Thursday, August 18, 2016

Rio Olympics, Gold Medals and Bad Investments

Rio Olympics, Gold Medals and Bad Investments
2016 Rio Olympics
I don't know about all of you, but I've been loving the 2016 Olympics.  Of course it helps that I'm currently unemployed and get to check out the events whenever I get a chance during the day.

Seeing all of these athletes from around the world competing and getting to see 4 years of hard work be put to the test is inspiring.  I've seen Olympic records, World Records and heard some great stories behind the athletes.

By now I'm sure just about everyone has heard of Michael Phelps and his insane accomplishments.  In the Rio Olympics alone he's amassed 5 gold medals and was involved in a 3-way tie for the silver medal he won.  Over the 4 Olympics that he's been in he's hauled in 28 medals.

Of course the pool was also the site of an amazing accomplishment by Katie Ledecky.  I was in complete awe of her performance in the 800 m freestyle where she set a new World Record and finished almost 12 seconds ahead of the silver medalist.  That's unheard of considering you're dealing with world class athletes.

The U.S. women's gymnastics team was equally amazing winning the team competition by over 8 points.  I also can't mention gymnastics without bringing up Simone Biles and her accomplishments.  She won the individual all-around event by 2.1 points.  That might not sound like much but for some perspective that's bigger than the margin of victory in the same event from 1980 to 2012. COMBINED!  

Usain Bolt has been amazing as always over on the track.  I keep waiting to see something else amazing happen over there.

These are just some of the amazing accomplishments that I've caught over the last week and a half.  For a great story in sportsmanship and helping people out check out what happened during the women's 5k.  To make a long story short 2 runners had a bad fall early in the race, but the first one to get up didn't take off and stayed to make sure the other was okay.  Not long after the other one collapsed to the track because her knee was hurting her and guess who was there to make sure she was okay.

What's in a gold medal?
Rio Olympics, Gold Medals and Bad Investments
2016 Rio Olympics Medals
For starters a gold medal isn't exactly a gold medal.  The gold medal for the Rio Olympics is actually made up of 494 grams of silver and 6 grams of gold.  So it's a bit closer to one of those chocolate gold coins than an actual gold medal.  Although I for sure wouldn't turn one down if someone handed one to me.  

Out of curiosity let's see just how much those gold medals are worth.  The current spot price of gold is $1,351.00 per ounce while the recent spot price of silver is $19.67 per ounce.

A little bit of mathematical magic gets us what we need.  The silver in that gold medal is worth $342.76 and the gold is worth $285.93.  That's $628.69 just for getting first in a competition.  Not bad at all.

Bad Investments

Let's take a look at gold and why I consider it such a bad investment.  If you have one ounce of gold today what do you have in 5 years?  That one ounce will be one ounce a year from now, two years from now, three, four and five years too.  Unless you've learned alchemy you won't have any more gold than you had at the start.  Five years from now the only way you can make money off that gold is if it's increased in $ per ounce and you sell some.  So you're relying solely on a change in the pricing or valuation of gold to generate a return.

How's that compare to another investment like bonds.  If you buy a $1,000 bond with a 5% interest rate your returns look much different.  Each year you would have received a 5% interest payment which works out to $50 per year.  $50 x 5 gives us $250 PLUS you receive that $1,000 back.  So you end up with $1,250.  If you own the bond for the entire life of the bond your return is also singular in nature and comes only from the interest you received.

What about stocks?  Each share of stock represents an ownership stake in a company with claims to the proportion of earnings from the company.  Your return stock comes from the growth in earnings, any dividend payments and the change in valuation.  That's 3 different sources of return which in my book is much better than just relying on just one source.

I'm not 100% bearish on the prospects of gold as an investment because it's not.  The problem is that gold is just flat out a horrible buy and hold investment because you're completely relying on repricing to generate any kind of return.

Gold is best suited as a short term swing trade kind of investment.  The problem with that is that you have to be right twice in order for the investment to pan out: when you buy and when you sell.  That doesn't mean it can't be done, but you just have to be more vigilant with your investment process.  If you don't want to commit the requisite time for an investment in gold then you don't need to invest in gold.

What about when "sh!t hits the fan"?

I can hear the arguments now "what about the failure of all of the fiat currencies around the globe.  When SHTF you'll be glad you own gold."

