Investment Portfolio Diversification – Gold Is A Vital Asset

This business and investing podcast interviews industry experts so you’ll learn what to do, what to ask and – ideally – how not to lose money. I’m just like you I want to make money from the stock market but I find the terminology confusing. I want to be able to make informed decisions. Let’s learn together on Stocks for Beginners.

Philip Muscatello

Podcast Interview Show Notes – Part I

Why Should Gold Be A Vital Asset In Your Investment Portfolio?

Dr. Stephen Leeb, Ph.D.

One thing that I want to emphasise and underline and bold face- do not invest in some things that are not just companies. There are things that are called ETNs, which are notes. They are NOT holdings of stocks. Those are the kinds of investments that you definitely want to stay away from.

Philip Muscatello

Hi! Welcome back to ‘Stocks For Beginners.’ My name is Philip Muscatello. Today we are going to be looking at the original currency, gold, and I believe that we are going to be talking about commodities as well. Gold has been around for a millenia and some say owning gold is central to financial survival. 

My guest today is Stephen Leeb, Ph.D, World Renowned Economist, Asset Manager and Wall Street Money Manager with 40 years of industry experience. Amongst his other NY Times best selling books on finance, investing and economics, Dr. Leeb is the author of a new book called ‘China’s Rise and The New Age of Gold: How Investors Can Profit From A Changing World.’ This book emphasises how we can protect ourselves against the global failure of fiat currency and a radically changing world economy.

Now, Stephen, you tell us that gold’s rise is just beginning. You think that all investors need to invest in gold to protect themselves against the falling dollar and the radically changing world economy. Tell us why…

Dr. Stephen Leeb, Ph.D.

There are two fundamental arguments for gold. One is the economy is changing and it is changing dramatically. There are two aspects to this change. One is the growth in emerging markets, the growth in the developing world which constitutes about 85% of the world’s population. That 85% percentile are in countries where the GDP per capita, or the average income per capita of 85% of the world’s inhabitants is about $10,000. That compares with the average income of the developed world- which is probably in the neighborhood of $50,000. And I should say that when I pick the average income of the developing world- the $10,000 estimate is actually on the high end of the spectrum. So when you compare the income of the developed to the developing world- you’re really talking about a difference of maybe seven or eight times higher in developed countries. That quantifies a lot of growth that you’re going to see in the next generation and beyond. It’s going to come from the developing world and that’s one of the major changes. 

The other change, which we read about so much- we have to go green. We have to basically find sources of renewable energy that do not release a lot of carbon into our atmosphere. So that’s a must and it’s coming again in the context of growth in the developing world is very likely to continue because China is catalyzing that growth. And they want it for themselves because other developing countries will provide China with a basis for that growth. You have these two things that are happening all at once and they’re likely to continue throughout the century. 

Gold has proven itself to be a necessary investment when you have major civilization affecting changes and we’re in the middle of that right now. Just to give you two examples. In the last 20 years, the first generation of this century, gold out performed virtually every other asset that you can think of. I’m talking from an American perspective- if you take the S&P 500 and you reinvest your dividends, which can happen automatically if you were to buy an S&P ETF. As a result, you would have seen your investment multiplied by three fold. Very good, but if you would have invested that same sum in gold, that investment would have multiplied by over five fold during the last 20 years. 

Philip Muscatello

Wow, that’s an amazing statistic. 

Dr. Stephen Leeb, Ph.D.

It’s a very, very powerful statistic and we’ve had 20 years where developing countries have led the way in terms of growth where there’s been constant pressure to shift to green and a lot of companies are following that. And this is what gold did. Again, if you have to think long-term, over the last 12 months or so gold has not been the greatest investment and it may not be a great investment for perhaps the next six months. But for the next two years after that- it may triple. So you have to be long-term oriented. I mean, that’s one critical caveat. One of the most successful investors of our time, Warren Buffett, says his favorite holding period is forever. When you look at gold and you look at possible corrections of fluctuating spot prices, you just have to be in there for the long term. And again, the long-term rewards you much more in gold than any other investment that you could have made.

Philip Muscatello

For people who are looking at investing in the stock market for the first time- they are going to be looking at stocks because of all the exciting stories in the names and technology and things that are happening there. But what you are saying, I guess, is that we should not put everything into gold but at least a percentage of your investment portfolio in gold as a buffer ballast as well.

Dr. Stephen Leeb, Ph.D.

Exactly right, Phil, and I’m so glad you mentioned that. I’m just saying that gold should be a necessary part of your investment portfolio and I want to emphasize this point. If you talk to an American megalithic financial institution, for example, BlackRock (which manages trillions of dollars) they’ll tell you to allocate your investments. Their recommendation is usually 60% stocks / 40% bonds. Don’t follow that advice. I mean, if you believe what happened in the last 20 years- that is just not good advice. It’s the same consensus you’ll hear from Vanguard, Fidelity, and virtually all the major financial institutions. I have nothing against these financial institutions but if you just look at the history of the past 20 years, which I believe are unique, it’s the whole point. What you have seen in the past 20 years is likely to continue on steroids. So, take some of their advice but also think for yourself. What’s done really well when emerging economies, developing economies are growing and we’re focusing on a transformation to green energies. Well, what happened is that gold did exceptionally well. Are there any signs these trends are going to change? No. Are there signs that these trends are going to accelerate? Many. So, gold should be at least part of your portfolio. I’m not saying it should be a 100%. I’m not saying it to be 5% to 20%. I’m just saying- your word was ballast- and I think that’s an excellent word. 

Philip Muscatello

That’s something I’ve been really thinking about a lot lately, especially in the terms of my portfolio. There’s a lot of people who have never experienced a market and what can happen with markets. You and I are old enough to have been through maybe one or two quite significant catastrophes in markets and diversification across asset classes is something a lot of young people don’t even know about.

Dr. Stephen Leeb, Ph.D.

It’s so important to emphasize and I didn’t want to get too much into the weeds but if you look at the stock market, it’s had three major corrections in this century where it’s going down 60% – 50% and recently about 30% or 40%. I can’t remember what the numbers were in 2020, with the advent of the pandemic. But gold, during this entire generation, it’s biggest correction, was down from high to low no more than 30%. And It’s obviously made that up. 

When the market falls like the tech stock, spelled in some cases 90%. In 2000-2001 you had to make ten fold on your money to get back even. If you lose half your money, which has happened several times, at least twice in the past 20 years- you have to double your money to get back even. So one of the things you want to look at as an asset investor… what’s the largest drop that has occurred over the period time you think that is relevant for the future. Now, if that  period of time is the last twenty years- which I happen to believe is the most relevant time for the future- you’re never going to experience a correction of much more than 25% in gold. So it is a ballast. Maybe it’ll go down 30% but there’s no case of it dropping 60 or 70%, which has happened in the stock market.

Stay tuned for Part 2 of the podcast interview “Stocks for Beginners” with Dr. Stephen Leeb- as he discusses commodities and what is on the imminent horizon for the future of investing.

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China’s Rise and the New Age of Gold

How Investors Can Profit from a Changing World

The radical change coming to the global economy—and the investments you need to make sure you stay ahead of the curve!