Inflation is not only eating its way through our wallets.
It’s also having a toll on our psyche and our outlook on the near future.
In times when the stock market is struggling, people flee into gold that promises stability.
One of the best examples of such movement is the lost decade from 2000 to 2010, when people left the stock market in fear, and leaned into gold.
With a looming banking crisis and geopolitical risks around the world, investing more in gold and less in stocks seems to be the solution.
But, is that really the case?
In today’s episode, you’ll discover how you can invest in gold, if the stock market is inferior to the stability of the gold market, and if gold is a quick fix to hedge against inflation.
Show highlights include:
- How gold commercials want to manipulate you (even if they have good intentions) ([1:02])
- The, historically proven, advantages of the stock market gold-only investors miss out on (even in decades of constant losses) ([5:51])
- How a fear rally in the 1970s may have earned gold a reputation it can’t live up to ([7:37])
- What you can research to make an informed decision before you buy gold in any form ([9:49])
- A healthy amount of gold to have in your portfolio (and still get high returns from the stock market) ([12:25])
Do you want a wealthy retirement without worrying about money? Welcome to “Retire in Texas”, where you will discover how to enjoy your faith, your family, and your freedom in the State of Texas—and, now, here’s your host, financial advisor, author, and all-around good Texan, Darryl Lyons.
Darryl: Hey, this is Darryl Lyons, CEO and co-founder of PAX Financial Group, and you’re listening to Retire in Texas. Thanks for tuning in. And remember, this information is general nature only. It’s not intended to provide specific tax or legal advice. Visit PAXFinancialGroup.com for more information, and be sure to text the word “TEXAS” to the number 74868. That’s “TEXAS” to 74868.
Okay, so this show, I’m going to talk about gold. This is just not required, but almost necessary in this type of environment, but, basically, I’ve been asked, “Hey, can you do a show on gold?” So, here I am. Hope this is helpful for those that are listening to all those commercials out there screaming at you for you need to get in gold because of a great reset. [01:10].2]
I’ve got to tell you, I get really frustrated. In fact, I’ve been frustrated with the gold commercials for a long time and I know some of the guys that run these companies. Overall, I believe their intentions are good, but I think using fear to get people to make decisions is not healthy, generally speaking. I know in certain situations, it can be used and can be healthy. But I think this situation is quite manipulative, and so just know, to me, when somebody is screaming, “Buy gold,” on a radio, you might as well make me brush my teeth and then drink orange juice. It’s just this combination of emotion, fear, and gold, putting that together to make an investment decision. It just doesn’t mix. Emotions and money do not mix. It’s like toothpaste and orange juice doesn’t work. [02:02].8]
We make cerebral, smart decisions that are logical that are locked in to our long-term plan, and we win that way, and so for somebody to circumvent that on the radio to try to get these emotions and fears to get you to make a decision because they say the great reset is coming is wrong.
Let me just frame this up. Why buy gold? Am I negative on gold completely? No. But let’s ask ourselves, why would we ever want gold? We might want it for inflation. We might want it for just an investment diversification. We might want it in an apocalyptic scenario. So, those are kind of three different scenarios, right? Inflation, just as long-term diversified investments, or apocalypse. We’ll talk about that and we’ll talk about the different ways to own it, so you can own it. There’s certain ways you can buy it, and we’ll cover that in just a few minutes, because the mind can only absorb what the tail end can endure, and so I won’t keep you long on this. [03:01].1]
But before I get started, let me tell you my gold experiences, if that’s okay, it won’t take long. When I first started in this business, I didn’t have any clients. I didn’t have anybody to– I didn’t have rich uncles and aunts and family that could just invest and start me off. So, what I had to do, and this was in 2000, in 1999–2000, was I just had to drive around town and knock on doors. I mean, I knocked on houses. I knocked on trailer parks. I knocked on every industrial complex. I went up and down high-rises, and tried to get somebody to do some business with me.
The challenge of doing that, it was better than sitting still. I just thought, I can’t just sit at my desk, I’ve got to go out and have some activity. I ended up getting lucky along the way and a lot of that worked out and I met some great people. But it was still a task and it required a lot of gas. So, I’m sitting there driving in my little truck and it’s getting on E, and I didn’t have two cents to get gas. [03:55].2]
So, I look at my finger and I’ve got a class ring, St. Mary’s University gold class ring that my mom– I still don’t know how my mom bought it. She paid for this gold class ring and it’s the only thing I had, and there was an Action Pawn shop right there, and I just pulled over and I went to the pawn shop, and I said, “Hey, I just need money for gas. Can you give me some money?” He gave me, I think, a couple hundred bucks. It got me some gas, and then I ended up getting enough business in the next couple of weeks to go back to the pawn shop. I returned with my little pink slip and they gave me my ring back.