There's two big problems with that argument.  If you are really afraid of government/currency failure, gold is a horrible investment.  Many people that invest in gold do so via the various gold ETFs out there.  In a world where currencies and governments are collapsing how delusional do you have to be to expect that you will receive the gold that's held in your name.  Personally I wouldn't bank on it.

The only way you can be sure of having that gold is to have it in your possession before anything happens.  Of course that introduces a whole new level of risk namely storage and protection of the gold in perpetuity.

Another argument against investing in gold is the fact that at the precise time it's most valuable, when SHTF, your gold is impractical to your survival.  If you really believe in the SHTF scenario coming down the line then you're best off buying land in a secluded area, building a bunker, storing up food and stocking up on weapons and ammo.  

Take a look at this illustration I made of what happens in a SHTF scenario when you were busy stocking up on gold when you should have been buying guns and ammo.

Governments and currencies fail, shit hits the fan, gold is useless
*As you can tell I'm a budding artist and as such if anyone is interested in buying this one of a kind sketch email me and we'll negotiate a price.

There's a time and place for any asset class and that includes gold.  However, as a buy and hold investment gold just doesn't hold up.  At best you're looking at inflation hedging which doesn't gain you any ground over the long run and you're forced to give up your gold to get anything in return.

10 year chart of gold prices

You won't find many well established companies that can produce 10%, 20%, 30% or even 50% returns in a short amount of time.  So yes gold can be an excellent short to intermediate term investment as long as you're vigilant and are prepared to move systematically to lock in your gains.

As for me though, you'll never read that I've been buying up gold as part of my long term investment strategy.  If you do please call 911 because something is definitely wrong with me and I need some help.

Have you been watching the Olympics?  What do you think about gold as a long term investment?  Have you ever speculated on short term price movements in gold or other commodities?

Please share your thoughts below.


  1. Hey JC,

    Thanks for sharing your thoughts. When it comes to gold, I think there's a lot of confusion out there b/c it can be viewed as both a commodity and as money. When you start introducing ETF products, mining stocks, etc. it gets even more messy b/c those products are meant to be ways to make gold more tradable (liquid), but as you mentioned ETFs such as GLD and SLV aren't guarantees that you have any claims to any physical gold...

    But if we just look at physical gold as it is, everything becomes so much simpler. Gold is money. It has been for thousands of years. Why is gold money? It's durable, portable, divisible, fungible, and most importantly a store of value... Gold exists in rare enough quantities that make it the perfect form of money... And unlike fiat currencies, you can't just print more of it on a whim... You want more ounces? You gotta go dig it up and that is labor and work intensive!

    Human history is littered with failed experiments with paper. The average life expectancy for a fiat currency is 27 years... Most paper currencies blow up (eventually) because you can't fix human stupidity and human hubris... Just look at where we are right now - negative interest rates! A decade of zero interest rate policy... How can anyone not be concerned with central banks and question if they even know what they are doing anymore?

    Again, gold is money... Investors have no qualms with holding cash, but really need to start looking at gold as an alternative currency and not as a volatile commodity... When gold fluctuates in price its due to the volatility of whatever currency you're looking at it in... To really gauge gold's volatility you need to compare it to other asset classes - stocks, real estate, oil, etc. If gold can preserve your purchasing power relative to those other assets over time, it's doing its job!

    Anyway, fiat currencies only depreciate over time. If you stuck a $1 bill under your mattress in 1913, it's now worth what, $0.04 today? Gold was about $20/oz in 1913 and priced about $1,350/oz today... But again, it's not "appreciation" we are after with gold, it's store of value. Relative to other assets, an ounce of gold in 1913 should buy you the same amount of goods and services today. That's the whole point of owning gold... Ask anyone in Russia, South Africa, Venezuela (can you say hyper-inflation?), Argentina, Brazil, etc. if they wish they had gold right now... That's right, gold is also universally accepted across the globe too.

    I'm not trying to preach like some crazy goldbug... I don't think I am but probably sound like an ardent one... I just think there's a place for gold in every investors' portfolio... I'm talking about physical gold, not the speculative paper products.

    Anyway, those are just my thoughts... IIf times get tough, I want the one form of money that has proven not to fail, time after time, again and again throughout history. Give me physical gold everytime and I like my odds.

    All the best!

