The Persistent Illusion Of Gold

Brought to you by the Everydollar app. Start budgeting for free today. Nick Murray published this essay in a financial planning periodical that I got a hold of this week. One of my buddies sent it to me in the business. It's very well done, and he's kind of a snarky like you, George. That's why I like him. I like just reading this article. Yeah. The Persistent Illusion of Gold. This is good. Yeah. For the record, the subtitle of the Wall Street Journal piece is Swings in Stocks and Bonds have Boosted the Metals' Popularity with Ordinary Investments. The statistic at the heart of the article is the percentage of Americans who believe gold is the best long-term investment jumped to 26% this year from 15% in 2022, according to a Gallup report from May. In contrast, those preferring stocks dropped to 18% from 24% last year, while those favoring bonds climbed to 7% from 4%. This happens quite reliably every time there's a bear market in stocks. Ordinary investors are always recalibrating their preferences in the rearview mirror, which is wrong. My major purpose in this little essay is to parse through the pathology, which persists in the illusion not just that gold is an efficient inflation hedge, but that it's somehow preferable to holding a broadly diversified portfolio of high-quality common stocks like a mutual fund for the long-term. First, let's get our terminology straight. Gold is not, in any accepted sense, an investment at all. That is, it does not produce anything. It just sits there. Gold's sole financial function is as an inflation hedge. The question then becomes, how's that working out? In August of 71, the price of gold was arbitrarily fixed at $35 an ounce. By January of 80, the last time ordinary investors went totally gaga over it, gold had reached $800 an ounce. Thus, if you bought an ounce of gold nearly 44 years ago at $800, you now own an ounce of gold that is, at this writing, worth $1,965. That's up about two and a half times, having produced in the interim neither dividends nor interest nor anything else. It now becomes my painful duty to disclose to you that the consumer price index in January of 80 stood at 78. In July of this year, it was 306. That's shy of four times, which means that to have kept up with inflation, your $800 gold ounce would have to be valued at $3,200, but it isn't. It's at $1,900. Not even close. So not much of an inflation hedge. Wait, it gets worse. The Standard & Poor's 500 stock index, the end of January 80, was 115. As of right now, it's in the 4,490. And that's right, while the price of gold was rising two and a half times, the S&P 500 went up 39 times, not counting dividends, which at the risk of repeating oneself, gold does not pay. With reinvested dividends and assuming you paid taxes from another source, $800 invested in the S&P in January of 1980 left a compound would currently be worth $95,000, not $1,900. There's the difference in mutual funds and gold. Mic drop. You can't even argue with that. I mean, the guy just laid it out so beautifully. Boom. In your face. Boom. So, I read somewhere that gold is actually a pretty effective inflation hedge over extremely long periods, perhaps a century or more. Not true either, by the way. If you go back and pull gold since the 1800s, it has an average annual of about 2.2%, where the S&P has an average annual of about 11.8%. How is that an inflation hedge? It's not. It's mythology. Gold has the mysterious ability to make people look like idiots. Really, it's mysterious. I mean, they say things that are just blatantly not factual and believe things that are blatantly not factual because it is a shiny rock. I do not understand. And I'll tell you what, from 1980 to today, you could put $800 in and you'd have $95,000, or you could put $800 in gold and you'd have $1,900. Ouch. I don't know how anyone could just be doing the math on that going, well, Dave, I sleep better at night knowing I got gold in case the economy crashes. No, and I got $1,900 instead of $95,000. I'll help you with your sleep. We've played this game because we've played it out of what happens. Let's say that every company goes to zero. That's what would have to happen for the stock market to go to zero. Every company goes bankrupt. You have your gold bars. If the stock market had grown from $800 to $1,900 since 1980, the American economy would have collapsed. Yeah. Would have collapsed. Because that would have meant that the typical company is losing money. That the average is that horrible. I mean, for the stock market to be that anemic, the economy would have to be that anemic. And it would just be, I mean, I don't know if our society would have survived if the stock market had done the same rates of return that gold had done. Think about that. Yeah. That's wild. I mean, you would have had to make nothing on your, I mean, sheesh, yeah. So these people are scared of the stock market. Hey, if this collapses, I'll have my gold bars and it'll somehow keep its value in these dark times. But they've lost so much money that, and it hasn't even kept up with inflation that I'm going, I'll be way better off than you just haven't been the tortoise over here investing in the stock market for 30, 40 years. Yeah. It's about as dumb as the guy called me up and said, you know, I got $400,000, I buried it in coffee cans in my backyard. That's an inflation hedge, Dave. No, it's paper money and buried in the ground. This is not going to go well, buddy. We're talking insects. We're talking dampness. We're talking, oh, well I sealed the car. I don't care. Well, even if the money is- You buried it in the ground. Do you not know those things rust? And now what happens when you die? Your hillbilly relatives are out there with their metal detectors. I would make that a reality show. I'd watch that on HGTV. That's about as dumb, you know? And your $40,000, 40 years later, having sit in the ground, ain't worth $40,000. Oh, it's $400,000. Oh my gosh. So I told him, you're losing $40,000 a year. It had been 10 years. I said, you've lost, you know, you've lost $400,000. What do you mean? I didn't lose it. I know where it is. No, you lost what you could have made another $400,000 in 10 years on this. It could have been millions. You're sitting back there doing absolutely nothing. Your $800,000 could have become $95,000, but you put it in gold and it became $95,000. And you put it in gold, it became $1,900. Nick, you did a good job with this article. I don't know you personally. I hope we get to meet someday. But your analysis and your critical thinking skills are dead on. It is not proper to say that gold or any other commodity is an investment. It is a speculation, but it's not an investment. It reminds me of crypto. Investments have an income that they produce. They have something going along with them. Even real estate, when you buy it and it doesn't have an income associated with it, all you're looking for is the increase in value. Now you're speculating rather than investing. You know, speculators lose money. Investors make money. Well, over the years as you've been doing this, Dave, most people are drawn to this out of fear, which is usually not a great reason to do anything financially, fear or greed. Yeah. You're right. Yeah. It's not. I mean, right after I get afraid, I get stupid because I'm in freak out mode and my critical thinking skills shut down. I'm in the middle of a trauma experience. Well, and usually I saw a headline of some guy yelling at them, go buy gold. It's all coming down, guys. Go buy gold and silver. You'll be okay. And it doesn't work out like that. And if all goes down, we're not going to be looking for gold. I'm not going to be looking to trade Dave Ramsey for gold. I need food, bullets, shelter, water, ammo. Yep. Bullets. Bullets and ammo. Both. Both of those. Well, Dave. You're loading up over here, George. I'm going to Dave's compound if it all goes down. So I'm okay. You guys fend for yourselves. Yeah. So Nick Murray that did this essay is quoting from the August 7th online edition of the Wall Street Journal. The article that he was picking apart was titled, When Markets Get Scary, Mom and Pop Buy Gold. So not mom and pop that want to be wealthy. If you want to build wealth, typically what we find is people buy real estate and they buy mutual funds. And they pay cash for their real estate, no debt. These are the typical paths that we find among millionaires. We don't find millionaires that say, I got rich buying gold. And now we know why. Because $800 in 1980 turned into $1,900 today. And what is that? 50 years, 40 years later, 45 years later? Wow. In 45 years, you doubled your money barely. Well don't dance in the street over that.