The Great Goldbug Invasion of 2021

If you live in certain portions of the Midwest and Atlantic coast, you're probably dealing with a terrible swarm of nasty bugs right now.  These bugs appear periodically, preying on innocent people.  Overcome with fear of these horrible creatures, some are no longer able to enjoy time with friends and family.  Instead, they huddle inside by the TV waiting for the next dire report to be published about the destruction sure to ensue.

Am I talking about Brood X Cicadas?  No, something far more sinister--Goldbugs!

What Are Goldbugs?

Goldbugs are vile creatures sent into this world with one instill fear into investors' hearts and convince them there is only one cure for whatever ails them...BUY GOLD!

Goldbugs have developed a sophisticated solution to any number of economic or investing challenges:

  • Has your stock portfolio gone down?  Well, stocks will probably keep going down so sell them and BUY GOLD!
  • Are stocks up?  Better sell them before it's too late and BUY GOLD!
  • The government is printing money and might go bankrupt.  BUY GOLD!
  • Inflation is coming.  BUY GOLD!
  • Bitcoin is down 33%.  BUY GOLD!
  • A Democrat might win the 2024 presidential election.  BUY GOLD!
  • A Republican might win the 2024 presidential election.  BUY GOLD!
  • A Martian might win the 2024 presidential election.  BUY GOLD!
  • China... BUY GOLD!

You might think the list above a little silly, but I have seen every one of those reasons touted by a Goldbug as a reason to "invest" in gold.  Well, OK, not the Martian one but all the others for sure.  And it's not a new phenomenon.  Historians believe the term Goldbug was first used in the 1896 presidential election, and Goldbug hucksters have been dredging up new fears and conspiracy theories ever since.

Gold and Inflation

In case you hadn't noticed, the media's apocalypse du jour is "INFLATION!".  For an overview of what causes inflation and why it's bad, be sure to read this post.   

Without question inflation is rising and, if it returns to levels seen in the 1970's, it could be a serious threat to long-term investors.  The Consumer Price Index rose 4.2% on an annualized basis in April, the fastest rise since 2008.  

Goldbugs, of course, have a solution to the looming inflation threat.  BUY GOLD! 

But Does Gold Work As An Inflation Hedge?

Sort of.  But you could do a lot better.

Private ownership and trading of gold was not available until the end of the Bretton Woods system in 1974.  Let's look at what has happened since then: 

  1974 Today Change
Inflation (CPI) 47 268 6x
Gold $184 $1,888 10x
S&P 500 Price Level 96 4,204 43x
S&P 500 Dividends $3.40 $57.66 17x

Some takeaways:

  • Over time, gold is a modestly effective inflation hedge (inflation rose 6x while gold rose 10x)
  • Stocks are FAR MORE effective, though
  • Owners of stocks earn BOTH the price increase of stocks (which were an astounding 43 times higher) AND the dividends from those stocks (which grew 17x)
  • Just the dividends alone gave you a great hedge against inflation (i.e. prices rose 6x but your dividends grew nearly three times as fast!)
  • Gold pays no dividends.  Stocks do.
  • Gold has significant storage costs (lockbox or broker storage fee) and risks (fire, theft).  Stocks cost very little to own, hold and trade.

What's Really Going On With Goldbugs?

Goldbugs make money two ways:

  1. Selling gold (or rights to gold) to you for more than they paid for it
  2. Charging fees/commissions every time you buy or sell gold

Here's the question nobody seems to ask the Goldbugs.  "If gold is such a great investment and will protect you from inflation, then why are you selling your gold to me?"

Goldbugs traffic in fear.  If they can scare you, then can get you to trade.  If you trade, they make money.  Therefore, Goldbugs must always find something to scare the public with.

And you know who else loves a good scary story?  The media.

Goldbugs + media = fear.  Fear = trading.  Trading  =  profits for the Goldbugs.  Simple as that.

Goldbugs will always be with us.  Ignore them.  

Is There A Better Way?

Yes.  When we build retiree portfolios at Oxford, we seek a balance between Stability and Growth following the principles outlined in our proprietary Power of 5 Investing system. Our goal is to help clients achieve inflation-beating growth in their wealth, while managing through market downturns. Our system has been battle tested in 25+ years of market ups and downs and is ready to tackle inflation. If you or someone you know would like to learn more, contact us today for a free get acquainted meeting.