Advisors: How to Show Valentine’s Day LOVE with Precious Metals Redux
Two years ago, I posted a piece recommending that one of the most tangible ways that advisors can show affection to their clients is to add precious metals exposure to their portfolios. After a rough start in the stock market this year, it is a relief that Valentine’s Day is around the corner. Market participants, including financial advisors’ clients, can use a similar show of love now!
As the chart below indicates, although gold prices have recovered from their late 2015 lows, it is significantly below the 2011 top. Adjusted for movements in the Standard & Poor’s 500 equity index, the precious metal is 70% below the early decade highs.
Gold has outperformed equities since mid-December. We believe that this is the continuation of a new bull market in gold and other precious metals.
Although we do not know if this is a beginning of a bear market in stocks, advisors should be prepared for the next one. In the past, gold prices have declined along with stock prices in the first phase of an equity bear market. At some point in the bear markets, as indicated in the graph below, gold prices begin to rise and become a safe haven for investors. This is aided by declining interest rates, which reduces the cost of owing gold bullion. After stocks peaked in early 2000, gold and stocks declined together until April 2001 when gold prices began to rise as the equity bear market continued for almost two more years. The same pattern took place after stocks peaked in late 2007. Gold bottomed in November 2008, one-half year before stocks began to rise. Although past performance is not indicative of future returns, given the bear market in gold prices, especially in relations to stock prices and declining interest rates, we believe that the bottom in gold took place in 2015.
Investment implications: Financial advisors should consider adding precious metal bullion and stock funds to client portfolios. These funds are up 2% to 4% so far in 2018. As discussed above, we believe that gold has likely put in a cyclical low in 2015 and will earn positive results in 2018.
iSectors® Implementation: The iSectors Precious Metals Allocation had a stellar 2017 (the best iSectors allocation). This strategy owns funds that invest in gold, silver, platinum, and palladium bullion. Given our precious metals outlook for 2018, financial advisors should consider adding a small position (10% to 20%) as a diversifier in client portfolios.
iSectors strategies are only available through advisors.