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A New Buy Alert

|Includes: Berkshire Hathaway Inc. (BRK.B), GLD, O, PLD, SKT, STAG, TSLA, VNQ

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I Used to Laugh At Gold, Now I Buy Gold

gold and reits

source

As a professional REIT analyst and real estate investor; I rarely discuss precious metals here on Seeking Alpha. There are better authors than me to cover this topic so I generally prefer to remain silent.

However, as a former gold bear, I have a different perspective to share that may be worth hearing out. I used to be one of those who would laugh at gold – and discredit it as pure speculation. Today, my opinion is much more balanced and I have even added a small Gold (GLD) allocation to my diversified portfolio to supplement my REIT investments.

From a Buffett to a Dalio Philosophy…

Individual investors often listen to world-renowned investors for advice. Unfortunately, the advice that we get from these experts often contradict itself, and this is especially true for gold.

One one hand, you have Warren Buffett (from Berkshire Hathaway BRK.B)who teaches us that Gold is a non-productive asset that should be avoided at all cost.

gold is not productive warren buffett

source

On the other hand, we have Ray Dalio (from Bridgewater Associates) who argues that gold should be an essential risk-mitigator in every portfolio.

gold and ray dalio

So which one is it?

Personally, I was long in the Buffett camp, but after reading more of Ray Dalio’s work (and others) on Gold, I changed my mind and now allocate a small ~5% exposure to gold within my diversified portfolio.

I continue to strongly believe in the Buffett philosophy of investing the great majority of a portfolio into productive assets (including REITs); but at the same time, we do not know what the future holds, so investors should remain hedged against all possible outcomes. When I say "all", I really mean all; and therefore, a small allocation to precious metals is justified.

I used to laugh at gold… Now I buy gold.... Here are five main reasons why:

#1. Heavily Leveraged Economy and Misallocated Capital:

As a result of over a decade of quantitative easing and artificially low interest rates from the Federal Reserve, household, corporate, and government debt levels have spiked to new record highs.

This has created a bubble-like economy where growth and profits have been juiced by applying excessive amounts of cheap capital while discouraging savings. As a result of this environment – which has pushed asset valuations ever higher – investors have had to allocate capital to increasingly risky assets in order to maintain their previous levels of profitability. In the process, economic calculation has been disrupted due to market-level capital costs and consumer demand being artificially tampered with by government/central bank planners. The result is a fragile economy and capital market that is highly sensitive to even modest interest rate changes.

This flimsy state of affairs was displayed during the stock market declines in the fourth quarter of 2018 as the Fed’s tightening and interest rate raising approach spooked investors. This shows that the Fed is in a tough spot: interest rates cannot be cut too much at this point without pushing the economy into a further overleveraged state, resulting in possibly too much malinvestment, overheating, and eventual collapse similar to 2008; at the same time, however, interest rates cannot be raised too much without causing a crash due to the vast amount of heavily leveraged capital that has been allocated based on the current low interest rates.

#2. The Ultimate “Moat” in Money

The long-term impacts of these untested monetary policies are highly uncertain and could very possibly lead to more mal-investment and an eventual meltdown in some of today’s biggest fiat currencies.

Backed by millennia as the premier form of money and a stable store of wealth, gold has – to borrow a term from Warren Buffett – perhaps the ultimate “moat” protecting their intrinsic value over the long term, and have proven to be an ideal safe-haven asset during times of monetary uncertainty.

#3. Geopolitics and Rising Risk of Larger Conflicts

With the ongoing tensions between the US and international rivals Russia, Iran, Syria, China, and North Korea, there are plenty of factors that could potentially combine to significantly disrupt the global economy at any time. The US could eventually play a more aggressive military role in Syria, thereby putting it into direct confrontation with Russia. Its sanctions on Iran could very likely lead to a major war in the Middle East. Its trade wars with China, Canada, and Europe could eventually lead to global economic recession or even an actual war, and its recently renewed relations with North Korea have hit a bump and could turn further south at any moment.

ukraine invest in gold

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Forget Brexit, we also have Russia invading countries in Europe right at this moment with an on-going war in Ukraine – right at the border of the European Union. History has proven that precious metals are second to none when it comes to safe-haven assets in uncertain times.

#4. Opportune Supply and Demand Dynamics

The drop in gold prices off of the highs seen earlier this decade has made it less economical to mine gold, resulting in both fewer mines as well shorter mine lifespans. This will inevitably lead to less gold production and possibly a supply crunch that would boost prices.

gold supply and demand dynamics

At the same time, Asian giants India and China have been accumulating large amounts of the precious metal - driving up global demand as well as laying the groundwork for future challenges to the dollar as the world's reserve currency. Indian households traditionally invest a large portion of their savings in the precious metal and also love gold jewelry. As their nation's wealth increases, so does their aggregate demand for gold. Geopolitical and economic uncertainty in China is driving their heavy demand for the metal: namely, the falling yuan and growing trade friction with major trading partners such as the United States. If the current trade war prolongs and begins taking a heavy toll on the economy, a further flight to safety might be in order.

#5. Gold is at a Decade-Low Versus the Stock Market

As the chart below indicates, the price of gold versus the value of the S&P 500 Index is around a 10-year low. This indicates that, particularly given the aforementioned tailwinds, gold is an especially attractive investment right now relative to other available options.

gold is cheap in june 2019

Furthermore, even as its relative price has declined significantly, equity valuations (based on the Schiller P/E ratio) have reached their second highest levels in modern history - despite the significant uncertainty.

High Yield Landlord: Diversify to Hedge ALL Outcomes

Due to all these factors, we believe that investors should seek wide diversification to hedge against all outcomes. In the near term, we believe that the Federal Reserve will be forced to keep interest rates close to their current levels. However, if/when a global recession hits and/or mal-investment reaches a point that leads to a bursting of the bubble and a meltdown in the United States, the Federal Reserve will likely have to return to quantitative easing and cutting interest rates once again.

The long-term impacts of these actions are uncertain and scary if you ask me. Diversifying into precious metals is an insurance against a Black Swan and a risk-mitigator in a well-diversified portfolio. We do not know what the future holds, but we are smart enough to recognize this limitation and prepare for all possibilities.

Coming from a real estate background, I like to invest in anything that is “real” and tangible. This includes:

  • Real Estate Investment Trusts
  • Master Limited Partnerships
  • Infrastructure
  • Energy
  • Precious Metals
  • Mines...

These alternative assets have historically allowed investors to boost portfolio returns while reducing risk. Still, 20 years ago, most investors would ignore real assets, but now they are rapidly becoming the biggest component of institution's portfolios:

brookfield demand for real assets on the rise

source

Precious metals are just one out of five "real assets" that we recommend in our latest Market Update to members of High Yield Landlord:

#1 - Increase Exposure to...

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#2 - Diversify into...

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#3 - Reduce Exposure to...

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#4 - Mitigate Risks By...

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#3 - Boost Income Through...

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What happens next is uncertain…

… but High Yield Landlord is here to help guide you through whatever lies ahead. More investors have joined us and follow our real asset investment strategy than ever before. Unlike most other services that focus on traditional equities/fixed income - we specialize in the alternative assets that will outperform in the decades ahead.

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Sincerely,

Jussi Askola

Disclosure: I am/we are long ALL STOCKS IN CORE PORTFOLIO + British Land, Big Yellow, Dic Asset.