Financial markets are famously difficult to predict, so you need a backup plan if you want to be able to retire and stay retired. Ideally, this backup plan would do best when stocks are at their worst. Bonds fulfilled this function reasonably well for many decades, but low interest rates make bonds a much less attractive asset class today. Precious metal prices may move up or down with stocks on a daily basis, but gold and other precious metals are probably the best hedges when you look at entire decades.
Today's prosperity is not guaranteed to last. The 1990s bull market gave way to the bear markets of 2000-2009, and the S&P 500 lost almost 30% after adjusting for inflation. During that same 2000-2009 period, gold went up nearly 200% in real terms. Merely investing 20% in gold instead of stocks would have been more than enough to preserve purchasing power over the decade.
It is true that long-term bonds provided retirees with decent returns after 1982, but we also know that those returns cannot be repeated. Unlike stocks, the returns on government bonds before inflation have been entirely predictable. In early 1982, the yield on 10-year treasuries was over 14%. By 2000, the yield had fallen to about 6.5%. The yield on 10-year treasuries is just 2.9% in 2018, while inflation is near the Federal Reserve target of 2%. That is a real return of only 0.9%, which is not nearly enough for most retirees.
It is certainly possible for stocks and bonds to decline simultaneously. By the end of the 1970s, large company stocks and long-term government bonds had both lost more than 13% after adjusting for inflation while gold rose over 600% in real terms. Investing just 20% in gold instead of stocks or bonds during the seventies would have been more than enough to double your wealth. Some may object that it was not legal for Americans to own gold bullion during the early seventies, but it was legal to own silver. Silver went up over 700% in real terms during the 1970s.
Everyone needs to consider the possibility of another lost decade because most of us can expect to live for a long time after retirement. The life expectancy at age 65 is 86.6 years for American women and 84.3 years for men. That's an expected retirement of about 20 years! What are the odds that they'll both be good decades for stocks? It would have worked if you retired in 1980. If you retired in 1960, 1970, 1990, or 2000, then the next 20 years featured a decade of negative real returns for stocks.
Lost decades in the stock market are not a black swan or a statistical fluke; they are a regular feature of financial markets. When the stock market fails, history shows that even a 20% allocation to precious metals can provide a golden parachute for your retirement.
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