Why Investing in Gold is an Oxymoron
Investing in gold is almost as bad a retirement/investment strategy as the 2008 film Fool’s Gold starring Kate Hudson and Matthew McConaughey is a movie. Rottentomatoes.com reports, “With little chemistry among the performers, humorless gags, and a predictable storyline, Fool’s Gold fails on every level.” They give the film a tomatometer score of just 11% with an average rating by viewers of 3.6 out of 10.
In this essay I deal with two issues–a) why you can’t save your way to wealth, you have to invest your way there and b) why “investing” doesn’t mean speculating in precious metals like gold.
Let’s see how much a person would have to save in order to have an income in retirement equal to what the average person in the US of Canada currently earns. In the US, the average hourly wage in November 2013 was $24.15 while in Canada (in October 2013) it was $26.14 for men and $22.58 for women.
A wage rate of $24.15 per hour implies an average annual salary of $48,300 in the US in 2013. GE Capital Retail Bank’s optimizer offers a 1.3% p.a. coupon on 3-year CDs (Certificates of Deposit) as of December 31st, 2013 while Ally Bank offered 1.2% the same day. So to receive an equivalent salary through savings requires that the average person have $3,864,000 in her bank account. Now that is hard to do.
For a 2,000 hour work-year in Canada, average salaries are around $48,720. Taking the 17 highest institutional deposit accounts in Canada and averaging their 1-year GIC (Guaranteed Investment Certificate) rates give us a 0.823% return*. This means you would need to have $5,521,600 saved up to maintain your lifestyle after you retire in Canada. Even harder than what an American faces.
Many self help books advise you to save your way to a successful retirement. They make various recommendations like putting away 8, 10, 12 or 20% of your earnings every month and deferring spending or reducing spending. Keeping your on-going living costs down is very important. If your credit card balances are out of control and other debts are piling up, this is bad. Every dollar you don’t spend is like $2 you don’t have to make taking into account taxes you have to pay and other factors.
But here’s the issue—almost no one can save their way to wealth. Here’s why—
1. People who are good savers almost always find reasons to later spend those savings.
2. Life is uncertain and black swan events (emergencies) are less rare, more virulent and much more costly than bell-curve statistical theory predicts.
3. Returns on savings accounts and savings vehicles (as we saw above) are at historic lows so they simply can’t provide enough income to support you.
There is good debt and bad debt. Bad debt (like unpaid balances on credit cards) is unsecured. This means that if something happens to you like you lose your job or you get sick, you are still stuck with that debt, personally.
Good debt, like mortgage debt, is secured by an underlying asset which means that if you have to, you can sell that asset and the debt (in most cases) goes away.
So using debt to bolster your lifestyle is a bad idea but using debt to add assets to your portfolio can be a good idea provided that the asset also produces enough income to service and retire the debt over time.
That’s why I am against other strategies like buying gold.
I went to a seminar two years ago at a university where I used to teach. I was invited there by the president of the university. She had a special guest coming to give a talk.
Most of these university talks are quite nice—sometimes informative, often entertaining. This one was embarrassingly worthless. The billionaire who gave the talk was hawking his gold fund to professors, staff and students. Perhaps the reason he was invited to speak had something to do with the twin facts that: a) he gave considerable amounts of money to the university and b) his name was on the building. But still, most of his audience was made up of young impressionable minds.
Investing in gold is not a retirement strategy. It hardly qualifies as an investment strategy either. It costs money to store it. It produces no income. It is not readily exchanged for goods or services—try going to your neighborhood food store and paying for your groceries with gold coins. You buy them for much more than the value of their gold content and you pay fees both when you buy and sell the things.
It is a hedge against the end of the world—if all else fails, having some gold might help your family in a world gone bankrupt but try negotiating your way out of a jam with, say, a zombie from the Walking Dead, or a motorcycle gang trying to rob you, might not work anyway.
The billionaire was talking up gold just as prices were peaking in the $1,800 to $1,900 per oz range in 2011. On the last trading day of 2013, gold was at $1,198.
A great hedge against inflation and awesome retirement plan, right? Just imagine what your portfolio would like you if you had borrowed money to buy gold at its peak.
“A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools,” Douglas Adams
If you still think you would like to try a flyer on gold, take a look at this spreadsheet first—
Gold Investing Spreadsheet
(Download the spreadsheet from here: https://www.old.dramatispersonae.org/images/gold.xls)
Invest equity $50,000
Buy gold on margin 25%
Total holdings of gold $200,000 2011 $1,850 per oz
Total holdings of gold $129,513.51 2013 $1,198 per oz
Debt $150,000 2.55% HELOC 15 yrs
Debt Balance ($133,118.21)
Invest equity ($50,000)
Cash cost ($183,118)
Value of gold holdings $129,513.51
Loss on investment ($53,604.70)
Cash loss on investment ($70,486.49)
Note: Ignores transaction costs and fees as well as interest on HELOC.
Now this is ugly. If you had followed the billionaire’s advice and leveraged your home with a HELOC (home equity line of credit) to buy gold on margin, you would have taken $50,000 of your savings, added a $150,000 “mortgage” on your house to buy $200,000 worth of gold in 2011 that was worth $129,513 by the end of 2013 losing over $70k in just two years.
Do you know the fastest way to turn a billionaire into a millionaire? Buy a National Hockey League franchise. Still, this has to be the second fastest way.
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