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Why I Don’t Invest in Gold or Oil

Welcome to the Stay Wealthy Podcast with Taylor Schulte.

As you may be noticing, this is not Taylor Schulte.

My name is Jeremy Schneider, filling in for Taylor for the month of June.

This is the fourth of five episodes during June, where I’m taking over for Taylor.

I am recording these a few weeks in advance, but I imagine at this point, Taylor has a newborn at home and he is resting comfortably on his paternity leave, and hopefully me giving him a little bit of a break on his podcast is helping along those lines as well.

You can find the show notes and links for this episode at youstaywealthy.com/114.

So I’m going to talk about why I don’t invest in gold or oil or other commodities.

Commodities are things that kind of trade on the open market that are, you know, gold, oil, pork bellies or precious metals, energy, things like that that don’t actually represent ownership in a business or a productive asset rather than just trading like a physical good essentially.

I used to invest in commodities actually.

So when I started investing, seriously, I sold an internet company at the age of 34 for just over $5 million.

And I had this big windfall and I read a book called A Beginner’s Guide to Investing that did basically recommend investing a small portion of your portfolio in commodities.

And so that’s what I did for a while.

And since then, I’ve done something very uncharacteristic of my style, and especially of my investing style.

And that is I basically changed my mind, I altered my asset allocation.

One of the tenets of investing that I basically believe in strongly is to stay the course.

You know, if you’re constantly changing your mind based on the hot stock or the hot fund at the moment, you’re much more likely to kind of be chasing your tail or chasing the most recent fad looking backwards and missing out on forward looking growth.

And so, I think a wise investing strategy is to have a plan and then stick to it for very long periods of time.

And in this case, I did change my mind, hopefully not because of a fad, but just because of more thoughtful reflection on the long term plan rather than what is currently happening.

And I’m going to basically break down why I did that.

So, it’s possible.

And I’m going to focus on gold.

This could be true for basically any of these commodities.

I’m going to talk about gold just because it has a really nice long price track record.

It’s easy to measure one ounce of gold, the price.

It’s easy to look up those numbers and things like that.

So, I’m going to talk about basically gold for this whole episode.

But I think you could translate that to any commodity.

And I’ll tell you why at the end.

So, on that note, it’s very possible to make a strong case for gold.

In fact, last summer, in the summer of 2020, all I heard was how gold was the best performing asset class of the last 20 years.

People loved quoting that statistic.

And you know why they loved it?

Because it was true.

That was actually true.

If you look between the year 2000, the year 2020, and you compare it to stocks and bonds, international, basically any of the major asset classes, even real estate, gold was the best performing.

And so, people would say to me like, Jeremy, why don’t you love gold?

It’s this great performing asset class.

Gold is also a hedge against inflation.

And right now, we’re maybe looking at some inflation happening in the future.

I never know what’s going to happen in the future, but certainly over the last year and a half during the pandemic, there have been a lot of influx of new dollars into the economy, which may or may not, we don’t really know, lead to inflation.

And so, gold is kind of another topic of the moment.

Gold is a store of value.

If you had a bar of gold in 1920, and that bar of gold could buy a house, that same bar of gold today could probably buy at least as nice of a house, right?

So just owning that gold, whereas the price of the house in 1920 was very, very small in the US dollar.

So if you just kept the dollars to buy a house under your mattress or something, it’d be a very old mattress.

And the dollars might have rotted by then, which is why paper money is not a very good store of value, both for the currency going down in spending power and the paper maybe not lasting hundreds of years, but gold is.

Gold also offers diversification.

So since 2004, when the GLD ETF, so there’s an ETF, the ticker symbol is GLD, that basically is a very easy way to invest in gold as a commodity without having to buy physical bars of metal.

When the GLD ETF was released, since then, since 2004 until the current day, mid-2021, the correlation with the US stock market has been 0.06.

And correlation is measured on a scale from negative one to positive one.

