Gold is up nearly 20% this year as investors pile into the precious metal for safety amid geopolitical uncertainty and trade war woes. Rational investors are buying gold for good reason.

Many stock investors may be tripping over a psychological investing pitfall known as the Endowment Effect.

This is a proven cognitive bias in which investors overvalue the worth of stocks that they own, and thus hang onto equity positions perhaps longer than they should. Why? The mere fact of ownership creates a psychological bias that it is worth more.

As the U.S. stock market climbs to all-time highs driven in large part to the low interest rate environment fueled by the Federal Reserve, equity valuations remain toppy and stretched.

Some stock market investors may be caught up in a Pollyanna view of the stock market.

Researchers first identified the Endowment Effect through experiments conducted with ordinary coffee cups.  Ownership of a cup of coffee triggered a response where people demanded substantially more to sell the cup than if they did not own it.  How much? Once owned, sellers required about twice as much to sell the cup as they were willing to pay to acquire it.

The Endowment Effect essentially put blinders on investors and blocks the ability to consider financial events rationally.

How to overcome this mental investing trap

Here are three tips to help you beat back this sneaky psychological mind trick as you plan your investment strategy for 2020:

1. Be open to new information about the stock market and the economy. The Endowment Effect reveals a strong tendency to stubbornly stick to the old investment strategy despite new and better information.
2. Be objective. Consider potential negative factors. The Endowment Effect creates a tendency to focus on the positive factors (Pollyanna view) while disregarding potential negative or changing signals.
3. Create an investing plan and stick to it. Long-term investors do best when you develop and implement a clear investment process. This includes a well-diversified portfolio to offset and mitigate equity market risk.

Rational investors bought gold with a vengeance in 2019. Goldman Sachs recently reiterated its $1,600 an ounce price target for gold. If you haven’t fully diversified your portfolio, consider new information and review current economic and political conditions from an objective standpoint.

Call Blanchard today at 1-800-880-4653 for a personalized portfolio review and individual diversification recommendations based on your long-term financial goals and risk tolerance levels.

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Investors are starting to think about the start of a new decade. They have reason to question the future. Consider a recent move by Bridgewater Associates, the world’s largest hedge fund. The company has placed a $1 billion bet that markets around the world will decline by March of 2020.

The bet comes at a time of unprecedented prosperity in the S&P 500 which reached 23 highs so far this year. Many, like the leadership at Bridgewater Associates, are questioning if the market can continue its bull run which is already the longest on record. Today, diversification seems as important as ever. For many, investments in gold can serve as an attractive alternative to the uncertainty behind traditional equity and bond holdings.

New research from the World Gold Council provides a far-reaching view of what 18,000 survey participants believe about gold. Those included come from India, China, the US, Germany, Canada and Russia.

More than half of those surveyed in the US, India, Germany, and China trust gold more than other currencies, and 67% of all survey participants agreed that “gold is a good safeguard against inflation/currency fluctuations.”

The researchers also looked at what drives demand for gold. They learned that there are three key factors underpinning the retail investor’s decision to buy gold. The study shows that 44% bought gold to manage risk via diversification or simply by shifting money away from more volatile investments to gold, which they believed to be more stable. The study also reported that 31% bought gold on the “recommendation of a financial advisor or a friend.” Finally, 29% bought gold because they believe the price to be low or experiencing an upward trend.

Those buying gold are likely to be focused on the long-term. The research shows that 64% of those who have previously invested in gold would purchase again in the future. Those who have not purchased gold are taking note of the loyalty existing gold purchasers display. Of those surveyed who have never purchased gold, 38% stated that they are open to buying in the future.

It is also interesting to note that despite the timelessness of gold and its longstanding place in the history of commerce, many of those who buy today are being driven by robo-advisors. These programs, driven by algorithms, provide investment recommendations after considering a host of data input by the user. The data indicates that in China 45% of retail investors use this technology to formulate their investment plans.

These robo-advisors appear to be filling a knowledge gap given that the same data shows that half of the participants said that they never hear the media mention gold. Moreover, two-thirds of retail investors stated that they lack the knowledge they believe is necessary to buy gold. Of this group 28% state “I don’t know enough about it to buy it,” and 22% state “I don’t understand what drives price.” The value of more research into gold would help investors construct more diversified portfolios.

As 2020 nears investors have an opportunity to rebuild their portfolios to embrace the looming uncertainty in the investment market and the world at large.

Want to read more about diversifying your precious metals portfolio? Take a look at our proven diversification strategy here.

Investment analysts often discuss volatility. They examine the frequency of fluctuations in asset prices to determine how fickle the market is at any given time. To measure this fickleness, analysts use the VIX Volatility Index, also known as the “Fear Index”. The analogous to this for gold volatility is the GVXX index.

