For a long time now, precious metals have been considered alternative assets – assets that exist outside the realm of those bought and sold through traditional financial institutions such as banks and brokerages.
For me, one of the great ironies in viewing assets like precious metals and real property as “alternative” has to do with just how mainstream they were regarded for millennia. Since the beginning of recorded history, property ownership has been associated with wealth. It’s the same with precious metals. Gold and silver coins have been regarded universally as true money and wealth sources for thousands of years. As a matter of fact, the discovery of gold treasure at the Varna (Bulgaria) Necropolis – which dates back to 4600 BC – gives some indication as to how long precious metals have been prized as valuable assets.
And yet since the advent of modern financial markets, physical gold and silver have been regarded by the general public almost exclusively as “niche” assets, suitable for purchase only during select periods of economic or geopolitical upheaval.
There are signs that perception may be changing, however.
Last summer, as the economic fallout from the pandemic was spreading like wildfire, the New York Times detailed survey results that said roughly half of all Americans were seriously considering the purchase of gold. Several states currently are looking at the possibility of diversifying their reserves with gold and silver, while prominent public pension funds in Ohio and Texas already have added gold to their holdings. And in January, the dynamic and innovative Tesla, Inc. said in its most recent 10-K filing with the Securities and Exchange Commission that gold bullion is now an eligible asset for investment of excess cash.
So, what’s going on?
Here’s how I see it: Since the beginning of the current millennium, the economic environment has been characterized by a significant amount of uncertainty and even outright turmoil. This turmoil has benefitted crisis assets such as gold and silver, so much so that precious metals have been among the best performing assets of the last 20 years. With the onset of a chronically problematic economic, geopolitical and political climate, the potential for gold and silver to strengthen not just during select periods but over the longer term is enhanced. Under such circumstances, precious metals could perform reliably over greatly extended periods in the way many so-called mainstream assets have done. One possible outcome could be a sea change in how metals are viewed – from purely alternative assets to those more representative of the mainstream. If that is indeed what’s happening, the implications for gold and silver going forward could be substantial.
The Rise of Gold and Silver Since 2001
Over the course of the last 20 years, gold and silver each have logged what many would agree are rather impressive long-term performances. Since January 2001, silver has appreciated 460% and gold has climbed 550%. Not too shabby, considering precious metals really are supposed to be – by reputation, anyway – “niche” assets that thrive under select conditions.
To be clear, I’m not of the opinion that the characteristic of precious metals as crisis assets has changed. In fact, I would contend that metals’ long-term success over the last two decades is precisely a function of that characteristic. I think a closer look at how and why metals performed as they have for the last two decades will illustrate the correctness of that contention. I also think the performance of gold and silver over this period helps lay the groundwork for possibly viewing metals more as mainstream assets now and in the future.
Take a look at the chart below, which graphically illustrates the appreciation of gold and silver over the last two decades.
Performance of Gold vs. Silver, January 2001 to April 2021
(Chart Courtesy of StockCharts.com)
The path upward taken by each metal over the last 20 years has been anything but linear. From this image, one might conclude – correctly, I believe – that numerous economic and geopolitical influences have impacted gold and silver’s prices during this period. And because a large number of these influences have been metals-positive, one consequence has been an overall substantial appreciation of each metal over a lengthy period.
Starting at the beginning, you’ll notice a steady improvement in the prices of both metals from 2001 to 2008. Metals have a tendency to thrive during periods of economic and geopolitical upheaval, and there was no shortage of either during these years. From the burst of the dot-com bubble, to 9/11 and the onset of frightening global instability, to the crash of the dollar index by 40% during these years, it’s difficult to dispute that a metals-favorable climate was in play at this time.
Moving on, we all know the years from 2008 to 2011 were heavily impacted by the global financial crisis. After a brief period of panic selling at the crisis’ outset that affected virtually every asset, gold and silver soared sharply on a steady diet of drastically accommodative Federal Reserve monetary policy and profligate government spending.
A 30% increase in dollar strength – along with a vastly improved economic outlook – from 2011 to 2018 were, I believe, two of the reasons we saw downward pressure on metals prices during those years. However, the initiation of a highly contentious trade war in 2018, the decision by the Fed in 2019 to send interest rates back down and the arrival of a global pandemic that saw U.S. unemployment reach its highest levels since the Great Depression were among the many reasons why both gold and silver have surged again over the last couple of years.
Bridgewater CIO: Expect “More Volatile Set of Circumstances”
My thesis, such as it is, is that when crises become a regular feature of the landscape, those assets with a demonstrated tendency to respond favorably to crisis conditions can go from being exclusively “niche,” alternative assets to something more mainstream.
I believe that’s what we’ve seen play out over the last 20 years. There is, in fact, a veritable laundry list of influences and factors that have arisen during this period which could be seen as potentially having a positive effect on precious metals. These influences and factors include:
- Burst of the dot-com bubble.
- 9/11 and the ensuing Global War on Terror.
- Extended periods of profound dollar weakness.
- 2008 financial crisis.
- Global pandemic characterized by the highest U.S. unemployment level since the Great Depression.
- Highly contentious trade war with China and many other nations.
- European sovereign debt crisis.
- The application of previously-unseen ultra-accommodative monetary policy measures.
- Record levels of deficit spending.
- Record-high federal debt that’s steadily increasing.
- Historic social and political discord throughout the U.S. and the rest of the world.3
The $64,000 question as it pertains to the subject at hand is if we should expect to see the continuation of a global environment fraught with uncertainty and conflict – the kind of uncertainty and conflict that seems to have helped energize gold and silver over the last two decades.
No one can say for certain, of course. But I see no reason to assume the general climate of volatility that has characterized the world for decades now is going to suddenly disappear. On what basis would that happen? If anything, it seems as though conflict and contentiousness will increase. I’m reminded of a statement made in early 2020 by Greg Jensen, chief investment officer of world’s-largest-hedge-fund Bridgewater Associates, in which he predicted gold would rise because “there is so much boiling conflict.”
“People should be prepared for a much wider range of potentially more volatile set of circumstances than we are mostly accustomed to,” Jensen added.
In light of what we’ve seen not only since Jensen made that declaration but over the last 20 years, as well, his speculative assessment is reasonable, in my opinion.
The potential implications of ongoing global socioeconomic and geopolitical chaos for perceived safe-haven assets such as precious metals could be significant. A persistently discordant environment could help strengthen metals throughout the foreseeable future. If that eventuality comes to pass, it will be increasingly difficult in my view to see gold and silver exclusively as alternative assets. Indeed, the “mainstreaming” of precious metals in the modern age could be upon us.