206 – Fool’s Gold: The Hidden Costs and Risks of Gold Investing

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206 – Fool’s Gold: The Hidden Costs and Risks of Gold Investing

Is investing in gold really worth the hype, or is there more to know?

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Have you ever wondered if investing in gold is truly a safe bet for your financial future? Is gold really the ultimate hedge against inflation and economic instability or are there hidden risks and downsides that you need to know about?

In this episode all about gold, Bob and Shawn uncover the historical significance of gold, delve into the real risk and returns, and explore the Biblical perspective on gold as an investment. Overall, it’s important to work with a fiduciary financial advisor to tailor one’s investments to their goals and risk tolerance.

Mentioned In This Episode

Shawn:
Have you ever wondered if investing in gold is truly a safe bet for your financial future? Is gold really the ultimate hedge against inflation and economic instability? Or, are there hidden risk and downsides that you need to know about? In today’s episode, we will uncover the historical significance of gold, delve into the real risk and returns, and explore the Biblical perspective on gold as an investment. Let’s get some perspective. Welcome to Christian Financial Perspectives. Today we have a really fun topic on investing in gold. And Bob, I believe we have a quote to start with right on the truth.

Bob:
Well, you shall know the truth. The truth shall make you free.

Shawn:
It’ll set you free. So we are going to be covering this topic a little different than what I would say you have seen from your “insert favorite host or media host or news anchor who’s been sponsored almost every single time” to promote the selling and trading of gold. But we think it’s a very important one. We are not sponsored by anyone, so whatever we talk about on this show, not just this particular episode, but in general, it’s just something that we think would be helpful and put it out there. I know Bob, we cover a lot of topics that don’t really directly even relate to what we do as a firm, but just to try to get some Christian Biblically based knowledge out there.

Bob:
And fiduciary based, Shawn. It’s very important that we’re fiduciary based that way we don’t have a bias because we’re paid by our clients. We’re not paid by any vendor.

Shawn:
And over time too, we’ve got to work for a long time to make say a 10% payout. Well, we got to work for about 10 years on that.

Bob:
It’s not right up front. So what we’re going to do, we’re going to talk about the history of gold and how it’s been used in the past. So there’s a lot of great information today I think that you’ll find by listening and watching.

Shawn:
I’m kind of excited to share this with you guys. The inflation adjusted returns of both gold and the, we’re going to use the Dow Jones today as kind of our benchmark since everybody knows Dow Jones. And yeah, when you do the inflation adjusted for a investment touted as an inflation hedge, it’s become very interesting. So stay tuned to that part. Alright, so introduction. Gold has traditionally been seen as a hedge against inflation and geopolitical risk with its perceived value enduring for millennia.

Bob:
But you know what? Gold doesn’t provide. It doesn’t provide any income stream. It can carry storage costs and it often moves counter to stocks and bonds since all the way back since the 1970s, from our information.

Shawn:
Over decades, stocks and bonds have delivered higher total returns on average compared to gold.

Bob:
And gold tends to spike during political uncertainty. It can shine over the short periods, but it lacks compound growth when it comes to the long periods, like I say, because it produces nothing and it doesn’t pay any interest or dividends.

Shawn:
That’s right. That’s where it struggles. If fiat currencies collapse, practical goods hold much better value than speculative metals.

Bob:
These are some of the things we’re going to go deeper in today. Now, historically, gold has played a role and we think about it, it’s mentioned in the Bible hundreds of times, actually 440 times in the Bible gold is mentioned, and it once was considered a source of wealth and currency in the pre global, pre-digital, world economy.

Shawn:
I think Roman Empire Biblical times when it was readily accepted as payment. So examples.

Bob:
We have good scriptures.

Shawn:
We’re not going to read all of them. We’re just going to give you the scriptures. We’ve definitely encourage you to read them, but give you just kind of a highlight of it. So Genesis 132, “Abram’s wealth in livestock, silver, and gold.”

Bob:
Exodus 25: gold was used in the construction of religious items.

Shawn:
Like the Ark of the Covenant.

Bob:
Yeah, but it was also the golden calf.

Shawn:
That’s right. That’s it. Yep. Some good ones and bad ones. 1 Kings 10:14, “King Solomon’s yearly receipt of gold.”

Bob:
That’s because it was a currency back then. Okay. 2 Chronicles 1:15, “Abundance of gold in Jerusalem during King Solomon’s reign.”

