Is it good to invest in Gold in 2022?
This article took a different direction than I had intended when I sat down to write it.
I intended to talk about why Gold is a good Investment and instead, I spent most of my words explaining the current state of the Investing world.
Of course, it is the current state of the Investing world that makes Gold such a good Investment right now so I think I actually accomplished my original objective...
Hi, I'm Bryan V Post. I've been investing in Gold and Silver since 2002.
There are three main reasons why Gold is a good Investment today:
To answer the question, “Is it good to invest in Gold in 2022?”, let’s consider each of the three factors above based on current conditions in the Financial markets and in the World.
Inflation in the United States is currently at 40-year highs based on data published by the Bureau of Labor and Statistics (BLS).
According to the BLS American consumers are currently experiencing 9.1% Inflation (CPI as of June 2022) but the BLS arrives at that number after applying several questionable adjustments.
~ Substitution adjustments ~
For example, the BLS assumes that consumers will change their lifestyle as the cost-of-living rises. Instead of eating steak for dinner they will switch to hamburger when steak becomes too expensive for their budget. Based on this theory, the previously-steak-eating family has experienced zero Inflation even though their quality of life has been reduced.
~ Hedonic adjustments ~
Hedonic adjustment is another method used by the BLS to ignore rising costs. This theory suggests that the increased cost of a consumer good can be ignored if the perceived quality of the item has increased. Hedonic adjustments are applied to clothing, wireless phone and internet services, appliances, and consumer electronics.
~ Six more adjustments ~
There are six more adjustments that the BLS applies to their raw data before they arrive at the official Inflation rate: cost-based, structural change, age bias, facility, analyst, and cost of utilities. We aren’t going to discuss these adjustments in this short missive or we’d be here all day - just understand that real Inflation is tortured into submission before the BLS publishes their headline numbers.
Real Inflation is over 16%
according to economist John Williams at ShadowStats.
He tracks Inflation without all the BLS adjustments.
American consumers are probably experiencing an actual Inflation rate closer to 20% in their day-to-day living. The cost of gasoline alone has more than doubled since January of 2021.
Whether we accept the BLS Inflation rate or measure Inflation based on our own experience at the gas station and grocery store, there is no way to deny that Inflation in 2022 is raging at levels that haven’t been seen for several decades.
Geopolitics / State of the World
Geopolitical tensions are clearly rising around the World.
Sanctions against Russia and the conflict between Russia and Ukraine have been in the headlines for several months now and those situations show no signs of ending.
We also have NATO-led countries posturing as though outright military conflict with Russia somehow makes sense. A sober analysis of the situation, however, makes it clear that the European economy will quickly collapse without Russian resources - natural gas and fertilizer in particular.
If we dig beyond the mainstream American news, we find that China has essentially stopped sending goods to the Western World and appears to be preparing for an invasion of something, perhaps Taiwan.
China is also dealing with the financial collapse of Evergrande and the massive debt that this Real Estate developer accumulated and then reneged on.
Digging even deeper in the news we find multiple countries dealing with economic collapse and the related problems. Just to name a few, we have Sri Lanka, Turkey, Argentina, South Africa, Chile, Lebanon, and Ecuador. All of these countries are dealing with existential (life threatening) problems. Inflation in Turkey is over 70% and people are rioting on the streets of Sri Lanka, Chile, and Ecuador.
Financial risk assessment
What is the current state of our Financial markets? Are investors close to jumping ship and seeking the safety of Gold or will they hang on to their traditional Investments as their Wealth continues to dwindle?
Less than 1% of the World’s financial assets are currently invested in Gold even though Gold has outperformed most asset classes for the past 20+ years. Gold started this century at $282 per ounce and its current price (07/12/22) is $1724. That’s an increase of 611%. In the same time frame the S&P 500 has only gained 261%.
Let’s take a quick look at the major markets and where they are at today.
~ Stocks ~
The equity markets peaked in late-2021 or early-2022 and they have been working their way steadily lower ever since. The S&P 500 briefly dipped into bear market territory (a loss of 20% or more) in June 2022 and then recovered slightly – it is currently flirting with the bear again. The NASDAQ has been in bear country since April 2022.
