4 Reasons Why Your Financial Advisor Won’t Recommend Gold & Silver Coins
We regularly meet with clients who have financial advisors they rely on for their investments and financial future. Inevitably, these advisors tend to be more bullish on traditional investments, such as stocks, bonds and real estate and often shun alternative investment options like gold and silver.
In fact, many financial planners recommend they simply stay with the current course without even knowing much about precious metal assets such as the US silver coin market.
Now, in some respects, this is a good strategy as you don’t want to make a kneejerk reaction that you may end up later regretting. On the other hand, the idea of a “set it and forget it” strategy without a periodic review of the plan could also be detrimental to your financial future.
While we’re not here to provide financial advice, we wanted to share with you four reasons why most financial advisors won’t recommend gold and silver coins as investments and why we believe they could be doing a tremendous disservice to their clients.
Traditional Investment Advice
The American Dream.
Isn’t that what we all strive for?
Part of that dream means achieving financial wealth or independence. To do that, many of us look to the experts to help guide us. The key is finding the right expert. We have personally learned over the years that many financial planning experts still subscribe to a more traditional investment advice model.
We’ve been told time and again, that a diversified portfolio “should” consist of stocks and bonds and the more aggressive you are, the higher the potential returns, but greater the risk. Alternatively, a more conservative approach of a 60/40 or 50/50 stock to bond ratio will reduce your overall risk, but also result in lower overall returns. For many people, this may not be the best course of action to take in today’s market.
The flaws in this traditional financial model were revealed during the Great Recession of 2008 – 2009 when the stock market crashed after the largest point drop in history up until the short-lived stock market crash in 2020 because of the COVID-19 pandemic. And, as history tends to do, it is once again playing out before our eyes in 2022 as the stock market continues to remain volatile.
So far, how has this same strategy played out during the first half of 2022? Unfortunately for many, not so well. In fact, bonds have lost just as much, if not more, than the overall stock market, as measured by the Dow and S&P 500. The Russell 2000 and Nasdaq indexes have performed worse than bonds, but are composed of smaller and tech companies, which tend to be more volatile and do worse in a higher interest rate environment.
What about cash?
Well, with a current reported inflation rate of 9.1%, having cash holdings hasn’t been the best strategy so far either. What about real estate? Nope. We’re amid the greatest real estate bubble in history, which is not likely to turn out well when the bubble pops.
Unfortunately, this sums up all the options most financial advisors employ. Savvier advisors may recommend TIPS or I-Bonds, which are bond investments that partially hedge against inflation, but these bonds need to be held to maturity to realize the returns, which is typically five years or more. If you need the cash earlier, substantial penalties are assessed if you attempt to cash out of these investments before they fully mature.
Not to mention, these options rely on government-provided Consumer Price Index figures (CPI), which as we all know, doesn’t really reflect the true price increases that we’re currently experiencing at the grocery store or at the gas pump.
Now, there are situations when this traditional investment model works such as in a bull market since a rising tide lifts all boats but may need to be revisited as we officially enter a recession. The artificial economic boom that was created from printing more than $5 trillion dollars since 2020 appears to be ending with the Federal Reserve tightening monetary policy.
As a result, the crash is likely to be as severe as the amount of money created and injected into the system, which may result in the worst recession since the Great Depression. That is a scary thought all together.
We briefly mentioned a diversified portfolio earlier, but diversification only works when asset classes are non-correlated, meaning assets that are differentiated in such a way that their value shifts differently than the broader market.
Totally non-correlated assets move such that as one goes up, the other goes down and vice versa. Investing in non-correlated assets is also a way to diversify your portfolio to help protect yourself as an investor from loss as the market swings.
As we’ve seen so far in 2022, stocks and bonds have gone down together, so this means that their correlation coefficient is too similar to provide the necessary diversification that you need to weather the storm.
This means when one stock or bond goes up or down, you have other stocks or bonds also moving at the same pace and direction. Having all your investments heading in the same direction at the same pace, especially if/when that direction is down, is likely not the results you’re hoping for.
In general, one of the many benefits of precious metals investing, specifically gold and silver coins, is that they tend to have a negative correlation with more traditional investments allowing for needed diversification. This helps to moderate some of the risk in a portfolio and should help to improve potential returns over the long run.
