July 02, 2019
Gold, which has been testing a tough six-year resistance level in U.S. dollar terms this week, continues to make news.
The yellow metal is near all-time highs in a variety of currencies (including the Canadian dollar), central banks are restocking their vaults, and former press baron Conrad Black recently came out in favor of a gold standard .
As president of Sprott Money, I naturally get asked about gold all the time. And I am often stunned by the misinformation out there.
For example, many investors think: 1. That gold is really “just” a commodity like any other; 2. That when they buy a gold ETF from their broker, the security is fully backed by gold; and 3. that governments can just print the money they need to get us out of our current debt crisis.
I’ve been in finance for more than twenty years and was an investment advisor for part of that time. Frankly, my old profession deserves much of the blame for the public’s lack of knowledge.
Case in point: when we advised clients to buy physical gold, we received little or no commissions. But when we sold other stuff, we made money. As a result, too many of us responded to the wrong incentives.
Worse, while many of us talked about the long-term, much of our focus was on short-term quarterly earnings results and mutual fund rankings.
I am no longer a financial advisor. But my work here at Sprott Money, within the gold community, and on the boards of the Sprott Foundation and Trigon Metals have got me thinking more strategically.
During the coming months, when I have some time, I’ll be sharing thoughts on recent developments—including the disastrous, often-excessive focus on short-term results.
Obsession with short-term results
Markets today are dominated by traders using algorithms that flip stocks in milliseconds. Some say such trades account for more than 80% of equity volumes.
Former U.S. Senator Mark Warner, who later migrated to Wall Street, estimates that the average holding period for stocks plunged from eight years during the 1960s to just four months by 2016.
While there are no universally-recognized official data on either metric, it is clear that investors are thinking short-term.
But many in the gold community—including central banks, precious metals’ storage clients, and couples choosing an engagement ring —argue that there are big advantages to thinking long.
Focusing on a goal … despite the bumps
Thinking long-term keeps you focused, so that you don’t bounce off course every time you hit a road bump. Some examples:
Navigating stock market crashes
Stock markets as measured by the Dow Jones Industrial Average and the S&P 500 lost about half their value twice during the last twenty years.
However, hanging onto some stocks has been a wealth builder for those who were prepared to weather those crashes and were thus able to think and act long-term.
Tax efficient investing
Another advantage to holding investments longer is that you pay less in taxes.
Warren Buffet buys stocks that he plans to hold for the rest of his life, in part to avoid coughing up capital gains taxes when he trades.
This long-term “tax efficient investing” strategy is one of his main competitive advantages.
A natural life cycle
Thinking long also ties in with our natural life cycles. For example, many of us save to fund retirements.
Accumulating cash to help kids handle exploding college expenses, wedding costs, and starter-home down payments is another popular investing priority.
Thinking long term helps you do all of that.
Lessons from thinking long-term
Long-term investors also tend to be big fans of history. For example, if you look farther back, crashes like those seen in North American markets don’t always work out so well.
- Thirty years ago, the Japanese stock market fell more than 80% … and even today, stocks still haven’t recovered half their value in inflation-adjusted terms…
- However, gold in Japanese yen terms has nearly tripled during that time…
- Interestingly, the demographics of Western countries today are roughly what they were in Japan when it peaked….
Long-term investors wonder: could a Japan-style scenario occur in Canada and the U.S.?
Or should they trust politicians, the financial press, and Nobel Prize economists who argue that, while we have problems, they are mostly manageable?
Gold and the long term
Let’s admit it. It’s not only investors that think short-term.
News media, driven by Twitter and other social media platforms, think in terms of what is happening now, or a couple of seconds ago.
U.S. politicians (even the best) think in terms of two-year election cycles driven by House of Representatives and Senate elections.
Publicly traded companies focus on how to spin their latest quarterly earnings results.
Economists follow with silly one- and two-year forecasts that show how a little more borrowing and spending will keep us all afloat a little longer.
Indeed, the physical gold community is one of the few that does think long term.
Gold has been regarded as money for the past 2,000 years.
During that time, experts calculate that hundreds of paper and other fiat currencies have come and gone.
I am not an economist, and I don’t give financial advice.
But it is clear to me that the gold community is onto something.