Gold Offers Purchasing Power Protection and Upside Potential as Economic Risks Rise

• Gold could triple or quadruple in price due to increasing demand and low current ownership among investors
• Central bank gold buying has driven recent price increases, and retail investor buying could dramatically boost prices further
• Owning physical gold provides portfolio insurance, while investing in major gold miners offers leveraged upside; junior miners are riskier but can provide exceptional returns
• Investors could allocate a portion of their portfolio to gold and gold stocks based on risk tolerance and willingness to research companies
• Economic conditions of rising inflation, negative real interest rates, and dollar devaluation mirror the 1970s, setting the stage for a major gold bull market

Gold: A Case for a Tripling in Price

The gold market is poised for significant gains in the coming years. Economic conditions, central bank buying, and the potential for increased retail investor demand could send prices substantially higher. For investors seeking to protect their purchasing power and gain exposure to this trend, here is a framework for constructively investing in gold.

Gold's Bull Market Potential

Gold and gold-related investments currently have a low market share among U.S. investors—less than 0.5% compared to a historic average of 2%. A mean reversion in investor portfolio allocation could increase demand fourfold in the world's largest market, which would equate to a quadrupling.

This potential rise in investment demand would build on a rally already underway. Gold has climbed from $1,800 to over $2,300 an ounce in the past two and a half years, driven largely by central bank buying. This has occurred without substantial retail investor participation. Prices could rise dramatically if retail investors start buying on top of continued central bank accumulation. If you layer retail buying, traditional gold buying, and central bank buying, a tripling or a quadrupling of the gold price is not out of the question.

Economic Parallels to the 1970s

There are strong parallels between today's economic environment and that of the 1970s, a decade that saw gold surge from $35 to $850 an ounce. Specifically,

With 10-year Treasuries yielding around 4.3% while true inflation runs at 7-8%, bond investors are guaranteed to lose purchasing power. An investment in Treasuries will lose half its value over a decade.

This mirrors the financial repression of the 1970s, where inflation averaged over 7% for the decade. Initially, investors were slow to seek inflation-protection assets like gold. But as the loss of purchasing power persisted year after year, demand for gold as an inflation hedge grew.  Expect a similar delayed reaction from investors as inflation's pernicious effects compound over time.

Constructing a Gold Portfolio

For investors convinced of the bull case for gold, here is a framework for responsibly gaining exposure:

• As a baseline, investors should own physical gold as insurance.
• For leveraged investment exposure, investors can own shares of major gold mining companies. Focus on a select group of roughly half a dozen well-managed firms like Franco-Nevada, Wheaton Precious Metals and Agnico Eagle with a track record of profitably growing their businesses. More speculative investors can consider industry giants Barrick and Newmont.
• Investors with very high-risk tolerance and a willingness to research can invest in junior mining companies. While 95% of juniors are "garbage," the top 5% can provide spectacular returns. Investors should only own as many juniors as the number of hours per month they're willing to spend researching the companies.

The Investment Thesis for Gold

• Negative real interest rates guarantee a loss of purchasing power for safe-haven assets, driving demand for gold as an alternative
• Retail investors remain under-allocated to gold at 0.5% of portfolios compared to a historic average of 2%, allowing for substantial price gains if sentiment shifts
• Central banks are buying gold to diversify reserves away from dollars, providing a strong floor for prices
• Economic conditions mirror the stagflationary 1970s, a decade that saw gold rise over 20-fold
• Investors can gain exposure via physical gold, shares of major miners, and, for those with very high-risk tolerance, junior mining stocks

The combination of high inflation, negative real interest rates, central bank buying and the potential for increased retail participation creates a strong bull case for investing in gold. Investors can position this opportunity in a risk-appropriate way by owning physical bullion as insurance and shares of well-managed major miners for upside potential. Those with very high-risk tolerance can selectively invest in top-tier junior mining stocks. Ultimately, in an environment of financial repression and dollar debasement, gold offers one of the few avenues for prudent investors to protect and grow their purchasing power in the years ahead.