Should Gold Be Part of Your Investment Portfolio?

In this episode of Ready for Retirement, James discusses if gold should be part of your investment portfolio.

Questions Answered: 

• Should gold play a role in your investment portfolio?
• What are the best investments for your specific goals?
• How do your investments connect to your overall retirement plan?

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Transcript

Discover the tips and strategies that will help you achieve your retirement goals. I'm your host, James . And this is the podcast dedicated to helping you retire. Well, it all starts right here. I'm ready for retirement.

Hi, everyone. Welcome back to another episode of ready retirement. I'm your host James canal. Today's episode is all about gold. And does gold play a role or should gold play a role in your portfolio? And it's gonna be a fun conversation. I hope you stick through to the end because there's a few different points I wanna make.

There may be a little bit different than the way most people view this. This episode is based on listener question in this listener. Question says this, and it's from Joshua. Joshua says, what is your take on investing in golden precious metals to D. Especially for beginners, how can we get into it and is it worth it?

So let's talk about that now, before we do wanna quickly highlight the review of the week. I always appreciate when people leave reviews, that's one of the main ways that people find this show. And if you found this content valuable, and if you want more people to learn about retirement and how they can create a more secure retire, Leaving a review helps other people to do that.

So this review comes from user named C R N a 1974, CRNA 1974 says, James, keep up the good work. I have listened to all your episodes. After recently, discovering your podcast to echo other reviews. You present clear, concise, applicable financial information. I very much look forward to hearing all future episodes.

Well, thank you very much. Always enjoy reading that. I love that that gets more people to be able to find the show. So really appreciate you taking a couple minutes out of your. Two do that. And if you wouldn't mind, if you're listening and you've liked this episode or liked this podcast, well, please share it with someone else you think might like it.

This could be family. This could be coworkers. This could be neighbors. Share this episode, leave a review. So more people can find it through apple podcast, through Spotify or wherever it. They listen to podcasts. So thank you very much again, for all of those of you who have done that. So let's jump in to the question.

Should gold be part of my portfolio. And this is an interesting conversation because when people talk about things like gold, as well as certain other in investments, there's the investment component to it. But there's also just the total belief or disbelief in it. Almost a philosophical approach that some people take to this.

So let's set that aside for a second and let's look at it from a purely investment standpoint, not just the financial. Investment, but also the emotional components to it and what you need to be able to withstand as an investor. If you think a certain investment should fit into your portfolio, the real basic approach, this high level approach I like to take when asking myself what investment belongs in my portfolio, what investment belongs in client portfolios.

There's three basic things that I wanna make sure at a minimum are getting covered before we even consider an investment. Number one is, does this investment make sense? AKA, does it pass the sniff test? Number two is the performance of this investment persistent across times in geographical boundaries.

And then number three, is this an investment that I, or that clients can stick? So let's explore those and let's go back to number one. Number one, does this investment make sense? And as I mentioned in the beginning, does it make sense in the sense of, does it pass a stiff test? This doesn't have to be overly complicated, but just look at something and this could be as basic as lemonade stand does eliminate the stand as a business.

Make sense. Well, let's see, I can go to the store. I can maybe buy a lemon for 10 cents or maybe boy buy multiple lemons or 10 cents a piece. I can go back. I can squeeze those lemons, add some water, add maybe a little bit of sugar and I can sell it for 75 cents or a dollar. Okay. Maybe I need some cardboard and then a little thing to set up a stand.

That makes sense. I can sell something for more. Purchased it for there's some profit there, any business you can do that for, is there kind of a logical justification of why this investment might make money and why this investment might grow? Sometimes this point is best understood in terms of investments that don't make sense or in the context of investments, that don't make sense.

And there's been plenty of those. You know, we can go back to beanie babies in the late nineties now, beanie babies, they cost a couple bucks maybe to manufacture in. And they were selling for several thousand dollars per beanie, baby at the height of the beanie baby craze. Now eBay where beanie babies were often sold on eBay beanie, baby sales comprised 10% of all eBay volume at some points, the company that made beanie babies, they did 3 billion in revenue in 1998 alone.

