Just last week gold hit a nine-year high closing over $1800 per ounce. The prior peak was $1920 an ounce in 2011. The bottom was $1057 per ounce in 2015. This little bit of history is important because we’ve seen this before.
During the 1970s, gold began a meteoric rise from $35 per ounce to just under $910 an ounce by 1980. Some of you may remember the Hunt brothers from Hunt Oil who tried to corner the silver market. In those days, interest rates and inflation were climbing to double digits. Stagflation was a new economic term.
What’s the significance of this history lesson? In the past, commodity moves have lasted longer and gone to larger extremes than many expect. They started quietly and ended with a BANG. As the Hunts attempted to corner the silver market from January 1979 to March 27, 1980, also known as “Silver Thursday”, prices moved from single digits to approximately $50 an ounce before a commodities rule change forced liquidation of contracts and caused margin selling leading to a collapse. Again, this was all in a period of inflation.
Today, inflation appears benign. Interest rates are less than 1%. But gold is once again approaching an all-time high. What these two time periods have in common is not inflation or deflation, but the future purchasing power of your dollar. In the early 1970s it took $35 to buy an ounce of gold. Today it takes $1800 to buy the same ounce.
While past performance cannot predict future results, I believe this could be a perfect breeding ground for precious metals. Low interest rates reduce bonds as a competing investment. A falling dollar also acts as a tailwind. While gold is near a new high, its “little brother” silver is around $18 per ounce. In my 43 years of investing I’ve seen silver approach $50 twice: 1981 and 2011. Platinum, which is gold’s “big brother”, is at $850 an ounce or less than half the price of gold. Platinum is more rare than gold and has historically traded at a 30-70% PREMIUM to gold, not at a discount. Could these precious metals also re-test their previous highs?
In these uncertain and rapidly changing times, we think investors should consider precious metals in portfolios. So far this is NOT conventional wisdom. When it becomes conventional wisdom, we’ll say “thank you” and move on, but that is yet to come.