I Hate Gold—Here’s Why I’m Buying It

I admit… the richest I ever felt was when I was 10 years old, holding one of my grandfather’s gold coins.

He was going through his collection of coins and currencies.

I saw a blue velvet box among the piles. When I opened it I felt like I had discovered a treasure.

“What is this?” I asked.

“Gold coin,” he said. “You want it?”

“What, really?” I asked.

“Yeah. Here’s a second one,” he said. “All yours.”

I felt like that kid from the movie Blank Check. I had not one but two $5 Indian Head Gold Coins. And I still have them to this day.

“But Sean,” I hear you cry. “That sounds too good to be true. Who the heck gives a 10-year-old a collectible gold coin?”

To which I would respond: You’re right. Nobody would do that.

Turns out, my grandfather, the millionaire penny stock broker, was a liar.

See, while a real $5 Indian Head Gold is worth over $2,000 today…

My grandfather had handed the idiotic, excited, 10-year-old me two “gold clad” replicas from the National Collector’s Mint.

Anybody with $20 they want to waste can go and buy one of these.

Like most visible riches and prestige items, it was a facade masking a worthless core.

When I got into my 20s and became more cynical, I came to view gold for what it is…

A shared delusion. A social construction.

A rock that people want simply because other people want it.

But as I get older, my opinion on shared delusions has… softened.

All money, after all, is a shared delusion. And I will gladly indulge in the delusion of money as much as humanly possible.

Perhaps it is for this reason that I find myself looking at what’s happening in the economy and going… “you know what…”

Gold looks pretty alluring right now.

(Maybe “lustrous” would be a better word.)

So let’s mine that a bit for more insights about how you can use gold to help you build wealth.

I’ll cover the case for gold… I’ll cover why gold is, regardless of any argument or macroeconomic moment, a terrible investment…

And then I’ll explain why, right now, I’m looking at pouring a significant chunk of money into gold.

Let’s get started…

The Case For Gold

It may surprise you to know that gold is not the oldest or longest lasting form of money. That accolade is reserved for “livestock.”

Nor is gold the first form of metal money (that one goes to bronze and copper).

Gold coins first circulated as an official means of exchange around 500BC, depending on your source.

When metal money hit the scene — bronze and copper coins included — it caught on quickly. For the first time, people could pay for things by count, instead of by weight.

But since silver tarnishes over time, and bronze isn’t considered a “rare” enough metal for controlled coinage…

Gold became the preferred form of currency.

Gold is thus the “original and best money,” the goldbugs assert.

For one, it’s a rare enough metal — such that not everyone can mint gold coins in their basement.

Yet it wasn’t so rare that it was hard to find and create enough coins for circulation.

And when compared to paper or fiat money, which first appeared in China in the 11th century, gold certainly has added benefits.

[Fiat currency is any government-issued money that is not backed by a commodity like gold or silver.]

For example, while any government can print more money, no one can print more gold. Gold must be discovered, mined, stored and physically transferred, and minted.

And up until 1971, the amount of paper money circulating in the U.S. economy was directly pegged to the amount of physical gold stored by the Federal Reserve.

If you’ve ever heard of “the gold standard,” this is what folks are referring to.

But as soon as this link was severed, paper money printing soared… crushing the purchasing power of the U.S. Dollar by as much as 85%. Making paper money even more worthless today than it was. (Another argument in favor of gold’s supremacy.)

To this day, gold is seen less as a form of currency and more as a store of wealth.

In fact, after being net sellers of it for nearly a decade back in 2010, central banks began hoarding gold again…

In 2008, the spot price of gold broke $1,000 per ounce for the first time ever.

It crashed to $692.50 later that year.

Central banks love these corrections. It lets them buy gold at cheaper prices.

And in fact, according to the World Gold Council, central banks are gobbling up gold at levels not seen since 1967. Much of this part of a global “flight to safe assets” due to ongoing fears of inflation and a looming recession.

Many pessimistic investors are following suit and buying gold for three big reasons: It is tangible. It is portable. And in most cases, it’s private.

Let’s go over each of these characteristics quickly:

Tangibility: Your stocks and bonds exist on an electronic spreadsheet, as does the money in your bank account. This spreadsheet is the property of some huge financial institution. What if it disappeared?

It’s not likely, but it’s still a possibility. Global banks have failed. They’ve shut their doors and put limits on withdrawals to prevent crazy bank-runs that could lead to bank failures. Hackers can enter internal banking systems and drain accounts. These things have happened in recent history and happen every day to citizens worldwide.

Gold, on the other hand, can be physically held. While it can be stolen from its physical location, it’s a real and hard asset, unlike 1s and 0s on a digital ledger.

Portability: Real estate is another tangible asset. But real estate is not portable. If, for some reason, you want to get out of the country, you can’t load up your property in your luggage and take it with you. You can take your gold with you. And since real estate is non-portable, you can’t protect it from confiscation, either. Hardworking people have lost their homes to fraud. One day they owned them, and the next day they didn’t.

