Why I am Holding Cash and Gold

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I would like to welcome a very special guest writer to the blog. Lyn Alden Schwartzer is the owner of Lyn Alden Investment Strategy. She is also a frequent, very popular writer on the financial blog Seeking Alpha where I also contribute articles. 

Lyn’s work has been featured in a host of well known financial outlets which include: Time, Forbes, the Street, Market Watch, Morningstar, Fidelity, Reuters, CNBC, and a host of others. Lyn also has a free investment newsletter on her website for those interested in following her work. 

This article is a summary of her post on Seeking Alpha, which you can read in full by clicking on her profile link.

*Note I will be summarizing Lyn’s article and her thoughts on her current investment strategy, at her request.

Why I am Holding Cash and Gold

Lyn’s Summary

  • The United States is running an unusually high federal deficit of 4% of GDP, projected to soon increase to 5% of GDP, during a bull market and economic expansion.
  • Ten-year treasury yields recently dropped from over 3.2% to under 2.7%; I’m taking my profits and moving most of my bonds to cash-equivalents and ultra short-term bonds.
  • While my portfolio remains highly diversified, I prefer cash-equivalents and gold as safe-haven assets rather than 10+ year U.S. government bonds at this time.

Lyn outlines her current investment strategy in equities, bonds, and precious metals in the article.

I have a highly diversified portfolio of U.S. equities, international equities, REITs, bonds, and precious metals.

For the equity portion of my portfolio, I’m overweight high-quality, low-debt North American dividend stocks and emerging markets ETFs.

Recently, I shifted my bonds to being very short term, more like cash-equivalents. I specifically bought the SPDR Bloomberg Barclays 1-3 month T-Bill ETF (BIL) and the Invesco Ultra Short Duration ETF (GSY). This article explains why.

Lyn  mentions that with 10 year treasury yields being low, she is invested more in the short end of the debt market. Given the recent yield curve inversions in certain bond pairs, it makes more sense to hold shorter term debt because the rates are very similar to the 10 year. It doesn’t make sense to take the longer term risk without receiving more yield for the longer time horizon.

In addition, the uncontrolled federal deficit which has been outpacing the GDP for the last 40 years is not sustainable. Entitlement spending projected by the Congressional Budget Office should increase pressure on deficits going forward. Therefore, locking money in long term US debt is not attractive to Lyn at this time.

Lyn’s believes that treasury rates should rise due to the following factors:

  • Slack demand from China and others diversifying from the US dollar
  • The Fed is tightening their balance sheet
  • The deficit will increase during the next recession, hurting the US credit score and potentially affecting yields
  • US debt is high and yields will likely increase
  • Tariffs may be inflationary in the current economic environment

Lyn advocates holding a 5% allocation of gold in a portfolio. Gold is a safe haven asset and does not have someone else’s liability as bonds and stocks do (e.g., no counter-party risk). Lyn has held physical gold in the past and sold during the last bull cycle peak in 2011.

Lyn also recommends gold streaming companies because they lower break even costs and higher upside than many of the mining companies. Lyn holds gold mining companies that have low AISC in production and a good management history.

Lyn leaves us with this last thought in her article summary.

Over the long term, I’m bullish on high-quality dividend stocks, several emerging markets with low valuations and high growth, and precious metals. I’m more concerned about Europe, Japan, the United States, and intermediate/long-term debt in general.

Our Thoughts:

I want to thank Lyn for allowing us to provide her thoughts on the stock, bond, and precious metals markets. It is very gracious of her to allow our readers access to her investment strategies.

We see more analysts turning from long term bonds and into the precious metals sector as this current bull market ages. The typical allocation recommendations we see from prominent analysts like Lyn are 5-7% in some mix of physical metals, miners, and gold streaming companies.

We believe more investment analysts and money managers will follow suit, and this is very bullish for the gold price in the intermediate term (1-3 years). The depth of the coming recession will determine gold’s overall value. Gold is a relatively small market compared to stocks and bonds, and any reasonable movement of investment capital into gold should see the price rise substantially in the next several years.

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