So, yeah, that’s my experience with gold. I don’t have a lot of experience with gold. Now, I will tell you, I don’t sit around with a bunch of gold bars or anything, but there was a time period where, as PAX, as an organization, gold was a material part of the dialogue. That was about 2010.
I mean, you think about it, 2001–2010, and I’ve been doing this since ’99, but in that period of time, the stock market was flat, because in 2001, you had 9/11, and then in 2008, you had a market crash, so that whole decade was called the Lost Decade for the stock market, and as a result, people were leaning into gold, so part of our portfolio construction was that we did have gold. We did have gold as a part of our recommendations. [05:08].1]
We typically use it in a fund. You can buy gold in a mutual fund. Inside of a mutual fund, you can actually own gold. You can own the miners, if you want, instead of just owning gold as what they consider a spot price of $2,000. You can own miners, and sometimes there’s benefits of owning the mining company versus gold. There’s just some business decisions to be made there.
We would own it from– There’s a company called Permanent Family of Funds and then there was one in town called U.S. Global. Those were two of the gold families. VanEck also does a lot of work in that space, a lot of research, a lot of great ways to access gold and get exposure to an increase in the price of gold. And that’s what we wanted for our clients during that decade, and so we did have some exposure.
I say all that because we’re not completely opposed to gold. I mean, it’s just not one of the things that we just hate gold. It’s just a tricky thing to own. I mean, look at the long-term investments relative to stocks. [06:04].1]
I’ll give you this as an example: 1980, let’s go to 1980. Since 1980 to 2023—this is pretty good research from Kiplinger—the stock market. We usually look at the stock market as the S&P 500, the 500 largest stocks. We include dividends in this.
You’ve got to be careful when you’re listening to somebody quote the stock market. You’ve got to make sure that they include dividends. A lot of times they won’t, and they do that because they’re trying to make a point, and I’m just going to give you that heads up. If somebody’s quoting you something, especially these gold bugs, these people that are just pitching gold, a lot of times they’ll remove dividends from the stock market to make gold better, to give gold better returns. But dividends account for 40% of stock markets’ returns. They’re a real part of the stock markets’ returns.
In this data here that I’m giving you, since 1980 to 2023, the stock markets averaged 11.4%. That’s great, right? We love that. That’s awesome, if this is the key element, if you stuck it out. Now, if you got weak along the way, you bailed out and then came back in, and you didn’t get that. You probably averaged close to the two. But for those people that stuck in it and had a long-term plan, they got that 11%. [07:14].7]
Now, bonds, on the other hand, got 5%, not near as good. Gold? How did gold do? Gold had an average rate of return from 1980 of 3%. So, the stock market had 11% and gold at 3% since 1980. That’s not even close, guys. If you look at gold as a long-term investment, that’s not even close. That would tell me that gold is a ridiculous consideration.
Now, I say that, here’s something to consider. If I take this return and I squeeze it back from 1980 and I go back in the ’70s, now we’re getting some interesting data here. We go back to the ’70s and we’re talking about Jimmy Carter and Vietnam, there’s some interesting returns in the ’70s. In 1973, the return in one year for gold was 72%. The following year, it was 66%, and then in ’79, it was 126% in one year. Gold had some smashing returns in those years. The question is why, and can we find a way to predict that return going forward? [08:08].1]
A lot of people associate gold being so valuable in the ’70s because of inflation, and I’m still not convinced that that’s the case, because if you look at other data points, it’s not necessarily as good of an inflation hedge as you might think. I think there’s other reasons it did good during those times and it wasn’t because of Jimmy Carter’s inflation. I think it was good because there were geopolitical risks.
Another reason that I don’t think it was good is, look at 2022. Look at the returns for gold and 2022—2022 is an inflation year, we all know that. How did gold do? It was flat. In fact, it was kind of negative. In an inflation year, isn’t it supposed to do really good? I’m not buying that gold is an inflation hedge necessarily. I’m just not a hundred percent convinced the data is telling me that it’s not a hundred percent correlated. [08:50].7]
What I believe happened in the ’70s, I think there was so much geopolitical risk with Vietnam and everything else that was taking place. I think that geopolitical threat caused a fear rally into gold and we saw that, and we say that in ’08. We’ve seen that before. We saw that during COVID. During hyper-fear-elevated environments, COVID, 9/11, the ’70s, I mean, the Cold War, people had run to gold, and that’s what causes gold to take off.
Here’s the biggest issue. Remember, I told you about the S&P 500 returns? I said, look, if you stuck with it, you got those returns. With gold, it’s really hard to get in at the right time. By the time you’re ready to get in gold, you’ve already missed most of the run up. I’ve seen these flowcharts, most people get into gold after it’s already run up and then it’s going to turn over and go back down, and so getting into gold and getting out of gold is considerably challenging because the time horizon in which they get to those good returns isn’t particularly long.
