You should know, most of the time, gold is an atrocious investment…
It pays no dividend. It has limited industrial uses. And it can go through long stretches of time where its price goes nowhere.
That’s why I treat gold and other precious metals as disaster insurance. They’re like a chaos hedge against Armageddon. So we generally recommend you allocate no more than 5% of your portfolio to this asset class.
But as I’ve told you before, under certain conditions, gold prices soar. And along with them, certain gold stocks explode even higher.
During gold’s last bull run from 2008–11, three of the best-performing gold stocks were up as much as 23,673%, 8,729%, and 6,694%.
You see, gold prices and gold stocks boom when central banks crank up their “printing presses.”
This creates inflation. And when you combine that with low interest rates… gold becomes much more attractive to own than other income-producing assets like bonds.
And as I’ll show you today, just a small shift in central banks’ allocations to gold could send prices skyrocketing.
Real Rates Are Dropping
Here’s why I’m so bullish on gold. It has to do with something called real rates.
The real rate is the interest rate return you receive on the 10-year government bond minus the current inflation rate.
In normal times, the real rate of return is positive. That means the yield investors earn on government bonds is greater than inflation.
For example, if a bond pays 3% interest and inflation is at 2%, your real rate is 1%.
As long as you’re earning a positive real rate, you’re maintaining and growing your purchasing power.
But when real rates go negative, you’re no longer maintaining your purchasing power. That’s exactly how the world’s central banks will handle their debts.
They’ll dilute the value of their respective paper currencies. And that’s where the opportunity lies…
When real rates go negative (like they are now, globally), smart money flees bonds and paper money as they drop in value.
Instead, they go for the protection of gold, which rises in value and offsets the losses from holding paper money.
That’s exactly what’s happening today. Year-to-date, gold has gained nearly 15%, while major global currencies (excluding the U.S. dollar) have lost an average of nearly 5%.
Smart Money Is Flocking to Gold
As I mentioned above, gold pays no interest. So if you buy gold instead of bonds, you forgo the interest you would’ve received on the bonds.
That loss of income is the opportunity cost. But when real rates go negative, the opportunity cost disappears.
So central banks and pension funds make huge shifts in their portfolio allocations from bonds to gold.
And we’re seeing that happen now…
According to the World Gold Council, central banks hoarded over 668 tonnes in gold purchases last year – hitting a half-century high. Top hedge fund managers, such as Ray Dalio, John Paulson, and George Soros, have also placed big bets on gold.
Is it a coincidence that while they’ve been diluting the value of their paper currencies… they’ve also been loading up on the world’s greatest currency hedge?
I don’t think so.
Remember, always look at what the big money is doing… never at what it’s saying.
And right now, big money is POURING into gold.
Now, historically it’s been considered a good idea to hold at least 5% of a portfolio in gold as true diversification. But no one holds that much gold anymore.
According to Credit Suisse’s Global Wealth Report, global investors are estimated to have a gold allocation of just 0.5%…
So gold could be worth much more if their allocations go up the way I believe they will.
Let’s say that allocation goes from 0.5% back to a conservative 0.85% (the most recent high in 2012)…
Over $1.2 trillion would need to flow into gold. And it would take gold’s price to $2,550 – a 50% increase from today’s level of around $1,700.
Here are the prices gold could reach if we hit other allocation levels:
At a 1.37% allocation (just half of the 1980 level), gold’s price would be $4,110 – a 142% gain from today.
At a 2.74% allocation (the level in 1980), gold’s price would be $7,170 – a 322% gain from today.
At a 5% allocation (as we saw in 1960), gold’s price would be $15,000 – a 782% gain from today.
As you can see, just a small increase in the percentage of gold holdings could send gold’s price skyrocketing. But certain gold stocks could soar even higher because they’re levered to the price of gold.
For example, from 2008–14, tiny “special situation” companies like Northern Star Resources, Regis Resources, and Gold Road Resources went up as much as 23,673%, 8,729%, and 6,694%, respectively.
Just $1,000 into each of those names would’ve made you as much as $237,730, $88,290, and $67,940, respectively.
Gold Will Go Much Higher
Remember, when the Fed and other central banks turn on their printing presses and real rates go negative… investors flee paper money and bonds.
They flock to gold to protect their buying power. And physical gold surges and ignites a huge rally in gold stocks.
This unique series of events is rare. It doesn’t happen very often. But when it does, it can make you life-changing gains.
In fact, my three favorite gold stock ideas are up an average 34% since I recommended them on April 2 in my flagship Palm Beach Letter service. (Paid-up subscribers can read the issue here. If you’re not a subscriber, you can learn more here.)
These are stocks I would’ve bought for myself. But my publisher’s policy prevents me from owning stocks I recommend to you.
And based on how high I believe these ideas can go, I calculate I’m giving up about $3 million in potential profits by not buying them.
So instead of buying my three favorite gold stocks, I’ve made the decision to buy SPDR Gold Shares (GLD) for my own account. I think I’ll at least double my money over the next 18 months.
Let the Game Come to You!
Editor, Palm Beach Daily
P.S. Gold isn’t the only thing I’m bullish on. There’s another industry that is about to explode, too. In fact, I’m calling it my No. 1 investment of the decade.