right. But frankly, $38 trillion is a lot to grow out of. And we don't see it as the most likely scenario. We see the most likely scenario being a continuation of what's already occurred. And so when you continue to spend more than you bring in, that leaves you with issuing more and more treasury notes. And the number one purchaser and holder of treasury notes is the Federal Reserve. Officially, they are not in the business of propping up our government. But they have been a big buyer of treasuries as we've issued more and more to fund the debt. So as a reminder of how the Fed does this, it's not like you or I where we earn money and save it and invest it wisely. They have the luxury of creating money out of thin air. And they use that to purchase financial assets, which puts more money into circulation. And they repeat that at will. And so, again, there's a lot of difficulty predicting the drivers of gold in the short term. Long term, as you can see in this chart, gold prices have followed the supply of money. It's not a perfect match year in and year out. But over time, that's what's happened. And for those of you that are more statistically inclined for what it's worth, the correlation of the factors we're looking at on this chart, it has a correlation of 0.94. So this is a very, very strong correlation over time, gold and the supply of money. So bringing it back to the question I asked first, is now the time to own gold? Again, we don't think of it as a short term instrument. But if you believe, as we do at SAM, that the government will continue to spend more than it takes in and that those fiscal shortfalls will be financed with more and more debt and that monetary policy will continue to devalue fiat currency with the issue of more and more money. And also, of course, assuming that preserving wealth is a priority for you, then yes, absolutely. We believe that you should be considering gold. But that being the case, how do you invest? There's a lot of different ways. So we're going to touch on those right now. First is gold bullion, physical gold, coins, bars, and so on. This has, you know, it has its benefits. One being that you avoid the risk of having to pick individual gold stocks like gold miners. Physical gold can be just owned outright, although that does come with some of its own concerns like risk of theft and then storage and insurance. There are depository companies that will take care of that for you, of course, for a fee. There's also physical backed ETFs. And the returns have been quite good for physical gold. It's actually outperformed gold mining stocks in over two thirds of the past 18 years. So in our view, physical gold is definitely a strong consideration when you're looking at the gold asset class. So we'll talk about gold miners next. There are a lot of gold miners out there, and we roughly think of them in two different categories, major gold miners and emerging or junior miners. And when you think of major gold miners, these are typically companies that have global operations. They have a diversified portfolio of gold mining assets. They have multiple mines that are in production and generating revenue. Even so, even with that larger scale, this is a tough business. Major gold miners, they are dealing with oftentimes foreign governments that, frankly, can be known for extorting, especially when gold prices are on the move. All of a sudden, they want to renegotiate things or even seize assets. There's a lot of costs to the mining business that are out of the operators' hands. There's a dwindling pool of labor. It's not a lot of younger people that aspire to go work in mines in many parts of the world. And there's a lot of operational uncertainties that can range from equipment malfunctions that cause headaches to, God forbid, collapses or other tragedies that can cause loss of life. So this is a tough business. On top of that, you own assets that are depleting, right? You're taking more and more minerals out of the ground. Eventually, that mine life ceases. And so you need to continue to find good quality deposits as well. With all of these factors, why in the world would you invest in miners when I just told you that most of the time gold outperforms the miners anyway? Well, the reason is operational leverage. Yes, on a year-by-year basis, maybe physical gold outperforms these miners. But when gold miners outperform, they can outperform big. And we're seeing that this year. The blue line is the performance of spot gold year-to-date. The red line are major miners, and it's more than doubled. So what is operational leverage? If you think about a mining operation, a lot of their costs are fixed. The cost of a machine is going to be the same whether gold prices are up and down, as an example. So as gold prices go up, a lot of that just drops to the mining company's bottom line. They become more and more profitable. They can go from maybe not even making a profit to having really impressive profit margins and a ton of cash on their balance sheets in short order. And when that happens, the stocks of those companies can re-rate, and it becomes a more attractive business and trades at a higher price. That's what we're seeing right now. And so gold mining stocks have that appeal that they can do a lot better than physical gold when the price of gold is rallying. What about emerging miners? Well, in a sense, it's the same thing, but amplified in both return directions as well as risk. Emerging miners, some of them are larger profitable operations and might be on the cusp of becoming a major. Some of them have no revenue whatsoever. They have pounds on the ground, so to speak. They have mines that maybe are still being explored or developed. Frankly, a lot of these will not become profitable companies and have a reputation for incinerating investor capital. But some of them, on the other hand, will be home runs. So this is an area where you want to be very selective, in my opinion, of what you own, but there are great opportunities out there. This table compares major gold miners to the juniors rather than go line by line, which you're welcome to. But I'll give you the gist of it. During times when major miners are up, with very few exceptions, the juniors tend to be up even more. And the same thing works in reverse. When the price of major gold miners are down, junior miners tend to be down even more. So again, you're getting amplification to the upside and the down. To wrap it up here, as far as different ways to invest in gold, we'll touch on royalty companies. And over the long term, this may be my favorite way to do it. These are, in our opinion, really attractive businesses. They really aren't miners at all. They almost act more like banks in the sense that royalty companies finance mining projects. And unlike a bank that just gets a fixed rate of return monetarily, these royalty companies receive a royalty on the gold production of the mine. In some cases, they actually receive the physical gold, but more often than not, they're getting a part of the proceeds after