Happy St. Patricks Day :)
See How I Create My Videos: https://youtu.be/jymaWbdFxJU
Here’s an interesting thought experiment. I’m going to make you instantly the richest person in the world. The only catch, I’m not going to give you cash. Rather, I’m going to let you choose between a line of gold bars that stretches 88 miles or all the cropland in the United States. What do you choose?
Both the gold and the farmland have the same value, roughly $400 billion. Does that help you decide? If they both have the same value, it shouldn’t really matter which one you pick right? Well, if you picked the gold, what would you do with it? Maybe build a mansion for yourself entirely of gold, or a golden yacht. Alternatively, you might just want to store it in a warehouse or an underground bunker, it’s really up to you. What if you kept it all for 35 years? How much do you think it’d be worth? Over the past 35 years, gold has an annualized return of 1-2%. I’ll be gracious and give it the full 2% for 35 years. After that time, you would just about double your gold’s value to $799.96 billion.
How does that compare to the farmland? Had you chosen the cropland and farmed it you would have become the world’s first trillionaire just 14 years later. After the full 35 years, you’d be sitting on $4.27 trillion. Unless you’re Austin powers… “why make trillions, when we could make, billions?” …you would most likely choose the farmland. So what’s the deal with gold? Why do people invest in gold? One of the most common reasons people give for buying gold is that the dollar isn’t backed by anything, it’s all a fugazi, an illusion. Fiat currencies, like the dollar, are only backed up by the government’s good word.
To some extent, I absolutely agree. But, I ask the question, Is ownership of a company also a façade? Understand, assets exist on a spectrum. On the one side, you have physical, tangible assets you can hold in your hand, like gold. On the other hand, you have virtual assets, like a deal made with a firm handshake, or a crypto-currency, like Bitcoin. The appeal of gold is its scarcity and its tangibility. If everything fell apart, you’d still have that gold… right?
Let’s imagine, a depression, on the likes of which we’ve never seen before. Something on a scale that would put The Great Depression to shame. In this nightmare scenario, I hate to say it, but your gold is worthless. When people are fighting with their last breath for a scrap of food, they don’t care about bartering for gold. In a situation like this, I would imagine the only things traded are food, alcohol, and bullets. None of which are proper assets you should have in an investment portfolio.
So what about the farm? Why does the farm make you a trillionaire four times over, while the gold leaves you a billionaire? To answer that we just have to look at how you get your return. With gold, the return is very simple. 1oz of gold today is 1oz of gold in 35 years. The change in price is due to asset appreciation. 1 acre of farmland is still 1 acre of farmland 35 years from now, so you get asset appreciation as well. But with farmland, you also get all the profits from all the crops you sold for the past 35 years. That’s the difference between 2% and 7% returns.
With all that said, should you invest in gold? The answer seems to be no at this point. But let’s consider Ray Dalio, one of the most successful investors of all time, he has gold making up 7.5% of his All Weather Portfolio. Why? Because gold is not strongly correlated with other assets.
I don’t want to get too far in the weeds here, but typically gold is not included in modern portfolio theory because it has low expected return and high volatility. However, gold does have a low correlation with other asset classes. This is a good thing and papers have been written that show, having some gold in your portfolio can increase your expected return without increasing your risk. So my conclusion, as a friend and not your investment advisor, the evidence seems to say you can have some gold. 0%-7.5% appears to be the acceptable range.
As always with investments, past performance does not indicate future performance.
You want to change the world? Start by upgrading your ideas. Hit that subscribe button to join the community. you know that successful neighbor down the street? He hit the subscribe button. I make interesting videos like this every other day so don't miss out. If you have any suggestions on how i can improve let me know in the comments.