Checking Up On Gold With Mark Biller

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Learn more at soundmindinvesting.org. Charles Dickens is credited with coining the phrase, as good as gold. But how good is gold, really? Hi, I'm Rob West.

Inflation and several bank failures have a lot of folks thinking about buying gold and other precious metals these days. Mark Biller joins us today to give us his point of view. Then it's on to your calls at 800-525-7000.

That's 800-525-7000. This is faith and finance, biblical wisdom. Biblical wisdom for your financial decisions. Well, the inimitable Mark Biller is executive editor at Soundmind Investing and underwriter of this program.

Folks have tried to imitate him, but so far no success. Mark, great to have you back with us. Oh, that is quite an intro, Rob.

Thanks for having me back. We're delighted to. Hey, Mark, the latest issue of your newsletter featured a deep dive on gold. Listeners can, of course, go to soundmindinvesting.org and read that article. It's titled Checking Up on Gold. But why don't you set the stage for us by explaining why a lot of gold watchers expected gold prices to be halfway to the moon by now and why that hasn't happened?

Yeah, absolutely. So when investors think about gold and what drives its price, there are a handful of things that stand out in their minds. So inflation is certainly a big one. Government spending might come to mind, war and other types of fear events and so on and so forth.

And so when you think back over the last three years, what have we had? We had a global pandemic and all the fear that went along with that. Then we had massive monetary and fiscal stimulus, which led to the most significant inflation spike we've seen in 40 years.

And then on top of that, we had a major war break out in Europe. So since then, we've continued to have, you know, high government deficit spending, tons of market uncertainty. The point I'm trying to make, Rob, is when you add all this up, it would seem like this would have been the perfect storm to drive gold's price massively higher.

Yeah, but that really hasn't happened. You know, if we look back, gold peaked in August of 2020 at around $2,070 per ounce, then it fell over 20%. And last November, it was trading just a little above $1,600.

We've had a nice bounce back since then towards the 2000 level again. But the point I'm trying to make is that gold is actually cheaper today than it was in the summer of 2020, despite all these things that have happened since then. Yeah, and clearly that has perplexed many people.

So what do you attribute this to, Mark? Well, one of the main points that we make in the article is that gold isn't just one thing. And what I mean by that is gold is an inflation hedge, but it's not just an inflation hedge.

It is a hedge against war and other fear trades, but it isn't just that either. So gold responds to a lot of different factors, and expecting it to trade perfectly relative to any one of those factors often leads to a lot of confusion and disappointment by investors. Now, ironically, the one factor that probably correlates the best to gold's performance is one that most people don't really think about at all, and that's interest rates.

Now, when we think about it in those terms, the past couple years make more sense. So in the summer of 2020, interest rates were at rock bottom levels, and they've climbed really significantly since then. If we look at the Fed Funds rate, for example, it was less than a quarter of 1% in 2020.

Today, it's nearly five and a half percent. So that big move higher in interest rates has played a significant role in keeping the price of gold from soaring higher like so many people expected. In fact, we make a pretty strong case in the article that based on what interest rates have done over the last couple years, we would actually normally expect gold to be significantly lower than it is today.

So really, rather than be disappointed that it isn't higher, I'm kind of impressed that it's held up as well as it has. Yeah, that's really helpful and brings some explanation to why the movement and the price of gold has done what it has done. Well, Mark, we'll continue to unpack this just around the corner.

Folks, we'll get into much more on this. Why do interest rates matter and what does the outlook for interest rates say about where gold might be headed? What is the outlook for gold and what are the different ways you can invest in gold? We'll talk about all that and more with Mark Biller. He's executive editor at Sound Mind Investing.

You can read this article called Checking Up on Gold at soundmindinvesting.org. We're back with much more plus your questions just around the corner. 800-525-7000.

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Simply go to faithfi.com and click app to get started. It's delighted to have you with us today on Faith and Finance. I'm Rob West. Joining me today, our good friend Mark Biller, executive editor at Sound Mind Investing and underwriter of this program. We're talking about the recent article in the Sound Mind Investing newsletter called Checking Up on Gold.

