Gold is flirting with all-time high prices set back in 2011. Learn why that proves gold is not an investment and has no place in your nest egg.
Gold is Trading at All-Time Highs
On Monday, July 27, 2020, Gold smashed through it’s all time record high. Gold passed $1,980 per ounce, which is more than $50 higher than the previous record of $1,920 set in September of 2011.
Gold started the year at $1,517, which means it has seen a 30% increase in value in the last 8 months.
Within a few minutes of trading over $1,980, gold fell to $1,913, a drop of over 3% in about 5 hours. Then, it rebounded and was trading in the $1,950-$1,960 range for the next few days.
In the last month I have heard a million pundits talk about how Gold is such a good investment right now.
Gold Is Not Safe
It is a common talking point among financial reporting sources that investors “flock to gold” during uncertain times. This is true. But, the next line is often when the reporter says it is a “move to safety”.
Gold is absolutely not “safe.” When I think about diversifying my investments into something “safe,” I want something that is relatively stable. Something that doesn’t make wild swings up or down.
When I am looking for a “safe” investment I am certainly not looking for something that has ever swung 30% in less than a year! Or, over 3% in a few hours! An investment that can move that much is closer to the “speculative” end than the “safe” end of the spectrum.
Also, Gold dropped from $1,920 in 2011 to about $1,050 in 2015. That’s a 45% drop in value. I would be very upset if my “safe” investment fell 45% in four years and took another 5 years to recover.
What kind of a “safe” investment can have a nine-year slump?!
Gold Is Not an Investment
Which brings me to my main point: gold is actually not an investment.
I have three criteria for investments in my own portfolio:
- An investment pays you for owning it.
- An investment creates value.
- An investment predictably responds to market conditions.
An investment pays you for owning it
When I invest, my goal is to get paid for having money. I am either buying ownership in a company, or lending a company money.
When I buy ownership of a company, I receive a portion of the profits.
When I lend a company money, I receive interest payments.
Gold is just a metal. It does not pay dividends or interest.
An investment creates value
I only invest in things that create value. For example, when I invest in Apple, I become an owner of an organization with tens of thousands of employees who go to work every single day and try to add value.
All of those employees are working toward the same goal: make Apple profitable. And, when they are successful I get paid a percentage of that profit because I’m an owner.
Of course, I don’t invest in individual stocks. But, I do have shares in an S&P 500 Index fund. Which means, I am an owner in the 500 largest companies in the US. According to Business Insider, 17% of the US workforce is employed by the companies that make up the S&P 500, which is about 24 million employees.
In just one of my investments, I have 24 million employees who are working hard every day to provide me a profit. That is incredible! And, that doesn’t even count my Mid-Cap, Small-Cap, or International Stocks, or my High-Yield or Investment-Grade bonds.
Or, I could just buy Gold. A lump of dirt that doesn’t do anything.
Gold is just a metal. It creates no value.
An investment predictably responds to market conditions
This is the only investment criteria that gold meets.
All of my investments are predictable. Stocks generally go up in good times and down in bad. The bonds that I hold generally move in the opposite direction as stocks, and have much smaller fluctuations.
Gold goes up in bad times and down in good times.
Gold is just a metal. It swings with the market.
Gold Is a Commodity
So, if gold is not an investment, what is it?
Gold is a commodity. It is a raw material that is used as an input in other products. And, one batch of gold is a perfect substitute for any other batch of gold.
This means that producers of gold are competing for customers almost completely on price. Which is different from non-commodities, where differentiation is a primary driver of value.
I don’t invest in commodities because they don’t meet my criteria. They are passive, they don’t add value, and they move completely at the whim of the market.
I’m not a farmer, so I don’t have corn, soybeans, wheat, cattle, pigs, chickens, or any other farm output commodities. That would be silly.
I’m not a miner, so I don’t have gold.
However, if you want to profit from the run-up in the price of Gold: great news! 22 of the companies in the S&P 500 are mining companies. That means that as an owner of the S&P 500, you are a part owner of 22 mining companies, which are all booming because precious metals are at all time highs.
Don’t buy Gold. Buy mining companies and leave the mining to the miners.
Invest in Exactly Six Categories
So, if you shouldn’t invest in Gold (because it isn’t an investment), what should you buy?
I invest in exactly six categories:
- Large-Cap Stock
- Mid-Cap Stock
- Small-Cap Stock
- International Stock
- High-Yield Bonds
- Investment Grade Bonds
Small-Cap Stock is a new addition to my portfolio. When I was rebalancing my own portfolio, I kept my investments to only 5. But, now I’m using the Fidelity Go RoboAdvisor, which added a little bit of Small-Cap Stock to the mix.
Every one of these six categories meet all three criteria for investments. They all pay me regular dividends for owning them. They all invest in things that create value. And, they all predictably respond to market conditions. As a result, I am set up to profit from all market conditions, even a recession.
The global pandemic in 2020 has been a test for all of us. Things have happened this year that have never happened before. But, even in these “unprecedented” times, there are a lot of things that are behaving exactly as you would expect.
This time is different… just like last time was different. And, next time it will be different again.
The point is that your financial plan should be dynamic enough that it is the right plan in good times and in bad times. It shouldn’t matter too much to your financial situation if we have a global housing crisis or a global pandemic. Or, a global tech bubble, or a global energy crisis.
There will always be another crisis. The best we can do is make sure that we are not overly exposed.
Gold is not an investment. And it certainly isn’t safe.
Since 2011, Gold has had quite a roller-coaster. From 2011 to 2015, it dropped 45%. Then, it took the next five years to recover.
Gold set a new record high on July 27, 2020… proving, that Gold is not an investment.
Gold creates no value. And, gold doesn’t pay you for having money.
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.