This table shows the state of the major equity indexes as of 07/12/2022.
Loss so far
Dow Jones Industrial
Equity investors have been trained for the past 10+ years to buy the dip so it will probably take steeper losses before they give up on Stocks and try to preserve what is left of their Investment money.
~ Bonds ~
High quality Bonds (e.g., US Treasury Notes and Bonds) have lost over 10% so far in 2022. Some Bond ETFs are down as much as 18%. The magnitude and speed of these losses caused the Wall Street Journal to opine that 2022 is the worst Bond market performance since the Collapse of 1842.
Bond Collapse of 1842
In 1842, several American State governments repudiated (defaulted on) the Bonds they had issued because the financial condition of the States had deteriorated dramatically. These State-issued Bonds were being traded in both New York and London so the defaults wreaked financial havoc on both sides of the ocean.
One glance at the long-term chart of the yield on the 10-year Treasury Note (shown below) should make it obvious that the 40-year Bull market in Bonds has ended. Notice in this chart that the previous period of rising interest rates lasted for a full 18 years.
~ Real Estate ~
Real Estate markets are very localized so national numbers can be misleading. There is also several months of lag time involved in the metrics published about the housing sector. For example, a house that closes escrow today was likely put into escrow 30 to 60 days prior and the mortgage rate for the purchase was locked-in not long after escrow was opened.
It’s hard to believe but the interest rate on a 30-year fixed mortgage has almost doubled since January 2022. With mortgage interest rates rising so dramatically in the past six months, we have yet to see the negative effects that declining affordability will have on Real Estate markets.
There are, however, two data points we can look at to assess the health of the national housing markets. One is the interest rate on a 30-year fixed-rate mortgage, and the other is the housing affordability index which, of course, is directly tied to mortgage rates.
There are two reasons why Real Estate markets have a larger effect on the economy than might be immediately obvious.
First, the largest asset that most Americans have is the home they are living in. When Real Estate prices are rising, consumers tend to feel wealthy and spend more of their money on discretionary goods and services. This Wealth effect makes the US economy appear to be healthier than the underlying fundamentals would suggest.
Second, cash-out refinancing has been a large driver of the perceived strength in the US economy since 2012 when housing prices turned skywards. With house prices continually rising, Americans have felt comfortable pulling cash out of their home equity and using that money on discretionary items.
As Real Estate markets peak and rollover, these two factors will reverse.
With housing prices stagnant or declining, Americans will feel less wealthy and they will accordingly change their spending habits. The previously strong discretionary sectors of our economy will weaken and contract.
Rising interest rates and stagnant-to-falling house prices will also put an end to cash-out refinancing and, again, economic sectors that benefited from this source of spending will contract.
Rising interest rates and stagnant-to-falling house prices
mark the end of cash-out-refinancing.
Is it good to invest in Gold in today?
Let’s summarize the points we just covered and then we can answer the question, “Is it good to invest in Gold today?”
Official Inflation (i.e., reported by the BLS) is at 40-year highs and real Inflation is far higher than the BLS-published number.
All three of the major Stock markets are down more than 15% from their peaks. The S&P 500 is almost in bear market territory and the NASDAQ has been deep in a bear market since April 2022.
Rising interest rates
The Bull market in Bonds lasted for 40 years but it ended abruptly in April 2022. Based on the long-term history of the 10-year Treasury Note we could see steadily rising interest rates for years to come.
Real Estate bubble popping
Rising interest rates are dramatically reducing the affordability of houses. Real Estate prices and demand are softening or declining in many locations. These changes in the housing market can cause consumers to reduce or stop their discretionary spending as the Real Estate induced Wealth effect reverses and cash-out refinancing is no longer possible.
World tension rising
The level of geopolitical tension is rising dramatically as Russia and Ukraine continue battling one another and economic conditions worsen throughout the developed World. We have Europe on the brink of economic collapse and people rioting on the streets of at least three countries.
The current outlook for American investors is not great, to say the least. Inflation is raging and all of the asset classes where they typically invest their money are suffering losses in 2022. Real Estate markets are poised for a downturn that is likely to cause further deterioration throughout the economy.
