All that Glitters Isn't Gold -Ep #55

All That Glitters Isn’t Gold, Ep #55

On my drive to work, I mostly like to listen to podcasts but on occasion, I will listen to the radio. And frequently, I hear advertisements that claim that the economic sky may be falling and that one needs to invest in gold to protect themselves from the oncoming economic apocalypse. Well, the truth regarding investing in gold is a very different story and those that invest in gold may not have fools gold but I’ll share why it could be very foolish to do so.

In this episode...

Using Fear to Sell [2:54]
The lies salesmen tell you about Gold [4:10]
Gold has grossly underperformed for over 40 years [6:26]
Three Additional Reasons to NOT invest in Gold [10:25]
Beware When Salesmen Use Fear to Sell [13:13]

This communication regarding a precious metal is limited to a general and educational discussion as an asset class such as an economic or market commentary. This is not a promotion or solicitation for the direct purchase of a hard asset.

Gold has enamored the mind of mankind for millennia. There are tales of Eldorado, the lost city of gold, or King Midas who had the golden touch, or even a leprechaun that hides a pot of gold at the end of a rainbow. In fact, the very state I reside in, California, owes much of its initial rise to the tens of thousands of people that came out west in hopes of also striking it rich in the gold deposits after gold was first discovered in 1848 at Sutter’s mill.

Gold holds a certain allure to people and the commercials advertising investing in gold use this perception to peddle an investment theory regarding how gold supposedly has these incredible wealth-preserving capabilities. Now the advertisements I have heard always focus on fear and emotions with references to a teetering economy or references to the stability of the dollar owing to our massive national debt. That they use fear is no surprise as few things motivate people like fear. Greed is a close second, but fear is certainly the most powerful.

Since 1980, Which Investment Has Generated the Best Returns? Stocks bonds or gold?

From January 1980 through January 2023, the S&P 500, with dividends reinvested, returned an annualized 11.4% before inflation. Adjusted for inflation, it was 8.0%.

As for bonds, the benchmark 10-year Treasury note delivered an annualized total return of 5.6% over the same period. Adjusted for inflation, it was 2.4%.

What were Gold's returns since 1980? Gold had an annualized return of just 3.1% before inflation. After adjusting for inflation, the average annualized return was negative. 0.01%. Meaning you had less money than you started with 44 years later.

Let me repeat that, since 1980, over 44 years, gold has had a negative return when adjusted for inflation. Again, how these people can get away with these lies on the radio and TV is beyond me.

Now if that’s not enough reason to convince you why you shouldn’t invest in gold let me share 3 additional reasons why all that glitters isn’t gold.

First - Gold pays ZERO income

Gold doesn’t produce income. It’s only worth what someone will buy it from you in the future, whereas stocks pay income via dividends and bonds pay income via interest payments.

I like Apple products. I own a Macbook Air, a watch, an iPhone, iPad and Airpods, and Apple TV. These are all products Apple makes. They sell these products to consumers for a profit. Some of those profits are shared with stockholders/part owners in the form of dividends.

Bonds are when you lend money to either the government or a corporation. You lend them money and they pay you interest for the privilege of borrowing your money. That’s income for you.

But what does Gold pay you, absolutely nothing. Nada, Zilch.

The second reason why solid gold sucks as an “investment” is that it’s not very liquid. If I had a gold bar, how do I sell it? If you are wondering who would buy a gold bar, Costco just sold $100 million in gold bars in the fall of 2023. How do you exchange that for money?

With stocks and bonds, there are markets where you can sell the shares or bonds easily and get your funds in a matter of a few days all from the convenience of your couch.

The third reason why gold sucks as an “investment” is taxation. This refers to when people buy physical gold. When you sell that for a gain, you will pay higher taxes because the IRS considers it a collectible and it is taxed at a 28% rate. If you purchased stocks and bonds in a non-retirement account and sold them for a long-term gain, then the rates are dependent upon your income and could be 0, 15, 20%, or 23.5% for really high-income owners. All of which are much lower than what the tax rate would be on solid gold.

Hopefully, I’ve been able to demonstrate why you shouldn’t listen to some washed-up former politician or washed-up B-list celebrity when they tell you to invest in gold.

Because when it comes to gold, the best “investment” you can make is the purchase of jewelry for your spouse. My wife’s wedding ring was the best “investment” in gold I ever made.

Securities and Advisory services are offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.