Gold, The Ultimate Contrarian Investment

Sheep chase rallies, Wolves stack gold

Feb 12, 2024

Gold and other precious metals are such a foreign thing to many folks in today’s society. The way most folks understand gold is it is the shiny stuff in the nice jewelry they have. However, this wasn’t always the case. Scrooge McDuck has a vault full of gold coins for a reason. First and foremost, gold was and still is money (despite what the federal government wants you to think). Secondly, gold has been a store of value and hedge against the inflation of printed money for decades. And because of business cycles and heard mentality, it’s always best to buy gold when everyone else is chasing stocks higher and FOMO’ing into the market (kind of like now).

Beta

To begin this discussion, we must tackle some boring crap. Beta is the market term for how correlated an investment is to the broader market. A way to understand this is if a stock needs the market to move higher for it to move higher, it is highly correlated to the market and thus has a high Beta. If it moves lower when the market rises and higher when the market drops, that stock has low to inverse correlation or a negative Beta. Investopedia defines Beta like this:

Investments that have a low or negative Beta are considered contrarian investments because they move higher when everything else is flat or moving lower. Depending on the time frame you look at, Gold has historically had a low or negative Beta.

Its’ low Beta has given Gold a few important roles within anyone’s investment portfolio. Inflation hedge, safehaven asset, and SHTF insurance.

**A note on investing in Gold vs. Gold Miners - gold miners are a good way to supplement your gold investments by giving you some higher Beta. The miners after all are companies and those companies have the potential to benefit from upward movement in equities markets.

Gold vs. Stocks

Everyone likes to point to the "historical outperformance” of stocks vs all other asset classes. This presents a very narrow view based on a single statistic (total share price over time). The secret sauce in investing (and why so many asset managers preach diversification) is that absolute return isn’t as important as consistent return (assuming of course that inflation isn’t dramatically higher than that return for a sustained period of time).

It is true that US stocks have outperformed almost every other asset over the past 100 years. However, a multitude of financial researchers have looked at the rises and drops of equities markets and have concluded that you could have been very profitable or underperformed considerably simply based on timing. This is also why dollar cost averaging is important. Buying all at once is gambling. I prefer a synthesized approach. A core amount you wish to dollar cost average (ie - $100 per month) but adjusting that up or down based on some relative valuations so that you’re buying when things are cheaper and buying less or evening selling a little when they are more expensive. This keeps you in the market but allows you the flexibility to buy good investments when they’re ‘on sale’ relatively.

The added benefit of a lower Beta investment is apparent when you look at drawing down those funds. Retirees that draw down on their stock holdings can outlive their money simply because of the rise and fall of the stock market. Pulling out money while investments fall can have brutal results on your overall portfolio value in the present and 10-20 years into the future because of compounding returns (or the lack thereof). Lower beta investments such as Gold offer the ability to smooth out those ebbs and flows.

Contrarian investments also offer one final benefit. You are buying when everyone else is selling. This means you’re probably getting an even better deal than buying an asset at the same time everyone else is and paying a premium for that asset. Warren Buffet didn’t say, “When there’s blood in the streets, stuff your money in the mattress”. He said, “When there’s blood in the streets, buy real estate.” If you buy when everyone else is selling, you purchasing undervalued assets without having to pay up to get them.

Gold Doesn’t Earn Interest

A large reason many investors shy away from precious metals like gold as a core portfolio holding is because the asset doesn’t come with an interest yield or dividend. This is part of the reason many equities bulls frown on precious metals and are quick to point out the disparity in return. Well all of that is changing. I’m a big supported of Joe Brown at Heresey Financial and he introduced me to MonetaryMetals. They offer depositors the ability to earn interest in the form of gold by leasing out their gold to good producers that use gold as an input material. The producers get to hedge their exposure to the price of gold and silver while paying an interest rate return to the depositors. This doesn’t mean that your gold and silver won’t continue to fluctuate in price but it will provide a 2-4.25% return on the assets which can either soften any price moves lower or juice returns on price moves higher.

There are other precious metals investment opportunities as well through Hersey Financial such as investing in precious metals and crypto via an IRA with iTrust Capital. The ‘boring’ world of precious metals investments is coming to life in response to the need for solid stores of wealth in troubling times.

Is Now A Good Time to Buy Gold?

The short answer is there is I never think it’s a bad time to start buying gold. If it’s any kind of indicator though, the ratio between the S&P 500 stock Index and Gold are reaching historical levels. This typically means a reversion to the mean is near. That could be the result of an appreciation of the gold price, drop in the S&P 500, or a combination of the two. It can also mean a drop in both but more for the S&P 500 than gold. Now there is no guarantee where this ratio will top out but if history is any indicator, it’ll be sooner rather than later.

What do you think? Is now a good time to buy gold?