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 stockcharts.com)

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 stockcharts.com)

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 stockcharts.com)

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®
Principal

The Biggest Mistake You Can Make

Top Of Mind...

I saw a news story the other day where supporters of President Trump were hailing him and his policies as the sole reasons for this persistent stock market rally. Ironically though, none of these people interviewed were investing themselves.

This got me thinking...  As the U.S. stock market just completed its 4th-straight weekly gain to start the year and its 17th among the past 20 weeks, most of the conversation is about how impressive this market rally has been and how much longer it will continue. For me though, there is a more relevant, tangible conversation that should be happening that supersedes our sentiment on the market...

How you put money to work.

This is the most important thing you can do. It does not just mean buying stocks and bonds. You could invest in real estate. You could pay down interest-bearing debt. You could invest in your skills/education in order to boost your future career earnings potential. You could start a business. There are many ways to effectively use money rather than stockpiling cash or spending it frivolously.

This concept is simple, but gets overlooked if we are consumed by the ebbs and flows of the market or the impact that one, polarizing political figure might have on the economy. As I wrote on this blog pre-election, no one knows how the market will react to uncertain, future events. So there is no point wasting our energy trying to predict as much.

Instead, focus on the biggest known risk: Inflation. It is a fact that the price of goods and services will increase in the long run. Always. Yes, some markets have experienced peaks and valleys, like real estate and stocks did last decade. But both of those have since rebounded and gone on to new highs. Meanwhile, there are other areas where prices have constantly appreciated, recession or not. Here are three I often cite:

Child care -- Because people have not stopped having kids
College tuition -- Because kids have not stopped going to college
Health care -- Because no one has stopped aging

Prices will continue to rise, so how do we at least keep pace with inflation? By putting money to work. Invest in such a way that you outpace inflation. Pay down debt so that you increase your capability to invest. Invest in yourself so that you maximize your single greatest asset for making money...  YOU.

It is important to maintain an adequate cash balance. In fact, this is one of the first things we address in financial planning because having cash means not having to take on debt in the event of a budget crunch or emergency. But cash is a little like Vitamin C -- the right dose of it is good for your health, but having more than you need will not make you any healthier.

I would recommend taking a step back and using tax season as a good opportunity to take inventory of how your assets and debts are dispersed. If you feel you are sitting on too much cash, are spending too much or are not investing enough, let's talk. The biggest mistake you can make is failing to put your money to work for your future. Most of us work years and years for money, but shouldn't that money work years and years for us in return?

In The Market...

The S&P 500 gained +2.2% this past week. Here is how the individual sectors performed:

(price data via stockcharts.com)

Another impressive week for the U.S. market. The S&P is now up +7.5% this month, which would be the best January since 1987 provided the bottom does not fall out in the three days remaining. This plays well for those who trust in The January Effect, which is a seasonality-based belief that however January goes, so goes the rest of the year. Historically, The January Effect has been more predictive than not, but the results are not overwhelming. In some ways it is self-fulfilling, given that the odds for the remaining 11 months will slant based on how January performs.

At the sector level this was arguably the best week of the year. Every sector was up more than +1.0%, This was good news for our positions in Financials, Utilities and the two growth-oriented index funds we own. It was also good news for the gains we recognized from selling our Technology sector fund (XLK) this week.

Somewhat surprisingly, bonds had a good week as well. I highlighted last week how long-term interest rates might be on the verge of a major breakout, which would be bad news for bond owners. The bond funds we own (high-yield, investment-grade corporate and long-term Treasury) managed to gain on the week despite the fact that the 10-year Treasury bond rate actually DID rise from 2.64% to 2.66%. It was a minimal increase, but an increase nonetheless. I am lukewarm on Treasuries right now and am actually looking for the right opportunity to sell that position (TLT) if it presents itself.

In Our Portfolios...


In Financial Planning...

One more note about tax forms (and hopefully my last)... As mentioned previously, TD Ameritrade tax forms will be available over the next month. In addition, for most of you there will be a second 1099 form for the time in 2017 that we held accounts at Scottrade. The following relates to how you will receive those Scottrade tax forms.

Your Scottrade Form 1099 -- whether for a taxable account or an IRA (or both) -- should be available in the next week or so. They will be sent to you using the same delivery method by which you were previously receiving Scottrade statements. For most of you this means email. For some of you the forms will be mailed to your home. For those of you who are newer clients and never had an account with us held at Scottrade, disregard this altogether.

In recent weeks I have said to ignore any notices you receive from Scottrade. Let me revise that... KEEP any notices you receive that resemble tax documentation. Unfortunately, I cannot call Scottrade on your behalf and request information because our firm is no longer a servicing firm to them. So, if for some reason you do not get the information you need or want to follow-up on something with Scottrade, you will need to contact them.

You can do so by calling: (800) 619-7283. Provide Scottrade with your old account number (which I can provide) and they should be able to put in a request with their back-office to provide you whichever forms are needed. I apologize that I cannot do this for you, but again, our firm is no longer authorized on those legacy accounts because they were closed out when the funds were migrated to TD Ameritrade back in May 2017.

Finally, if you deduct investment management fees as an itemized deduction in your taxes, I can provide you those fee numbers. This current tax season (2017) is the last year you can do so following the recent tax law changes.

What's New With Us?

I am a little under the weather, so I am hoping to be back in top shape in a day or two. My goal over the next month is to try and watch all of the Oscars movies nominated for Best Picture. Hopefully I can stream one or two of them this weekend. It seems like a good opportunity.

Have a great weekend,

Brian E Betz, CFP®
Principal