Goldie Rocks and The Permabears

Where Are Your Parents?

Seeing that today’s title was inspired by Goldilocks and the Three Bears, I’d like to start us out with a few questions:

First, what parent in their right mind is letting their precious little daughter wander around the forest alone?

Next, I believe this little girl has committed multiple crimes, breaking and entering and theft to name a few, no?

Lastly, why has no one taught this little girl that it is not wise to be hanging around bears?

Perhaps questions we will never get answered, but I digress.

The Facts of Life

What I would like to address today is the importance of (1) filtering where you get your advice and (2) always fact-checking the advice you are going to act on.

Amongst my friend group, we have this common saying, “Cite your source.”  A familiar term, as many of us saw it noted in red pen by a professor or two in our college days.  This little adage was blurted out regularly when a friend started to embellish a fact or build an argument on a questionable premise.  “Cite your source!” someone would blurt out, and we’d all chuckle, joining in on the razzing.

A funny and playful little antic, but one that holds a lot of truth.  Just the simple importance of fact-checking the validity of this or that tidbit.  Something of great importance when we are talking about investing.  The supply of opinions and claims out there are plenty while the inventory of financial truth are both rare and precious.

There’s Gold in Them Thar Hills

To help illustrate this point, I thought today we could talk about gold.  A timely discussion as gold prices hover near all-time highs and a relevant topic as there is no shortage of gold spokesmen out there.

You will hear claims like, “Gold is the best hedge against inflation,” or “Gold is the only safe haven,” or “Everyone should have an allocation to gold,” and an endless list of other assertions.

So, is it true that you need to own gold?

Perhaps a way to unpack this is to simply look at (1) how gold has behaved historically and (2) if there is a defensible way to value gold.

A Lesson in History

To understand gold’s historical behavior, I want to look at returns and volatility.  I’ll also need a reference point for these returns and volatility.  So, I’ll just hold the results of gold next to stocks and long-term government bonds.  Three very different investments, which will make for a simple and clear comparison.

Source: Portfolio Visualizer – April 23, 2024

Our first endeavor was just to see the results at face value, so there they are going back to 1978.  I will note that the return of gold in 1979 – the second year tracked over this period – was up nearly 127% in that single year.  Yet, over that entire period, an investment in gold grew from $10,000 to $124,034, representing a 5.6% annualized return.  Over that same time period a $10,000 investment in long-term treasuries would’ve yielded a value nearly 2x that of gold and stocks a value of nearly $1.7mm.

When it comes to investing, we are familiar with the idea that returns are often relative to the risk (or volatility) one is willing to endure.  So, it would be logical to assume that this diluted return produced by gold would be accompanied by more stable prices (low volatility).  Unfortunately, the numbers don’t lie – gold posted the highest volatility (standard deviation) and the largest historical drawdown (peak to trough) for this measured time period.

Ouch, right?

It’s All About Timing?

Well, maybe the argument is that gold is all about timing.  If you hold it for long time periods, like the one expressed above, it can be disappointing, but maybe if you can nail the entry and exit point it could be profitable?  Let’s try to test this theory.

If you study the annual returns of gold, you won’t find any patterns or themes jumping off the page. As I said, gold was up almost 127% in 1979, and stocks were up roughly 25% that same year. So, does gold produce some amplified upside results compared to stocks? In 2013, gold was down more than -28%, while stocks were up over 33% that same year. Again, there is no pattern, rhyme, reason, or rhythm to this behavior.

If you can’t predict the results of gold based on the results of stocks, is there another logical way to know when gold is expensive or on sale?  Well, with stocks, we know that history reflects a strong relationship between future returns and starting valuations.  This means that when stock prices, relative to profits or other valuation metrics, are historically high, then the future returns will be historically low; the opposite stands true as well.  What valuation metrics can we use for gold, though?  Gold doesn’t produce profits or rental income, so you don’t have a source of cash flow to relate the price to.  Gold is a speculative asset; your investment gains depend solely on a future buyer willing to pay more than you paid.  I see no intellectually defensible or historically reliable argument for how to know when gold is a good deal or bad deal, pure speculation.

An Inflation Hallucination

Oh, and that note about gold being an inflation hedge.  Let me provide some recent data for you.  In the years 2021 and 2022, we saw some of the highest inflation we’ve seen in this millennium.  The results for gold over those two years were -4.15% and -0.77% respectively.  The data simply doesn’t support the claim.

Who to Trust?

Yet, with all of this said, there still exists a cottage industry of newsletters, books, and pundits preaching doomsday via the promotion of gold.  2024 will be ripe for an uptick in interest and readership as claims about gold’s all-time high will attract eyeballs and elicit clicks.  Let me let you in on a little secret, the price of gold at the beginning of this year was nearly the same price it was in September 2011… 12.5 years ago!!

Just as Goldilocks had no business hanging around bears, I would encourage you to steer clear of permabears.  These peddlers of opinions will not be accountable for their advice.  You need, and deserve, advice tailored to you.  Guidance is built based on all of the nuance that surrounds your financial plan.  You need someone you can trust, and a big part of trust is accountability.

“These catastrophists who do not manage any real money and have no real skin in the game have a business model dependent on ignorance and fearmongering.” – David Bahnsen

My colleagues and I care about our clients.  We value their trust, and we don’t take this responsibility lightly.  Our convictions are strong and not wavering, convictions built on a philosophy that’s stood the test of time.  We are not perfect, but we stand by our advice and invite accountability.  I will say it again, trust hinges on accountability.

So, next time you’re faced with a questionable claim, please be sure to reply quickly and loudly, “Cite your source!”

With regards,

Trevor Cummings
PWA Group Director, Partner

The Bahnsen Group is registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Securities are offered through Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC.

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About the Authors

Trevor Cummings

Private Wealth Advisor, Partner

Trevor is a Partner and Director of our Private Wealth Advisor Group.

As the author of TOM [Thoughts On Money], Trevor endeavors to write and speak about financial concepts and principles in a kind of “straight” talk demeanor and posture.

He received his Bachelor’s degree in Organizational Leadership from Biola University and his MBA from California State University, Fullerton.

James Andrews - CFP®

Private Wealth Advisor

James is a Private Wealth Advisor based out of TBG headquarters in Newport Beach, CA.

As an author of TOM [Thoughts On Money], James seeks to share core principles in decision-making that bring clarity to managing life and wealth.

He received his Bachelor of Science degree in Entrepreneurial Finance from Cal Poly Pomona and is a CERTIFIED FINANCIAL PLANNER®.

Blaine Carver, CFP®, CKA®

Private Wealth Advisor

Desiring to be a financial advisor since high school, Blaine has continued this passion by stewarding client capital for over a decade. A patient educator, he enjoys aligning clients’ financial resources with their values, particularly through creative charitable gifting strategies.

Blaine holds a Bachelor of Business Administration in Finance from Seattle Pacific University, where he also led the soccer team as captain.


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