So negative one means if the US stock market went up by a dollar, gold would go down by a dollar.

Positive one means the US stock market goes up by a dollar, gold goes up by a dollar, you have perfectly correlated.

Negative one is perfectly inversely correlated.

And the correlation between gold and the US stock market has been 0.06, which is basically pretty darn close to zero, which is pretty darn close to no correlation, which is actually what you like to see when you’re diversifying among multiple asset classes, because if everything correlates perfectly, then why would you add more?

You’re just adding complexity without actually getting any of the benefits of diversification.

And the reason diversification is good is let’s say the US stock market tanks, gold is unlikely to have tanked because it doesn’t correlate with the US stock market.

And so maybe that will help smooth out your overall portfolio and maybe even let you rebalance to realize some better gains when the stock market rebounds.

If you compare gold to international stocks, for example, international stocks have a 0.88 correlation.

If you think about it as a percent, gold would be like 6% correlated, whereas international stocks would be 88% correlated, very highly correlated.

Okay, so that’s basically the argument for gold.

And I think those are all fair points.

None of that is not true.

So why don’t I invest in gold?

First, let’s break down that claim.

It’s the best performing asset class of the last 20 years.

And like I said, that is true.

I’ve looked into it.

And when I first heard it, I was a little bit skeptical.

I was like, no, come on, gold, it’s just a chunk of metal.

But sure enough, it’s true.

And so if you look at from May 2000 to May 2021, gold has had a total, what’s called a compound annual growth rate CAGR.

I think in one of my previous podcasts, I called it a compound average growth rate or something.

I think I misquoted that acronym.

It’s CAGR, compound annual growth rate.

Gold, last 20 years, 10.1%.

Compare that to the S&P 500.

The S&P 500’s CAGR, compound annual growth rate, has been 8.1%.

So gold wins.

It’s not dramatic.

2% is a lot for sure over a long period of time.

But it’s not like the S&P 500 lost money or something.

There’s a good 20 years for the S&P 500.

It’s a great 20 years for gold.

And so that’s true.

But that’s basically the only window for which it’s true.

And it’s basically, if you look at the charts of these two asset classes, US stocks and gold, it’s basically cherry picking the worst possible window for stocks and the best possible window for gold.

Because for stocks, at the beginning of 2000, the market was at the very end of the.com bubble run up, off the crazy 90s, the stock market was one run way up.

And then the stock market experienced the.com bust.

And then just less than 10 years later, the financial crisis.

And so it’s starting right at the beginning of these two, basically one of the biggest crashes in US history.

On the flip side, at the beginning of 2000, gold was at a 21 year low.

It was under $300 an ounce, a price we hadn’t seen since 1979.

So if you were buying gold in the year 2000, you’re getting 1979 prices.

So then when you compare those two things, buying stocks at relative very, very highs, buying gold at crazy lows, and then you look at how an investment on that day would have performed over the next 20 years, gold slightly by 2% outperforms stocks.

Okay, let’s look at some different windows though.

How about the last 10 years?

How about recently?

If you look from May 2011, instead of 2010, 2011 to 2021, just the most recent 10 years, gold had a compound annual growth rate of 2.1%.

Two, not 10, two.

And if you look at the S&P 500 over that same period of time, 14.1%.

So that is crushing.

That’s not a 2% difference, that’s a 12% difference.

So if you start investing in gold in 2011 based on the previous great 10 years, you would have had a terrible next 10 years, which has been the last 10 years, right?

Okay, and so you might be thinking to yourself, well, Jeremy, you’re just looking at very recent performance.

The 20-year period is longer than the 10-year period.

All right, let’s back up.

Let’s zoom out a little bit.

Let’s do the last 40 years from 1981.

I was born in 1980, so this is basically my whole life.

From 1981 to 2021, that 40-year period, May to May, gold had a compound annual growth rate, an average growth per year, if you will, of 3.5%.

The S&P 500, 11.7%.

So it gets crushed by over 8% in this scenario.

