Our Portfolio for Income investors may not have realized, they own exposure to gold. Back in 2006, the Curran Wealth Management Investment Committee (IC) made the decision to add exposure to commodities through newly available ETFs. Our primary rationale was to offer investors a hedge against inflation. Commodity prices tend to rise during inflationary times. These new investments included exposure to gold and other commodities. Over the years, enhancements occurred to these investment vehicles, removing the need for the dreaded Schedule K-1 tax document. Thankfully, with K-1s a thing of the past, investors now enjoy the investment benefits of a vehicle that not only acts as a hedge against inflation but also provides uncorrelated returns with respect to both stock and bonds over extended periods of time.
However, many investors continued to ask specifically about gold. Our response always reminded me of those old Prego Sauce commercials from the ‘80s with the tagline, “It’s in there”. Investors already owned exposure to gold through our ownership of a basket of commodities, PDBC, Invesco Optimum Yield Diversified Commodity Strategy.
Recently the Investment Committee made the decision to buy direct exposure to gold through its purchase of GLD shares, State Street SPDR Gold shares. GLD is backed directly by gold bullion held by custodians such as HSBC and JP Morgan. Gold has proven a store of value for centuries. It has gone through lengthy periods offering investors meager returns but has also enjoyed prolonged periods when it enhances portfolio returns.
Historically, gold has proven to be a good hedge against inflation performing well during inflationary periods. Inflation has persisted at around 3.0%. This is both higher than the Federal Reserve’s target inflation rate of 2.0% and higher than the rate the public had grown accustomed to over many years leading up to the Covid pandemic.
Higher inflation leads to higher nominal rates but lower real rates. Think of it as Nominal Interest Rate – Inflation = Real Rate. In addition, gold is a hard asset that can offer a hedge against fiat currency (money backed by government). Inflation is a global issue and its persistence along with rising interest rates can make gold look even more attractive.
The chart below from Scoiete Generale illustrates the rise in the longest maturity bonds across five major global economies: UK, USA, France, Germany and Japan. At Curran we have been discussing and preparing for this inevitable long-term rise in interest rates for years, predating the Covid-19 Pandemic. This is a global issue affecting all developed economies. It is by no means unique to the United States. Interest rates bottomed out in 2020 following a historically long decline, lasting nearly 40 years. Rates are now clearly trending higher. However, while interest rates have moved higher, inflation has remained stubbornly high, resulting in lower real rates. Inflation’s stickiness makes gold an attractive hedge against enduring inflation.
Central banks have also increased their gold purchases. The primary reason for this is to diversify their US dollar reserve holdings. While US dollar assets remain overwhelmingly the top holding, central banks are buying gold as well to serve as a hedge against inflation, rising interest rates, rising deficits and concerns over US dollar debasement. While some point to other currencies such as the Euro, the British pound or Japanese Yen, there is simply not enough Yen or pounds in circulation for either to be a practical option. The Euro lacks a large enough supply of high-quality assets to compete with US Treasuries. Again, look at the chart. The trend is higher interest rates across all these countries. Deficits are rising and inflation is a global issue. Gold appears to be the best diversifier.
At Curran we have taken steps to protect your money from inflation. Our increase in gold holdings is a prudent hedge to help investors maintain purchasing power. While gold has recently hit new highs, it is our view that we are still in the early years of a cycle of rising interest rates with inflation staying stubbornly high. Stock investors should not see this as a reason to change course. Keep in mind that overtime, arguably the best defense against inflation has been owning stocks. Please feel free to contact your private wealth manager with any questions you may have about your investments and asset allocation.
Sincerely,
Kevin Curran
Co-CEO & CIO
Curran Wealth Management
At Curran we value service over sales and believe quality service yields happy clients. Below is our 4-step process (the first three steps at no cost to you).
A short introductory call for us to get to know one other. During this call we will discuss your financial goals, concerns and hopes for the future.
In this meeting we will go over your current financial situation, take a deeper look at your goals, discuss your risk tolerances, and collect the data necessary to build a formal proposal.
Based on our data gathering session, our Private Wealth Managers will present you with a custom proposal tailored to your needs. We encourage individuals to take the time to evaluate this proposal.
If you are comfortable with the proposal and choose to invest with Curran, our team will be there every step of the way assisting in opening the recommended accounts and facilitating all necessary parts of your onboarding process.