Privacy: Money in your bank account is not private. The banking system sees it. The government sees it. Who knows who else can see it. And the other problem with real estate (and many other forms of tangible wealth) is that it is actually public. Clerks record and preserve every real estate transaction you make for anyone to see. With a working knowledge of Google, your neighbors can study your real estate and what you paid for it. None of these problems exist with the gold bullion coins like Eagles, Maples, or Krugerrands.

These are the main benefits of owning gold. (It’s also divisible and scarce, two added perks we covered earlier. Another common quality we often see is its durability. Compared to paper, for example, it’s a lot harder to destroy.)

However, there is a slightly nerdier, final argument on gold’s behalf that I appreciate…

This one comes from George Gilder, who views wealth and knowledge to be one and the same.

If wealth is knowledge, then growth is learning. As he writes in his short book, the 21st Century Case for Gold:

Money is the channel that carries the information to investors, workers, small businessmen, major corporations and entrepreneurs. All need to gauge the success or failure of their attempts at growth… The source of the value of money is time — irreversible, inexorably scarce, impossible to hoard or steal, distributed with remorseless equality to rich and poor alike. As an index of time, gold imparts the accurate price signals needed for sustained economic growth and expanded opportunity.

The argument here is that, since money is information, governments only have the ability to increase the volume of money. But they ultimately have no ability to enhance the value of money.

Without that quality of time-bounded scarcity, free-floating currencies not backed by tangible assets fail everyone in an economy.

This argument gets, uh, far more into the weeds than we have the page space for here.

But for all intents and purposes, gold (or some kind of digital currency) shields money from manipulation and prevents some of the most egregious problems that arise from current monetary policies.

This covers the basis of the Pro Gold Camp well enough. How about the opposition?

The Case Against Gold

All of the arguments about gold’s scarcity and serving as a tangible, portable substitute for money are, well, quaint.

But at the end of the day, we’re talking about shiny rocks that aren’t especially industrially useful.

Meanwhile, while gold is technically portable, it’s not easily portable.

It’s inconvenient if not impossible to carry a sizable gold storage around the world. In the modern world, there are customs agents to navigate. There’s the sheer heft of it — gold (especially gold bars) is not light.

Gold is considered durable, but it’s not indestructible. And in fact, with gold being very malleable, wear and tear through exchange and use over time does lead to the lowering of gold in coins over time. The more worn they are, the less valuable collectible gold coins are.

Sure, gold is divisible. But again — not easily. It requires specialty equipment and extreme temperatures. It must meet specific standards for use and “purity” guidelines for collecting.

It’s extremely difficult to produce and becoming more and more scarce…

Meanwhile, perhaps the biggest argument against gold out there is that historically, governments have actually banned the storage of gold… or made it inconvenient to own. Others have gone as far as confiscating it.

In 2010, gold bugs lost their minds after discovering a hidden gold tax buried in the Obamacare legislation, whereby coin and bullion transactions over $600 in a calendar year and made by small businesses and self-employed people were reportable.

But that seems relatively innocuous when you consider the fact that it was actually a federal felony to own gold in the U.S. from 1933-1974, unless you had a special license.

In fact, it was one of Franklin D. Roosevelt’s first acts as president. In the midst of the Great Depression, Roosevelt wanted to stop Americans from withdrawing their gold and currency from the wrecked banking system. So he ordered all banks to shut down from March 6-9th, 1933, "in order to prevent the export, hoarding, or earmarking of gold or silver coin or bullion or currency."

But it wasn’t enough.

Fearful of Americans draining the system, one month later, Roosevelt issued Executive Order 6102 and made outright gold ownership illegal — both in coins and in bars. If caught and prosecuted, owning gold was subject to up to 10 years in prison and a fine of “twice the amount of gold that was not turned over to the Federal Reserve in exchange for paper money.”

And even if all of that doesn’t dissuade you from being a nut about owning gold…

On top of it all, gold is just… not a good long-term investment.

In this blog, I often make fun of traders and retail investors because they often get a miserable long-term return on their investments because they simply… do too much.

The average stock investor gets something like a 3% to 4% annualized return.

That’s barely better than inflation…

And you know what? Gold is hardly any better.

Since 1974, the average annual inflation-adjusted return for gold was 2%. (Unadjusted, it’s close to 6%.) 

And bear in mind: gold is a speculative asset.

Whenever you buy gold, you buy it hoping that some future schmuck is going to pay you more than what you bought it for.

It’s not like a bond that pays you fixed income or a business that generates products and shares profits…

Gold is, I reiterate, a shiny rock. Valuable only due to perception.

Now let me ask you this: When you think about investing your money, getting rich, saving for retirement…

Does it excite you to risk your money on something that has historically generated returns barely better than inflation?

If so, I’d like to recommend our sister site: DIYpsychologicalevaluations.

So that’s the case against gold, and why I haven’t been fond of gold since I was a child.

And yet…

With sky-high inflation and the prospects of a global recession looming, I think I’ve finally found a reason to be bullish on gold and precious metals generally…

Why I’m Buying Gold Now

Let’s quickly revisit what’s happened of late…

To combat out-of-control inflation, the U.S. Federal Reserve Bank initiated two policies: rapid interest rate hikes (to make debt more expensive and discourage growth) and quantitative tightening (to get rid of some of the Fed’s bond and mortgage-backed security holdings, removing some of the support they provided to the stock and bond markets).