And so even though that 40-year window includes the last 20 years, which have been really good, when you zoom out a little bit, the 40-year gold return is terrible.

All right, let’s zoom out all the way.

We go to as much data as I could find back to 1915, when the first time I could find both gold and stock market prices.

Since 1915, gold has generated an average cumulative annual growth rate of 4.4%.

The US stock market, the S&P 500, or the closest analogy to that before that was actually created, over that same 106 years now, 10.4%.

That is a drubbing, 6%.

And so 4.4% doesn’t sound terrible.

And it’s not terrible, it’s better than 0% or something like cash under your mattress would get, which is why I definitely would prefer owning gold over just keeping a bunch of cash.

But let’s look at the real impact that has had over that time, over the maximum amount of data we have available.

If we take out inflation, so some of that increase in the value of gold is just the increase in the value of everything, just inflation.

If we take out inflation, the growth of gold over that period of time is 1.2% compared to the S&P 500 of 7.0%.

That is a big difference.

1.2% per year after inflation is basically close to no growth.

And so what would have happened if you invested $10,000 in gold in 1915, after adjusting for inflation today you would have $35,000.

You know, not terrible, like $10,000 to $35,000, better than losing money like cash would have relative to inflation.

If you put $10,000 in the S&P 500 in 1915, after adjusting for inflation, $13 million.

$35,000 versus $13 million.

So when people tell me it’s the best performing asset class in the last 20 years, I just like roll my eyes because I was like, yeah, that’s like the most cherry picked time frame.

It sounds good.

It’s like a good stat because it sounds like a big round number.

But basically over every single time frame, other time frame, gold just gets annihilated by stocks.

So that’s the reason that I don’t really buy that 20-year time frame statistic.

How about the hedge against inflation in terms of benefit?

Yeah, that’s true.

But so are stocks.

If inflation goes up, companies charge more, they profit more dollars even if they don’t profit more buying power.

And so owning stocks are also a hedge against inflation, just like gold iron.

And you can see that in the inflation adjusted returns of the stock market versus gold over the last 106 years.

How about diversification?

That very low diversification correlation, that 0.06%.

Yeah, that’s true.

Like I said, it’s all true.

But cash is also a diversification against stocks, right?

Cash and stocks have a 0.00 correlation because whether stocks go up or down, cash does nothing.

And because US dollar is what we measure these things, and so by definition, it has to be a 0% correlation.

And so if I’m in the wealth building portion of my career, which I still think I am because I’m 40, I still think I’m relatively young, hopefully have 40, 50, 60 years of life to look forward to, I don’t diversify into low growth asset classes just for the sake of diversification.

While diversification is good, if not so good, I would sacrifice potential growth.

So those are basically the reasons that I don’t invest in gold.

That kind of breaks down the benefits as they’re proclaimed and how I look at it.

But here’s another way to think about it.

You can break every asset class down by two different categories.

The first category is whether that asset class appreciates or depreciates.

So, for example, gold does appreciate.

We basically all agree on that.

Over time, gold is going to be worth more dollars.

And for example, cars almost always depreciate.

If you buy a car, a new car off the lot today, you expect that car to be worth less going forward.

So that’s one way to break down these assets into appreciates or depreciates.

And another way to break them down is into productive or unproductive.

So a productive asset might be something like a rental property that you own that produces income for you.

And an unproductive asset might be something like your primary home, which does not produce income unless you’re house hacking or something.

But generally, no one’s paying you rent to live in your primary home.

So if you think of these things as like a little matrix, a little four squares, if you will, with productive and unproductive, let’s imagine this together at the top.

So productive on the right and unproductive on the left, and then appreciates and depreciates on the left side with depreciates at the top and appreciates at the bottom.

The bottom right square would be productive and appreciates.

In my opinion, that square is where wealth is built.

So when you find assets that both go up in value and produce income or productive, they provide income along the way, that is where you get this magic of compound growth.