So as you look at this and you step back from the. Does that make sense? Does it make sense now if it's purely as it collectible and people really like the beanie babies? Sure. But I think in this sense, when people were purchasing beanie babies, it wasn't necessarily because they just loved them. They were buying them, thinking this could resell, this could be an investment.

This is something that will turn into more money for me. But when you look at it, does that really make sense that this beanie baby, as cute as it might be. Should be something that you should invest thousands of dollars into, probably not. What about.com stocks in the late nineties? Did it really make sense that some of these companies with zero revenue and questionable business models could really be worth millions and millions and millions of dollars simply because.com was in their name.

Probably not now, sometimes this is hard because you have to step back from the hype. You have to step back from the thing that's going up in value, like crazy, because there's some speculative mania, but does it make sense? You go all the way back to tulip mania in, in the 1720s. And if you've ever felt bad about an investment decision, you make, consider this.

In 1720 at the height of tulip mania when people were buying tulips and there was a speculative craze, Isaac Newton, the same person who discovered the laws of gravity in motion and the same person who invented calculus lost the equivalent of $3 million in today's dollars by getting caught up in this fat.

So if you ever kicking yourself because you made a dumb investment mistake or maybe a dumb Purchas. Just remember Isaac Newton did this too, you know, in between and venting are discovering the laws of gravity and, and, and venti calculus, somewhere in between there, he lost the equivalent of 3 million to getting caught up in what was probably the equivalent of the tech bubble that we had in the late nineties or even the beanie baby at.

Bubble where there's this investment tulip bulbs. Why would this have any value? Well, it really didn't, but the speculative craze that was around it was taking over. And so it sucked a lot of people into that. So that's why number one, does this investment make sense? Well, look at gold from that context.

Does it make sense? Well, yeah, I guess in a way, because there's some practical uses for gold and in general people accept it as valuable, but at its core, It's speculative and speculation just means you buy something in hopes that someone else will buy it at a higher price. You know, if I go back to that lemonade stand example, and if I invest in it, well, I'm investing in it because there's gonna be revenue and profits coming from that lemonade stand that I can count on.

So, whether I believe in lemonade or don't believe in lemonade, there's still dollars coming from this business. Well, Gold's different with gold. It is widely held as valuable because people generally accept it as valuable. And when they're investing in it, it's not because there's cash flow from that.

It's not because there's revenue or dividends coming from it because people believe they can buy it today and it'll be worth more money in the. So when you're looking at that, when you're comparing gold, which generates nothing in revenue or profits to a stock, and what a stock does is it does generate revenue in profits.

You know, Apple's not a two and a half trillion dollar company because people accept it as valuable. It's a two and half trillion dollar company because it generates a huge amount of profits. So when you own apple, you own a right to those future profits. And it doesn't matter if you think the iPhone is the best phone in the world, or if you like the apple watch or AirPod.

You don't care about that if you're investing it's because you want your dollars to make more dollars in your buying apple, because you want a right to those future earnings, the company's gonna generate. So with gold, you have to ask yourself, does this make sense? Well, in some regards, yes, there are some practical uses for gold, but that's not why it's so valuable.

It's valuable because it's widely considered to be valuable. And so that's something that you have to hope continues is that. Widely considered value going to be something that society continues to hold or at some point will that fade? I don't know. It's something that you have to ask yourself. So does this investment make sense when it comes to stocks and investments in companies or real estate or assets that generate real profits?

To me, that makes a lot of sense. I'm putting my dollars into something that are gonna generate more dollars for me over. When you're investing in something like gold or metals or things that have value because we hold them to be valuable, a little bit harder to tell, is this something that's going to persist over time?