The same applies to any other investment that has a low or negative correlation as compared to traditional investments.
While many financial advisors hate to admit it, when presented with the evidence, they’ll acknowledge that gold and silver provide diversification to most traditional investment portfolios. They also perform well when the dollar weakens or is devalued. If we look at the last two recessions (if you consider 2020 a recession), gold and silver increased in value as the Federal Reserve increased their monetary base by printing more money.
When the Federal Reserve runs a loose monetary policy by pumping more money into the system, this tends to weaken the dollar and result in higher precious metals prices and vice versa. When the Federal Reserve tightens up the monetary policy by increasing interest rates, and withdraws liquidity from the system, the dollar tends to strengthen while gold and silver pull back.
As we know, the Federal Reserve is currently pursuing a tighter monetary policy but that may change soon, as economists are anticipating negative growth during the second quarter of 2022. This would technically put us in a recession, as the first quarter of 2022 posted a negative growth rate of 1.6%.
It’s highly unlikely that the Fed will continue to increase interest rates while in a recession. To do so, would result in devastating effects to the economy.
The more likely scenario is that the Fed reverses course and begins to loosen monetary policy toward the end of the year. This should, in theory, weaken the dollar and increase the value of precious metals.
A quick look back at history shows gold has done quite well during high inflation and/or an accommodative monetary policy. For example, gold jumped from $35 an ounce to $800 an ounce in the 1970’s during a high inflationary environment. Gold bottomed out in $692 in September of 2008 and increased to $1,900 three years later in September 2011 when the Federal Reserve increased its balance sheet from $800 billion to $4 trillion.
The most recent example occurred within the past couple of years. We saw gold bottom at $1,472 in March of 2020 only to rise to an all-time high of $2,075 by August of 2020 in large part due to the unprecedented amount of monetary stimulus by the Federal Reserve.
While adding gold and silver to a portfolio wouldn’t be enough to result in positive investment returns during the first half of the year, it likely would have moderated some of the risk and reduced overall loss.
Additionally, these metals will likely help to provide the diversification that’s needed during the uncertain times that lie ahead during the second half of this year.
Gold and Silver Investments
Let’s say that you have an investment advisor that acknowledges that gold and silver are good asset classes to add to a portfolio. This is a great first step, but what are their recommendations specifically? It’s been our experience that they recommend their clients invest in ETFs or mutual funds.
While we have nothing against ETFs and mutual funds overall, these may not be the best investments when attempting to add gold and silver to a portfolio.
One reason these recommendations may not be the best investment option is because many are based on derivatives contracts and are highly leveraged. Leveraged investments entail an additional element of risk and typically aren’t fully backed by an asset. For example, GLD and SLV, are ETFs that track the price of gold and silver, but don’t hold enough physical gold and silver to support the number of contracts that have been issued.
In other words, not everyone will be able to trade in their GLD ETF for a physical piece of gold.
The amount of leverage in these investments varies over time, but it’s been reported by financial outlets in the past to be over 100 to 1. In other words, they may only have 1 ounce of gold or silver on hand for every 100 ounces of contracts that they’ve issued. These are paper contracts that carry a high level of risk and are currently being supported by confidence in the system.
If there’s a panic, and physical gold and silver are demanded to settle the contracts, which aren’t available, this could cause these investments to collapse leaving investors with an empty bag.
Another potential risk with gold and silver mutual funds and ETFs is that they are typically dollar-based investments. If you’re attempting to hedge against a depreciating dollar, this could be counterproductive. Furthermore, as mentioned above, it’s typically not possible to receive physical gold and silver when you close out your ETF or mutual fund position. If your goal is to hedge against the dollar by having something tangible, this probably isn’t the best choice for you.
We personally recommend investors consider physical precious metals as investments, such as gold and silver coins. We’ve shared in prior articles some of the most popular gold coins and silver coins. Gold and silver are one of the only investments that don’t have counterparty risk. Counterparty risk means that another party may not fulfill their end of the deal and could default.
Obviously, when you have physical gold and silver coins or bullion in your possession, this is no longer an issue.
While physical gold and silver are a bit more costly, as there are premiums and storage to consider, it’s a lot less risky and should help you sleep more soundly at night.
