The Wrong Way to Invest in Gold

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
invest in gold 0

One weekend last year, I was standing in a karaoke bar deciding whether to sing The Rolling Stones’ “Miss You” or David Allan Coe’s “You Never Even Called Me By My Name” - two very different grooves...

I was trying to read the room, gauge how my performance would be received and analyze a variety of other factors of this very important decision.

My concentration was broken when a friend of a friend asked what I do for a living. After I told him, he said he was getting more interested in stocks.

He added, “I’ve only invested in gold for the last 20 years.”

It was like one of those moments when a record player’s needle screeches, the music stops and everyone turns to stare... except this was 2016, so there was no record player - just a tipsy millennial singing along to the digital music track.

“That’s the only thing you’ve invested in for two decades?” I asked.

When he confirmed that was the case, I wanted to grab him by the shoulders, shake him and ask if he was nuts!

All of his investable assets are in gold coins.

I have a few gold coins because precious metals should be part of a diversified portfolio. (The Oxford Club recommends a 5% allocation to precious metals.)

But a 100% allocation in one asset is never wise. Especially when the asset isn’t very liquid, doesn’t pay dividends and doesn’t create value (or anything else for that matter).

Gold is only valued at whatever someone is willing to pay for it at that moment. But a stock can at least be valued according to earnings, cash flow or a variety of other metrics.

Of course, gold is seen as protection against calamity and inflation. And when the spit hit the fan in 2008 and early 2009, gold performed very well while stocks got creamed.

So my new karaoke buddy was probably feeling pretty smart back then...

But 2012 to 2015 must have been brutal. Gold fell by a third while stocks jumped 63%.

People who hold 100% of their wealth in gold are usually waiting for the world to end.

The problem is they’re going to be right only once, if at all. And even then, their gold may not be worth as much as they think.

I often tell the story of my father-in-law who, as a teenager escaping the Nazis, saw his father trade valuables for food and shelter. He’d hand over gold and diamonds in return for a loaf of bread here... or a barn to sleep in there.

The precious metals and stones certainly helped them, but they hardly retained their “values.” A 2-carat diamond instead of a 1-carat stone wouldn’t have gotten them an extra loaf of bread.

The point is, people who prepare for Armageddon by storing their wealth in gold may be surprised that they’re not as wealthy as they think, when Armageddon comes.

Stocks Outperform Gold

After the Great Recession, it took a few years for stock returns to get back above gold’s returns. But most of the time, stocks outperform gold.

To be clear, gold belongs in your portfolio. Gold and gold mining stocks make for excellent trading vehicles.

But gold shouldn’t be your portfolio. If gold is the only thing you’re invested in, you’re not diversified. And worse, you’re missing out on income-producing stocks, bonds, real estate and other assets.

My new buddy’s conservative approach to investing meant he missed out on gains of more than 137 percentage points.

I only wish he’d shown the same kind of restraint before he launched into an off-key performance of Journey’s “Open Arms.

Good investing,

Marc

Thoughts on this article? Leave a comment below.

P.S. Many investors are overzealous when it comes to buying gold... but they aren’t paying enough attention to the metal that could power the future.

This obscure element could revolutionize the transportation and energy fields, making investors a fortune in the process. Click here to learn more.

A Sane Precious Metals Play

Like Marc, Alexander Green is no gold hoarder, but he does recommend a small allocation in precious metals to his Oxford Communiqué subscribers.

Sometimes it’s easier to buy a mining stock than to collect physical pieces of metal. That’s why Rio Tinto (NYSE: RIO) is a part of Alex’s Oxford Trading Portfolio.

Here’s Alex checking on the multinational mining giant earlier this summer...

Based in London, Rio Tinto is one of the world’s leading global mining and metals firms. Employing over 50,000 people across more than 30 countries, it operates open pit and underground mines, mills, refineries, smelters, and power stations, including a significant hydropower portfolio.

Rio also owns and operates much of the infrastructure - railways, ships and ports - that takes its products to major customers.

The firm supplies minerals that are indispensable to fueling economic development and maintaining our modern standard of living.

What Rio unlocks from the earth is inside the buildings you live and work in, the planes you fly on, the bridges you drive over, and the computers and smartphones that keep you connected.

Construction, communications, transportation, recreation, healthcare and renewable energy - among many other industries - all rely on what Rio Tinto supplies.

Meanwhile, the company’s balance sheet is getting stronger. Back in July, Rio completed a $2.5 billion repurchase of its own notes. That - combined with other buybacks - has left the company with roughly half the debt it had at the start of 2016.

History shows that in a mature bull market, it pays to favor value stocks over growth stocks, large caps over small caps, dividend payers over nondividend payers, and inexpensive international firms over expensive domestic ones.

Rio Tinto meets all these criteria - and belongs in your portfolio.

- Samuel Taube with Alexander Green

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