Many Reasons to Think Twice Before You Buy Gold

August 15th, 2020 from Denver, Colorado.

I woke up today, Saturday, at 5am and decided I needed to dump out my thoughts on Gold.

Because I’m tired of reading the same old bullshit articles from the mainstream media.

These banal articles are designed to consume your time.

They don’t really tell you anything of value to help you invest or manage your finances.

So before you rush out and buy gold because Warren Buffet just did

Or because the gold spot price soared past $2,000 for the first time ever, hitting a new record-high on August 6th

Let’s just hit pause and educate ourselves for a second. 

Breathe. Pause. Count to ten please. Relax.

I would argue that Gold’s recent price run-up has been caused by the global pandemic.

Which has put the world into an overnight recession. Heading towards an eventual global depression.

Followed by a long-term “K” shaped economic recovery. (Some things go up and others stay down)

High geopolitical tensions between the US and our global counterparts over the last 3 years hasn’t helped matters either.

Because we assume our world leaders are like a bunch of bickering family members who can’t get their shit together to get us out of this crisis.

And given our lack of control over all of these things, our minds are searching for something stable to hang onto.

We start to picture ourselves hanging from a financial cliff-edge by our finger nails, about to fall into the crisis abyss!

And thus, our minds start to think about buying some gold as a financial hedge against all that uncertainty.

And with the price at record highs, and the constant media FOMO, we start to think about joining the herd at $2k an ounce.

Then my mate James called yesterday to ask me “does gold still represent an attractive investment?” (yes, he’s a bit posh)

And it hit me, BAM!!!

That is the EXACT WRONG QUESTION TO ASK.     (Sorry James!)

Because gold is tough to value in the first place, as an ‘investment’.

And here’s why:

Gold doesn’t do anything. It is an unproductive asset.

It doesn’t generate earnings that you can benefit from or pay dividends, like stocks.

It doesn’t pay interest like bonds or generate cash flow, like rental properties.

Gold produces nothing and has no value. Other than what other people are willing to pay for it.

Gold has lousy long-term returns.

Gold gets a lot of fanfare and news coverage when its price goes up.

We saw it in 1980 and 2011, and we’re seeing it now.

But in spite of all the attention gold gets when prices surge, gold doesn’t really go up that much long term.

A report on gold returns between 1836 and 2011 found that it earned an average annual inflation-adjusted return of 1.1 percent.

Compared to 1.0 percent for Treasury bills, 2.9 percent for long-term bonds, and 7.4 percent for stocks.

And by the way, this must be true because that report is full of fancy, undecipherable, mathematical equations that none of us can challenge ;-)

Gold pricing is highly volatile.

Gold may come with an average ROI near that of Treasury bills, but its volatility is higher than that of stock prices.

Since Nixon abolished the gold standard, the volatility of gold’s returns has been around 50 percent higher than the volatility of the stock market.

Remember therefore: gold’s value, in the short-term, is driven by fear.

And right now, the price has risen because people have lost confidence in our economy, our financial system, governments, central bankers, and especially our politicians. 

But just because the price has been going up recently and just because it's hit an all-time high is not a reason to buy it.

The recent price rise is NOT an indicator it’s going to keep going up. It could go up further. Or it could go way down.

Beware the temptation to jump on the FOMO bandwagon, because small investors like us are more likely to lose by getting into a price rally at the end.

So how should I think about Gold? you might ask

You see, even though I gave you lots of reasons above why gold is useless and why not to buy it, I already own it.

Not as much as Warren Buffet in value-terms but between 3-5% of my personal wealth at any given time.

Because that is my long-term financial asset allocation strategy.

That is my strategy because Gold is a long-term store of value.

Yes, the value of my gold goes up and down over time but I don’t hold it for investment purposes. 

I hold it as a hedge against inflation.

A hedge against the value of fiat currencies trending to zero over time.

For over 5,000 years, gold has been used as a medium of exchange and outlasted 590 fiat currencies!

Because Gold Is Rare.

All the mined gold on earth today would not fill 4 Olympic-sized swimming pools.

It cannot be made, supply is inelastic. (Unless you happen to own a Neutron Star!)

And the supply, through private gold mining, only increases at ~1% per year.

It’s atomically stable; bury it in the garden and dig it up 500 years later!

And it has zero counterparty risk: it is NEVER anyone else’s liability!

Some say it is God’s Money. And they gave it a number, 79, on the periodic table.

Do you see US Dollars on the periodic table?

Therefore the advice I gave to James and many other investors, is just stick to an asset allocation strategy, especially if you have a long time horizon to retirement.

Because ordinary investors like us are most vulnerable to buying in at this price point without that long-term strategy.

While you can argue that fear, desperation, and doubt could persist for some time given the global pandemic, keep in mind that these fears will vanish once a vaccine is developed and a new normal is established.

Because human beings can be very adaptive and entrepreneurial when faced with a crisis.

And given gold’s rapid rise in price, we expect that a peak could form any day and set off a sharp, multi-week correction. 

Set an asset allocation target and dollar-cost average into Gold over a 3-5 year period

Remember, Gold will always hold its value over the long-term even if it pays no interest — it will not inflate away and it is always better than losing your capital. In whichever fiat currency that capital resides.

Thanks for hearing me out.


P.S. Don’t forget about our Super Saturday Education Series coming up in September. Places are filling up fast!




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