Analysts, Money Managers Suggest Precious Metals Should Be Required Assets

As the effects of the pandemic spread like wildfire last summer, the New York Times informed us roughly half of all Americans were seriously considering the purchase of gold.

The trend toward metals on the part of individual savers unquestionably is noteworthy. But something I think could be even more revealing is the growing interest in physical metals on the part of states and private business to help shore up their reserves. 

You might recall that a few weeks ago I discussed what appears to be a movement, of sorts, among some U.S. states to use physical precious metals as a way to bring stability to their financial reserves.

Amid the pandemic’s ongoing fallout as well as the highly expansionary monetary and fiscal climate, some elected state officials are growing particularly concerned about relying exclusively on cash to keep their all-important reserves intact. In Idaho, the Sound Money Reserves Act (HB7) currently making its way through the legislature would empower the state treasurer to buy gold and silver as a way to diversify reserve funds.  

It is not just states, however, giving metals a serious look for the investment of financial reserves. In a recent article for Streetwise Reports, veteran precious metals analyst Peter Krauth discusses the recent decision by one of the world’s most dynamic and innovative companies to name gold an eligible asset for the investment of its excess cash. 

In that same piece, Krauth declares gold to be “the ultimate reserve asset” in no small way on the basis that state governments and now private business are taking a shine to it. And he’s not the only expert to suggest gold – and silver – essentially should be required portfolio assets.  

If precious metals indeed come to be seen as mandatory assets of state portfolios, pension funds and even corporations, the implications for gold and silver could be seismic. And the implications for individual retirement savers could be just as profound.

The Problem with Cash

As an asset, cash is synonymous with financial safety. That’s the perception, anyway.

But that doesn’t mean cash is not without its problems. First off, it will come as no surprise that cash and cash equivalents earn between nothing and less than nothing during periods when interest rates are extremely low, as they are now and have been for many years. 

But there’s more to cash’s problems than low returns. There also are the inherent risks associated with dollar debasement and inflation, which can be particularly pronounced during periods of expansionary monetary and fiscal policies – the very policies in place right now. 

Some consider cash to be an especially poor reserve asset right now for corporations, pension funds and other entities that have as their express purpose the generating of returns. There can be sound strategic reasons for companies to keep a lot of cash on hand, to include the facilitation of stock buybacks. But for all the relative safety of greenbacks, large sums of cash held in perpetuity can serve to lower overall return (ROA) and increase cost of capital (COC), among other problems. 

One company – and a very high profile one, at that – is moving aggressively in the direction of diversifying its excess cash with alternative assets, including gold. 

You may have heard about Tesla, Inc.’s $1.5 billion purchase of bitcoin at the beginning of this year. In its most recent 10-K filing with the Securities and Exchange Commission (SEC), Tesla not only announced the massive bitcoin purchase but also updated its corporate investment policy to include physical gold as an eligible reserve asset:

In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, which was duly approved by the Audit Committee of our Board of Directors, we may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future.

Following the Tesla 10-K filing, Alex Mashinsky of cryptocurrency lender Celsius Network said the quiet part out loud:

What they’re not telling you is they don’t trust the U.S. dollar. They’re saying by voting for Bitcoin and putting gold as a reference, they’re basically saying we do not want our treasury to be held in U.S. dollars because we expect high inflation, we expect debasement, we expect everything besides good news about the U.S. dollar.

In fact, Peter Krauth wonders if we’re heading toward a day when companies could be held liable by investors for holding too much cash and not diversifying into other assets that potentially could provide a better return and help hedge against the effects of a weak dollar. “Corporations, pension funds and insurance companies—anyone responsible to stakeholders—could one day face class action lawsuits if they don’t diversify into other reserves assets,” Krauth writes. He sees gold as one suitable alternative – particularly in the context of the current climate: “Gold’s proven itself as the ultimate reserve asset and financial insurance for millennia. And it’s set to fulfill that role once again.” 

Advisor: Failing to Own Precious Metals “Is Pure Negligence”

Krauth’s pronouncement that gold is “the ultimate reserve asset and financial insurance” will seem like a bold declaration to many. But he’s hardly alone in that opinion. Some experts, in fact, go further. 

In a recent interview with Eurasia Review, Robert Hartmann of German institutional precious metals advisor Pro Aurum made a compelling case for keeping gold and silver core assets among all portfolios – and went as far as to suggest not owning it is tantamount to “negligence.”

Precious metals are and always have been the ultimate insurance. They provide protection both against state failures and against mistakes in the monetary policy of the central banks. Every investor who looks into the history books sees that both have happened over and over again in the past centuries. From that perspective, investing in physical gold and silver is a common-sense precaution and a necessary part of any wealth preservation plan. Investors and ordinary savers ignore this at their peril and the failure to include precious metals in one’s portfolio is pure negligence.

For his part, Shayne McGuire of the Teacher Retirement System of Texas (TRS) – one of the nation’s largest public pension funds – stops short of saying that not including gold among a portfolio’s core assets is an act of negligence. As Krauth notes in his article, however, the TRS Gold Fund manager does view gold as the “ultimate financial insurance.”

Before 2008, counterparty risk was not a consideration if you had the backing of Lehman Brothers or Citigroup or even the largest bank, RBS, or the backing of a colossal insurance company like AIG. Gold is ultimate financial insurance, the only viable and liquid investment asset that is not another entity’s liability and pension funds are talking about this.

Rep. Ron Nate, co-sponsor of the Sound Money Reserves Act presently making its way through the Idaho legislature, also doesn’t express as negligent an unwillingness to keep gold and silver on hand. That said, during testimony before the House State Affairs Committee on behalf of his bill, Rep. Nate made clear he sees metals as “real assets”: “With new concerns about financial instability, it makes sense for investors, and it makes sense for states, to turn to real assets, especially in terms of precious metals, to protect investments of their funds.” 

Retirement Savers Face the Same Basic Challenges as States and Corporations

“The winds of change are blowing,” Krauth said in his article. “Pension, corporate and even government fund managers are looking for alternative reserve assets. Is it such a stretch to think one day it [owning gold] will be expected and considered prudent?”

Not at all, in my opinion. Although famously seen as “alternative” assets since the advent of modern financial markets, gold and silver have been among the best performing assets since the beginning of the millennium. Over the last 20 years, gold has appreciated 570% and silver hasn’t been far behind, rising 490% over the same period.  

Perhaps even more important – from the standpoint of reserve assets, specifically – is that precious metals registered impressive numbers during the two worst economic crises of the 21^st century (so far). From 2008 to 2011, against the backdrop of the global financial crisis, gold jumped 160% and silver soared 400%. And last year, in a pandemic-wrought 2020 that saw the U.S. unemployment rate reach its highest level since the Great Depression, gold climbed about 25% and silver did nearly twice that, rising by roughly 48%.

It’s probably not a stretch to suggest these numbers are at least part of the reason why precious metals now are receiving a great deal of affection from state politicians, pension funds and even Elon Musk’s Tesla, Inc. Of course, the past performance of gold and silver is not indicative of future results.

But even if one sets aside all historical performance figures and focuses only on the inherent properties of precious metals as assets, it’s not difficult to understand why entities with so much to lose are warming to gold and silver as alternative reserve options in what now is a persistently uncertain economic climate. And as for astute individual retirement savers? They’ll notice that same uncertain economic climate pertains to them, as well.