And if it does persist over time, to what degree will it persist over time? Which really ties into our second point that I want to consider with every single investment, which is, is that performance persistent? You know, so it's not enough that something has a great return over a six month time period or 12 month time period.

Is this something that demonstrates considerable and significant returns over long periods of time? And I shouldn't even say considerable or significant, but are these returns justified relative to the amount of risk or uncertainty that I'm accepting by owning this investment? You know, short term bonds, for example, it's not gonna be a significant.

But I'm also taking very, very little risk, at least in the short term when I put my money there. So is the return I'm receiving, going to be compensating me appropriately for the risk I am taking? Well, let's look at gold and to truly accurately look at gold, we have to understand it in its appropriate context because gold isn't just an investment, but it was part of our currency.

The gold or the dollar was backed by gold. There was some laws around this, so here's just a very, very. Summary the price of gold used to be controlled in the us. And this was because the dollar, the us dollar was pegged to gold. So dollar was backed by gold as opposed to just being purely Fiat money, which means it's backed by the full credit and taxing ability of the government.

That issues it from 1933 to 1974, it was actually illegal to physically own gold bullion without some special license to do so. And this was because gold was a. Back the value of dollars. So the government wanted to control the ownership of gold. Now in 1934, Congress passed the gold reserve act. And what that did is it raised the price of gold to $35 an ounce.

So gold wasn't something that floated freely on an open market. It was pegged at $35 an ounce, and it had the same value in 1970. So from 1934 to 1971, gold was valued at $35 per ounce. So that's a quick history. And then president Nixon in 1971 removed the us from the gold standard. So let's take a look at gold performance since then, and let's break it down by decade and have something to compare it to because when you're looking at an investment, it's not enough to say, did it grow or not grow it's did it grow compared?

What, what could you invested your money in? So you can have a general sense of, is this performance good or could this performance have been better? So 1971, the gold standard no longer exists. And before 1971, the price of gold was $35 announced for decades and it did not shift. So from 1972 and beyond that's really where the price of gold had the ability to float freely based upon what the market value did that.

So from 1972, to the end of 1970, So let's look at the seventies. So after though the gold standard was removed and after the price of gold was no longer pegged artificially to some price. From that point, the price of gold rose 36% per year from 1972 to 1979. That's a huge return for comparison, large us stocks from 1972 to the end of 1979, they grew up 4.6%.

So if you were invested in the seventies and you invested in gold, you did significantly better. 36% per year is a huge return. When you look at the last eight years of the seventies, compared to 4.6% for us, large. Well now let's go to the 1980s in the 1980s, gold. It averaged negative 2.5% per year from the beginning of 1980 until the end of 1989.

So for perspective, that's a negative 22% total return for the entirety of that decade. Well, in the meantime, us large cap stocks averaged 17% per. So that was a much better return, a really strong return through the 1980s. And then if we move on to the nineties, we see that performance continues so gold had a negative return.

The entirety of the eighties, negative 2.5% per year. Move into the nineties from 1990 to through the end of 1999, gold had a negative 3.3% average annual return. So for a perspective, that's a decade of losing over 30%, which followed a decade of losing 22. So a pretty rough 20 year stretch for gold from the 1980s to the 1990s.

And if we're looking at 1990s where gold lost on average negative 3.3% per. Well us large cap stock. They grew up 15.3% per year on average throughout the nineties. So coming off a decade in the eighties where they averaged 17% per year, now they averaged 15.3% per year. So in the eighties and the nineties, the.

Us stocks, us large cap stocks, handily beat gold in the 1970s. At least after the gold standard ended gold handily beat the us large cap stocks in terms of performance. During the two thousands gold had a great run. So from 2000 to 2010 gold averaged, just under 14% per year where us large cap stocks lost 1% per year during the two thousands.

So again, things switched gold was much better than us. Large cap stocks during the 2010. Gold average, 2.9% us large cap stocks, average 13.4 and from 2020. So January 1st, 2020, until August of 2022, gold has averaged 5.5% compared to us large cap stocks at 11.6%, which is taken into account the downturn that we've experienced so far and 2022.