And then, how do you buy gold? I’ve just made the case to you, I hope, a little bit, and 2022 was a good example, that it’s not necessarily the best inflation hedge. It may be, but I’m not convinced. I’ve also, hopefully, made the case based on those returns since 1980. It’s not a good long-term investment. There is a case that it could be a diversifier. That way, it might zig when your stocks zag. But owning it, how do you own it? [10:13].4]
There’s several different ways you can own it. You can own it in the coins. You can own it in the bars. You can own it. There’s a lot of different ways to own it, but just remember, if you buy it from anybody, there’s going to be transaction fees associated with it. Those can be on the buying and the selling combined, 3–6%, so just know there’s always transaction fees when you buy. I’ve found it to be a little bit challenging, finding a reliable source to buy and sell gold.
Storage is also an issue and, potentially, insuring it is an issue, and then also making sure that, if you get the coin, it’s high quality, because the grade matters. So, buying gold does require a little bit of research and experience, and then you store it away in a safe place. There’s nothing wrong with that. That’s fine. I’d say that you just have to pay attention to the vendor you’re using. There’s a couple of them that we know about, but we don’t keep on top of the markets all the time. Check with your advisor. We’ll do research. Like I said, we do have a few that we’ve gone to for our clients. [11:11].6]
If you own it, the physical gold, that’s not bad, again. In Zimbabwe, I think in Zimbabwe, people own the bars and they would shave off some of the bars to buy groceries, so you could, in essence. There have been use cases to use the bars. I just think the coins might be a little easier in an apocalyptic scenario. But in an apocalyptic scenario, if that’s why you’re buying gold, I’d suggest you buy ammo, guns, probably whiskey, and gasoline. Those are probably more effective bartering tools than gold, to be honest with you, so think about an apocalyptic scenario.
That’s why they’re always screaming on the radio, “The great reset, the great reset, the great reset,” and all this stuff. “China is going to destroy us,” and all this. “Buy gold, buy gold, buy gold.” Forget that stuff. To me, that’s like toothpaste and orange juice. Emotions and money do not mix. That’s what they do all the time, and don’t let them manipulate you. [11:59].4]
People manipulate all of us. They put the smell of apple pies in furniture stores, because they know that when people smell apple pies, they buy more furniture. People put music in certain places because they know certain types of music makes us buy more. We know what Vegas does with the floors and lighting. And I guarantee you, the gold people know what they’re doing by screaming bloody murder, the world’s going to end, and they know you will buy more gold. Don’t fall for it.
Here’s how you do this. Here’s how you play this game. If you want gold, then maybe 5%. Maybe 5% of your investable assets. Maybe. No more than that. Okay? And this is just a scratch-an-itch. It’s something that you may have a thesis on. You may believe that there is an upcoming geopolitical event and you do want to hedge that. Cool. But no more than 5%. [12:51].7]
We talked before that a key element of investing is having a core portfolio and satelliting it with ideas and theses and convictions. But your core portfolio needs to be about 90% of traditional investments that pay a dividend or pay a bond, pay rent, whatever it is—90% of your core holdings need to pay you something, and the other 5–10%, generally 10%, can be satellites, and one of your satellites can be gold. That’s fine. No problem if you want to do that, great.
How do you buy gold? Again, you can buy the coins, the bars. You can buy an exchange-traded fund. GLD, I’m not recommending this, but it’s a low-cost way to access gold, to get exposure to it. If the market provides returns for gold in an apocalyptic environment, you’ll be able to capture that. You can buy it in a fund. In those funds, sometimes they’ll own the mining stocks. You can own the individual mining stocks, if you want. There’s plenty of mining stocks out there. I think of Newmont, that’s one of them.
So, there’s a number of different ways to get exposure to gold. Check with your financial advisor. They’ll give you a few features and few ways to capture gold. Again, I just think it’s a little bit overrated, but I’ve seen seasons. I will admit, there have been seasons where we’ve held it. It’s a tough one to really get a good return. When you see the other stuff going up and you’re just sitting there on gold and just look at it, it’s not paying you a dividend, it’s not paying you a bond yield, it’s not paying your rent, you’re just sitting and it’s flat, it’s a tough investment. [14:16].6]
So, I would discourage you, but if you really want it, then no more than 5%. Is that fair? Okay, good. Check with your advisor, too. Make sure that you’re getting second opinions on this stuff. I don’t want you to be taken advantage of by some gold nut out there that’s going to take your money and run, so let’s be careful. Let’s be smart. Let’s be cerebral. Let’s not use our emotions. Let’s not use fear. And, as always, you think different when you think long-term. You guys have a great day. Bye-bye. [14:45].0]
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