Broker Check

Mistakes in Client Thinking Part 2 - Let’s Put All Our Money into Gold

November 23, 2023

This blog is part two of our series Mistakes in Client Thinking. We share this not to make people feel bad, but being on the front line, we see folks follow much of the media-invoked panic. A famous investment book called "The Madness of Crowds." We as people can easily fall into group think.

The second mistake we commonly see investors and clients make starts with a question like this," I was talking to so and so, or I saw on television, and they think I should move into gold. What do you think?"

Television, internet advertising, and the financial press are constantly singing the virtues of gold. The actor, William DeVane, is prominently displayed on television advertising recommending investors to invest in gold. Gold advertising and investing get particularly heated during political and financial uncertainty periods. It typically gets to a fever pitch when people are concerned about the Federal Government's dysfunction, and there is worry that the whole system will collapse. Additionally, it is also advertised as an inflation hedge.

In a lot of folk's minds, gold is synonymous with safety. They think gold is safe.

Several things for you to consider:

(1) Concerning gold as an inflation hedge, you have to evaluate long-term facts. I have regular insights from Nick Murray, and this is appropriate:

"If you bought an ounce of gold nearly 44 years ago in January 1980 at $800, you now own an ounce of gold worth (at this writing) $1,965. It's up about two and half times, having produced interim neither dividends, nor interest, nor anything else. It is now my painful duty to disclose the Consumer Price Index in January 1980 at 78. In July of this year, it was 306. This means your $800 gold ounce would now have to be close to $3,200 to keep up with inflation. But it isn't. Not close. Wait, it gets worse; the Standard and Poor 500 index at the end of January 1980 stood at 115. (At this writing) It is 4490. That's right: while the price of gold rose two and a half times, the S&P 500 went up 39 times, not counting dividends, which are at the risk of repeating themselves; gold does not pay. With reinvested dividends and assuming you paid taxes from another source, $800 invested in the S&P 500 Index in January 1980 and left to compound would be worth around $95,000."

There is no better long-term hedge for inflation than investing in the best-run companies in the United States and the world.

(2) Gold can be just as volatile as stocks. In 2011, with fear of the debt crisis in Greece and the downgrade of the debt for the United States, the price of gold skyrocketed. As the crisis subsided the following year, gold was down almost 50%. People think investing in gold will give them stability, but one must understand that the price of gold can also be volatile.

(3) Folks often think I will own gold in case of hyperinflation, and the currency becomes worthless. They want to own gold physically. The logic of this makes sense. However, storing, protecting, and using it presents practical challenges. If we were in an apocalyptic hyperinflation time and you wanted to use the gold to buy things, how would one exchange the gold in whatever form, like a bar, to get change? Gold as a currency would be challenging.

(4) Our economy and world economy have expanded well beyond the gold standard. Part of the reason that the United States and other major world economies went off the gold standard was that the economies grew to the point where there was not enough gold to handle the complexities and sheer scope of an advanced modern economy. What makes investing in a company's stock more valuable than gold is the cash flows that those companies derive. Apple's value as a company is a constant demand for Apple products in the form of iPhones, MAC computers, and other products that produce revenue and cash flow for Apple. Gold does not do this.

What to Do - We understand the emotional appeal and use of gold. Just like we encourage clients regarding individual stock, we recommend that if someone wants to own gold in their portfolio, they own at most 5 to 10%. We, as investors, want simplified solutions and just put our money in a place where it makes returns stable. Gold has challenges achieving this and is less safe than we may have been led to believe.

If you have any questions or concerns, please reach out to us. For us, it is all about having a dialogue with clients. Ultimately, it is your money. You are in charge. We are there as fiduciaries to bounce ideas and get perspective you most likely won't get from media or other influences.