Zoomers, read this if you want to retire one day.
Retirement systems across the world are in danger. Hard assets and inflation edges can save you.
Shrinking youth, shrinking dollar
The uncomfortable truth is that many people from my generation (and those who follow) won’t be able to retire, or at least not enjoy retirement in its current form.
Simply put, our current retirement systems were not designed to support countries with an aging population. They were implemented during times when the working population was significantly larger than the retired population and life expectancy was lower. Western countries’ demographics look vastly different now, take, for example, Germany:
Less than half of the population is of working age, and a good chunk of them is not even working. This change in demographics is already putting immense pressure on pension systems worldwide, and the trend is set to accelerate in the years to come.
The consequence of all that is that the money that was supposed to pay for your parents’ retirement is already gone. The money that was supposed to pay for your retirement is also gone. But, what might they use for money?
Now, social security services won’t just default and tell you or your parents, “Too bad, so sad, no payout for you.” It’s likely that first, governments will attempt to increase taxes furthermore or create new absurd taxes (like Australia’s brand new tax on unrealized capital gains) to fund the pensions.
When there won’t be anything left to tax, you might still receive your respective amount, but the purchasing power of that number will be so drastically reduced that it will be impossible to live off of.
The reason for that is that Western countries have a severe debt problem, with the United States leading the pack. Bear with us, because this math is relatively disgusting:
At the federal level, the U.S. owes $36,000,000,000,000 in on-balance-sheet liabilities (the government's visible debt), and that number grows by $2,500,000,000,000 a year.
Additionally, the net present value of off-balance-sheet liabilities (future obligations of the government, such as those of Medicare, Medicaid, etc.) exceeds $100,000,000,000,000 according to the Congressional Budget Office.
So the current total debt is $136,000,000,000,000. But, don’t be alarmed, it gets worse: the IRS has suggested that the aggregate net worth of American taxpayers is $141,000,000,000,000. So, there is a mere $6T difference, while the debt increases (in total) by $5T a year.
There are only two solutions to this. Either the US defaults, or it inflates away the net present value of this debt. Scott Bessent, United States Secretary of the Treasury, has made it clear that the preferred solution is, of course, the latter.
For non-American readers, this unfortunately also applies to the rest of the developed world and their respective currencies, with the G7 public debt averaging 128%. Decades of financial mismanagement and quantitative easing have left Western states with no option but to sacrifice the purchasing power and real value of the pensions of their own citizens in order to avoid default.
This piece can come off as alarmist. Unfortunately, the debt is real, the devaluation of your currency is real, it is happening right now, and it affects you. The government has lost control of its finances. We find that Lyn Alden’s metaphor of an unstoppable train accurately describes the situation: “Basically, what that means is they don’t have brakes anymore. Nothing stops this train because there’s no brakes attached to it anymore.” It’s time for zoomers to take control of their own destiny.
Gold to the rescue
Now that the bear case for fiat currencies has been established, let us establish why this same math represents the bull case for Gold. Historically, people tend to buy Gold when they are scared that their currency’s purchasing power is declining. That is because Gold has done an excellent job of maintaining purchasing power for thousands of years. It can’t be inflated away. Further, it has shown resilience across economic cycles and geopolitical changes, enjoys high liquidity, carries no credit risk, and is scarce. Benefiting from multiple demand sources (investment, jewelry, technology), it does not rely on specific industrial applications as opposed to other metals.
Why choose gold over stocks if stocks can yield higher returns? It’s not a matter of choosing one over the other. Gold should complement stocks within a diversified portfolio.
In the perspective of retirement, owning an asset class decoupled from the stock market is critical. Imagine someone ready to retire but whose portfolio consists solely of stocks or mutual funds during a bear market. They may be forced to delay retirement because they cannot sell at a favourable price and might have to wait several years for the market to recover. On the other hand, gold acts as a hedge during bear markets, allowing for withdrawals or liquidity to buy stocks when they are cheap.
A testimony of its faculty to retain/gain value in harsh economic times is the 1970s, when the Dollar lost 75% of its purchasing power. Between 1971 to 1980, Gold went from 35 Dollars to 700 Dollars.
Why are we convinced that this will happen again? First, gold is denominated in U.S. dollars. Second, we argue that gold is more than a simple hedge. Over the past 25 years, gold has delivered average annual returns near 9%, matching equities and better than bonds. There is still plenty of room for growth on top of that. While it is already popular in Eastern cultures (China, India) to save in Gold, the West has not yet fully adopted this trend. In fact, the market share of Gold as an asset class in the West is historically low.
Investing in Gold 101:
These are the three main ways to invest in Gold:
Physical gold (coins, bars)
Gold ETCs (Exchange Traded Commodities)
Gold mining stocks
Physical gold is the best, but it requires secure storage. Also, you pay a small premium to your dealer, so physical Gold shouldn’t be traded; it should be kept for years to decades. Gold ETCs, in contrast, are super liquid, easy to trade, and convenient. You don’t need to take care of storage either, just buy the ETC in your brokerage account. For American investors, we recommend PHYS 0.00%↑ (Sprott Physical Gold Trust), whereas for Europeans, good options include iShares physical gold, Xetra-Gold, and Euwax Gold. The option with the most leverage (to the upside AND downside) is gold mining stocks. These come with lots of additional risk, but in a gold bull market, these stocks truly scream. For beginners, we recommend the biggest and the best: AEM 0.00%↑ and FNV 0.00%↑.
However, please always keep in mind that gold holdings should still be diversified with other assets to balance risk and return. Also, understand that gold does not generate income like dividends or interest, i.e., it has no yield. There are some interesting methods to generate income with gold, like Monetary Metals, but we haven’t tried them yet.
For beginners just getting into it, we would recommend starting with a small allocation to gold within a diversified portfolio. Use reputable dealers in your area or platforms for physical gold or ETCs.
Platforms where you can purchase gold ETCs easily include:
Trade Republic (Europe)
Trading 212 (Europe)
Wealthsimple (Canada)
Robinhood (US)
IBKR (worldwide)
If you already have a brokerage account somewhere, you can likely buy a Gold ETC with it. As long as you have access to the NYSE and TSX, you can also buy the majority of gold mining stocks (some are also on the LSE, ASX, or TSX-V).
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