At the time of this writing, gold and silver prices have pulled back as Wall Street believes the Federal Reserve will continue to fight inflation by increasing interest rates and selling bonds.
Furthermore, the dollar is at a 20 year high versus the Euro and a 24 year high versus the Yen, which is not likely to persist. However, as we discussed above, the Federal Reserve is likely to reverse course during a recession.
In other words, it’s far more likely that they’ll turn the spigots back on and attempt to inflate their way out of the recession that we’re likely already in.
One other factor to consider is that the current price of gold and silver isn’t substantially above mining costs. This means that there should be minimal downside risk and substantial upside potential. Afterall, if prices drop much more, companies will cease mining, which will put a strain on supply and cause an increase in demand and prices.
Additionally, central banks, such as the Central Bank of Russia and The People’s Bank of China, will likely continue to add to their gold holdings while gold is on sale, which should minimize the downside risk.
Assets Under Management
We’ve had frank discussions with financial advisors over the years and some will admit that their clients would be better off by owning gold and silver coins. If that’s the case, you may be wondering why they don’t suggest that to their clients? One reason could be that it will reduce their assets under management (AUM). Why is that important? Most financial advisors/planners are compensated by AUM. In other words, if they have $1 million under management and charge a 1% – 2% annual expense, they’ll receive a fee of $10,000 – $20,000.
However, if they recommend to their clients that they allocate a quarter of their investments in gold and silver, their fee will be reduced by 25%.
This is one reason why financial advisors are more likely to recommend ETFs and mutual funds. In doing so, the amount of money they’re managing for their clients will remain the same and they won’t run the risk of reducing their fees. You may or may not be familiar with the book, “Where are the Customers Yachts.” If you’re not, it’s a book about an out-of-town visitor to New York that admired the yachts owned by the brokers and bankers and naively asked where the customers yachts were.
It’s a stark reminder that financial planners, brokers, and bankers get paid regardless, while many of their clients struggle to get by. It’s certainly worth a read.
We’ve also recently met with many of our customers who wanted to cash out their stock investments and take a more defensive approach in anticipation of a financial downturn.
In fact, one of our best customers recently shared with us that she lost $400,000 in the stock market. This was AFTER she shared with her financial advisor that she wanted to reduce her risk and he convinced her to stay fully invested. Hopefully, we’ll see a bit of a temporary market increase or bear market rally, which will allow her to cut her losses. Obviously, a financial advisor isn’t going to receive a fee when their client(s) is out of the market and in cash.
Again, this is where there’s an inherent conflict of interest, which is unfortunate, as many of these wealth managers are looking out more for their best interests as opposed to their clients.
On a related topic, we met with a customer a while back who happened to be an investment advisor. This individual shared with us that their firm pushes the sale of annuities because they’re among the largest margin investments for the firm. While she didn’t agree with this strategy, this was her marching orders, and I’m sure that they have monthly quotas they need to meet.
Don’t get us wrong – there are some good financial advisors out there.
Especially those that are knowledgeable of Austrian economics, the boom/bust cycle, artificial demand created from monetary stimulus, an understanding of the valuation of stock markets, and the importance of physical gold and silver in a portfolio. This is the type of financial advisor you want to manage your portfolio, but unfortunately these individuals appear to be few and far between.
That means you’ll need to take it upon yourself to go against the grain and take steps to protect yourself.
In conclusion, we’ve shared a few reasons as to why your financial advisor isn’t likely to recommend investing in gold and silver coins. They tend to rely on more traditional investment advice, which works until it doesn’t.
As we’ve seen, stocks and bonds can lose value at the same time, which leads us to diversification. To be properly diversified, you need to include asset classes that have a low or negative correlation to your core primary holdings. This includes non-traditional investments, such as gold and silver.
We also discussed a few gold and silver investments and why we recommend that you steer clear of ETFs and mutual funds. They tend to be leveraged investments, with counterparty risk, and may not provide you with the protection or return that you’re ultimately looking for in an investment.
Lastly, consider assets under management and why your financial advisor may not want you to cash out your stock and bond investments and move your funds to physical gold and silver or to a more defensive cash position.
We hope this article has been helpful. While we’re not investment advisors, we would love to share with you some of the pros and cons of different physical gold and silver investments and look forward to earning your business.
Give us a call today at 678-515-5763!