Gold has always been considered a safe haven investment when the economy is going through a rough patch but is it really that safe? In this episode of Coffee with Brendan, Brendan takes a look at the history of gold and its usefulness as an investment, especially as it compares with stocks and bonds.
Topics Discussed:
The price of gold over the years
The volatility level of different assets, including gold
Where gold fits in a portfolio
Gold as a replacement currency
Issues with selling gold
Transcript:
Hi, and welcome to another edition of coffee with Brendon. This one was teased a couple of weeks ago. And it's entitled, is it time to invest in gold? I'm starting to get more and more questions about gold as a potential investment. Honestly, it's mainly from Mike more conservative leaning clients. So whatever they're hearing or whatever they believe, is starting to make them really second guessing question where the US economy is actually going. And it's causing them to think about gold. And why gold, gold has always been kind of known to be the safe haven. So whenever there's a geopolitical event that happens or things like that, people tend to start investing more and more in gold, and then the price of gold actually goes up. So a lot of people on Wall Street, look at that price of gold as almost like the Fear Index as things as the price of gold goes up, it usually means that investors are starting to get nervous about whatever is going on in the world.
So what I'm going to do today is do a little bit of a history lesson to see is gold truly a safe haven. And then secondly, if it's not a safe haven, is it something that should be incorporated into your portfolio. And then if you want to keep listening, I am going to have a little bit of an extra part to this, this podcast to talk about our podcast, this video to talk about physical gold that if the US economy truly does melt down, will physical gold be the new US dollar because the US dollar collapses. So we'll get to that in a little bit.
So let's start with the price of gold. So let me start sharing my screen and show you you know what the price of gold has actually done over the years. And what you see here is that it actually peaked in 1980. And not surprisingly, that was a time when people were very nervous about things we had Russia invading Afghanistan, we had the Iranian revolution, we had double digit inflation, double digit unemployment, certainly there were a lot of things that were really scary about that time at the beginning of 1980s. But if you look at this, if you invested in gold, the peak in 1980, it wouldn't have been until 2007, that you'd actually start making a profit. In other words, you would have to hold it for 27 years for you to have made a profit. And then from there 2007 2008 2009, all the way through 2011. There was a bull run, you know, and that doesn't surprise many people that was during the financial crisis. And people were genuinely concerned about whether or not the financial system of the United States would actually survive what we're going through.
But then look again, once thing, once people started feeling a little bit more confident and things, those people that bought in 2011, at a high, didn't see a return on their investment for nine more years until COVID in 2020. And since that time, it's gone up to a peak of you know, just over 2000. And now it's come down to 1800 1850, somewhere in that neck of the woods. So long story short, lots and lots of volatility. And that's paid off in the chart that I'm going to show you next, which is here.
What this chart on the right is actually showing is how volatile different investment assets actually are. So let's look at this over here. And so if you look at just the US stock market, which is represented by us large cap, the volatility is about 14%. So think about it like this, that there is an average rate of return. And in most markets, you're going to be plus or minus 14% of what that average actually is. So it's a it's a measure of how wide of a range of returns you should actually expect. Now what most people do when they're putting a portfolio together as they match stocks up with bonds, and why do they do that? Because stocks have a volatility of about 14%. But bonds have a volatility of much lower out 3%. And so when you think about what's an aggressive investment versus what's a conservative investment, typically what people say, if there's an annual volatility of 14%, that's an aggressive investment. If there's only a volatility of 3%, then that's a very concern. of investments.
So where does gold lie on this volatility scale? So it's down here. And it's 15%. Of all the different things on here. It's second only to emerging market equity, which is pretty much third world countries. It's the Russia, Brazil, India, China, you know, those emerging markets that shouldn't be first world economies probably sometime in our in our lifetime, but right now they're considered emerging. They're very, very volatile. 17% plus or minus 17%, the best around where gold is somewhere between developed stock markets and emerging stock markets, so very volatile.
So the idea of gold being a safe haven, it's paid off in that former chart that that chart that I was showing you that, you know, some people didn't make money, who purchase gold in 1980 for 27 years, that leads to a lot of volatility in in the price of gold. So certainly not, it shouldn't be considered a safe haven, even though its price typically increases during times of volatility and concern and fear. So where is it used? When and where should it be used? Well, it's a great diversifier. All these other numbers that are listed here are showing you know how these different asset classes when you're putting a portfolio together correlate with one another. And you don't want a lot of things that are 100% correlated with one another.
So in other words, if you were to match up a US large cap, equity index with another US large cap equity index, guess what the alpha or the correlation is one, it's, it's perfectly correlated, when one US large cap goes up, the other US large cap typically goes up. So there's a one. And then when you look at, let's say, US large cap compared to bonds, again, you actually have a negative correlation. In other words, a lot of times when, when stocks go up, bonds typically go down, that's a negative correlation. So where does gold fit in all this, it is not core almost zero correlation, which pretty much means it's almost random to the price movements of the US large cap and bonds. So you can almost look at it as a third asset class and a good diversifier to a diversified portfolio.
