Have Gold/Silver Investors Got This Wrong?

Gold and silver are both at all time highs and after 70% and 200% gains in the last year, you're probably thinking that if I buy now, it'll tank. And the problem is that 99% of YouTube videos out there are designed to make you feel like you're missing out with conspiracy theory, clickbait, peddling this bloody pet rock. We know the metal markets have been on fire. Gold might see 5,000 an ounce this year. Silver might see $100 an ounce this year. It might easily go back to 50. But that won't help you decide if you left it too late. By giving you the knowledge you need to protect your money from inflation and grow your portfolio without it being risky. If you're new here, I'm James. I'm a former professional trader turned financial educator. And in this video I'm going to show you exactly what the data says, how to think about the difference between gold and silver, and whether you should be buying, selling or frankly sitting on your hands. So without further ado, let's get into it with the first problem. A lot of what you'll hear online right now is that gold surging because retail investors are piling in. But, but this isn't what really drives the long term returns in markets like this. It's actually not that complicated. Unlike, frankly, my relationship status on Facebook back in 2008, which is around the time that the great financial crisis happened. I wasn't the only one having a crisis and this saw a big change in regulation and what people could hold as supposed Tier one capital. Now, I know that sounds very dry, perhaps even drier than that vegan that I went on a date with. But it gave birth to something known as the Basel Standards. These banking rules basically determined what counts as safe capital that the banks had to hold. A certain percentage of what's happening is that physical gold now sits in that same tier one safety bucket. But you need to remember that the more reserves a bank holds, the less it can leverage, the less it can lend and the lower its return on equity becomes. And that's basically the bank's profits. So they'll naturally only hold as much tier one as they have to and not a penny more. Which puts cold water on this idea that Wall Street's on an unstoppable buying spree. So what about the central banks? According to the World Gold Council, more central banks plan to add to their gold reserves within a year, despite record prices. And in fact, Poland's central bank bought almost 100 tons of the stuff Last year, which was almost double the purchases of the next largest buyer, which amazingly is Kazakhstan. But the country we need to focus on here is China, which has been adding to its reserves now for 14 months straight. So despite the fact that these smaller countries like Poland were buying larger amounts, it still represents only a fraction of China's total reserves. And this is actually where the story begins to get interesting, because for much of the last 50 years, the dollar has held reserve status. But what China is now supposedly exploring is the introduction of this so called golden Yuan, which would be an alternative settlement currency that instead references gold. Instead of relying on the US dollar, it would strongly imply higher gold reserves at the PBoC. So China's arguably the most influential player in all of this because once gold becomes part of that bridge, demand stops being speculative and it becomes structural. And that's what many investors are missing. The all time highs don't mean the what people think they mean. So now we understand the structural shifts that are taking place amongst institutions, but there are other macroeconomic drivers that are just as important, especially in the near term. So let me explain exactly how they move so that you don't potentially end up buying the top. The first thing that you need to know is that gold and silver move with the business cycle. So inflation, growth and interest rates all matter. And what really drives these over time is something known as the real interest rate, which is what your cash could earn after inflation is taken into account. And the direction of this is arguably the most important thing here. When real rates are falling, cash is going to lose its appeal. You're not getting as much return after inflation. And that is why precious metals tend to rise. You can see this clearly between 2018 and 2020 and again from 2025 through to the beginning of this year at the time of recording. But silver doesn't always follow gold. So whereas gold's mainly a monetary metal, as we've determined its use in financial infrastructure reserves and so on, 60% of silver demand comes from industrial uses. It rises faster when growth is strong and it falls faster as growth weakens. A simple way to see this is a silver to gold ratio. And it behaves in a very similar way, believe it or not, to the ratio between high risk stocks and defensive stocks. Here's the same chart of the silver to gold ratio, but this time compared to the performance of the S&P 500 industrials versus the consumer staples sector ETFs. And it's also the same chart as the Australian dollar to the Japanese yen. So this Rises. When Australia's mining exports are getting a boost through higher prices and safe haven, demand for the yen, which is positively correlated to gold, falls off. And if you want more charts like these, I'll leave a link to my macro playbook. In the description, you can get the better picture of what's going on in the market. If you're buying silver instead of gold. What you're basically doing is trading the business cycle and leaning into growth and risk. Which raises the important question, if you want growth exposure, why not use assets that are easier to value and actually pay you an income while you wait for them to perform? So let's take a look at what gold and silver have returned over a longer time frame and how they compare to results in the stock market so that you can decide whether they still