The GVXX index gives investors a sense of the distance between the peaks and valleys of gold prices across a period of trading. Recently, this index has had something interesting to say.

Over the last several days, gold’s volatility has dropped considerably. At the same time, some have noted that another important index has improved. They are referring to the Global Earnings Revision Index. This index measures the degree to which analysts are revising their upgrade and downgrade outlooks for global equities. This index has dipped into negative territory. Some read this movement as a signal that the fundamentals behind this year’s strong equity performance are improving. These recent movements within both indexes are interesting because it shows that “investors do not feel comfortable keeping too much risk on their books and they like to have a hedge in place,” according to Naeem Aslam at Forbes.

In other words, even though analysts are more consistent with their earnings assessments, investors are not eager to go all in on stocks. They want to hedge with gold.

This interest in gold, even during a hot equities market, echoes a recent sentiment from Ray Dalio. He is the founder of Bridgewater Associates, the largest hedge fund in the world with more than $160 billion in assets. “The world has gone mad and the system is broken,” he remarked.

Dalio cited several fundamental problems. He warned that “prices of financial assets have gone way up and the future expected returns have gone way down, while economic growth and inflation remain sluggish.” Dalio also warned that the “process of having money at the top trickle down to workers and others … is not working, the system of making capitalism work well for most people is broken.”

The movement of the GVXX gold volatility index and the Global Earnings Revision Index suggest that others share Dalio’s outlook.  That is, they cannot be won over by exuberance in the stock market. It appears that more investors are learning that the forces propelling equity valuations are more in question than ever before. As a result, more people are taking the steps necessary to safeguard their wealth. They are turning to gold for its dependability as a safe haven asset.

This strategy, however, does not assume that gold prices will remain stable or improve with certainty. Instead, this strategy suggests that the factors boosting stock prices are disconnected from the factors underpinning gold’s value. Therefore, once those equity-friendly circumstances crumble, gold will not crumble with them. The time to strengthen defenses is when times are good. For many that time is now.

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Gold demand continues to climb as overall global purchases rose 3% in the third quarter, the World Gold Council reported.

Global central banks still show an insatiable appetite for physical gold and have already bought 547.5 tonnes (t) in 2019, which is 12% more than last year’s record level.

A massive surge of investment-related gold purchases for exchange traded funds (ETFs) was the main factor driving gold demand higher last quarter, as funds bought 257t of the yellow metal. Gold-backed ETF holdings soared to a record high in September of 2,855 t, representing $136 billion in gold investments.

This shows that investors around the globe crave the diversification that gold offers for your portfolio.

What’s Better? Gold Backed ETFs or Physical Gold

Given these numbers, it’s worth considering why physical gold purchases offer more portfolio protection than an ETF. When investors buy gold-backed ETFs, this form of diversification is more risky than owning physical gold, like a 1 ounce American Gold Eagle coin seen here.

For starters, ETFs do not always follow the price of gold.  There are sometimes outside forces at play that can move the price of paper investments at different rates and in different directions than the spot price of gold. 

ETFs also come with their own set of unique issues, including management fees, marketing fees and storage and insurance fees.  Most notably, investors putting money into ETFs also do not take possession of the gold they’ve invested in and most funds do not allow you to ever take physical ownership. An ETF is a paper investment, which is very different than owning an actual tangible asset that you can touch, hold in your hands and feel the weight and see the beauty of your investment.

It’s a good idea for an investor considering an ETF to read the prospectus to make sure the gold will always be held by the custodian.

Physical gold does not have these same downsides.  When you invest and own physical gold, you are purchasing an investment that has the power to store and grow your wealth. Just look at the plethora of negative interest rate bonds around the globe right now. A negative interest rate bond is an investment that returns 98 cents on the dollar; you lose money just by buying it.

Gold Rose 5% in the Third Quarter

Spot gold price surged to new six-year high in the third quarter.

“The primary factors behind this price momentum continued to be ongoing geopolitical tensions, concerns of a slowdown in economic growth, lower interest rates and the level of negative yielding debt”, the WGC said.

Current Pullback in Gold Offers Investors an Excellent Buying Opportunity

The current retreat below $1,500 an ounce offers investors an opportunity to accumulate physical gold at a better price than last month. See the spot gold chart here and take advantage of this dip to purchase gold at a better price now.

Globalization gets a bad rap.

Just like much of economics, globalization is a zero-sum game.

There are Winners and Losers

American manufacturing workers were losers during the recent wave of globalization. It’s blamed for massive job loss here in America as manufacturers chased cheaper labor opportunities in other parts of the globe. To be fair, however, many economists point out that technology also contributed to the loss of manufacturing jobs.

American consumers won as our purchasing power increased with access to cheap imports, which included everything from sweaters to children’s toys to most items you’d pick up on a weekend shopping trip to Wal-Mart or Target.

