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Avoid The Gold Hedge

Out of the Frying Pan and Into the Fire

Out of the frying pan and into the fire describes the situation of moving from one bad situation to one that is worse.

For many investors who finally come to their senses and decide to abandon Wall Street volatility, most jump into a worse situation by reallocating to gold. 

Here’s why that’s a bad idea:

Lately, even as stocks are riding high, many investors are hedging their bets by flocking to gold for when the Wall Street surge ends. As a consequence, the price of gold has soared to all-time highs.

The crowd has never been a good gauge for what to invest in since it’s almost always wrong (see dotcom, mortgage-backed securities, etc.) so when the price of stocks and gold soar beyond reason, one has to be skeptical about engaging in either market.

Touted as a hedge against inflation, the reality is gold isn’t a great hedge because of its volatility. Gold is currently trading at $1,960, an all-time high, beating out the previous high in 2011.

As a note of caution, the previous record hit nine years ago came in the aftermath of another tumultuous time – the aftermath of the Financial Crisis – and in the face of another potential crisis, the European sovereign debt crisis.

The price of gold is likely not done climbing. Historically, it’s where the crowds who run for the Wall Street exits end up. Gold is not an investing strategy, it’s a hide your money under the mattress strategy by investors hoping to preserve their capital for when the markets calm down. But that’s the fallacy and danger of gold. It is neither a great hedge nor a preserver of capital.

The problem with gold is when things calm down a bit, its price drops like a brick. Those left holding the bag are often in worse shape than when they fled the stock market.

Out of the frying pan and into the fire.

When the European sovereign debt crisis calmed down, the price of gold dropped 40% and has see-sawed ever since. With the U.S.-China trade war, gold took off once again and continued to climb with the latest COVID-19 crisis. There is no doubt the price of gold will drop like a brick again.

How do we know?

Because the smart money – ultra-wealthy individuals, institutional investors, and university endowments – are staying away.

Why does smart money avoid gold?

Because it’s no different than investing in stocks where making money is speculative – wholly dependent on the rise and fall of the price.

The ultra-wealthy are more interested in productive assets and businesses. Gold is not productive. 

Warren Buffett put it best:

“The one thing I can tell you is it won’t do anything between now and then except look at you . . . it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

Don’t run from one foolish crowd to only join another more foolish crowd. Why run from one speculative investment to another?

Are you tired of speculating?

Where your fortunes rise and fall with the crowd?

Follow the smart money not the crowds. While crowds run to gold for a hedge against inflation and to preserve capital in downturns, the smart money runs to productive assets that don’t rise and fall based on the latest craze or the flavor of the month.

Productive assets are the only true hedge against downturns.

Insulated cash flow in industries and assets that are immune from downturns is the true hedge against inflation and downturns.

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