This week, our focus has been on the spreading panic over the coronavirus.

As I (Chris) have been reporting, this panic has led investors to take stocks to the woodshed.

On Wednesday, the Dow plunged into a bear market (defined as a 20% or more drop from a peak).

And the S&P 500 wasn’t far behind.

But regular readers shouldn’t sweat it too much. With the help of colleague Teeka Tiwari, I’ve laid out a wealth-protection plan for you in March 4’s and March 9’s dispatches.

Today, I want to deal with some important questions around our favorite precious metal here at the Cut – gold.

I’ve been recommending you stock up on gold since we launched the Cut to all paid-up Legacy Research subscribers in August 2018.


And since then, it’s up 20%.

As regular readers know, one of the main reasons you own gold is as “disaster insurance.”

In short, gold tends to rise as stocks plunge. This makes it a great way to hedge – or insure against – stock market turmoil.

But at least one reader expected more from gold…

Hi Chris, why has the price of gold fallen dramatically, since the VIX [the Volatility Index, Wall Street’s “fear gauge”] has gone up, stocks are down, and there is panic about the C virus? This seems odd to me.

– Tom K.

My answer: It’s a great question, Tom. Thanks for asking it.

Since the coronavirus made front-page news in the U.S. on January 8, gold is down 3%.

That compares with a fall of 16% for our regular stand-in for the U.S. stock market, the S&P 500.

Take a look…


But that doesn’t worry me one bit.

Gold’s fall is a result of its recent strength… and has nothing to do with it no longer being a safe haven.

As the old-timers on Wall Street say, “When the times are dire, you don’t sell what you want, you sell what you can.”

That’s exactly what some overleveraged traders have been doing with their gold.

That’s because of margin calls.

Some traders borrow money from their brokers to buy extra shares and amplify their gains in a bull market.

And they often use their shares as collateral to back those loans.

If the value of that collateral falls… as it does in a stock market crash… the broker who loaned an investor the money can issue a margin call. That means the investor must add cash to bring his account level back up to the required minimum.

Investors typically sell other assets to raise the cash to satisfy the margin call. If they don’t, their broker could take their shares from them, and they’d lose everything.

That’s exactly what we saw happen with gold back in 2008.


As you can see, when the U.S. was in the thick of the financial crisis, gold fell along with the stock market. However, over time, gold rallied back sooner and more intensely than stocks.

What made the situation worse this time around was that, at the start of February, the level of cash in investors’ accounts was the lowest since March 2013. That’s according to research by BofA Securities.

This forced investors to sell even more of what they could get their hands on… including their gold.

Although this isn’t an ideal situation, I expect gold to be one of the best-performing assets over the months ahead.

Remember, the market sell-off has only strengthened the case for owning gold.

As I showed you here, when the next recession hits, central banks will unleash a tidal wave of new cash. And investors will pile into gold to protect their buying power from the onslaught of paper money.

Sticking with gold… here are some of the other questions and answers we’ve featured from the analysts here at Legacy…

First up, a question for gold industry insider E.B. Tucker

Reader question: I’m retired now and in the same boat as some of your other readers. I cannot put a lot of cash into physical gold, but I could redirect a certain amount of my 401(k) funds into gold stocks, but I’m not sure about ETFs [exchange-traded funds].

Without giving investment advice, could you go into more detail about the difference between investing in actual physical gold and investing in physical gold stocks and ETFs?

– Anonymous

E.B.’s answer: Before owning a gold stock, it’s wise to have some physical gold. That’s because gold is a tangible asset that you can hold in your hand. It’s real money, a safe-haven asset, and a way to protect your wealth. It’s survived every financial crisis and will continue to do so.

Then, you can speculate on higher gold prices by buying gold miners, which gives you the chance to multiply your money in a gold bull market.

You can look into an ETF like the VanEck Vectors Gold Miners ETF (GDX), which holds a basket of gold stocks.

But the best way to take advantage is by following our advice in my Strategic Investor newsletter. In our core portfolio, we have a world-class gold miner that’s up more than 45% since we added it last year. This is no penny stock. This multibillion-dollar miner turns a profit and pays a dividend.

Just remember, gold stocks are extremely volatile. Like in any industry, the stocks of stronger companies will go up more than those of weaker ones. As always, never bet more money than you can afford to lose.

It takes only a small stake in the right companies to make a fortune as gold prices rise.

Next up… our resident “rock hound” (aka geologist), Dave Forest, answers another question about investing in gold through your retirement account…

Reader question: Hello. Can you please recommend the best mutual funds for gold? I am restricted to buying mutual funds in my 401(k) from my employer, so I would like to know which ones you recommend. Thank you!

– Marla H.

Dave’s answer: I don’t follow or invest in mutual funds, so it’s a bit hard to comment on specific ones. But it’s hard to imagine any gold-linked investment being a bad decision as we weather another big stock market collapse.

In general, all gold-linked investments did very well in the wake of the 2008 crash. They initially dove with everything else, but they recovered those losses in a matter of months – and then went on to significant gains. So in short, yes, I think gold mutual funds would be fine to invest in, especially if you’re worried about a crash.

In the short to medium term, junior gold exploration stocks are a better bet. Those tiny stocks tend to enjoy a delayed rise, a little after physical gold prices move up. That “wave” is still coming, and I’m positioning in the juniors ahead of it.

But in the long term, all of these gold stocks are good spots to be in.

The wider stock market is rolling over, financial markets are strained, and the Fed is injecting hundreds of billions of dollars daily to keep them afloat. We never know for sure if a crash is coming, or exactly when another 2008 crisis might hit – but why make yourself worry about it?

Put a small amount of your portfolio in an investment like gold that goes up when the stock market goes down. Then, rest easy knowing you’ve got “catastrophe insurance” that will pay your bills even if the worst case happens and big stocks melt down.

You might even make a tidy profit in the meantime. Remember, gold stocks as a group gained 62.5% in the year leading up to the 2008 crash. Some junior mining stocks did even better. And the whole gold complex roared up over 180% after the crash.

Moving on from retirement accounts…

Our next reader has a question about investing in the physical metal for our world-traveling gold bug, Tom Dyson.

Reader question: Do you buy your gold in ounce coins, or smaller fractions of those, or bars of bullion, or do you just have some paperwork from a company showing you own some gold?

I thought the small coins would come in handy for bartering someday. I’d appreciate any suggestions. Thanks, and have fun [on your travels]!

– Anonymous

Tom’s answer: I bought the cheapest physical gold I could find. I looked at Krugerrands, Maple Leafs, even Chinese Pandas. I looked into buying gold bars. I called a handful of different dealers. And I calculated the price I was paying per ounce of actual gold. (Some coins aren’t pure gold.)

In the end, I found one-ounce American gold coins from the late 19th century and early 20th century were just about the cheapest way I could buy physical gold.

I was the type of kid who loved finding and collecting old pennies, so I went for the vintage coins over Maple Leafs, Gold Eagles, etc. But I wouldn’t have done this if they weren’t also the cheapest way of buying physical gold.

I also bought a basket of “blue chip” gold and silver mining stocks and a silver ETF.

But I like physical gold the best. This might sound silly, but the main reason I like physical gold is it’s inconvenient to sell. I can be a little impulsive. This has undone my investment success in the past when I’ve sold great investments too soon.

That’s all for this week’s mailbag edition. Make sure you have a solid position in gold, and remain calm.

Have more questions? Write us at [email protected].



Chris Lowe
March 13, 2020
Barcelona, Spain

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