It's A Gold New World
The world economy is transitioning back to the Gold Standard, are you?
A common asset allocation recommended by financial advisors is 60% in stocks and 40% in bonds. This sounds very risky as Wall Street stocks are very stretched considering their valuations.
I would also be concerned about having a large allocation in debt. With my biggest worries being return of my capital and getting paid yields in devaluing US dollars (USD) as the Fed will be lowering rates and increasing their balance sheet.
There is a wide range of portfolio asset allocation models, depending on one's age, risk tolerance and growth goals. Most of them suggest high allocations of stocks and bonds. It is supposed to protect risk, but high allocations of those assets have risky issues.
Some advise a 10% allocation in gold as a hedge against economic calamity, that they shouldn’t look at growing their wealth, to them it is more about protecting it. This allocation sounds way too conservative in a world that is in a Death Spiral of Debt and returning to the Gold Standard.
Even gold bulls in the money management business feel this strategy is a good one. It may have been fine when the world wasn’t on the Gold Standard, but with constant devaluation of fiat currencies and insane spending by politicians, it is time for a rethink.
They even go so far as to say it is an insurance policy. One that they don’t want to cash in because they are afraid of what kind of pain the economic world would be in if gold was multiples of its current price.
I would argue that with the devastation of purchasing power of fiat currencies around the world, plus a Death Spiral of Debt, that the best thing for the health of the global economy is a return to the Gold Standard.
If I am right, an investor will want a much higher allocation of gold in their portfolio. For a fantastic combination of protecting their wealth, while combating erosion of purchasing power, and even better, growth of their wealth.
The S&P 500 is extremely stretched when considering historical valuations averages as stock prices are very high and earnings modest at best. The technology stocks are even more stretched. When they get this stretched, a significant correction happens.
When it comes to the heated up tech stocks, the last time I saw them this stretched was during the Dot-com Era, then the bubble burst and it took many years for the tech stocks to regain the losses. The AI stocks and Bitcoin look to be our current version of the Dot-com stocks as they have bubble valuations.
If I had to own Wall Street stocks, I would focus on value plays that are growing their earnings nicely, while still having reasonable valuations. I’m glad I don’t have to own them because even the best ones will get punished in a correction.
I don’t think the Fed will let them get smacked too badly and will drop interest rates back to the Free Money Era if they have to. They say their mandate is stable prices and maximum employment, but we all know that their unspoken third mandate is price stability of stocks on Wall Street.
Bonds look very risky to me as plenty of BRICS nations aren’t interested in owning them and more interested in selling them. Plus with all the debt in America, and the next president will be a massive spender, I can see a possible buyers strike.
Which would mean the Fed has to return to being the buyer of last resort and increase their balance sheet dramatically to keep yields where they need them to go into a rate cutting cycle.
I’m certainly not your financial advisor and have no idea of your risk profile. I just see a lot of issues with being highly weighted in Wall Street stocks and US debt, with only a modest allocation in gold.
Following conventional wisdom is usually a recipe for poor results when there is a big crowd following the same strategy. Especially when a massive economic shift is coming due to the Death Spiral of Debt leading to a return to the Gold Standard.
In the evolving economic world, there is an East and West battle, with the BRICS nations in the process of putting themselves on the Gold Standard. In this environment it seems wise for investors to take a long hard look at their asset allocation.
The BRICS nations have been buying a lot of gold since the 2008 GFC, and have ramped it up substantially over the past few years. I can see two key reasons for this, they see the debt crisis, secondly, they want to see an alternative to the USD as the world reserve currency. I further argue as they build up their reserves of gold they will want to use it for international trade.
Even when it comes to gold bulls, I think differently than most. As I would much rather own gold stocks than gold bullion. The key reason is that I see valuations of gold in the ground and what investors are paying for miners that bring it out of the ground as being very cheap.
The gold stocks have only started joining the gold bull market. Mostly it has been the major gold miners, it hasn’t really trickled down the food chain of gold stocks, yet.
I’m not a big fan of diversification either because when you hunt with a shotgun, you are going to buy the wheat and the chaff. It boggles my mind when I hear about fund managers in mining stocks that own 70 or more stocks. To me it says they are not very confident with their filters to pick mining stocks.
It is much more important to think like Warren Buffett, do lots of homework, know the companies you own stock in very well, when you see a fat pitch, load up.
How To Hunt Gold Stocks With A Rifle
I put stocks in three baskets, gold miners, gold mine developers and explorers for gold mines. With a focus on key attributes for each basket.
With gold miners, the key metrics I emphasize are those that are generating a lot of free cash flow. Which means they will have low costs of gold production and big margins.
When they can also increase production and reduce costs, or at least maintain them at a level that is lower than the average costs for gold miners, they are best in breed.
I’m a big fan of developers as well because there just aren’t enough of them to replace what the gold miners are producing from old miners. With this group I pay close attention to where they are on the development window of the Lassonde Curve.
I especially like them when they are in the sweet spot as they transition from spending money on development and start production to make money. This group of gold stocks are so under loved that some are trading at less than high profile explorers.
They offer tremendous value, and because they are so cheap, the risk has been dramatically reduced and offers plenty of blue sky as they advance along the development window of the Lassonde Curve. Even some that are in the sweet spot aren’t getting the attention they should.
Explorers have high risk and high reward potential. But, I argue that across the gold stock food chain, the gold mining industry needs more money going into explorers that results in success.
The key reasons for this argument is that there aren’t enough discoveries moving into the development stages and the miners need the explorers and developers to have success and help them replace what they mine from their old mines.
For the most part, the explorers are lagging well behind the developers and miners when it comes to joining the gold bull market. They are still pretty much in a bear market that has lasted for much too long.
One of the filters that can help is to look at explorers that are showing relative strength. If they are performing well in a bear market, it is usually because they have high quality projects.
Due to the explorers having been in a long-term bear market, I am seeing companies with projects that warrant them to be well up the left side of the Lassonde Curve.
Instead, they have hardly started the ascent up the left side of the Lassonde Curve. Some with excellent projects that have been confirmed with drilling are not even at the sweet spot of the left side of the Lassonde Curve.
In Closing
We are coming into a restructuring of the global economy that has $315 trillion in worldwide debt with very little of it backed by gold. The BRICS nations are leading the charge by starting the process of putting themselves on the Gold Standard. At some point, the West will also have to do the same.
Gold is by far the soundest money which adds a powerful argument for going back onto the Gold Standard. As more countries back up their debt in a more significant way, they will drive the price of gold much higher.
I can see a path to the world reserve currency transitioning from the USD to gold. Currently, gold is second only to the USD after recently passing the Euro for second place.
If gold does become the world reserve currency, then it will be used in a significant way for international trade.
These are the key reasons that have led to my prediction that gold will reach $20k within 10 years. I don’t need to be right on this prediction, even if I am only partially right, gold is going much higher.
Just looking forward to the end of 2024, I can see gold on a path to $3k which will juice up the free cash flow of miners, and catch the attention of plenty more generalist investors.
When they get into gold stocks and look down the gold stock food chain, they will find a small menu of high-quality developers and explorers. It won’t take much in the way of enthusiastic buyers to drive them up multiples of their current valuations.
As I always recommend, do your homework and understand the stocks you own. It will help you make better investment decisions. A well informed investor makes better investment decisions.
All the best,
Allan Barry Laboucan