  2. I prefer silver to gold. It is actually an industrial commodity.

    1. FV,

      I've heard that as well but never really researched it. I'd be curious to find out what the ratios of industrial vs jewelry vs bullion vs any other uses is.

      Thanks for stopping by!

  3. I disagree with your viewpoints, JC :)

    The fact that 1 oz of gold today is 1 oz of gold in 5 years is not an argument against owning gold, but an argument for holding gold. Fiat currencies devalue over time while hard currency such as gold does not. $1 in 1916 is only worth $0.04 today and that simply illustrates our monetary system where everything is designed with inflation in mind. The whole point of the Fed is to devalue currency and erode wealth. Owning gold (or other hard assets) is taking a stand against that system saying that you want to preserve your wealth.

    Re the SHTF, we dont need to go those extremes. We dont need to think about scenarios where society itself has collapsed and everyone turns into zombies eating each other. SHTF comes in many different shades. Just take Brexit for example -- that was a SHTF moment. Nobody was going around killing each other, but overnight, everyone's wealth disappeared by 10-15% (or whatever the GBP devaluation was). People still woke up and went back to work and continued as if things were normal. But people who owned gold and other hard assets were able to preserve that wealth because thats what it is -- a value store and not a fiat currency. Similar to Brexit, lots of other events have occurred in recent history - like the SNB depegging CHF against Euro, the Cyprus event etc.

    Gold may not provide you with income on a regular basis, but when it comes to value store, it has stood the test of time.

    Best wishes

    1. R2R,

      I understand the allure of owning gold but I view it as insurance in case something catastrophic happens. It can make sense in a holistic view of your portfolio but I'm a bit more optimistic, maybe naively so, that things won't drastically change. My big problem is with people not owning the physical gold because the ETFs and other paper products aren't going to be accessible so they're essentially worthless.

      Regarding the Brexit that whole thing is just a mess. It was purely noise in the markets that traders used to take advantage of the fears of others. What's supposed to happen with Brexit? First off the actual withdraw is supposed to take 2 years. Also what's happening is that GB decided that they no longer want to front the countries that aren't as productive within the EU or be under the control of the EU and some of it's ridiculous policies. I see this as a win for GB over the long term and in turn the companies that do business there, as they are now in control of their destiny instead of being under the thumb of the EU.

      Personally I expect more exits from the EU if not an outright disbanding of it. How much longer will the few productive countries there continue to provide welfare for the other countries? Sure that might cause some term upheaval but in my view it's a win for those countries over time.

      I'd be curious to speak with anyone that lives in GB to get a "boots on the ground" take on the Brexit and the devaluation of the GBP and what exactly that did to their purchasing power. If the GBP devalued by 10-15% that should have pushed prices on goods up in terms of GBP. Off the top of my head I don't know of any other bloggers that live there so it's hard to say if they really saw huge spikes in the prices of goods in a short time frame or not. Essentially was the GBP devaluation actually played out in the economy or was it only realized within the currency markets. That's definitely something I need to look into.

      Thanks for sharing your thoughts.

    2. Hi JC,

      I was in the UK a few days after Brexit but there wasn't an immediate sticker shock. The biggest immediate impact was the Euro rate since a couple of my family members had upcoming holidays in Europe; those vacations suddenly became more expensive.

      I think for general products that it takes time for products to move through inventories/warehouses so that price increases may be gradual. I'll have to ask my parents if they've seen any increases yet. Higher import prices may also drive more domestic sourcing although that will take longer to ramp up if it even does.

      I think the UK has always been expensive compared to the US in terms of buying power; a $10 product in the US was typically 10 pounds over there yet a UK salary was not dollar to pounds equivalent. Likewise housing is expensive relative to the average in the US, as is fuel / gasoline due to taxes. At least this trip, things were cheaper for me to purchase.

      Best wishes,

  4. Good article, which also sums up what I think about gold as well. If you are a good trader, you may be able to make money with Gold. I am not a good trader, so I do not own gold. Perhaps the only way I could ever see myself owning gold is either if I become a gold coin collector, or if I decide to embrace something like the Permanent Portfolio.

    The one thing about gold however is that in other cultures/countries, which have had major political issues, paper currencies and stock markets have perished. You and I have been very lucky, living in North America. But people in Eastern Europe, China escaping from the Nazi's or Soviets were definitely in a better shape if they had gold in their possession.

