The Misconception About Gold

Every so often someone asks me about gold and whether they should own it. Here is a look at the price of gold over the past 10 years:

(chart created in

You will notice a big run-up in the price of gold post-recession, from 2008 to 2011. Then the price fell -40% over the following years and has floundered around since then. Beyond the fact that we do not invest in currencies or precious metals (at least yet), gold lacks the one thing that matters most to us, which is a rising trend. The price of gold has been a mess for nearly 7 years.

So then why do people want gold?

Many consider gold to be a hedge against inflation. As prices rise throughout the economy (inflation) the theory is that the U.S. dollar becomes less valuable. If the dollar is less valuable, that means it requires more dollars to buy the same goods and services than it did in the past. This is what it means to lose "purchasing power".

This is where gold comes in.

The perception is that buying gold hedges against this risk that the dollar will become less valuable. Because gold is a hard asset and the oldest form of currency, it is believed to have a more stable value than the dollar, which fluctuates based on a variety of factors like stock market conditions, international trade and Federal Reserve actions. Using this logic, the "hedge" is that when the prices of all these other things in the economy eventually peak and reverse lower, gold will thrive.

In reality, it is really just a hedge against how we think others will react in times of economic fear.

The fear starts with feeling that real estate values and stock market prices will fall (for whatever reason). This stems to fear that the economy will fall into recession. Finally, because the U.S. Dollar is intrinsically linked to the economy, there is fear that the dollar will collapse. This all leads to the notion that buying gold might be a good idea because if the dollar dissolves the nation will be left with gold as its currency.

That entire thought process is flawed because the reality is that gold is an asset, not a currency. No one buys gold with the intent of transacting goods and services. They buy it because they think it will become more valuable should everything else they own plummet in value. The entire essence of thinking something will rise in value is based on believing that someone else will want it and be willing to pay you more for it. To that end, those who own gold are doing so as an investment, not as a means for bartering the exchange of goods and services.

If you consider buying gold at any point, ask yourself why...

  • Because you can touch/feel it? There are many physical assets you can hold that may or may not rise in value, from antiques to baseball cards to classic cars.
  • Because someone on TV said to buy it? By now I hope you know how we feel about taking advice from the financial media.
  • Because you will earn an immediate return on it? Actually, no you won't. Gold does not pay a dividend like a stock and it cannot be rented out for income like a house can.
  • Because you already own a lot of stocks? I would be willing to bet you lunch that if we looked at the distribution of your assets that there is probably something you do not own that is as good as, or better than, gold as a long-term investment.

I realize I sound somewhat negative when it comes to gold, but I am more so annoyed about the misconceptions that exist.

In The Market...

The S&P 500 lost -0.2% this past week. Let's look under the hood:

(price data via

Last week's loss snaps the 5-week winning streak for the S&P 500, which had gained +4.6% over that span. Most sectors were negative as the overall market struggles to eclipse the previous S&P 500 record high from January.

This comes as no surprise. I felt the market would run into some headwinds right now, as I wrote about in recent weeks. We sold our Health Care sector position (XLV) last week, as it appeared to be sharing in the struggle to get above its previous peak. Take a look:

(chart created in

The risk/reward slanted in the favor of selling this fund and capturing the nice gain we had earned in the prior weeks. The price ran back up to the previous high just as we anticipated it might. But it appeared to lose a bit of momentum when it got there, so we felt it was wise to sell and reinvest the proceeds into another area of the market that might have more upside. I normally do not go into too much detail recapping these types of decisions, but because most accounts owned this Health Care fund it is worthwhile to share our thought process.

In Our Portfolios...

What's New With Us?

I posted another short video on our "Video Q&A" page, which discusses our investment beliefs. Take a look:

Have a great week!

Brian E Betz, CFP®

"Black Monday" Turns 30 Years Old

In The News...

Thirty years ago, on Oct. 19th 1987, this happened:

(chart created via

Now known as "Black Monday", the S&P 500 fell -20% in one day. It remains the largest daily decline ever in the market - more than two times worse than any other day on record (for reference, the worst one-day decline during the 2008 recession was -9.0%). Following Black Monday it took roughly one year for stocks to recover those losses, also shown in the above chart.

Earnings season is here again. So far 17% of S&P 500 firms have reported third-quarter financial results. Among those 100 or so companies that have reported, profits are up +1.7% (vs. +3.0% estimate) and sales are up +5.1% (vs. +4.9% est.), according to data provider FactSet. Earnings kick into high gear this week, with many of the big boys reporting in the coming days. Google, Amazon and Microsoft all release results after-market on Thursday Oct. 26th.

Change at TD Ameritrade: Our custodian, TD Ameritrade, has revamped its commission-free ETF (fund) lineup. This brings good news, bad news and no news.

The good news is that TD has expanded its list of transaction-cost-free funds from 100 to 296. This means more investments to choose from that will cost us/you nothing to buy and sell. For context, when we buy or sell a fund (ETF) for your account that is not on this list, it is $6.95 to do so. We try to use funds from this list because it means there are zero trade costs, provided we hold the investment for the required 30-day minimum (which we most often do).

