Melting the Golden Calf (or Bulls) – Why You Don’t Need Gold In Your Portfolio

“The financial world is ending, buy gold now or watch your net worth evaporate.”

Or so the sentiment went a few years ago.

Look, if you’re a sophisticated investor then you’ve no doubt read articles about why hedging your overall investor portfolio with gold (or preferably a broad mix of precious metals) can reduce beta and possibly maximize alpha – or overall returns.  This article isn’t for you.  We can have that geeky debate somewhere else on a comment board far, far away.

This is about trying to give a quick frame of reference to the everyday investor out there.  Joe or Jane average who read just opened a Questrade acccount or Wealthsimple hands-off portfolio, and that wants to think about finances maybe ten hours a year (if at all).  This investor needs all the real talk they can get, because they are constantly bombarded with financial advertisements and accompanying misinformation.  For example, here is an actual verbatim quote from a dinner party full of teachers I attended last year:

“Yeah, my brother bought Jordan [speaker’s son] a couple of gold coins for his birthday a couple of years ago.  I’m not saying I know a ton about investing or whatever, but I know one thing: Gold always goes up.  I told Jordan to hang on to those coins, they’d be worth a lot more someday.”

Dinner Party Investing Advice

The personal finance nerd part of my brain (too large a part my wife might argue) was going crazy at all the things to unpack in this series of statements.  As I remember it, here was the rough series of rapid-fire thoughts I had:

  • You are right, you don’t know a ton – or possibly even an ounce – about investing.
  • Jordan’s coins might be worth more someday… but almost assuredly not as much as if your brother had bought him a unit of a broad-market index ETF.
  • Gold definitely does not always go up – in fact it goes down quite rapidly at times.  Gold is – on average – more volatile than the stock market.
  • Jordan’s coins have actually already lost value from the year before since the price of gold continues to drift downward since the highs of investor anxiety in 2009-2012.
  • You’re teaching your child some poor investing lessons – which our education system has very little hope of countering at any point.  This could end in heartbreak one day.
  • Don’t verbalize any of this because you’re at a dinner party and your wife will kick you under the table if you dare do anything as controversial as contradict another person’s clueless statement.

The Average Investor Doesn’t Need to Worry About Gold!

Why You Don't Need Gold In Your Portfolio

There are some sort of elite investor debates about whether to have 5%-10% of your portfolio in gold.  I personally think it’s not much of a debate and that speculating (when you purchase gold you’re not investing – you are speculating – but more on that later) in gold is a pyrite game (see what I did there).

That is all irrelevant to the average investor though.  The biggest problem the average investor has is inertia.  An investor at rest will stay at rest when acted upon by all forces at once.  Instead of just blandly socking money away in a very simple, easy-to-understand couch potato portfolio (such as the one we recommend in our free eBook or what you could easily get through one of Canada's robo advisors), the average person is apt to hear about all sorts of outperforming mutual funds, easy paths to real estate riches, and how gold is making people wealthy every day – and consequently do nothing.  After all, when you overload busy people with confusing terminology, complex statistical arguments, and contradicting statements, what else can you expect?  When you further consider that most people have had no formal education when it comes to personal finance & investments, and that most of the actors within the investment space are motivated to recommend products based on commissions, you get a system that is built to efficiently keep people away from simple solutions.

Gold isn’t a very good investment, and most people would be much better off to ignore the price of gold at all times and focus instead on the parts of personal finance they can actually control.

Warren Buffett’s Thoughts on Gold

If you don’t want to listen to some know-it-all blogger about this stuff, don’t take my word for it.  Perhaps I’ll let who many consider the greatest investor of all time teach you some golden rules (source).

  1. “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
  1. “I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola (NYSE:KO) will be making money, and I think Wells Fargo (NYSE:WFC) will be making a lot of money and there will be a lot – and it's a lot – it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

3. “I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today's market prices about $7 trillion – that's probably about a third of the value of all the stocks in the United States… For $7 trillion… you could have all the farmland in the United States, you could have about seven Exxon Mobils (NYSE:XOM) and you could have a trillion dollars of walking-around money… And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally… Call me crazy, but I'll take the farmland and the Exxon Mobils.”