It's a topic that interests a lot of our listeners. Many of you have been calling lately asking about the proper place for gold and precious metals in your portfolios. And Mark, just before the break, you were talking about the recent action in gold and why perhaps it hasn't performed in the midst of the uncertainty and the high inflation and the prospect of a recession. It hasn't performed quite as well as folks might have expected and that was a helpful analysis. As part of that, you said that interest rates play a big role in the movement of gold.

Why is that? Well, Rob, I think the simplest way to think about that is to recognize that gold doesn't pay investors any type of yield, whereas most other safety assets do. And what I mean by that is any type of savings account or bond or other traditionally safe places to park money. Those have all been offering higher and higher yields as interest rates have been rising over the last two years. So that makes those assets, those alternatives to gold, more attractive relative to gold, which isn't paying a yield at all. So because of that, we typically see historically that gold rises in price as interest rates fall and then vice versa as interest rates rise as they have been the last couple of years.

Yeah, very helpful. So given that, given the trajectory of interest rates, probably next year, starting to come down, what does that mean then for the price of gold? Well, gold has been expecting interest rates to kind of cap out at much lower levels than they actually have this whole way up. So the bond market has kind of been wrong all the way along with this interest rate increase, which, of course, is what makes it so tricky being an investor because it's hard to predict what these things like interest rates, just like other markets, what they're going to do in the future.

Very good. Well, that's a really helpful overview of what drives gold prices, Mark. So how does SMI typically suggest investors approach owning gold or other precious metals? There's, of course, a difference between physical gold and trading gold and exchange traded funds, right?

Yeah, there certainly is. And both have different pros and cons. You know, owning physical metal obviously has a lot of advantages.

You've got it right there in your hands, if things ever really get bad. And there's no counterparty risk where you're relying on a bank or a fund company to make good on the gold that you own through a fund or an ETF. There's a lot to like about owning physical gold directly.

It's why so many people do that. But owning physical metals also has some downsides. And one of the big ones is it's really expensive buying and selling physical metals is really expensive. Most people can't reasonably dollar cost average or make frequent purchases and sales of physical gold. And you can also run into the issue that beyond a pretty minimal dollar amount of physical gold, you really have to start thinking carefully about the safety of storing it at home. And if you don't store it at home, then you've got storage costs and the downsides of not having it right there in your hands. You've got kind of this push and pull about owning physical metals.

So SMI typically breaks it down this way. We think that having a small allocation of physical gold is a great idea. But we encourage our people to think of that as kind of a forever allocation. Ideally, you'd never need to sell this, you're more likely to leave it to family members or heirs.

Of course, you could sell it in a pinch. But the point of thinking about it that way is to put it more or less off limits in someone's mind, so that the transaction costs aren't an issue. And for most people, if they think about it that way, it kind of limits that allocation to physical gold to maybe 5% or less of their total portfolio allocation. Then on top of that physical forever gold allocation, we use the gold ETFs to supplement that allocation as conditions warrant. So these gold ETFs trade just like any other stock or mutual fund makes them really easy to buy and sell unlike physical gold. And we have a particular SMI strategy that provides us with signals as to when we think it's a particularly good or bad time to have a higher allocation to gold. So if we put those two ideas together, most of our SMI members have a small constant allocation to physical gold. And then they also have a variable allocation to gold ETFs that goes up and down as gold moves in and out of favor. Yeah, but you would typically cap that exposure among those buckets at no more than a total of 10%.

Is that right? Well, that's probably a good rule of thumb because we're taking our allocation up and down and sometimes we actually have zero additional allocation. At its peaks, we will sometimes go up above 10. I wouldn't recommend that for most people who are trying to set kind of a constant allocation in their portfolio, but because ours might go up as high as say 15% at times and then other times it's at zero. If you average that we're below 10 over an extended period of time, we just have a little more variability than most people probably would if they're trying to do this themselves.

That's really helpful, Mark. All right, so we've established that gold prices have been somewhat disappointing recently, but give us your outlook there at SMI for gold moving forward. Yeah, I'd say, Rob, that the long-term outlook for gold is strong and that's largely based unfortunately on the observation that government spending has really taken off since the COVID crisis. I don't see any reason to think that's going to change and on top of that, I still think a recession is likely sometime in the next year and government spending always soars during recessions.

