Don’t give up your gold

Gold is not dead.

Just ask Germany.

Germany’s Bundesbank recently announced that it had completed the transfer of $13 billion in gold bullion that had been stored in vaults beneath Lower Manhattan, bringing the metal back home. The country began repatriating its gold in 2013 with the goal of re-storing 50% of its reserves in Frankfurt.

When the gold transfer is complete, Germany will remove all the gold it has stored in Paris, leaving only 13% of its reserves in London and about one-third of its reserves in New York.

With the rise of cryptocurrencies – like bitcoin – and digital cash like PayPal, Apple Pay and other apps, there has been a steady decline in the use of physical cash, making the yellow metal seem downright archaic.

But gold has a special status, stronger even than the few twenties in your wallet right now. The precious metal offers protection and security. It is considered more credible than any government-issued currency.

Just look at the euro – the currency for a union of countries that threatens to break up. (Germany sure feels better to have its golden home again.)

Or even the US dollar – a currency backed by roughly $20 trillion in debt.

Not only is gold alive and kicking, but it should play an important role in your portfolio…

Let me start with this: I am not a gold bug.

I am a trader, first and foremost, and usually with a short time frame as my target. I was raised on variety of options and fast trading for good profits. I don’t care if the market is bullish, bearish or – come to think of it – range bound. There is always a way to make money if you know where to look.

But gold is a tricky thing.

It does not pay dividends, so there is an opportunity cost associated with the metal.

However, when there is market uncertainty, shaky economic growth or geopolitical discord, gold shines as a safe haven in the storm. When stocks take a hit, investors will run to gold as a safe way to store some of their bills instead of just turning it into cash and stuffing it under their mattresses.

And looking at how gold has been trading, it looks like many investors aren’t too sure about this market rally.

The Hedge

In 2016, the price of gold rose more than 8%, almost keeping pace with the stock market, as the S&P 500 gained 9.5%.

In fact, the World Gold Council reported that gold demand rose 2% in 2016 to 4,309 tonnes, marking a new three-year high.

And less than two months into the new year, gold is up another 8%, outpacing the S&P’s roughly 5% gain – which is noteworthy.

When stocks are strong and investors believe in rising markets, they are happy to ditch gold for high-flying stocks that promise far better returns.

For example, during the dot-com bubble, the S&P 500 gained more than 200% from January 1995 to September 2000. In contrast, gold has declined 27% over the same time period.

Or look at the market’s rise from October 2012 to January 2016, when the S&P 500 gained 37% while the yellow metal declined 35%.

In short, when times are good, gold is the forgotten child that remains in time-out until it learns to play well with other assets.

And when times are bad, gold is the prodigal son that offers security and protection.

So if the stock market is trading at all-time highs and regularly setting new records, why is gold still shining as the favorite?

The financial market has its fair share of potential stumbling blocks that could send things plummeting lower. Let’s take a quick look at the list:

  • Stocks are overvalued. We recently explained that, by traditional measures, stocks are painfully overvalued and we are preparing for a mean reversion.

  • Washington in turmoil. Our new president has promised a series of extreme moves that could have significant repercussions on both the US market and the global market that could begin with a sharp slowdown in earnings.

  • Next exit to Europe. The EU and Great Britain are reeling through Brexit, as well as major upcoming elections – Italy, Germany, Holland and France. Furthermore, European growth has been largely overlooked by many investors and could become the next hot trade as they tire of the US drama

  • Derivatives nightmare. The US is facing a collapse that could rival the aftermath of the housing debacle, as the five biggest US banks piled on interest rate derivatives.

  • The Fed’s wild card. The latest transcripts from the Federal Open Market Committee meeting revealed that the Federal Reserve wants to raise interest rates “quite quickly.” Higher interest rates will take money out of the economy because it costs more to service our growing debt. Higher interest rates also tend to dampen equity gains.

Investors are watching these issues closely, waiting for one or more of them to knock the stock off its current track.

Your Catastrophe Insurance

Of course, this does not mean that the market will fall off a cliff tomorrow.

I think the one quote that beats every speculator over the head is, “The market can stay irrational longer than you can stay solvent.”

In short, just because a stock or index has risen to an all-time high doesn’t mean it can’t continue to rise, even if it doesn’t make logical sense to you and me.

But it doesn’t hurt to have a hedge to protect yourself when it all comes crashing down.

Gold remains that perfect hedge: your insurance against the Fed, Washington, reckless banks, Europe, and even that black swan that’s not even on our radar yet. That’s why gold continues to shine as a favorite even during this year’s stock markets – investors know they need a safe haven, just in case.

Physical gold is your best option instead of investing in “paper gold” such as exchange-traded funds.

Regardless of how you choose to add physical gold to your portfolio, the important thing is that it’s there, ready to be your safe haven when everything falls apart.