So long story short, use gold for what it's designed to be, which is a diversifier. Don't use it if you're thinking that it's a nice conservative investment that you should invest in, when your fear and what you feel is going to happen with the world is it's going to happen.
So those are my my base comments that I'd like to do there, if you do believe that the US economy is headed for a meltdown. And that gold should be used for something even more than just a regular investment, but actually as a form of currency, because the US dollar will become worthless if the US economy melts down. Listen to the rest of this, this video. Otherwise, you can end it there. And I'll say goodbye, and we'll talk to you the next time.
But if you are interested in my comments on gold as a currency, let's, let's go into that. So why do people think that so let's say again, let's say that the US economy melts down, the US dollar becomes worthless? Will physical gold hold its value? For most? Logically, it makes a lot of sense. If you look back over the last several centuries, if you go back to ancient Egypt, you know, Ken King, Tut's funeral mask was made out of pure gold. You know, people have looked at gold for literally 1000s of years as something valuable. So it makes sense that if the US dollar, which literally is just a piece of paper, but it represents something doesn't represent anything anymore. It's just a piece of paper. Like what happened to the ruble, for instance, in in the 1990s, or what happened in Venezuela, just recently or not just recently, but within the last couple of decades. You know, then gold as a physical currency, it may be worthwhile.
The challenge with that assumption is is that if the US economy melts down, I would argue that the world would have a ripple effect. And it would probably crash the entire world economy except for a couple economies that may survive that kind of apocalyptic situation. And at that time, will we go back to the barter system, which was pretty much the system that was in place before currency. Because remember, currency was, was kind of a new idea that instead of saying, I'm going to trade you five chickens for that one cow. That's how trade used to happen before. They then said, Okay, I'm going to use this this valuable thing, whether it's gold, whether it's shells, whether it's pretty rocks, they use that thing to signify this is what a cow is valued at. And so will will we, in that kind of Armageddon situation, look at gold as a truly valuable thing? Or will the resource of the day rule so you look at some of the Sci Fi some of the more science, science fiction type apocalyptic movies, you think of it like Mad Max with Mel Gibson, like oil was the most valuable resource, you could have as much gold as you wanted. But if you had an oil that was that made you powerful, or you go to Kevin Costner's Waterworld, fresh water was the thing. So who knows? Who knows, and that kind of apocalyptic situation, what people will accept as something of value.
But let's let's so let's take put that bowl argument aside. And let's, let's just assume that that gold is valuable. Okay, so taking that aside, but what it let's take another what if, what if you're wrong, and let's say buy a bunch of gold in anticipation of this apocalyptic situation, the apocalypse doesn't actually happen. And let's say that the party that you support actually comes into power and fixes everything. And you're like, Okay, you know what, I want to get rid of my gold because that that fear that I once had, has now passed, how are you going to get rid of your gold?
Right now, if you have physical gold, and you no longer want it, you have to sell it to a gold dealer. And what a goal, there's no New York Stock Exchange, where just like, you know, Tesla view, if you know what your if you have a share of Tesla, and you want to sell it to someone else, or you want to redeem it and get cash money for it, there's an agreed upon value of Tesla that everyone knows, and you will get for that one share of Tesla, and you'll get it pretty quickly. Gold doesn't have doesn't benefit from that, you actually have to go to a gold dealer and say, I have all this gold and this many ounces of gold, give me money for that. Now, you're not going to necessarily get $18 or $1,850, for every ounce of gold that you that you that you give to that gold dealer, they will charge a markup in some cases, a pretty significant markup. So you lose some value of your gold to that dealer who is the person that's buying the gold from you.
So again, from an pure investment standpoint, gold is not the greatest, you know, it has a lot of volatility, as I showed you in the chart over there. And then if you decide that you're no longer enamored with the gold, and that some of the fear that you once had, has dissipated, and you try to sell that gold, you're not necessarily going to get the full value of the gold. And I showed you before you know, the the value, the price of gold, over time has gone up and down. And it's taken people, you know, years, if not decades to get your your that your value back. Once the fear goes up again, because it's all this stuff, kind of ebbs and flows. And right now it's very high and buying gold at a high right now, just makes it even that much more tricky to make money on on the gold.
So those are all my comments about gold. You know, again, I don't think I don't please don't take this as I think that it's a not a worthwhile investment. I think it is, but use it for what it's good for. And that's diversification of an existing portfolio. I would certainly not, you know, because you're afraid of what's going on with the world, sell a big chunk of your portfolio and buy into gold because you feel like gold is going to be the thing that holds the value in, as I said, an apocalyptic situation. So hopefully that wasn't helpful I'm sure I'm gonna get some comments from some of my my folks that have expressed some interest in gold about this video but I welcome those comments and we can talk through it thanks thanks a lot and have a great day
Disclosures:
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors
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