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The Fed’s
triennial Survey of Consumer Finances (SCF) came
out last week and the results
were nothing short of astounding. The data show that
the Great Recession wiped
out nearly 40% of the typical
American family’s net worth.
“Data from
the 2007 and 2010 SCF show that median
income fell substantially and that mean income fell
somewhat faster, an
indication that income losses, at least in terms of levels, were larger for families in the uppermost part
of the distribution. Overall, both
median and mean net worth also fell
dramatically over this period—38.8 percent and 14.7 percent, respectively.”
Median
family net worth plunged from $126,400 in 2007 to $77,300 in 2010, close
to levels not seen since the 1992 survey. The median, as the Los Angeles Times pointed
out is “the point smack in the middle of those richer and poorer.” In other words, the middle class bore — and continues to bear — the brunt of the
Great Recession, largely because the vast majority of middle class wealth
was wrapped up in the family home and the stock market;
either through direct investment in shares or through retirement plans.
 
According
to the Fed, another key contributor
to the erosion of wealth
over the period, was the marked decline in
“business equity”. This may be of particular
interest to the business owners
and professional
practitioners that
comprise a very large percentage
of our client base.
A Washington Post article summed it up thusly: “Over a span of three years, Americans watched progress that took almost a
generation to accumulate evaporate. The promise of retirement built
on the inevitable rise of
the stock market proved illusory for most. Homeownership, once heralded as
a pathway to wealth, became an albatross.”
Certainly
some are no-longer among
the ranks of homeowners,
and some have unquestionably
reduced exposure to equities, either as a strategic move or out of necessity.
However, perhaps unsurprisingly, investors remain dominantly allocated to the traditional asset classes.
Case in point: A recent
article featured on the website
of the American Association of Individual Investors (AAII) on the topic
of asset allocation suggested
“the three most
important asset classes for individuals
are stocks, bonds and cash.” Talk of diversification focused on sub-asset
allocation; “diversifying among
growth and value, large cap and small
cap, U.S. and international, and so on.”
While
the piece concedes that institutional portfolios
“have a range of up to 12 asset
classes,” all-too often
(beyond real-estate in
the form of the family
home) stocks, bonds and cash are presented as the only options for individual
investors.
Despite
a myriad of extraordinary
measures on the part of Congress
and the Fed, a true US economic
recovery remains elusive to this day. Yet, the Fed’s über-easy monetary policy has contributed to a rebound in the
stock market, commencing with the announcement of QE1 in 2009. Such policies lured investors right back into one
of the asset class that had just bitten
them badly, by pushing yields on bonds and
cash below the rate of inflation.
In fostering
a negative real interest
rates environment, the Fed has succeeded
in discouraging saving,
and pushed investors out along the risk curve. Rather than losing money in real terms with cash deposits and bonds, investors seem willing to take their chances with equities once again.
What
the Fed survey data said
to me was that the
portfolios of US families — and particularly those of middle
class families — were
improperly allocated and could have benefited from diversification into an
alternative asset such as
gold. From the beginning
of 2007 until the end of 2010, the price of gold rose 122%. Over the longer period noted in the chart below (1989 to 2010) gold
is up 243%. Even a relatively small allocation to physical gold (we recommend 10% to 30% of net assets)
could have significantly mitigated the devastating
impact of the Great Recession on the family balance sheet. Yet, physical gold remains a grossly under-owned asset.
Egon von Greyerz, the managing director of Matterhorn Asset
Management AG in Zurich says “Less than 1% of investors own gold.” The most recent Erste
Group study puts a finer point on it:
“The global equity
markets are currently valued at USD 56 trillion according to Bloomberg, while
the fixed income segment amounts to USD 91 trillion according
to BIS. If we assume that
only 20% of the gold reserves
are investable (i.e. come in the form of bullions, ETFs, or
coins), this would
translate into a value of USD 1.4 trillion (at USD 1,500/ounce) and into an allocation of close to 1%. In comparison with bonds, gold
holdings are small: bond holdings worldwide amount to almost USD 14,000 per capita, whereas
gold reserves per capita are less
than USD 1,180.”
In the
May issue of our newsletter, USAGOLD president Michael J. Kosares wrote an excellent article in which
he suggested, "just as we inoculate
our bodies against disease, we should
inoculate our
portfolios." The devastating plunge in the net worth of
American families in recent
years clearly indicates that families would be well served
to heed that advice. With gold trading near the midpoint of the 6-month range, arguably
the medicine for beleaguered
portfolios is pretty reasonably priced right now.
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Peter Grant spent
the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's.
Pete spent twelve years with S&P - MMS, where he became
the Senior Managing FX Strategist.
The financial press frequently reported his personal market insights, risk evaluations and forecasts.
Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief
Metals Trader for a Denver based
investment management firm.
This
special report is distributed with the understanding that it has been prepared for informational purposes only and the Publisher or Author
is not engaged in rendering legal, accounting, financial or other professional services.
The information in this newsletter is not intended to create, and receipt of it does not constitute
a lawyer-client relationship,
accountant-client relationship,
or any other type of relation-ship. If legal or financial advice or other expert assistance is required, the services of a competent
professional person should be sought.
The Author disclaims all warranties and any personal liability, loss, or risk incurred as a consequence of
the use and application, either directly
or indirectly, of any
information presented herein.
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