Why I Chose to Buy Gold
During trying political times, the topic of gold seems to always come up. People often discuss the pros and cons of buying gold, however I find most of the people who advocate for holding gold assets are preppers, survivalists, and fans of Alex Jones, with a minority of people having sound financial and investment knowledge. I’ve always had the view that I had no need for holding gold assets, because in my view, when the time came that the dollar was useless and we were to instead rely on using gold to buy goods and services, we would already be in a post-apocalyptic scenario and we should have instead stocked up on bullets, seeds, and alcohol.
Recently my investment strategy still included a commodity, but instead of gold I chose Bitcoin. My intention has been to slowly accumulate Bitcoin and HODL until the time came when it is so widely adopted it is used more as a currency than a commodity, or its value has increased so much I would be able to trade in the value for cash as needed during my twilight years.
My view of Bitcoin seems to align a lot with people’s view of gold, and the two are often compared with each other. I never really gave gold much thought until I recently listened to an episode of the Joe Rogan Experience featuring Peter Schiff. I first heard of Peter Schiff around the time Ron Paul was running for president in 2008 and I respected his views as he was a strong proponent of Austrian Economics, free trade, and capitalism. Schiff, however, is pretty bearish when it comes to Bitcoin, and at the end of the episode, Schiff discusses why he thinks Bitcoin is a fad and shills for his company called GoldMoney which is a system that allows you to spend gold like cash.
Schiff didn’t do anything to sway me from using Bitcoin, however it did make me start thinking more about how I could incorporate gold into my portfolio. Bitcoin is a new technology after all, and if they don’t solve the issue with large fees and long confirmation times, it won’t serve well to replace or even be used alongside fiat currency. If this doesn’t get fixed, after a while, peoples interest in Bitcoin will fade, and thus its value will fade too.
I see a lot of posts on Reddit where people ask where to store their emergency funds in order to make their money work for them. Time and time again, sound reasoning points out that an emergency fund should not be used as an investment, but for insurance. Investments are risky and are counterproductive to the purpose of having an alternative plan if things go south. My opinion of gold changed as I came to the realization that the real purpose of holding gold is not for use as an investment, but as insurance. People will often buy gold simply because they are speculating the dollar will collapse and they’ll be the only ones left who are able to go to the grocery store with their gold coins while everyone else is starving. These people have the view that the value of gold will steadily increase and they will be able to use the returns as a retirement mechanism.
I hold the opinion gold’s purpose is as a store of wealth and as insurance, however gold can also serve as an aid to my investment strategy if done correctly. If a time came where we had another recession, the value of stocks would go down, however the value of gold would go up as people start to panic. This would cause my asset allocation to be out of balance. Each year I would sell/buy assets in order to ensure the allocation remains ideally balanced. This would mean during times of a recession, I would be able to sell gold while the price is high, and use that money to invest more in stocks (and when I say stocks from here on out, I mean S&P 500 index funds, not individual stocks) when the price is low. To show this in action, let’s take a scenario based on a 15 year timeline between 2001 and 2016 as well as another short term scenario covering 5 years between 2013 and 2017. Oh yeah, we should also keep in mind past performance does not guarantee future results.
In our examples, we’ll do an A and B test as well as a control. Example A and the control will have the following holdings:
- 85% stock
- 15% bonds
In our B example, we will have the following holdings:
- 80% stock
- 10% bonds
- 10% gold
In our first example, we’ll assume we invest $100,000 in January 2001. At the beginning of each year, we reevaluate our holdings and re-balance as necessary. The historical prices will be based on Vanguard’s VFINX 500 Index , Vanguard’s VBMFX Total Bond Market Index, and XAUUSD to determine the price of 1 troy ounce of gold.
The first column is Test A, the second column is test B, and the last column is our control. Let’s fast forward 5 years.
In 5 years, our A test and Control aren’t that much different, but re-balancing every year has improved our standing by about 1%. In our B test, our standing is looking very good, but only because the price of gold increased by 98%. Let’s go to the next 5 years.
Due to the recession, we’re not looking so hot in our control, but re-balancing has helped us preserve some of our wealth by about 1.4% People are gold crazy at this point which has driven up the price, and it’s not very fair to continue this scenario since we bought so much gold when it was 80% cheaper. But let’s continue.
Things are looking up now. Our re-balancing has improved our A holdings by another 1.3% compared to our control. Gold has taken a dip, but since our re-balancing, we’re able to take advantage of the market recovering while buying more gold while the price is low.
Let’s move on to our second example and take a look at the short term and see what happens when we just have steady growth as shown from 2013 to 2017.
Here’s our holdings to start with. Now we’ll jump ahead to 2017.
Interestingly enough, re-balancing only does us favors when the market goes down and recovers, as it allows us to preserve our wealth. Otherwise our holdings will naturally shift more towards holdings that grow faster and faster. Holding gold also didn’t do us any favors as the price decreased by 31%, however because we are re-balancing, we’re able to buy more gold which will allow us to hold more of our wealth during the next inevitable market downturn.
Our examples show that holding gold really only makes sense if there are market downturns as it’s purpose, as we stated before, is for preserving wealth. It is not supposed to be an investment for growth. If that were the case, we would see a return in our second example.
My investment strategy consists of the following:
- 70% stock
- 10% bonds
- 10% Bitcoin
- 10% gold
I’m purchasing gold through AMPEX and will be holding it physically in 1oz and 0.1 oz bars.
I’ve provided the spreadsheet used to run these numbers in case you’d like to check my work, or if you’d like to play around with the numbers.
Leave a Reply