Weekly Mailbag: Gold Performance and Crazy CEO Compensation

Welcome to our Friday mailbag edition!

Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.

Today, we have questions on the performance of gold, foreign gold holdings on U.S. soil, and crazy CEO compensation…

But first, I want to say a huge thank you to each and every one of you who tuned in for my urgent briefing, Great Distortion: The Next Chapter on Wednesday night.

I am truly humbled that so many of you – more than 9,000 – decided to join me.

For those of you who may have missed it, the replay is still available to watch.

In it, I explain all about the proprietary new investing strategy I’ve developed to help ordinary Americans level the playing field with Wall Street.

It’s a strategy that can help you profit whether markets go up or down.

It’s based on the same type of strategy big banks paid me millions to develop during my 15 years on Wall Street. But now, instead of big, institutional investors, I’m making it work for everyday investors like you.

And honestly, although my team and I started working on this event a while back, the timing couldn’t have worked out better…

That’s because the S&P 500 just dipped into official bear market territory on Monday. It’s the first bear market for the S&P 500 since the onset of the pandemic in 2020. And it’s the fourth – and fastest – bear market since 2000..

So, with all the market volatility we’re seeing right now, I’m sure anyone with red on their portfolio balance is looking for a way to get back into the black.

My new strategy can help with that… In fact, it could help you make up to 10x your money in less than a month.

So if you weren’t able to tune in on Wednesday night, just click here to watch the replay and find out all about it.

Now, back to the mailbag, starting with a question about gold…

I’ve recommended holding gold in your portfolio many times. That’s because it’s a proven safe haven and inflation hedge.

But reader Norm is baffled at its recent performance…

Hi Nomi, I like how you think. And you are a welcome addition to Legacy!

I have a question for you. I do not understand how gold is not worth at least $3,000 an ounce, given the current state of the world. It did go up briefly but has given back all gains year to date.

Can you please explain why the performance has been awful? If gold is not showing signs of life this year, why should it be in our portfolios moving forward? Same question with silver.

Everyone keeps talking about a gold or silver run, but nothing ever happens. Looking forward to reading your answer.

– Norm B.

Hi, Norm. Thanks for writing in!

It’s an important question. After all, the Fed has been creating money faster than ever before in modern U.S. history. And we’re living with a level of inflation we haven’t seen in four decades.

But gold is also facing headwinds from the U.S. dollar. As I wrote recently, the dollar has remained persistently firm, relative to other currencies.

And, more importantly, gold’s growth has been hindered by the Fed’s three interest rate hikes so far this year.

You see, rising interest rates are considered a bearish sign for gold and gold stocks. After all, as legendary investor Warren Buffett once said, “gold doesn’t pay any interest.”

So as interest rates rise, folks will often choose to invest in interest-bearing accounts instead of buying gold.

But let’s take a look at gold’s performance this year… It’s actually not that bad, when you compare it to some other investments…

So although gold hasn’t shone of late in the way folks might like it to… it has performed comparatively well.

As for silver… It hasn’t done too badly, relatively speaking.

But, as I’ve been telling you, silver will play a vital role in the global shift towards New Energy. And that means its supply and price will explode in the years to come.

Now, I don’t want anyone who holds stocks in their portfolios to lose any sleep, either. As I’ve said time and again, the markets are primarily reacting to all the uncertainty about the Fed’s next moves, especially with regards to interest rates.

And yes, we got some bad news on that score this week, when the Fed announced a 0.75% rate hike. This brings the total interest rate increase this year (so far) to 1.5%.

But as I’ve said before, the market is the Fed’s ultimate master. If the markets continue to fall, I believe the Fed will pare back its hawkishness soon.

So I see a continued period of volatility for the coming months, followed by a recovery later in the year. That’s assuming no other major wars break out, or anything like that.

(The new strategy I revealed this week is a great way to play this ongoing volatility, by the way. If you want to find out more about that, just click this link.)

Now, getting back to your question about gold’s potential, I think we may well see it peak at around $3,000 in the coming years.

Historically, gold thrives in an environment of financial uncertainty or inflation. Despite the Fed’s recent efforts, I don’t see either one letting up soon.

Am I absolutely certain this will happen? No. But gold’s average annual rate of return since 1971 is about 10%. So if history is anything to go by, mathematically, it could hit $3,000 within five or six years.

Or it could go much higher. For instance, while gold fell in the initial shock of the 2008 financial crisis, the financial chaos that ensued triggered a massive rise in gold prices.

Between September 2008 and October 2011, gold soared about 170% to $1,900 per ounce. Meanwhile, the S&P 500 returned a meager 6.9% in the same period.

Now, physical gold isn’t – and will never be – a crypto-like speculation that could soar hundreds or thousands of percent overnight.

It’s a safe store of value that has stood the test of time. It gives you peace of mind.

And in today’s crazy market, that’s worth its weight in… well, gold.

Also on gold, we’ve had a lot of discussion in the mailbag and in my essays recently on the U.S. gold reserves.