On top of these US-centric challenges investors are watching as geopolitics takes center stage, with the potential to dramatically affect their Investment Portfolios.
Now certainly seems like a good time to seek a safe haven for at least some of our hard-earned money. Instead of thinking about investing our money, perhaps our focus should be on protecting our hard-earned money with the traditional safe haven which, of course, is Gold.
Now is the time for the safe haven of Gold
Are Gold Coins a good Investment
To answer the question, "Are Gold Coins a good Investment?", we need to talk about premiums and artistic value.
Premium over spot
When you see a price quoted for Gold, this is the "spot price" for a 400-ounce bar of the shiny stuff. Most investors aren't buying Gold in that quantity and, even if they are, they probably don't want all 400 ounces in a single bar.
Mints and refineries purchase the 400-ounce bars and use them to produce Gold products that have greater demand from investors and collectors. Typically this means 1-ounce bars and Coins. 10-ounce and 1-kilogram bars are available for larger investors.
The mints and refineries have to cover their expenses and make a profit so they charge more than the spot price for the products they sell. The difference between the spot price and the product price is referred to as a premium.
Premiums on one-ounce bars of Gold are typically 3 to 5% and premiums on Gold Coins run from 7% on the low end up to 70% or more for special edition proof Coins.
At Gold Well Live we always recommend that investors purchase the Precious metals products that have the lowest premium over the spot price. That is our standard advice for investors - we want you to get the most metals for the least amount of money.
When you are buying Gold or Silver products ask the seller which products have the lowest premium over spot. Usually this will be bars or South African Krugerrands. If you can buy a Gold Krugerrand for a 7% premium and an American Gold Eagle has a premium of 30% or more, it makes zero sense as an investor to buy Eagles. Paying a 70% premium for proof Coins is just silly.
Art vs Investment
The exception we make to our advice involves Gold Coins that will be appreciated for their artistic value.
Some of the pre-1933 Gold Coins are absolutely gorgeous. Our favorite is the $5 Indian Gold Half Eagle minted from 1908 through 1929. Its sunken-relief design makes it unique and its cool to think about how these Coins were used as circulating currency 100 years ago.
Four of these Coins contain 0.9676 ounces of Gold (0.2419 ounces each) and would cost us about $3100 today (07/25/2022) when the spot price of Gold is $1718. That means the premium on these Coins is about 180%.
As an Investment, paying a 180% premium for a Gold Coin is less-than-smart. If your intention, however, is to put one of these beautiful Coins on your desk or dresser where you can appreciate it as a piece of fine art, that's a different proposition.
Bottom line: buy enough high-premium Coins to satisfy your desire for collectible items but put the bulk of your Investment money into Gold products with low premiums.
How to invest in Gold
You can learn more about Gold and Silver here on the Gold Well Live website. We provide educational information for investors to help them make informed decisions about how to manage their money.
If you have tax-advantaged Retirement accounts that you want to protect, consider moving some of that money into a Precious metals IRA. These self-directed IRAs are the only way you can purchase and hold physical Gold with your tax-advantaged retirement savings.
The IRS allows you to transfer money out of an eligible 401(k), IRA, 403b, 457, TSP, Annuity, or Pension plan and into a Precious metals IRA without incurring any taxes or early withdrawal penalties.
To learn more about Precious metals IRAs follow the link below to receive a free Gold IRA guide book. In addition to the Gold IRA Guide you will have the opportunity to connect with an IRA specialist who can answer all of your specific questions.
Protect your retirement savings and do it 100% tax & penalty free
After the dot com bubble popped I started researching Financial bubbles - how they evolve, how they pop, etc. I quickly realized that Gold is the only real money on planet Earth and in 2002 I bought my first Gold Coin. I've been investing in the shiny stuff ever since - both physical Precious metals and the Mining stocks. I've also studied the Financial markets, trading, Technical analysis, and the endless games that central banks play with fiat currencies. I do my best to share what I've learned with others - that's what you'll find here on Gold Well Live.
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I'm just a good ol' boy from Texas, but I love to talk about the Precious metals. I share my ramblings with subscribers on a regular basis.