Shawn:
And Psalm 115:3-4, “Contrast between the true God and idols made of,” you guessed it, “Silver and gold.” So, infatuation with gold.

Bob:
Well, there’s been a lot of infatuation with gold over the years.

Shawn:
That’s right. Throughout history, there has been an infatuation with gold as seen in the Bible, golden calf, King Nebuchadnezzar’s golden statue. And in modern times the gold rush of America led to the rapid growth of towns and the destruction of lives and the environment in the pursuit of gold.

Bob:
It’s amazing to me, Shawn, when I…we’re big Colorado people, Rachael and I love Colorado. Of course all Texans…

Shawn:
Especially when it’s summer in Texas, Colorado is where you go.

Bob:
And this is coming out in August, so that’s the time to be in Colorado. But we have visited, we love to go hiking and we’ve visited so many of the old gold mines and I’m amazed at the destructive – what it’s done to…

Shawn:
Just destroy the area.

Bob:
Yeah, I mean the environmental impact is incredible and this is God’s creation.

Shawn:
And incredibly bad.

Bob:
Yeah, incredibly bad. Exactly.

Shawn:
The term gold fever was coined to describe the unbelievable greed and obsession surrounding gold and those who worship gold have fallen, and the stuff is so plentiful in heaven that it’s used to pave the streets. I love that. I love if you think about that, that imagery of the streets are paved with gold. It’s not just the wealth and majesty of God the Father, but it’s also the fact that it means so little to God that the thing that for thousands of years was the thing to have and to seek is something he just paves the streets with. Yeah, that stuff? You mean pavement, asphalt?

Bob:
We see the concrete truck pull up today, it’d to be the gold truck pull up.

Shawn:
Yeah, exactly. So let’s go into our next section. So gold as a currency.

Bob:
Yeah, it was used as a currency for many years, but now…

Shawn:
Today, gold no longer carries currency benefits in the global economy and converting gold into an accepted form of currency that you can actually spend can incur very high transaction costs. From our research, it was 3-5% as kind of an average, but there are many dealers that in certain situations that they’ll charge significantly more.

Bob:
So if I go down to my grocery store or I go to get gas in my car, I’m not going to be able to pay in gold.

Shawn:
Bob, how many times do you go through the checkout and unfortunately it’s not a knock on some of the kids and other people working there, but how many times do you go through and they have a hard time figuring out how to calculate the change in regular currency? How in the world do we expect a cashier or someone working at HEB – for us here in Texas – to know how much gold they need from you for the groceries? You can’t use it.

Bob:
So gold always has to be converted back to the currency of the country to be spent.

Shawn:
And no government currently uses the gold standard, with Britain and the US abandoning it in 1931 and 1933 respectively.

Bob:
And the final abandonment by the United States was back in 1973.

Shawn:
That’s right. The fun part.

Bob:
This is the fun part. This is really interesting when we talk about investing in gold.

Shawn:
Historically low returns. Now what do we mean by that? I know if you go, and I’m sure if you guys want to pause it right now and go take a look at this, but all the information we’re going to be presenting today for these returns we got from www.macrotrends.net. There is an option, which I would encourage you to look at, choose the “inflation adjusted”, because otherwise you’re really not comparing apples to apples and especially in this case, because what’s one of the most common things we hear, Bob, people say gold is something to help with inflation. It’s supposed to hedge against inflation. Okay, well we did the inflation adjusted numbers and when you do that and compare gold and the Dow Jones Industrial average, which is again very well known, here are the facts. In 1980, again, this is inflation adjusted. I just want to make sure I say that multiple times.

Bob:
Right, because gold was not selling for this in 1980.

Shawn:
But inflation adjusted for today’s dollars, in 1980 gold was $2,736.96 an ounce. In 2011, 31 years later, gold was $2,529.45 an ounce. I dunno if you noticed, but that already went down by about $200. And as of summer of 2024 when we were recording this episode, about 44 years after 1980, gold is hovering around $2,327.28 an ounce. That is a loss of 14.97% or 15% for those who want a nice even number, a loss of 15% over 44 years. Now Bob, correct me if I’m wrong, but if that math is correct, that’s not a good return and definitely not helping with combating inflation, right?

Bob:
No, it’s not.

Shawn:
Okay. Because I’m pretty sure it should be going up significantly for inflation adjusted numbers if it was a good inflation.

Bob:
Well, I’m just looking at this. So that’s what the price is? See, I don’t follow it that much. I thought it was around $2,500. I didn’t realize it was that. That’s the latest figures.

