September 1, 2021
Mark Mobius, the legendary emerging market investor, says 10% of investor portfolios should be gold in anticipation of a currency devaluation resulting from unprecedented stimulus measures.
Speaking to Bloomberg on Monday, Mobius said the devaluation “is going to be quite large next year, given the incredible amount of money supply that has been printed.” As such, it will be “very, very good to have physical gold that you can access immediately without the risk of the government forfeiting all the gold.”
I would add that while you don’t worry too much about the currency devaluation (you should), gold still looks attractive as a diversifier, especially now that the market has hit new highs for a record number of days. .
The S&P 500 on Monday posted its 53rd record at the close of 2021, the highest on record in a calendar year through August, even as economic indicators point to weakness due to the pandemic. Stocks also appear to be overvalued right now with a price / earnings ratio of over 27. This may make some investors wonder if the bull run is excessive and look for a store of value such as gold or Bitcoin.
Historical benefits of the 10% golden rule
I support Mobius’ call for a 10% gold allocation, which I have been recommending for years. I call him Rule of thumb 10%.
But don’t take my word for it. A recent study by the World Gold Council (WGC) shows that a gold allocation of 10% helped improve risk-adjusted returns over the past 20 years. Between June 2001 and June 2021, a hypothetical portfolio which held 10% physical gold had higher annualized returns and lower volatility than a portfolio containing 5% gold. It also outperformed a portfolio that was invested in a general commodity index and another that was neither in commodities nor in gold.
Inflation among economic risks
At Mobius’ point on currency depreciation, we are already seeing a deterioration in the purchasing power of the dollar due to overheated inflation. In July, consumer prices rose 5.4% from a year ago, the second consecutive month of inflation above 5%.
Consumers across the Atlantic are facing similar price increases. The Eurozone Harmonized Consumer Price Index (HICP) rose 3% in August from the previous year, the fastest rate since November 2011 and well above the target of 2 % of the European Central Bank (ECB).
Some European investors face inflation by buying gold. As I shared with you last week, German investors in particular have accumulated more bullion in the first half of 2021 than in any other period since at least 2009. One 2019 survey conducted by the WGC found that about half of all German investors who owned gold said they had done so to “protect their wealth”. They certainly cannot seek refuge in the German 10-year Bund, which is currently yielding less than -4% on an inflation-adjusted basis.
Negative yielding debt is not just a German phenomenon, of course. To date, about $ 15.7 trillion in government bonds around the world have sub-zero yields.
These gold stocks were very profitable
The 10% rule of thumb is more than physical bullion. I have always recommended that about half of that be made up of gold mining stocks, mutual funds and / or ETFs.
I think it’s important to focus on companies that have a habit of staying profitable even when gold prices are going down. Royalty and streaming companies do the trick.
Take a look above. Franco-Nevada, Wheaton Precious Metals and Royal Gold, the three leaders in royalty and streaming, all averaged a net profit margin of around 50% over the four quarters ended June 30, 2021. The main producers, as for them, they reached on average only about 15%. . The juniors were even lower at 10%.
Want to learn more about royalty and streaming companies? Watch our video by by clicking here!
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The S&P 500 includes 500 leading US companies and covers around 80% of available market capitalization. The Philadelphia Stock Exchange Gold and Silver Index is a capitalization-weighted index that includes the major companies involved in gold and silver mining. The MVIS Junior Gold Mines Index covers the most liquid small-cap companies active in the gold and silver mining sector.
The price / earnings ratio (P / E ratio) is the valuation ratio of a company that measures the current price of its stock relative to its earnings per share (EPS). The Harmonized Consumer Price Index (HICP) measures the evolution over time of the prices of consumer goods and services acquired, used or paid for by households in the euro area. Net profit margin, or simply net margin, measures the net income or profit generated as a percentage of sales. It is the ratio between the net profits and the income of a company or a sector of activity.
Holdings may change daily. Holdings are reported at the end of the most recent quarter. The following securities mentioned in the article were held by one or more accounts managed by US Global Investors as of 6/30/2021: Franco-Nevada Corp, Wheaton Precious Metals Corp., Royal Gold Inc.