Okay. So those are a lot of numbers. Uh, what's the average James, what's the average over that time period? Well, cumulatively since 1972. Us large cap stocks are grown by about 10 point half percent. And gold has grown about 7.4%. The thing with gold, though, if you remove the 1970s from that, it didn't do so hot.

The 1980s, it lost two and a half percent per year. The 1990s, it lost three and a half percent per year or 3.3% per year. It is strong run in the two thousands and then 2010s. It returned less than 3% per year. So when we look at this though, this kind of makes sense. Remember what I. The price of gold was pegged at $35 an ounce from 1934 all the way until we were removed from the gold standard.

So when you look at the performance in the seventies of 36% per year, which is an absolutely enormous return. Could it be that some of that was just built up almost as built up pressure of yes. Gold should have been increasing in value, but it was artificially pegged at $35 an ounce because it was backing our currency.

If you go way back, if you go back to about 1934 and say, what's the average return on gold bin since then, and again, it's kind of tough to do because it was pegged. So there's a little bit of not allowing the free market to do it's thing during that time. But the return of gold is about four and a half.

Meaning, it was about 1% greater than inflation when you go back about 90 years. So as you look at this, it's clear that gold does have a positive return over time. But you have to ask yourself compared to what are my dollars better suited in something like gold that doesn't generate cash flow or are my dollars better suited in something like stocks that do generate a cash flow.

And again, I want to reiterate here, even this is not an apples to apples comparison because we have to determine what's the risk here. So are you taking the same exact amount of risk when purchasing gold as you are when purchasing stocks? I would argue, no. I would actually argue. Stocks are much more safe.

And the reason for that. There's a couple ways you can look at risk, but one of the most common ways people look at risk is there's something called standard deviation and standard deviation is just telling you how much does an investment return deviate from its average return? You know, for example, let's say there's a stock that's generated 10% per year and it generates exactly 10% every single year.

And it's done so for 30 years. Well, that investment would have an average return of 10% in a standard deviation of zero. And the deviation is zero because you're getting exactly 10% every single year. Now the stock like that existed, that'd be quite fun. Fortunately it doesn't. But for example, that's a standard deviation of zero.

Now let's assume you have another stock that also averages 10% return over the last 30 years. But in some years it's been up 300% in some years, it's been down 90% and it's constantly fluctuating. Well, that would have a very, very, very. Standard deviation because you can't expect to get that 10%. The actual return is gonna deviate quite significantly on a yearly basis from the average.

So when you look at gold standard deviation, since the, the peg was removed, since it started freely floating on the market, it's about 19.9%. Compared to us, large cap stocks at about 15.3%. What that's telling you is that us large cap stocks have deviated a lesser amount than gold has. So not only has the return been greater, but the deviation from that return has also been lower.

Another way of looking at this is what's the worst down. Well for gold, the worst draw down was negative 62%. So from October of 1980 to August of 1999, had you put all your money in gold in October, 1980 and left it there until August, 1999, it went almost 20 years. And during that stretch, it lost 62% of its value.

That's a really difficult hold to dig yourself out of. In fact, you had to leave your money in there until April of 2007, just to break even. I mean, that was 26 years. 0% performance, which is actually a negative, real return. When you factor an inflation that was growing over that time, we'll compare that to stocks during this time period, their worst drawdown was down 51% from November of 2007 to February of 2009.

And they had fully recovered by August of 2012. So that's less than a five year drawdown of worst case scenario. Your money dropped 51%. It took some time to recover and all that was done in, but less than five years, So to me, when I'm looking at this, the numbers and the evidence is pretty clear, at least historically speaking stocks have generated a higher return and have done so with less risk than gold, which as an investment seems to make a lot of sense.

