How Much of This Must-Own Asset Should You Own?

This Investment Accounts for 25% of My Non-Crypto Portfolio…

Monday, September 26, 2022: We might label that “The Day the Gold Market Called B.S.”

On that day, the dollar hit the highest level it has seen in more than 20 years. Yet it’s been all downhill since. In fact, the buck is down nearly 16% since then.

That same day, gold hit a recent low, and has been on an uphill climb ever since. Indeed, gold is now up 24% since then. Just this week it hit an all-time high, topping $2,130 per ounce.

The oddity here is that gold’s run toward historic levels, and the dollar’s sharp selloff, started back on that Monday in September, just three days after the Federal Reserve had hiked interest rates by a substantial 0.75 percentage points to 3.25%.
Of course, you know that interest rates today are 5.5%, which means the Fed still had about 2.25 percentage points worth of rate hikes to go—a comparatively large run of rate hikes to come, given the starting point.

In textbook economics, the dollar should not have fallen.

Gold should not have risen.

Both should have begun moving opposite to their eventual actual direction.
Fed officials in September 2022 were telegraphing the higher rates to come. As CNBC reported that day:

“My main message has not changed since Jackson Hole,” [Fed Chairman Jerome] Powell said in his post-meeting news conference, referring to his policy speech at the Fed’s annual symposium in August [2022] in Wyoming. “The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.”

That resolve should have lit a fire under the dollar’s backside. Higher interest rates would imply global investors could earn a relatively safe return selling lower-yielding yen and euro and pounds to buy the dollars to collect the higher interest-rate income.

Gold should have been falling. Higher interest rates make holding Treasury paper far more profitable since gold pays no interest and offers no dividend. Holding Treasury debt would have at least yielded 3.5% vs. nothing.

And yet…

It was like the upside-down Bizarro World had paid a visit to Wall Street.
Only, it really wasn’t Bizarro World.

It was Rational World.

The mainstream media have been referring to “spot currency traders”—let’s call them by their rightful job title: speculators—who were simply placing a well-timed bet on the dollar’s decline after the greenback hit its 20-plus year high.

A bit simplistic. Spot currency trades don’t typically hold positions for what has been 15 months now.

Moreover, these traders would have been looking to “fight the Fed” when it was still clearly in aggressive rate-hike mode.

A better explanation: Central bankers, long-term investors, and those seeking to insulate their portfolio against a Fed misstep began dumping dollars and loading up on gold. Which is exactly what’s been going on.

Central bank gold purchases hit a record in 2022, with a huge amount happening in the fourth quarter of that year, which would capture that September 2022 change in sentiment. So far this year, gold buying in first nine months of 2023 has outpaced the first nine months of 2022, indicating that the “yay, gold; nay, dollar” trend continues apace.

The World Gold Council, meanwhile, reported last May that a majority of central banks expect to continue increasing their holdings of gold over the next five years.
That, along with expected interest rate cuts in the U.S. in 2024, would imply that the greenback is heading lower, and gold is heading higher. Or exactly the trend that began on September 26, 2022.

The takeaway here is the message I regularly send: You gotta own gold in portfolio.
Central banks all over the world are buying gold. They don’t care what textbooks say about gold prices and higher interest rates. They only care about the likelihood that a Western debt crisis will roil the global economy at some point. They rightly worry that the dollar, despite its global heft, is a 98-pound weakling still acting like

it’s Big Man on Campus.

How much gold should you own? Depends on your tolerance for risk, and how well you sleep at night.

Personally, I have 25.3% of my overall non-crypto portfolio in gold investments—from ETFs that own physical gold to various gold miners. That doesn’t mean you should follow my lead. I’m comfortable with such a high concentration in gold because I have deep fears about the U.S. economy, the dollar, America’s debt, and what I see as a high probability that the system needs a reset in some fashion to right all the fiscal wrongs that have accumulated over the last 40 years.

Gold, playing a role it has played for millennia, will once again be a huge part of the solution.

In fact, it would seem the European Union is possibly angling for a return to the gold standard.

But more on that to come…