that gold is sold. These companies operate lean. They typically don't have a lot of employees. They often have very, very robust profit margins. And they also have a lot of potential upside. If you think about an extension of mine life, for example, that maybe wasn't anticipated when the agreement was signed. Well, the royalty company benefits from that. The mining company is putting in all the work, doing all the capital expenditures. Frankly, the royalty companies just sit back and collect checks for the most part. So we don't have any problem with owning businesses like that. And the results have been spectacular. We're looking at total returns since 2008. And the reason I started it in 2008 is it's the first full year of Franco Nevada being a publicly traded company. So you can see on this table, spot gold up about 400 percent. Gold miners up a pretty modest 100 percent. And again, it's because they have those big up years, but, you know, can can often underperform on any given year when gold isn't rallying hard. Royalty companies and the numbers speak for themselves. I've listed the big three of the royalty world as far as gold royalty companies go. Frankly, some of the smaller ones have done even better. I didn't list them because they might not be particularly liquid. And in a lot of cases, they don't exist anymore because how do these companies grow? Oftentimes buying buying the small ones. So definitely a category that we are a fan of. These different types of gold investments are going to do relatively better or worse, depending on a number of factors. So the way that we approach it is not trying to pick what's going to be the one best one in any given year or over the long term. We invest across all four categories from physical precious metals. To the major and emerging miners, as well as those royalty companies I mentioned, this is not a set it and forget it type of gold approach that we take. We add or reduce exposure to these categories as well as individual companies based on a number of factors. And I'll give you an example. I mentioned that royalty companies are among my favorites long term. However, in this current environment, we don't feel that they're quite as attractive as a lot of the miners that are out there. This is a time when miners have incredible balance sheets because the commodity that they pull out of the ground is worth a whole lot of money right now. So they are reducing debt. A lot of times they're debt free. Their operations are very profitable. When you have those sort of balance sheets and those sort of forecasts driven by high prices, banks are a lot more happy to lend to you. Investors are a lot happier to lend to you. So simply put, royalty companies might not be able to get as sweet of a deal. Contrast that with an environment where nobody's interested in gold. The price is going down. Miners are struggling to make a profit. That's not, you know, an ideal situation. If you go and ask a bank for a loan or go to the market issuing bonds that are, you know, maybe rated junk. That's the type of environment where royalty companies can, you know, negotiate a better deal for themselves. So that's just one example of the type of things that we look at when we're trying to determine what areas do we like the most? What areas do we still want exposure to? But maybe not as much as we would in a different sort of environment. The results really speak for themselves. And this is something we're really proud of and actually pretty recent news that I'm sharing here. Our gold strategy was once again named a Top Gun award winner for best performing strategies. We won this over a one year and a three year basis. And we also just won it for the most recent quarter. And what this Top Gun list is, is it's a database of different managers and strategies. And in order to be considered a Top Gun, you need to be in the top 10 strategies within that universe. And we're actually in the top five for both the quarterly one year and three year numbers. And that's in a universe of 2,651 strategies to be precise. So obviously, we're thrilled with how the strategy has done. Now, while this webinar is clearly focused on gold, and yes, we are fans of gold. I want to take a few moments to bring it to a bigger picture, if you will. Because while we do feel that gold has a purpose for most investors in preserving wealth, in our view, it's one part of a greater strategic allocation. And the other parts of that allocation really depend on you and what you're trying to achieve. That's why we have 10 different strategies in addition to our alternative funds. But the way that we look at it, investors have different goals. Some are looking to maintain and preserve their wealth. Others are looking to generate income or maybe seeking growth. And of course, there's plenty of folks that are looking for some combination of all of those. And so gold, in our view, often is a fit alongside of our other strategies to help you find that optimal balance to make sure that you're achieving your goals. If you're a SAM client, I hope that you're speaking with your wealth manager about these different strategies, not only just what you're invested in, but what we also have to make sure that we do have the right balance and the right fit for you. And if gold is something that's interesting to you, maybe you're wondering if you should have more of it, maybe you don't have any and are wondering if it makes sense for you. Again, please make sure to be having that conversation with your wealth manager. We want to make sure that you're aware of everything that we offer here. And importantly, that we find the best balance to help you meet your financial goals. If you're not a SAM client, we do want to extend an offer to you to learn more about how we approach things. Part of that is really having a plan in place for our clients. And this is something that is complimentary, no obligation. But if you're interested to get feedback from us on what we think could make sense for you, maybe a second pair of eyes, if you will, on what you're currently doing, we're happy to do that for you. And you can do that by scanning the QR code on the slide. You can give us a call, visit our website, or send us an email at info@stansberryam.com. Frankly, I know a lot of people that have gone through this exercise. Some of them have become clients of ours. Some of them have chosen not to. But all of them have found this tremendously valuable, whether it's getting to know us and our process better, or again, just getting a second opinion, if you will, and making sure that what you're doing makes sense. I hope that you'll take advantage of this. You're welcome to follow us on social media, LinkedIn, Facebook, X. We try to have a lot of information on there, including how we're looking at different investment topics and also news on events and a host of other things. So hope you'll take a look at that as well. And with that, want to thank you for joining us. Really, really appreciate the interest and hope it was valuable to you. Thank you.