That’s where you turn your 10,000 to 13 million over 106 years.

Whereas if it’s just appreciating, you’re going to beat inflation by a little bit maybe.

And if it’s just productive, a productive asset that doesn’t appreciate might be something like a work tractor.

If you’re a farmer or it’s productive because it’s helping you build your business, but the tractor is going down in value.

If you’re a farmer and you need that to run your business for sure, but as a pure investment, I wouldn’t invest in tractors.

I want to invest in things that go up in value and provide income along the way.

And for me, there’s basically two big categories that meet that qualification, stocks and bonds like securities and investment in real estate.

So, in my opinion, the best way to invest in securities is through index funds.

And investment in real estate is a whole kind of big can of worms that I don’t think Taylor goes into a ton on this show, but also a great way to invest.

Gold is not one of those, nor is oil or any commodity because none of them are productive.

They’re just basically speculating that someone’s going to pay you more for it in the future than you paid for it now.

And that’s not how I like to invest.

I like to buy things that I know are going to be productive.

So the longer I hold them, the more money I’ll make.

So what does an index fund have that gold doesn’t have?

Well, it pays dividends.

It represents actual products in the market.

It represents companies that have revenues, that have profits.

It represents innovation.

It benefits from population growth.

What does gold have that index funds don’t?

Well, gold is a shiny rock.

And you can make a ring out of it or a necklace or something and you can wear it.

You cannot wear an index fund to my dismay.

So if your matrix looks different, like appreciates and can I wear it, then yeah, gold would qualify those two satisfaction or satisfy those two qualifications or whatever categories.

But index funds would not.

That’s not how I invest.

When you are a guest host on the podcast, you can tell people your theory, but I like productive and appreciating assets.

Okay.

So when would I buy gold?

Well, maybe, and I might one day, but probably not until I’m more concerned about wealth preservation than growth.

So at the age of 40, when I’m looking at more than half of my productive career, because in the first 20 few years, I was a child and didn’t have much making money.

I want to be in the wealth accumulating portion of my career.

If I was more concerned about hedging against inflation, storing value, probably the age of 60 plus, then maybe I’m looking at it.

It depends on my situation.

If I have $20 million, then I’m not that worried about it.

Even if my 20 million turns into 10 temporarily, I’m still going to be okay.

If I have a couple of million dollars, and I’m planning to spend some of it soon, or I need to live off of it, or I’m especially conservative with regards to inflation or something like that, then yeah, I might include gold or commodities as a small portion of my portfolio.

But even if you’re 60, and you look at the actuarial tables on when you’re likely to die, 60-year-olds have, I think, on average, about 25 years left.

That’s average.

You don’t want to plan for average.

You hopefully live much longer.

And 25 years is a very long investing timeframe.

I would personally be shocked if over the next 25 years, gold outperforms index funds or investment real estate as an asset class.

I would be shocked.

I can’t tell the future, but that seems like an almost impossibility, especially with things like digital currencies, like cryptocurrency, maybe taking part of what gold used to do, which is be this hedge against inflation and store of value.

So that’s my take on it.

Maybe if I’m older, trying to do wealth preservation, but in general, I don’t like investing in things unless they are productive and appreciating in value.

That’s why I do not invest in gold or oil.

Okay.

That is the topic of the day.

Moving on, we have a question from Sabrina from Austin, Texas.

Our question of the day.

Do you recommend investing to save for a down payment?

And if so, investing in what?

Thank you.

Thank you for the question, Sabrina.

I’m going to go ahead and assume that you mean saving for a down payment for a house.

And so the quick answer is no, I don’t.

But let’s break down some numbers.

Let’s run some numbers.

Let’s say you want to save a $25,000 down payment.

And let’s say you’re saving $800 per month.

You can save $800 a month.

And then you want to get to $25,000.

When you have that much, you’re going to go house hunting and use that as your down payment.

Hopefully by that time, Sabrina, if you’re looking to buy the market will have cooled down.