So my base case is lots more government spending. Probably that means we'll be fighting inflation off and on for some period of time still. And now all of that is a good long-term backdrop for a higher gold price. I think as more people realize that this government spending is going to continue, interest in gold and precious metals is going to keep going. I would just offer a quick caution, which is if we have any type of panic or crisis going into that recession, gold usually sells off at the beginning of that. So those people who are inclined to maybe load the boat right now on gold, it may be a little early to do that because it usually sells off as markets fall and only after they've fallen then does gold typically rebound and perform real strongly as interest rates come down and the government measures ramp up.

So you might want to just not load the boat right here and keep some powder dry in case you do see that type of a panicky selling move on the front end of a recession if that is how this all plays out over the next year or so. Wow, that's so helpful. We've covered a lot of ground. Unfortunately, we're out of time, Mark. But thanks for giving us a real education about gold and how to invest in it and other precious metals. Thanks for stopping by. Always my pleasure, Rob. That's Mark Bill, our executive editor at Sound Mind Investing.

The article we've been discussing is at soundmindinvesting.org. Just look for Checking Up on Gold. Your calls are next. Stay with us.

We'll be right back. Getting started to those getting ready for retirement through scriptural principles and practical suggestions, SMI offers financial wisdom for living well. More information, including the short video webinar on profit and peace of mind, no matter what's happening in the market, is available at soundmindinvesting.org. Because of my past health history, finding affordable health care was nearly impossible. But then I found CHM, where costs are not adjusted based on medical history. Christian Health Care Ministries even provides the freedom to choose my own providers. And the best part, CHM members pray for me. Too good to be true?

It's not. I'm a proud member of Christian Health Care Ministries, and if you think it could be right for you, learn more at chministries.org. Welcome back.

This is Faith and Finance. I'm Rob West. We're taking your calls today. 800-525-7000. That's 800-525-7000.

By the way, you don't have to call. Just send an email. AskRobAtFaithFi.com. That's AskRobAtFaith, the letters F-I dot com. 800-525-7000. Let's head to Lowell, Indiana.

Hi, Ann. Go ahead. Yeah, I heard earlier that you said I-Bahn rate is going down.

I purchased an I-Bahn March of 2022, and I just want to know how soon would you advise for me to close that account? Yeah, that's a good question. Let's talk about what this money is for.

Do you have it earmarked for any specific purpose? To make money. Yeah, okay. Yeah, I mean, you know, they were at 9.3%.

That was great. And then it dropped to 6.89%, and now it's at 4.3%. You know, the rate on the I-Bahn's is a rate that has to do with, you know, there's a fixed portion, which is at zero, and then there's a portion that changes with inflation.

And as the Fed aggressively fights inflation, you know, the composite rate is going to come down on these I-Bahn's, and I would expect that 4.3 is going to be some number lower. So when you get to the end of this six-month period where you've got the current rate in place, because you get six months from the point in which you buy it at the prevailing rate, and then you'll get six months at the next rate. So when this current six-month period runs out based on the 4.3% rate, then I would probably look to go ahead and cash it out, which you can do because you're beyond a year. You're going to pay a small penalty of three months' worth of interest because you took it out in less than five years, but that's okay. And then at that point, based on your goals and objectives, I would redeploy it, whether that's into a one-year CD at 5.5%, or if you have a longer time horizon and you want to take a little bit of risk, maybe put it into a bond portfolio because bonds will do well.

They're not guaranteed. You could lose value, but bonds will do well as interest rates come down, and they will come down probably starting next year. So I think there are a lot of other options there, whether it's guaranteed bank products or some more conservative-type investment products. But I think when we get to the end of this current period, and you'd have to go to treasurydirect.gov to see when this current six-month period would be up, that's probably the time for you to go ahead and cash it out.