This is why, in 2022, we saw the rare phenomenon of both the stock and bond markets crashing.

Now, in Q3 of 2022, the U.S. economy grew at an annual rate of 2.6%. That’s the first increase in 2022 and a sharp turnaround after six months of contraction.

Now, Treasury Secretary Janet Yellen says inflation will come down significantly in 2023, and things won’t be so expensive.

If you’ve been following along in these pages, you already knew this would happen.

I’ve been predicting a sudden and unexpected reversal in 2023 inflation for several months now…

Also while the U.S. economy continues to grow, there are many signs that the Fed monetary policies are beginning to have their intended effect.

As I’ve been saying, I think early- to mid-2023 will experience a sudden and dramatic surge in the markets in the mid-term (a.k.a. a disinflationary shock).

But will this temporary bull market hold? And how does this all affect today’s asset focus: gold?

This gets a bit weedsy, but stay with me…

The first and most important effect of the Fed’s efforts is that it massively increased the yield on short-term U.S. treasuries.

This has caused a global investment flight to U.S. denominated bonds, resulting in the U.S. Dollar gaining against almost all other currencies in the world. You can see that in the U.S. Dollar Index, which has gained 9.7% in 2022 so far.

It is hard to believe that, in 2022, one of the best assets to have held was simply cash. But it has been a strange year with unusual circumstances.

But now, two new things are happening that are threatening to topple the dollar’s dominance…

First, other nations’ central banks are rapidly trying to “catch up” to the U.S.’s rate hikes. Most nations are doing what the U.S. began a year ago. Now international investors and banks do not have to “flee” to dollars. I’ll explain what this means for gold in a moment.

Second, the U.S. looks highly likely to enter an economic recession in late 2023 or 2024.

There are a variety of reasons for this. But I like how analysts from the enormous asset management firm BlackRock stated it:

Recession is foretold as central banks race to try to tame inflation. It's the opposite of past recessions. Central bankers won't ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect. Equity valuations don't yet reflect the damage ahead.

Translation: Basically, analysts from BlackRock suspect that central banks will not be quick to rescue markets and economies in the event of a recession or crash. This will make a long, painful recession inevitable as high rates prevent growth (and inflation) for the sake of stability.

Personally, I find BlackRock’s analysis to be a little too pessimistic considering that central bankers in the E.U. and Switzerland have literally said that they plan to “ride to the rescue” in the event of a calamity.

But also, I admit that I do not know everything.

What I do know is this: Signs are strongly pointing toward there being a recession in late 2023 or 2024… and further devaluation of the dollar.

So how will investors prepare for this double dollar destruction?

Well, now we return to where we started…

Gold.

Gold is the one asset that’s often recommended as a hedge both against a declining dollar and against a possible recession…

At this moment, gold is moving in the exact opposite direction as the dollar — gaining value at nearly the same pace the dollar loses value.

The escape from dollars to gold has already begun.

But is this trend likely to continue, and will gold really protect us from recessions?

The answer is “Yes, but it is complicated.”

Since 1970, there have been seven major recessions in the U.S.

I looked at how the stock market did during recessions, and how the market performed in the year before a recession.

Here’s what I discovered:

We can make a few conclusions from these data.

For one, stocks are extremely risky to hold during a recession. That’s obvious.

The stock market (the S&P 500 in particular), dropped an average of -8.1% during recessions.

But less obvious is the fact that stocks are neutral-to-positive in the leadup to a recession, with some years gaining an above-average amount and some years losing.

Gold, on the other hand, performed pretty well during recessions, but performed amazingly well in the year leading up to a recession.

The belief that gold is a good “recession hedge” holds true, with gold increasing in value during all but one of the recessions over the last 50 years.

But in the year leading up to a recession?

It seems that investors know to buy lots of gold before the onset of a recession, which spikes the price.

That means that the best time to buy gold as a “recession hedge” is not at the beginning of a recession…

No.

The best time to buy gold as a “recession hedge” is long before a recession begins. Up to a year or more.

And guess what?

The best indicator that a recession is going to happen in the future, the yield curve, is telling us to expect a recession to begin in the next 6 to 18 months.

To put it simply, gold looks like an attractive, smart speculation.

Something worth buying and holding — potentially for the next couple of years.

However, if you’re going to do this, the time to buy gold, if you want to protect yourself from a recession, is now.

Right now.

In the issue of the Living Rich Monthly I’m working on, I recommend my favorite gold-related stock that overcomes a lot of the problems I previously stated about gold.

But if you want physical, tangible, portable gold to hang onto in the coming years?

Grab some bullion if you can. Or treat yourself or your partner to some really nice jewelry.

If you want to buy online? You can buy gold bars from dealers, individuals or online from sites like JMBullion, the American Precious Metals Exchange (APMEX) or SD Bullion.

I just bought a few thousand dollars’ worth of gold and silver. If you want a shiny rock that tends to gain a lot of value before a recession begins? Consider doing the same.