Shawn:
The latest, this was specifically from the end of May. We’re recording this partway through June. I think it’s almost $2,500, but it’s still less than what it was in 2011’s Inflation adjusted numbers. So in contrast, alright, so we just covered gold, which was a loss of about 15% over 44 years. The Dow Jones Industrial average has grown significantly. In 1980, the Dow Jones was $3535.81.

Bob:
That’s inflation adjusted.

Shawn:
$3,535.81. In 2011, it was $16,096.35. And as of again, this month, June of 2024, it is $38,834.86. That is a gain of 998.33%. Okay, so for those of you at home, if you want to pause it for a second and get something to write with and then some paper, do the math, but which number is bigger? Negative 15% or positive 998%?

Bob:
Now what’s the reason for that, Shawn? Because I hear that and I think, “Okay, there’s got to be a reason.”

Shawn:
Yeah, what are the reasons for the lower returns?

Bob:
There’s a bunch of ’em actually. We came up with about five of them.

Shawn:
To hopefully help explain why. And the first one, which I have heard you say this so many times, 1) Gold produces nothing and pays no interest or dividends unlike stocks and bonds. So even if you have a portfolio of stocks and bonds that don’t really have a lot of growth potential, they’re not growth stocks, they’re large cap dividend stocks, for example. You’re still making an income off of that asset. The only way you make anything off of gold is selling it for enough additional higher price to make some money on it. That’s it.

Bob:
And I want to go to this point number three and we’ll come back to two. Okay. Okay. I know we have five points. Okay? Is that, 3) Buying and selling gold involves high commissions, too, often ranging from 5-6% or higher. I mean, we’ve heard as high as…

Shawn:
I’ve heard 3-5%, but it seems the highest number around 5-6%. The highest I heard was some elderly people being targeted at 50% where they thought their retirement savings, they were buying say $500,000 worth of gold. Come to find out they actually got about $250,000 worth of gold in today’s dollars. And so, I’m not saying that every gold dealer is going to be charging that high, but because it’s not regulated, which we’ll get into a little bit later as well, that causes a problem where they could swindle people, especially the elderly, which just boils my blood for people to take advantage of the elderly like that. Anyway.

Bob:
And this something else that’s very interesting is that, 4) The IRS classifies gold and silver as collectibles.

Shawn:
Yeah, that’s right.

Bob:
And when they do that, that’s subject to higher tax rates up to 28% on long-term gain taxes and ordinary income rates for short-term holdings. So you really don’t get that 15%.

Shawn:
So even the IRS doesn’t even classify gold as an investment. They classify it as collectibles.

Bob:
Right. Like we said, 5) It can’t compare to the historical returns of a well diversified portfolio of stocks and bonds, ETFs, mutual funds, and those are so easy to convert back to cash.

Shawn:
I mean, virtually no one even charges a trading commission anymore.

Bob:
Not anymore. Yeah.

Shawn:
So it’s super easy to trade if you do need to raise cash because again, in both situations, whether you have stocks and bonds or you’re owning gold, you’ve still got to convert it back at some point to the currency of your country. In our case, the US dollar.

Bob:
I wanted to point out that one, I don’t know if it really comes under the low returns, but we had it in this section was is, 2) Gold is very environmentally harmful. We’ve already pointed that out. It leaves a lot of lasting scars on landscapes and communities and it’s very linked to social injustice and…

Shawn:
Human rights violations.

Bob:
Yeah. Right.

Shawn:
Exactly. So seven reasons to avoid gold as an investment – if you haven’t heard enough yet. So 1) It’s no longer a widely accepted currency and must be converted back to cash for everyday transactions. You can’t go to the store and spend it.

Bob:
2) It has historically very low returns and is below what it was selling for 44 years ago when you adjusted for inflation.

Shawn:
That’s right. 3) It produces nothing and pays no interest or dividends.

Bob:
4) It’s environmentally hard on God’s creation. So we as Christians really need to think about when we’re buying gold, if we love the Creator, take care of the creation.

Shawn:
Which includes also not supporting child slavery in other countries.I don’t think the Lord would be happy with that. 5) It’s expensive to buy and sell because of high commissions and higher tax rates because it doesn’t have the benefit of the same long-term capital gains rates as stocks and bonds.

Bob:
And 6) It’s been proven over the long-term over and over that a well-diversified portfolio of stocks and bonds and even real estate will —

Shawn:
Outpace.