The interest would be credited, that's taxable, and then you could transfer it back to the funding account that you used to buy the bonds in the first place and then redeploy it at that point. Does that make sense? Yes, it does. I'm just a little bit confused about the period because I purchased it in March. I don't know how long I was at that higher interest rate. If I purchased it in March, did it go all the way till September?

Yes. So from the period you bought it, whatever the prevailing rate was during that period, you would have gotten that for a full six months. And then at that point, it would have shifted to the new lower rate that came out in April of this year. Let's see, you bought it in March of 2022. Is that right? Yeah, so then you would have shifted to the rate that came out in November, which was the 6.8%.

And that's probably still what you have now. Oh no, let's see, you just went down to the lower rate, but basically it works in six-month increments. So six months from the date you bought it, you got the initial rate, and then another six months, and now you're into your third six-month period.

So when you get to 18 months beyond when you purchased that bond, so 18 months beyond March of 2022, that's probably the month to sell it. Okay, very good. Thank you so much.

Okay, thanks for calling. We appreciate it, Ann. God bless you. Let's head to Grand Rapids. Hi, Teresa, go ahead. Yes, hi. My name is Teresa, and I just bring you blessings from Grand Rapids, and I'm such an honor to be speaking here today, and I thank you for taking my call. Yes, ma'am. Thank you. That was very kind.

Go ahead. And Robert, I was just wondering, how do you finally figure out how to break the back of poverty off of your life? You know, I'm a single working mom. I have two sons, but it's just always living paycheck to paycheck. You know, I tied, I sold, but it's just like not enough. And of course, I want to be in a position where I can actually have something put in savings, some type of cushion, and there's just not enough hours in a day.

And I didn't know how you could give me information or should I maybe follow one of the apps that you guys have and use my budget on an app and what I could do to make things better for me and my situation. Yes. Well, I appreciate that. Teresa, did you say you have children still at home? Yes, I do. I do. I have a son that's 20 that's in college, and I have a junior in high school, so I got two juniors, one in high school and one in college.

Okay. Well, I know how challenging that is, Teresa. I've counseled hundreds and hundreds of single moms and dads over the years, and it's just challenging when you've got kids at home. It's a blessing to be a parent.

I'm not saying that it's not, but it's challenging financially when you're on a limited income and you've got growing boys that are, you know, they need a lot of food and there's a lot of expenses to go around, and it just seems like there's always more month than money. And, you know, it all comes down to, first of all, I think trusting the Lord, and clearly you're giving honor to God as your provider, and I think that's the beginning point. Recognizing you want to be a wise and faithful steward, recognizing that we've got to live within God's provision, be content with what he's provided and live within that, and I realize that's much easier said than done when you've got a lot of bills and you've got limited resources. It's all going to come down to that spending plan.

I love that you're a giver. I think that's key. That's going to break the grip of money over your life. But ultimately, we've got to get this budget such that we are living within God's provision, we've got a little bit of cushion or margin so we can build up some emergency savings and break the cycle of any borrowing that's going on there, and that's challenging. And what I'd like to do, I mean, yes, the Faithfy app would be a great resource for you to help you, but I'd like for somebody to journey with you, somebody to pray with you, somebody to help you set up that budget, maybe give you a fresh perspective on your income and your spending. So I'm going to have one of our certified Christian financial counselors call you. We're going to cover the cost of that, just as our gift to you, and that person will walk with you for the next few months and see if we can get you turned around, and then let's get you back on the air at that point to talk about it. Teresa, you stay on the line.

And that's going to do it for us today. I really appreciate your taking time to listen to this program and to committing the principles we talk about each time to your financial life. You see, God's plan isn't difficult, but it does take discipline, and I hope we can encourage you along the way as you listen to this program. Incidentally, if you've been helped by what you've heard here, would you mind helping us? This broadcast, the Faithfy app, and the other great resources we provide wouldn't be possible without the financial support we receive from listeners like you. If you're not yet one of our financial partners but would like to be, would you visit our website, faithfy.com, and then click the Give button to sign up. We'd certainly be grateful. Thanks for listening and sharing, and I hope you'll come back and join us again next time for another edition of Faith and Finance. Faith and Finance is provided by Faithfy and listeners like you.