Goldbug. “You should buy gold.”
Goldbug. “Are you kidding me? Look at the state of the world, it’s a mess and only getting worse.”
BuddhaMoney. “Chaos makes gold an attractive investment?”
Goldbug. “Yes! The more fear, the more gold increases in price.”
BuddhaMoney. “So you’re saying that I should buy gold because people are scared?”
Goldbug. “Hey, I’m saying that I invest to make money and there’s money to be made in gold.”
BuddhaMoney. “I’m not interested in making money from other people’s fear.”
Goldbug. “You’re not getting it. Listen:
- Gold diversifies your portfolio, and protects against market volatility.
- It’s inversely correlated with stock prices. When stocks trend down, gold moves up. When stocks move up, gold trends down.
- It acts like an alternative currency, increasing in value when the US dollar decreases.
- It’s hugely liquid, meaning it may easily be converted into cash.”
BuddhaMoney. “It sounds to me like the price of gold is based entirely on supply and demand, and, according to what you’re telling me, demand is highly correlated with fear.”
Goldbug. “What’s wrong with that?”
BuddhaMoney. “I’m not interested in investing in a commodity that has no intrinsic worth, the value of which is arbitrary.”
Goldbug. “Hedge fund managers and billionaires buy gold.”
BuddhaMoney. “While the actions of others may be informative, I don’t blindly follow.”
Smart investors can disagree. Some are gold fans, some are not. Personally, I’m not. I’ve never invested in gold mining companies nor have I bought any gold bullion. Why?
Gold may be a portfolio hedge but it’s a risky one that can quickly drop in value. When stock and bond markets are falling, your portfolio is better protected with good ole’ cash.
Gold does not offer a proactive way to generate wealth. Rather, it acts as a safety net, with demand rising, and price increasing, based on:
- Growing and persistent inflation;
- American dollar devaluation;
- Global economic turbulence; and/or
- Geopolitical crisis.
In other words, things that scare a whole lot of people.
Be Wary The Fearful
In July, 2016, Jeffrey Gundlach, CEO of DoubleLine Capital, an investment management firm watching over $100 Billion said that, ‘gold remains the best investment amid fears of instability in the European Union and prolonged global stagnation, as well as concerns over the effectiveness of central bank policies. Things are shaky and feeling dangerous. I am not selling gold.’
So what is Gundlach really saying? The sky is falling, horde gold because all other methods of payment will soon be declared worthless? Maybe. But what’s more likely is:
- Because Gundlach holds a large gold stake, he’s promoting gold for the purpose of increasing its market value; or
- More importantly for our understanding, Gundlach is saying that gold is the go to asset when ‘things are shaky and feeling dangerous’.
The more people quivering, the more demand increases, the higher the price of gold. Or, as Warren Buffet said, ‘What motivates most gold purchasers is their belief that the ranks of the fearful will grow.’
Gold is a gamble, a risky, speculative trade, not an investment that pays interest or dividends. Profit comes only from selling at a higher price than what was paid. To paraphrase Buffet, ‘you’re betting on what someone else will pay for gold in the future’.
Buy when price is low (when the fear factor is minimal) and sell when price is high (widespread panic which leads to a gold bubble, such as what happened during 2008-2013 when the price of gold blasted from just over $700/oz to almost $1900/oz) and, sure, you’ll make money. And when the bubble bursts? In 2013, price dropped more than 40% to under $1100.
As for the share price of gold mining companies, these too are high risk plays with share price bouncing up and down largely depending on the price of gold. These companies are not in the business of creating value from gold.
Rather, their business involves digging gold out of the ground and exchanging it for paper currency. Kind of laughable when you consider that it’s the steely eyed goldbugs who claim that paper money is a pervasive conspiratorial scheme perpetrated by central bankers.
If this were so, you would think that gold mining company executives and shareholders would be paid in gold bars rather than choose to receive payment in the currency of choice, US dollars.
Chicken Little Is Not Your Friend
If you don’t subscribe to chicken little’s preaching, and if diversification and minimal volatility is a goal, then gold, and gold companies, are not prudent investment vehicles. Instead, if you’re looking for ultimate security, place your money in a real investment, one that offers safety and generates income, such as US Treasury Bonds or Government of Canada Bonds.
Chewy Bits. A Treasury Bond is a fixed interest debt security issued by the US federal government. Interest payments are made to the investor twice per year.
A Government of Canada Bond is a fixed interest debt security issued by the Canadian federal government. Interest is typically made to the investor once or twice per year, depending on the particular bond.