Precious Metals: The Emerging Asset Class

Over the past year, the cult of equities has made a return, as indices roar to all-time highs, and as many look to cash in on new IPOs like they did in the last tech boom 15 years ago.

Yes, the markets are flying high, and if history is any guide stocks look to be on the cusp of the kind of parabolic breakout that characterized the 1982 to 1987 and 1993 to 2000 bull markets, where conventional markets went up 4 and 5 times, respectively.

It looks as though 2008 is a distant memory– heck, one wonders if what occurred 5 years ago even matters at all, when looking at current stock prices.

As the song “happy days are here again” plays in the background, the herd can once again ignore the precious metals, perhaps as they did in the 1980s and 1990s, the last time we saw such powerful moves higher in the conventional markets.

But I’d like to make some historical comparisons between the two periods, to explain how even with stocks catching all the attention, this hardly means that gold and silver will continue to be left out in the cold.

Here are three main reasons why I do not believe gold, silver, PGMs, or mining shares will behave as they did in the 1980s and 90s:

1) Just last month, President Obama actually made reference to the reserve status of the U.S. dollar as being in jeopardy based on current dysfunctional behavior in Washington, D.C. I don’t ever recall Presidents Reagan through Clinton saying something similar– and for good reason. To take the case of President Reagan’s first term in office, the US Dollar rallied something like 50% at one point. While I don’t expect the dollar to crash anytime soon, too many players globally are looking to diversify away from the greenback for the dollar to re-enter a secular bull market. A big question mark remains over the US dollar’s reserve status and this represents one of the most powerful reasons to continue to own precious metals– or even to acquire more.

2) The challenges facing mining companies these past couple of years signals a downshift in global gold and silver production. This decline won’t happen immediately, since it takes a while to shudder mine projects- but ore grades can only decline so much before it becomes uneconomical to attempt to increase overall mine output. This reality stands in marked contrast to the 1980s and 1990s, where mine output for both metals made significant increases during those decades. Supply constraints– especially if they are coupled with new industrial demand for the white precious metals– will eventually lead to higher prices.

3) The growth in the global middle class outside of the West is a trend that began 20 years ago, but the trend has accelerated in recent years. Many commentators believe that the shift in wealth from west to east will mean that upwards of 50% of new entrants to the global middle class in future years will come from areas outside the U.S. and Western Europe. As has been seen all year, buyers in Asia and the Middle East possess an attachment to physical gold- ranging from the person buying jewelry to the central banker buying bullion bars– that is hard to break. Oftentimes these attachments speak to the cultural memory of volatile local currencies or political malfeasance in these nations.

Overall there remain some big differences between today and 20 or 30 years ago when it comes to precious metals. While faith in central planners and their ability to levitate equity markets is strong among some, there are others like myself who do feel that 2008 mattered–and not in a good way. Zero percent interest rates, a stagnant economy for upwards of 80% of people in the U.S. and Western Europe, continued discussion of unsustainable debt levels, and the existence of a black hole of derivatives and other “off balance sheet” financial sleights of hand are just a few issues facing investors currently.

Every day comes news of an exchange opening up somewhere in the world to trade gold, in addition to the plethora of new investment vehicles available for those who seek out alternative investments like precious metals. We have truly never seen a world where on the one hand gold and silver can be traded as investments, and on the other so few people actually own these investments.

It may be hard to believe it now, but I don’t think the precious metals will remain under-owned forever.