The U.S. economy also won with a pick-up in economic growth since 1990. (Economic theory suggests that globalization is good for the world economy and economic growth and that seems to have played out during the recent globalization wave).

The stock market benefits from globalization as it opens borders, which allows higher corporate profits.

Over the past three decades, U.S. stocks outperformed equities elsewhere, Capital Economics notes.

“That in part reflects the success of US companies in harnessing globalization to increase their earnings in foreign markets and improve their margins by outsourcing their production,” Capital Economics said.

History Shows Waves of Globalization

Looking back over the past 150 years, there have been three distinct waves of globalization.

First Wave: 1870-1913

Second Wave: After WWII until the early 1970s

Third Wave: Around the fall of the Berlin Wall in 1989 and gained steam in the 1990s to the present.

Is the third wave ending now? Some economists say yes. And, the populist movement in America is pushing for that.

What’s at Stake

The current U.S. – China Trade war may have deeper implications for the future of global economic growth, U.S. economic growth and stock market returns.

Capital Economics released new research highlighting that “the de-globalization scenario that is most concerning is a deep split between a China- and US-led economic bloc. This could potentially lead to a permanent reduction in trend GDP growth.”

Capital Economics research shows that globalization has boosted asset returns over the past 30 years.

So, it makes sense if globalization halts that would weigh on stock market returns. Both bond and equity returns are likely to be lower over the next decade than in the recent past, Capital Economics said.

“If policymakers threw up major barriers to trade and sought to undo a significant part of global economic and financial integration, the absolute real returns from most assets would suffer and equities and industrial commodities would probably under-perform safe assets, such as high-grade government bonds and gold,” Capital Economics said.

The Bottom Line

The U.S. China Trade war encompasses many issues that are far-reaching to our future.

“If we are right that the trade war reflects China’s strategic threat to the US, then some form of decoupling is inevitable – which will have an adverse effect on global GDP.”

A major shift in the world economic order is underway. East is rising up against West. A breakdown of cooperation could have an impact on your portfolio and your wealth. Safe assets like gold are expected to outperform as the current wave of globalization comes to an end. Do you own enough?

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Investors sometimes hesitate when contemplating a gold purchase. They are unsure of about taking the next step because they find commodities confusing. This uncertainty is understandable. Gold is nebulous. It doesn’t trace back to a product, service, or a board of directors.

In contrast, stocks and bonds are less opaque. They are the life blood of one of the most American of institutions: the corporation. People understand the basic idea of these two asset classes. With stocks you are becoming an owner of a company. With bonds you are becoming a lender to a company.

For too long, people have complicated gold investing by making false, or needlessly complex statements about the precious metal. Here, with the help of research from The World Gold Council, we dispel some of those myths by discussing the three key truths of gold, and one major misconception.

Truth: Gold is Less Volatile Than Other Commodities

Gold is more stable than a host of other commodities. The metal’s annual volatility is well below that of silver, platinum, and several commodity indexes like the Bloomberg Oil Index, the Bloomberg Energy Index, the Bloomberg Industrial Index, and even the S&P GS Commodity Index. Over the past 10 years, gold has been more stable than all of theses other commodities and indices.

Truth: Gold Delivers in High Inflation Environments

Between 1971 and 2018 gold has delivered an average annual nominal return of approximately 15% during periods of high inflation (>3%). What makes this performance so impressive is the fact that it outpaces the nominal average annual return of the Bloomberg Commodity Index over the same period. Even more impressive is the fact that in low inflation environments (<3%) gold still generates a positive return of approximately 5% while the commodities dip into negative territory.

Truth: Gold Behaves Differently Than Other Commodities

Gold is often discussed in investment literature as a commodity. While it is true that gold is a commodity, it is also misleading to discuss the precious metal as if it behaves like all commodities. Consider that gold tends to generate positive performance when volatility increases. For example, during the Great Recession, the Bloomberg Commodity Index lost more than a quarter of its value whereas gold delivered a return just shy of 50%. This same relationship occurred during the second Sovereign Debt Crisis in 2011 when the Commodity Index fell into negative return territory while gold delivered more than 25%.

Lie: Stocks Outperform Gold Over the Long Run

Of all the untrue statements about gold, this one is perhaps the most pervasive and harmful to investors. Over the past 20 years, gold has outperformed many different equity configurations including US stocks and EAFE stocks. In fact, gold has also outperformed the US Bond Aggregate, US cash, and the Bloomberg Commodity Index over the same period. Moreover, even when we extend this time line to the last 48 years we see that US stocks and EAFE stocks only narrowly outperform gold. It is also worth mentioning that this out-performance comes at the cost of increased volatility compared to gold.

Getting it right as an investor means getting the facts and nothing speaks louder, or truer, than data. Take these three truths (and this one lie) as a starting point to explore how gold really helps a portfolio over the long run.