    Of course, many people from outside the US also value dollars for the protection of their savings. So I think that for an American investor today, gold is not really needed.

    1. There is also the Warren Buffett's argument against gold - gold is not a productive asset. He would much rather own all farmland in the world than all the gold in the world. It makes perfect rational sense.

    2. I completely agree, if you have enough money to buy all the farm land DGI. In my case, each investment in physical farmland is at least a couple hundred thousand dollars.....and largely illiquid. Gold on the other hand can be purchased in coin or ingot form for far less.....and is far more liquid. I prefer productive assets as well, but sometimes I need to invest in smaller increments.

    3. DGI,

      Yes I do have to say that I'm very blessed and my ideas on the golds investment merits are heavily biased by the fact that I live in a stable and prosperous country. If I lived elsewhere gold where there's a lot more political turmoil/upheaval then gold would make more sense.

      However, unless/until I get a sense that the greenback will no longer be the safety currency that everyone wants when economies go haywire I don't foresee gold becoming part of a long term plan. There's money to be made using people's fear for your gain so I can't argue with people that go that route.

      Thanks for sharing your thoughts.

    4. Hi PIP,

      The dollar will likely be the reserve currency for the next few decades. I do not see any other economy that has the ability to become the reserve currency right now.

      Thank you for your response.

      Income Surfer,

      You can buy agricultural land with much less money that hundreds of thousands of dollars. You can gain exposure for as little as a few dollars. Just think outside the box pal.


  5. I'm not big on gold myself, though I do see the potential benefits of owning goal in a financial crisis. There seems to be a lot of advice going around now to buy gold. Gold stocks and ETFs don't pay (much in) dividends, so I'm not particularly interested. Owning physical gold is another option. Buying gold coins seems to be fairly easy. I'm just wondering how the sell side would work out, especially if you "need" the cash.

    1. Ferdi,

      Regarding your comment about there being a lot of advice to buy gold now chances are that means that now is the wrong time to buy gold. That's been my general experience with investing and reading up on history. If everyone's piling into it you can expect a crash in the future. Not that I expect that from gold because it hasn't seen any crazy price moves.

      Something else I meant to bring up was what do you do if you need to sell the gold. I've heard you don't get a fair shake due to high cuts/commissions but I can't speak to that first hand. The other thing is that you wouldn't sell your gold to get back into the fiat currencies so you're left with shaving some off or trading only in whole coins which complicates things.

      Thanks for stopping by!

  6. Great conversation starter JC. I can see your perspective for a strictly buy and forget investor looking for cashflow, but I know you are much more dynamic than that. I don't know that I would want to have a large, or for that matter even a modest, amount of my family's wealth in gold.....over centuries. At the present time however, i am interested in owning some gold and silver.

    I view gold, and to a lesser degree silver, as another currency. Like all currencies, it holds a relative value to other currencies. At the present time, I see it as an insurance policy against the foolish policies of central bankers. Don't get me wrong, if I thought equities were inexpensive....I would be far less interested in gold/silver. At present though....most other assets are expensive and central bankers are getting increasingly nervous. I see that as bad for us "normal people". Our small investments in gold provide good diversification against the dollar, which we have stockpiled while waiting for better investment opportunities. In a similar vein, i would like to add additional farm land to our portfolio....which provides a small annual income and inflation hedge.....but is far less liquid than gold. History suggests that governments and central banks will do anything to remain in power.....even at the expense of constituents/residents.

    1. Bryan,

      As a short term investment gold makes a lot of sense, but as a buy and hold investment I just don't see the point in owning gold. The fact is it's just not a productive asset. Yes it's portable compared to some of the other hard assets such as land. Plus gold is probably one of the better hard assets to own because you can hide your gold to keep it away from others whereas you can't exactly hide your land.

      My big issue is with people that are seeking the diversification and store of value that gold offers in the form of paper assets rather than physical gold. If there is a collapse of currencies or governments you're not going to see your claim on the underlying assets that the gold ETFs represent. I'm not foolish enough to believe that and I don't think you are either.

      Plus the only way gold works out as a long term investment is if there is a major economic/government/currency catastrophe. Maybe I'm just more optimistic than that.

      Thanks for sharing your thoughts.