Now let's tie this to point number three. The third thing I wanna look at when deciding does this investment belong in my portfolio is what investment will I stick with? Now, this actually is, is very important, especially with things like cryptocurrencies becoming hot or different types of investments is let's say, for example, cryptocurrency does generate huge returns over time.

That's great. But how many investors will actually capture those? You have to honestly ask yourself, are you going to be able to stick with something when you're getting whipsawed and you might be up 200% in a year, or you might legitimately be down 80, 90% in a year. Most people cannot stomach that. So what good is it?

If an investment average is a really strong return over 20, 30 years, but you can't capture that because you're just buying high and selling low, which we all know is. But we're so tempted to do because of the whip saw effect that some of these investments have. So why what's the context of gold with that?

Well, some people just don't like the stock market. They think maybe it's rigged. Maybe they've been burned for whatever reason. They just refuse to invest in the stock market. And I'm not this way, but some people are, maybe they don't feel the same way about gold. Well, if that's you and your options are, keep your money in cash or invest in.

Well, I'd probably say gold is better, long term growth, potential than cash. Even if that potential is based largely on speculation, in my opinion. So if owning a piece of your portfolio in gold helps you stick with your portfolio, then great. It doesn't have to be what's the greatest return it's what's gonna help you.

Get the best possible returns you can get. I don't typically I don't, I should not typically, I don't ever recommend gold to clients, but I do have clients own gold in their portfolio. And we've had the discussion. It's something they believe in. It's something they're comfortable with in having that piece of gold in their portfolio.

It allows 'em to stick with things, even when things are turbulent, it's something that gives, 'em a sense of comfort of, okay, it's an extra level of diversification. And if that's something that in their mind allows 'em to stick with the portfolio. Then in my mind, it has served its purpose. Even if that purpose isn't getting every last bit of return that they could have.

By having it there, it's allowing them to own the types of things that will get them the strong returns over time. So that is something that we cannot ignore. We can't just look at the numbers in the spreadsheet. We also have to know ourselves and we also have to know what will I stick with and could gold be something I stick with, even if it's not the greatest long-term returns.

So those are my thoughts on gold. And just in conclusion, as we're looking at this, the first thing we have to look at is when we're asking ourselves is golden good investment. We have to say, compared to what stocks well in sometime periods. Yes, but overall, no, to me that's largely because Gold's return is largely based on speculation at the end of the day.

Whereas stock returns are based on cash flows. You're investing in real companies with real profits and real cash flows. And that's, what's driving the majority. If not the entirety of stock returns over long periods of time. Yes. There's short spouts of time. There are short time periods where stock prices going up and down is entire.

Built on speculation. That's how things work in the short term. But over time, it's the earnings that these companies are generating that is leaving to those returns. That's leading to those returns. So if owning gold helps you stick to your investment plan, that is based in stocks or other investments that do have cash flows, don't negate that don't dismiss that that is something really important, but at the end of the day, you need to design a portfolio.

That's right. For. And that's only something that you can know, what's the right mix of conservative investments to growth investments like stocks to maybe something light gold. Me personally, I don't own any gold. I don't want to, I don't think it's gonna be a good part of my portfolio, but there is a really strong use case.

And that use case is, is this going to be something that helps you sleep at night, stick with your. Even if historically it hasn't been the greatest return. So that is it for today. Joshua. I really appreciate the question. I hope that was helpful when asking my take on gold and precious metals. I know today we kind of just talked about gold, but the principles here applied to all precious metal.

And if you're listening and you're liking this again, please leave a review. I really truly do want more and more people to create their secure retirement, to be able to get the most out of life with their money. And this podcast is designed to help people do. That. So leave a review, share this with people, leave comments.

I, when people write me in, I like to write back. So with that being said, once again, really appreciate you listening, and I will see you all next time. Thank you for listening to another episode of the ready for retirement podcast. If you enjoying the show, please subscribe and let me know by leaving a five star review.

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Hey everyone. It's me again for the disclaimer, please be smart about this before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment tax legal or other financial advice. It is for informational purposes only.