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Stock Market Bubble vs Gold and Silver

September 09, 20201933 view(s)

One of the best times to invest money in the stock market is when earnings are up, and stock prices are down. But as anyone who has been paying attention recently knows, stock prices have climbed much higher than earnings would normally allow. Like a small piece of gum made to look larger by filling it with air in the form of a bubble, the stock market has become much larger than the underlying economy would tend to indicate. It appears to be overdue for some air to be let out of this bubble, while precious metals continue to look like a bargain from here. As we discussed last week, Silver has outperformed even the high-flying NASDAQ market index this year. I contend that even so, Gold and Silver continue to offer potential for future gains, with less risk than currently exists in many sectors of the stock market.


Up More, Down Less

To be fair, there is risk involved with any investment - including in Gold and Silver. Prices can fluctuate on a daily basis. When a significant downturn occurs in the stock market, it can often influence the price lower for other assets such as Gold and Silver as well. But usually the impact to Gold and Silver is muted and somewhat short-lived, compared to the impact felt by those invested solely in the stock market. This past week is no exception. A popular stock in the news lately is the auto maker Tesla. Tesla shares have dropped 34% in the last 5 days. The tech-heavy NASDAQ index has dropped 10.16% over the same period. During this period of stock market decline, Silver has performed 33% better than the NASDAQ, and 444% better than Tesla shares. Gold has performed 339% better than the NASDAQ, and 1141% better than Tesla shares.

Meanwhile, there are economic pressures building that indicate danger for the financial markets, while continuing to indicate support for precious metals going forward. Many big names in the world of investing have been dumping other assets, in order to add exposure to Gold and Silver. Readers of this column are no exception, and have benefited from this groundswell of support for their existing holdings of precious metals. Even with the latest market pull back discussed above, stocks are still closer to their all-time highs than Silver. Would you rather invest in a market filled with hot air only 10% from its’ all-time high, or a sector that has been outperforming the market, with good momentum and fundamentals, still 80% from its’ previous high?

Downside Risk vs Upside Gain

Losses are an important thing to consider. A parallel related to maximizing gain, is minimizing losses. As mentioned in The 7.0% Solution, a 30% loss requires a 43% gain to get back to where you started. If for example you invest $100,000 in something that drops 30%, you would have an asset worth $70,000. It would take a gain of nearly 43%, to move the $70,000 back to $100,000. Understanding this concept can mean the difference between a long retirement with steady income, and a short path to insolvency in retirement. When building wealth and buying consistently, price declines can be viewed as an opportunity to purchase good investments on sale. But when wealth is already built and being used to provide an income, large declines can become impossible to recover from.

As we have said before, Gold and Silver can fluctuate daily, and sometimes decline in price. But we are currently in an upward trend, as even famed investor Warren Buffett has recently acknowledged. He has continued to sell stocks in various sectors including banking and technology, while adding positions that provide exposure to precious metals. With thousands facing layoffs and business closures related to the Covid-19 pandemic, many are looking for a safe place to invest. Meanwhile interest rates are hovering at historic lows, with a verbal commitment from the Federal Reserve to keep them that way for the foreseeable future. In many cases, interest rates on deposits are less than the rate of inflation. The graph below from the Bank of England indicates rates worldwide have trended lower for the last 700 years. This means that many FDIC insured bank accounts are guaranteed to lose purchasing power over time. One way people have mitigated these risks throughout history has been with Gold and Silver.

trend decline

To balance this discussion, it should be noted that there are periods of time when any investment (including Gold and Silver) can struggle without much growth for several years. After meandering for 14 years, $100,000 invested in the S&P 500 Index in 1999 recovered to $100,000 by 2013. Meanwhile, $100,000 invested in Silver bullion in

1999 became $420,000 by 2013. $100,000 invested in Gold bullion in 1999 became $429,000 by 2013. We could also discuss periods of time that were better for stocks than for precious metals. But what’s important now is what the future holds, instead of the past. I believe, and have been recommending for the last few years, that precious metals offer tremendous value for those looking for downside protection, and upside potential. Those following our advice have been rewarded handsomely for doing so, and I believe this trend is set to continue.

Full Diversification

The need for diversification exists even within the realm of precious metals. While an important first step for any investor wanting to diversify away from paper investments involves purchasing precious metals, the next step involves owning different types of metals. There are important reasons to own Gold, and important considerations when buying Silver. Another strategy that can help protect a bullion owner is to add some investment-grade numismatic coins that often rise in value during periods of bullion price decline. With all the new attention and interest in the precious metals space, criminal scammers are also being attracted. It is more important than ever to deal with a reputable partner, when purchasing or selling precious metals.

Last but not least, is the issue of storage. How do you safely store precious metals? It is fairly easy to do. Although be careful if you decide to bury Gold or Silver on your property, that only your intended recipients know where to look. Some of my ancestors were successful in passing down precious metals to future generations, while others forgot to tell their descendants where to look. To avoid this type of dilemma, a simple and inexpensive solution is to safely store your precious metals in a secure place such as the Texas Bullion Depository.

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