Gold Sucks as a Long-Term Investment

Here’s the other thing about gold.  In addition to not being Warren Buffett’s favorite thing, it simply offers very little return on investment over the long term.  You might see gold retailers spin numbers using three-year windows and comparing gold to other weird baselines, but here are some cold hard facts brought to you by Jeremy Siegel in his critically-acclaimed book: Stocks for the Long Run. (Admittedly these are only relevant to 2001, but the principle is still the same even though gold has done “well” since 2001.  Two hundred years of data is nothing, and the results speak for themselves).

A dollar invested in the following assets in 1802 would have been worth the following amounts in 2001 (adjusted for inflation):

Stocks: $599,605
Bonds: $952
Bills: $304
Gold: $0.98

Yes, you read that correctly, gold actually slightly lost ground to inflation over the 200 years preceding 2001.

Here is a more recent look using Siegel’s same point of reference, but taking into account the rapid rise of gold up to its peak in 2012 (it has since dropped substantially).

A dollar invested in the following assets in 1802 would be worth the following amounts in 2012 (again, adjusted for inflation):

Treasury bills: $282
Long-term bonds: $1,632
U.S. stock market: $706,199
Gold: $4.50

Regardless of how you spin the data, gold has significantly underperformed as an investment over the long term.

Speculation Versus Investment

People (at the moment Canadian real estate folks are a good example) often confuse investment and speculation.  Both terms share the idea that something is purchased and then should go up in value where it could then be sold for a profit.

The difference is that speculation means you are purchasing something that will go up or down in price based on impossible-to-quantify factors such as if people are feeling scared or confident.  Whereas investing (while not an exact science) is based on quantifiable metrics such as profits, dividend payouts, and growth.  Investing means you hope a company will continue to become more efficient and invent new products and/or services – thus earning more money.  Speculating means you think people will continue to think a shiny metal with very little practical value is precious.

Again, let my boy Buffett learn you a few things:

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon' investors join any party, they create their own truth – for a while.”

Essentially, when you purchase gold in the hopes it will make money (as opposed to merely purchasing it as something that looks cool – like a piece of jewellery) you are betting on the whims of people’s emotions – not on any actual business.  Like Buffett, I’d rather have the farmland and money-making companies that power stock markets.

Remember that successful investing is often about tuning out the noise and staying the course.  Gold continues to fascinate the human race and makes for great media headlines.  Ignore all of that mumbo jumbo and just focus on building wealth in a steady, logical manner.  Take action today and quit being distracted by the latest trend or ill-informed piece of dinner party conversation!

3 Comments

  1. BeSmartRich on February 16, 2016 at 10:51 am

    Gold is a bad investment from a long term perspective however great in trading between cyclical highs and lows. Recently purchased junior gold mining company stock and it will be interesting how the stocks turn out considering the current market environment. Thanks for sharing!

    BSR



  2. Paul N on February 19, 2016 at 5:10 pm

    I believe you may have a different perspective on this if you lived in Greece or Venezuela. With 720% inflation their bolivar in one year at least precious metals could have protected a portion of their wealth. I guess you could say storing US dollars would do the same. Are you also 100% absolutely sure the US dollar couldn’t suffer a similar fate one day with $19T of debt and a couple of wacky candidates ready to add to that? Funny some of my my oil based stocks lost over 50% in a year, no one is grasping at reasons of why I shouldn’t own oil. I’m also not panicking about it, they will bounce back. You don’t always look at gold as an investment. If you have a long timeline sure, it will rise again. You can also look at it as a form of insurance.



  3. Kyle on February 22, 2016 at 8:51 am

    Hey Paul. Why wouldn’t my equities investments have the same hedge against inflation as gold? The land that McDonald’s sits on is just a good a hedge (much better in fact) than gold us right?



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