have a role to play in your portfolio in protecting it. And so you can get a better return without adding more risk. Now, over the past five years, gold has compounded around 18% and silver about 28%, both of which are ahead of the S&P 500 at just 16%. But over 10 years, they're broadly in line, and over 20 years, they're both lagged behind the stock market. So when you stretch the window back across full business cycles, as we're doing here, precious metals haven't outperformed quality stocks, and that's because they're more cyclical than people realize, which means that market timing matters a lot more than people think. And I've yet to meet anyone, including during my time as a pro, who can consistently do that. If you're closer to retirement, you don't have the time necessarily to recover from a downturn. And that can mean that it's actually a heck of a lot more risky to add these things to your portfolio if you are otherwise owning a solid portfolio of stocks. Remember that gold went sideways for nearly a decade after it peaked in 2012, and it took another four years to take off again in 2024. And it was even worse for silver. Now, meanwhile, the stock market never looked back whether it was quality stocks like Apple, Visa, MasterCard. They all saw greater returns. And that's because quality businesses tend to be a lot more dependable, because the pricing power that they have allows them to pass on inflation to customers and therefore continue growing their earnings, come what may. And this is what many investors overlook when they're worried about protecting the portfolio from inflation. But let me leave you with an example before we wrap up. So this is the model that I've developed, which basically picks stocks in the same way as I did as a professional fund manager and I've continued to manage money with to this day. It's focused on quality, like I say, and it considers seven factors that are historically proven to outperform the market. Profitability, durability, efficiency, growth, reinvestment, valuation and momentum. And you can see here with this example of Apple, the radar chart showing the footprint of how it compares to the investment universe. The MSCI World Index, roughly in white. So let's take a look at the stock that I want to highlight here. Because Lam Research Ticker LRCX was in fact the best performing stock in my portfolio last year, returned nearly 150% which is almost double that of Google, who was the next best performer. So as you can see, it is way superior in efficiency in profitability. The price trend is also solid, which we'll look at in a minute. Growth and durability. So even though reinvestment and valuation, these kinds of stocks are never going to be cheaper than the market generally speaking. Whilst those lag a little bit more behind the average stock, it's covering the majority of bases. We've got 1, 2, 3, 4, 5 out of the 7 covered. And that's the reason why I picked it a couple of years ago. So the first thing to look for is the profitability, profit, sanity, revenues, vanity. And this is the free cash flow which is less easily manipulated than earnings per share or EPS. And you can see here this first of all 45 degree trend line, there's a couple of little minor blips there, but for the most part it's gone up and to the right and increased from 550 million a year to 5.5 billion, meaning that it's gone up 10x in 10 years. So this is exactly what you want to look for. You also want to do a sanity check when it comes to revenue growth as well. Now you can see that there is some cyclicality here with it being a semiconductor name, it's understandable, but it is a super high quality player in that industry and that's represented in the revenues again gone from just over 5 billion to nearly 20 billion. So 4x growth and 10x free cash flow. But when it comes to the valuation, this is where unfortunately it's going to be a tricky one to buy into. Now, I hate to be the bearer of bad news, it was however cheap going into the new year, or at least it was in line with its historical valuation. Going into the new year it was in line with the historical valuation going into the new year. But now, following the 150% rally, it's trading at over 50 times free cash flow. You can think of this as using like a PE ratio. I just prefer to compare it to free cash flow for the reasons that I mentioned earlier around it being less easily manipulated. The average and we're using the median here is 20 times. So whenever it's around 20x, that is fair value for the stock historically. So there were a couple of opportunities last year to top up, but these will come around. Not so often. However, there are going to be periods of time where the stock is on sale, whether it's sentiment and fears about the business cycle as we looked at earlier with silver, or whether it's just the fact that free cash flow has accelerated massively. So this of course is just one idea. It's not financial advice, but if you want to get your hands on a short list of the best performing companies in each category, I'll leave a link to my top stock support in the description where you can get that completely free. Now, wrapping up everything that we've learned here, we appear to be in the early stage of what's arguably a multi year monetary transition away from the single dominant reserve currency system with the dollar hedge of money towards something backed by gold. The moves that we're seeing today being driven by these structural forces, whether it's the central banks, the regulators, and these are the settlement rails as opposed to fomo. So it seems crazy to go all in on something that pays no income, is still cyclical and historically has not outperformed quality stocks over multiple business cycles. And if you want to know how to find those so you can build a perfect portfolio that doesn't leave you worrying about inflation, gold and silver, then watch this next video where I'll show you exactly how to do that. Take it easy.