The bad news is that while TD has increased the overall number of funds to 296, it has removed certain funds from the list. This includes the S&P 500 index fund we use (IVV), along with most of the bond funds we use (AGG, LQD, JNK and TLT). We do not trade the bond funds nearly as often so in that sense it isn't a big deal. But it does mean I will need to research new, comparable commission-free bond funds and start using those instead when practical.

This is no news if you have $100,000 or more of invested, billable funds with us because we already pay for all trade costs if that is the case.

This is something I considered when deciding which custodian to choose upon leaving Scottrade. I had asked TD whether the list of commission-free funds could be reduced and the answer I got was a pretty vanilla corporate response. Honestly though, I could not expect much else. Changes happen and we roll with the punches. If this type of change were the deciding factor that kept me from choosing TD Ameritrade then our priorities were misguided when choosing a custodian. It's something we will adjust to and move forward.

In The Market...

The S&P 500 rose +0.9% this past week. Let's look under the hood:

(price data via

It was the 6th-straight weekly gain for the S&P 500 index, which has risen more than +4% over that time. The last time the S&P went seven-straight weeks? Dec. 2014. History suggests we should see a pullback here, though it may only be in the 2-3% loss range over the next few weeks. We'll most likely see the broad market flatten out over the next month or so. But seasonality still plays in the favor of the market rally continuing through December, as again, Q4 is typically the best three-month stretch of the year.

Meanwhile, bonds sold off as stocks continued to rise. Long-term interest rates look like they might be on the cusp of spiking higher, but have had a tough time doing so when they have reached this point (to be specific, whenever the 10-year Treasury bond yield has hit 2.4%). This is a tad concerning for our bond positions, but we will continue to monitor bond values with patience over the coming days and weeks before making any changes.

In Our Opinion...

Should you invest in Bitcoin?

A number of people have asked me this in recent weeks. The short answer is, I don't know. The longer answer requires researching and learning more about Bitcoin before feeling comfortable recommending it to anyone.

What is Bitcoin? Bitcoin is a digital currency, designed as an alternative form of payment to U.S. dollars or other foreign currencies. In effect, it provides a uniform currency across economies and eliminates the need for exchange rates. Bitcoin makes international buying/selling easier, but it is unregulated.

What is one Bitcoin worth? This is where it gets tricky, given its recent value surge. According to the NYSE Bitcoin Index, one year ago Bitcoin was worth roughly $600, six months ago it was worth $1,000, three months ago it was worth $4,000 and today it is worth $5,700. That is a +450% gain in just one year!

Bitcoin's rise may be the problem. Not because Bitcoin isn't "worth" $4,000 or $5,700 or whatever amount on a given market day. An investment is worth whatever buyers and sellers are willing to buy and sell for provided they have access to the same information. Bitcoin's value is a problem because it is supposed to be used as a currency and currencies should be somewhat stable. The extreme day-to-day price volatility makes it difficult to use in the exchange of goods and services, at least I would assume...

So... is it an asset or a currency? Given the increasing demand and rapid value growth, the result is that consumers buy Bitcoin as an investment and not for its original, intended use. This makes Bitcoin more of an asset and less of an actual currency, kind of like gold or other precious metals. This isn't to say that it won't become a mainstream currency, but for now it looks and smells a lot more like an investment/asset.

My biggest Bitcoin fear: When people start buying it for no other reason than they think they will get rich quick that makes it ripe for turning into a bubble. I suspect this is the case based on some of the inquiries I have gotten.

We could say the same thing about any given stock, but there is one key difference. For many investors, it is calming to be able to see the company they invest in and read things about what the company is doing. It emotionally helps validate the investment decision. Bitcoin, in comparison, is a bit of a black hole. Even if that is not truly the case, I know a few people who have blindly thrown money into Bitcoin without knowing anything about it. My fear is that the moment its value falls, investors will be quick to bail. Unlike stocks, which have lived more than a century and have a track record of rebounding from massive price declines, Bitcoin has yet to weather any real storms.

The Verdict: I need to dig a bit deeper on Bitcoin. For now I would refrain from buying it, but if you are interested let me know and we can discuss.

In Our Portfolios...

Q&A/Financial Planning...

Is it open enrollment time for benefits at your company?

If so, don't simply go through the motions with regards to your health care options and other available benefits, such as flexible spending accounts. Take the time to assess the differences between health care plan options, particularly if you anticipate any major medical expenses coming in 2018. Evaluate whether the tax-savings of the Health Savings Account (HSA) make it a worthier choice than the PPO, HMO or whatever other options are provided. We are happy to help if you have questions regarding your plan options.

What's New With Us?

I spent the weekend battling a stomach virus that I picked up from our daughter (who got it at day care), but I am all better now and ready for a great week.

Enjoy the week ahead,

Betz Signature 250px.png

Brian E Betz, CFP®