I just actually read an article that said like half of houses that got listed last month sold within or went went pending within a week or something.

Bananas.

So hopefully by the time you save up your down payment, it’ll be a little bit easier to buy a house.

But let’s say you do that.

$800 a month, saving for $25,000.

If you put it into a savings account, and let’s just assume a 2% rate of return.

Savings accounts aren’t paying that right now, but it’s not a crazy average based on history.

It would take you 30 months to save up $25,000.

So it would take you two and a half years, like two and a half years of renting, saving a hundred bucks a month, not terrible.

Okay.

And I know what you’re asking, which is, man, two and a half years.

What a bummer to just leave that cash doing their nothing.

I just listened to a whole episode about how putting cash under mattresses, just like letting it erode to inflation.

Yeah, that’s true.

But that’s only really true over a very long periods of time, like decades over one or two years.

That isn’t as true.

So let’s say instead of putting it in a savings account, you put it into an all stock index fund, basically like a maximally aggressive short of going to Vegas or something.

Investment, all stocks that have averaged historically about a 10% rate of return.

If you put your 800 bucks a month into an index fund and you get a 10% rate of return, it’ll take you to get to $25,000 instead of 30 months, it’ll take you 27 months.

So basically, it only really gets you there three months sooner.

We’re talking about the difference between like March and June or something like that in three years or two and a half years.

That’s not a huge difference.

And that’s basically the like, not the best case scenario, but the average scenario for the index fund.

But if we look at the worst case scenarios, the downside risk of putting your money in a savings account is zero.

That money is FDIC insured, that money is as safe as anywhere we know how to put money.

There’s really no downside risk.

The downside risk of putting into an all stock index fund is 50% or more.

There have definitely, just in the last 20 years, the.com crash and the financial crisis, we both saw the market drop 50% over the course of a year or two.

It would really stink if you had been dutifully saving 800 bucks a month to get to 25,000 and then you look at your index fund, when you’re about to go make that down payment, you see 12,500 and you’re only halfway there despite having put away all the necessary money.

Right?

For me, the risk reward just doesn’t get there.

The reward is three months sooner, and the risk is losing half.

Over a short period of time, it just doesn’t make sense.

So basically, any money I plan to spend within the next few years, I just keep in cash.

High yield savings account, money market fund, whatever you want to do, that gets you a few percents like might buy you a lunch or something these days because there’s not much paying any interest.

But that’s what I do.

And like I said, it just doesn’t like the risk versus reward.

It doesn’t make any sense.

There are other options.

You could do a shade of gray between cash and an all stock index fund, like a blended fund or an all bond fund, something like that.

But for me, it’s just a shade of gray.

If the best case scenario is 27 months on average, we’re going to get there one month sooner if you do it with bonds, but then you’re accepting risks with bonds because bonds can fluctuate in value when you need to sell them based on the interest rate whims of the Fed at the moment.

And I get this question a lot because it hurts a little bit.

You’re like, same as money and you want your money to work for you, but I think you just got to get over it.

I hate that that’s such harsh advice, but I felt the same thing.

I’ve sold properties and had money sitting there.

I’m like, man, I really wish this money was doing something.

But every time I look at the math, I’m like, nope, not worth it over a short period of time.

Long term, for sure.

If I don’t plan to invest it for five plus years, or I’m not sure if I’m ever going to need it, boom, right into the index funds, I’m willing to accept that risk because I’m not going to need it for many years.

But if you’re really saving up for a house, I just keep in cash.

That’s my answer, Sabrina.

I hope that at least gives you some framework.

That is the end of the show.

Thank you so much for joining.

For the links and resources I mentioned in this episode, head to youstaywealthy.com/114.

As usual, I’ll leave you with my two rules of building wealth.

Rule number one, live below your means.

And rule number two, invest early and often.

See you next week for my fifth and final episode after which Taylor will be back on the mic.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions.

This podcast is not engaged in rendering legal, financial or other professional services.