Today’s question comes from Oli. He asks:
“It seems like stocks are overbought at the moment. The rally has come to its peak. Stocks seem to start consolidating right now. Many potential threads waving through investors minds. Brexit, Italy, Trump, and so on. How do you think about investing in ETFs of gold producers or ETFs of gold in the current market situation? Like a famous quote says: At least 10% of gold in a good diversified portfolio is a must.”
People buy gold when things start feeling scary. Like when you have Brexit, Italy, and Trump all happening at the same time and you think this might be the end of civilization.
But if we’re staring at the apocalyptic, end of civilization, mother of all crashes, then it really doesn’t matter what you’re investing in. Because try buying bread with those ETFs of gold.
And I’ve always agreed with what Warren Buffett says about this:
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
That’s the thing about precious metals. When you buy an ounce of gold or silver or whatever then 10 years from now you’re going to have that exact same ounce of gold or silver or whatever because it’s been sitting in some vault someplace not creating more value.
Now, compare this to buying a company.
Take, I don’t know, Starbucks. You can go buy part of the company right now, I mean that’s what a stock is. So now you own a share of Starbucks and every quarter they’re building more stores, increasing their sales, increasing their profits, and this is making them more valuable and because they’re more valuable the share price goes up.
Investing your money in something that can create more value means you can make more money.
And the data backs this up. Professor Jeremy Siegel, of the Wharton School of the University of Pennsylvania, looked at the data from 1802 to 2008 and found if you invested $10,000, and reinvested all the dividends and interest, this is what you’d have (adjusted for inflation).
- Stocks: $5,600,000,000
- Bonds: $8,000,000
- Gold: $26,000
Investing $10,000 in stocks would give you $5.6 billion, bonds $8 million, and gold $26,000. This is because stocks return about 7%, bonds 3.5%, and gold, well, it’s not very good. So we know gold isn’t the best investment.
Should you ever invest in it then? Okay, what you’re doing when you’re buying gold is speculating that things are going to get scarier than they are right now and the price of your gold will go up. If you guess right, and you can guess when to sell, you can make some money.
On the other hand, think back to investing in a company like Starbucks. Every year it’s growing and becoming more valuable, even when we’re in a slow growth environment. So if you’re investing for the long term, which do you think is the better investment?
And if you have no interest in buying individual stocks you can simply buy index funds because when you’re buying index funds what you’re really doing is buying hundreds or thousands of companies just like Starbucks all at once.
Of course there’s no guarantees in any of this, but if you think companies can create more value than a piece of metal then you know how much gold should be in your portfolio.