John wrote in with this question about foreign gold holdings. Coincidentally, his question also relates to my recent book excerpt on China’s attempts to undermine the U.S. dollar’s status as reserve currency…

Doesn’t a significant percentage of the gold held in U.S. vaults belong to other countries?

With the undermining of the U.S. dollar by Russia and China, is it likely those other countries will want their gold back? If that was to happen, what would be the consequences?

– John Z.

Hi, John. Thanks for your questions. I reported a while back that the U.S. holds 8,133 metric tons of gold, per the latest official information available.

Roughly half of that is stored in the United States Bullion Depository at Fort Knox in Kentucky.

The rest is stored at mints in Philadelphia, Denver, West Point, and San Francisco.

To answer your first question, 100% of that gold belongs to the U.S.

Foreign governments do hold gold here in the U.S. But when the U.S. government says it has 8,133 metric tons of gold in its vaults, it doesn’t count this (foreign-owned) gold.

Foreign-owned gold is mainly stored at the Federal Reserve Bank of New York. It’s the largest gold custodian in the world. It houses gold on behalf of foreign central banks, governments, and international organizations.

The reason foreign governments and organizations choose to store their gold at the Fed is simple. They have confidence in its safety. It rests on the bedrock of Manhattan Island, 80 feet below street level and 50 feet below sea level. Its design is truly a masterpiece of protective engineering.

As of 2019, the New York Fed vault stored roughly 6,190 metric tons of gold belonging to other countries. It doesn’t provide a breakdown of how much it holds on behalf of any country.

But in total, China reports total gold holdings of 1,948 metric tons and Russia reports holdings of 2,298. Both countries can be “opaque” in their reporting. So we can’t know for sure if either country has gold stored in the U.S.

But it’s unlikely. The Bank of Russia owns and manages most of the gold reserves of the Russian Federation. And it is reported that China vaults its official gold reserves in Beijing, China’s capital, allegedly under the protection of the Chinese army.

Is it possible that Russia is storing some of its gold outside the country? Yes. But if it stored any of its gold in the vaults of say, the Bank of England or the Federal Reserve in New York, that would have been frozen by now. (Just like the West froze Russia’s gold held in its own central bank earlier this year.)

Now, Russia could well be storing gold in China. And vice versa. But would they tell us that? I doubt it.

In short, all 8,133 metric tons of the U.S. gold reserves belong to the U.S. And I don’t believe Russia or China store any of their gold here. So they can’t use the removal of their gold as a threat in any kind of financial warfare against the U.S. dollar.

Finally, earlier this week, I wrote about the exorbitant compensation packages some CEOs receive.

It’s a topic that has been on readers’ minds… with reader Jerry K. calling it the “gold old boys’ club” at work. Another reader, Sean C. has an interesting connection to the story…

Hi Nomi, I caddie at a golf club with a lot of current and past Goldman “big wigs.” And I’ve become curious about how execs at that firm become so ludicrously rich.

We all hear about a CEO or founder of a big tech company (i.e., Uber, Snapchat) cashing out for huge amounts of money. But it seems 9-figure net worths or more are commonplace at Goldman, even compared to other Fortune 500 companies.

It does make one wonder if they are ethical in how they conduct business.

– Sean C.

Hi Sean, that’s a very interesting job you have. You must certainly have been around some fascinating conversations!

It’s very true that those at the top of the Goldman hierarchy have done much better than CEOs at many other companies in the S&P 500, and indeed throughout the world. (That’s probably true for any Wall Street bank.)

As I wrote during the week, last year, Goldman CEO David Solomon raked in $35 million in total compensation. This was twice his take in 2020.

But other CEOs are doing pretty well, too. In fact, in 2020, CEOs got paid 351 times more than the average working American. That includes stock options and bonuses, of course. But even without those, their pay packages are excessive.

At Goldman, a lot of the compensation comes down to shares and options on shares, as well as cash.

Like all Wall Street investment banks, Goldman acts as a go-between, or broker, for financial deals. And it takes a big cut of those deals for its services.

Now, I left Goldman because, among other reasons, I thought that cut was too high. And the more complex the deal was, the higher the cut.

And it’s all a crazy competition for who can make the highest fees or bonuses, regardless how the clients did or how the economy is performing. Not exactly ethical, in my opinion.

In fact, just before I left Goldman, I had the “pleasure” of witnessing the excesses firsthand at a Goldman Christmas Party…

The economy was tanking… but that didn’t stop the party.

I actually wrote about it in my 2004 book Other People’s Money. I’ll ask my publisher to send it on… So look out for that in Monday’s edition.

And that’s it for this week’s mailbag. Thanks to everyone who wrote in.

And thanks again to those of you who tuned in on Wednesday night. I hope you’re already on the way to making some great investments to capture profits in this distorted market.

If you weren’t able to tune in, here’s the link to the replay of my event, Great Distortion: The Next Chapter, again.

And if I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.

I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.

And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].

In the meantime, happy investing… and have a fantastic weekend!

Regards,

Nomi Prins
Editor, Inside Wall Street with Nomi Prins

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