Bob:
Far outpace it.

Shawn:
Again, remember our numbers over 44 years? Negative 15% versus almost a 1000% return.

Bob:
And I think this last reason is really interesting a lot of people don’t think about if they’re going to own physical gold is, 7) It carries a high risk of theft.

Shawn:
Yeah. Exactly.

Bob:
Unless you’re going to put it in the safety deposit box, but then you got to walk from the safety deposit box back to your car.

Shawn:
Exactly. So Biblical perspective, as a fiduciary based Christian financial advisor or advisors, we believe that gold should be avoided as an investment. The Bible warns against coveting and idolizing silver and gold. Well, we’ve got two scriptures for you on this. Deuteronomy 7:25, “The images of their gods you are to burn in the fire. Do not covet the silver and gold on them and do not take it for yourselves or you will be ensnared by it for it is detestable to the Lord your God.” Bob, you want to take the next one.

Bob:
Deuteronomy 29:17, “You saw among them they’re detestable images and idols of wood and stone of silver and gold.”

Shawn:
That’s right. Just a couple quick additional points for you on why we think investing in gold is a bad idea.

Bob:
If we haven’t already beat it up already, right. It’s not an inflation hedge like the reputation says it is. It’s way over hyped.

Shawn:
Gold’s inflation hedging reputation is overhyped – period – as stocks and bonds have delivered higher long run returns on average, the environmental and human impact of gold mining is devastating, with evidence of destruction dating back hundreds and really thousands of years.

Bob:
You could see that today. You could still see it today. Yeah, this is a real big one, I think, as we’re ending up here is that gold dealers are not regulated like advisors in the financial services industry. This can really lead to investor exploitation through high commissions and targeting the elderly during times of economic uncertainty.

Shawn:
That’s right. And we’ve seen it happen.

Bob:
We have.

Shawn:
It’s really common, unfortunately, which again, I’m not kidding, it makes me feel like my blood boils when I hear about an elderly lady or a guy where they lost their spouse and then someone’s scaring them into selling their portfolio to buy a bunch of gold so they can make a huge commission. And it’s just, ughh, but that happens. That’s what happened, and there’s no regulation forit. I’m normally more libertarian. I don’t like a lot of regulation, but in this case.

Bob:
Two more points. So rather than timing precious metals markets, investors should focus on assets that build wealth through equity appreciation, dividends, interest, compound growth such as stocks, bonds, mutual funds, and real estate.

Shawn:
And the allure of “getting rich quick” and “beating the system” is not new.

Bob:
It’s not?

Shawn:
Nope. But has been given a modern spin to trick today’s population. As Solomon noted in Ecclesiastes 1:9, “What has been it is what will be, and what has been done, it is what will be done. So there is nothing new under the sun.”

Bob:
Amen. Do we have anything else? Oh my goodness.

Shawn:
In conclusion.

Bob:
Yeah. I think in conclusion we have really laid it out for investing in gold today.

Shawn:
Hopefully. Yeah. Hopefully everyone is very clear on what we are covering today. But in conclusion, investing in gold is not a substitute for a diversified portfolio. Historically, gold’s returns have not consistently beat inflation, which is what it’s always touted as. And the high fees further reduce long-term growth potential. By the way, those numbers we quoted earlier, that isn’t accounting for whatever the fee may have been in the beginning to buy it.

Bob:
Oh, it’s not.

Shawn:
Or selling it.
So at an average of 5%, well you lost 5% upfront and then you lost 5% at the end. So those are just the prices, but we didn’t have to change that for the Dow Jones because there typically aren’t trading costs.

Bob:
So, now over 44 years, you’re down 25%.

Shawn:
Exactly.

Bob:
It’s abusive to people, especially children in other countries forced into slavery to mine the materials.

Shawn:
That’s right. Don’t fall victim to the lies, and hurt your future. Instead, work with a fiduciary financial advisor. It doesn’t have to be us. If not us, go to Kingdom Advisors or find an advisor that’s a Christian fiduciary advisor to help you tailor your portfolio to your goals and risk tolerance for a more reliable path to financial security. And as always, we are here for comments, questions, criticisms, jokes, whatever you want to share about financial advice, planning, and investment management. You can contact us during business hours by either calling or texting, (830) 609-6986, or you can find us on the web www.christianfinancialadvisors.com. As always, thank you for joining us, God bless, and see you next time.

[DISCLOSURES]

* Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.