071 Is Gold Safe?

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Gold is not the safe haven you think it is. And people promote gold as a safe haven during inflation in times of uncertainty. But you know what? It can actually cost you more than it can save you. And I get it. I get it. When the market's volatile, you're looking for a place to hide. You're looking for a place to call safe. After all, we're trying to protect our financial future. But is gold the right place? Well, in this episode, we're going to talk about gold and where it belongs in your life, in your portfolio, and in your wealth. I'll see you in the episode. Welcome to this episode of the Absolute Entrepreneur show.

This is the Absolute Entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom, because that's what it really means to be an athlete. Entrepreneur.

Welcome back to the Affluent Entrepreneur show. This one is gold. I couldn't resist that. All right, that was horrible. This episode is about gold. Should you be investing in gold right now? Should you be considering gold? Listen, I was actually at a friend's. I was visiting a friend recently who.

Literally opens up a safe and has bars of gold, stacks of gold coins. And part of that is because of the thought process that gold is actually a safe haven. Gold is a place to go to, to look for when inflation exists, when uncertainty exists, that this is an investment that is stable. In fact, they've talked about cryptocurrencies that way. I'm going to do a whole episode on cryptocurrencies and what I think of cryptocurrencies when we get a chance. But here's the thing.

I think it's important for you to understand the dynamics. And then you can make the decision of if and how it. It belongs in your portfolio. Because you might find that it doesn't make sense. You might find that I want to have gold. Now, there's some things that have gone on. We'll talk about why, you know, why gold, where it belongs and all that stuff. But I think let's. Let's back up a little bit and let's just talk about investments in general. Why do we invest in an investment? Well, you're going. That's a crazy, silly question, Mel. We invest in it because we want to make more money. We want to build our wealth. Well, how do investments build your wealth? So I have an investment type matrix that I'm gonna. I'm gonna walk you through. I'm gonna. Those of you that are listening, you won't be able to see it, but we'll make sure we have the graphic for you. But I have a framework that will walk through a graphic that will walk through. So you understand. I'm gonna jump to my iPad. Here's the thing is that we typically want to look at investments and investment types based on two primary criteria. Now, there's more to evaluating an investment than these two things. But what drives an investment value is a couple of different things. The first is that we anticipate or we expect, or we want to see that it's going to appreciate. In other words, if I buy it for a hundred dollars, then in a year it's $110, it went up 10%. That's what we want. Value, what we call value, accretion, value, increase value, elevation, all that stuff. Appreciation, if you will. The other reason we buy investments is for cash flow. So two primary ways that our investments will increase our wealth is one, through the cash flow it generates. You know, things like rental real estate will. Will produce cash flows that you can take out and you can invest in more real estate or in other investments or something else. Business interests will generate cash flow. Successful business interest will, if you will. And I talked about these different things in the three investments that you should have in your portfolio. Video. We'll make sure we hook that video up at the end of this here. But the other side of it is when something goes up in value, real estate appreciates that. You buy a property for 100,000, in the next couple years, it's worth 110,000. It went up. Or you buy a stock, you buy, you know, Tesla, I don't know, it's at 700 now or 600 now, and it goes up to 800. That's appreciation. So both of those things, by holding it, will increase your wealth, will increase your net worth, and help you start to build wealth. Now, not all investments have those factors. Not all investments have them at the same level. And so this matrix starts to understand that. So if we have an investment that has literally not a lot of value increase, not a lot of value appreciation, and doesn't produce a tremendous amount of cash flow, typically that's a commodity, okay? And so what I mean by this is that it's not paying you cash flow. It's not paying you dividends. It might go up, but it's not something that ramps up really fast. It's not something that you're gonna see 10, 20, 30%. So I mean, commodities are things like, you know, coffee beans and things like that. Now, I actually believe it or not, will tell you, and you'll see why that gold is a commodity. Now, it's a precious metals commodity, but it's a commodity nonetheless because gold doesn't produce cash flow. And there's only one way that that will appreciate in value. So that's one element, is that if I've got low cash flow, low appreciation, or growth, if you will, then it's typically more of a commodity type of investment. Well, then you look at the next one where you sit back and say, okay, I have high value. In other words, the value of the asset goes up, but I'm not getting much cash flow. That's typically what we call a growth type of asset. These are assets that might be like, you'll see them in tech companies. They consider some of them growth companies because they're not paying dividends out. So what happens is that the company's generating profits, but rather than paying the dividends out in or the profits out in dividends to the shareholders, they reinvest in the company. And because the company's growing and because the company's profits continue to grow, the value of the stock goes up.

But the only way to get the value into your portfolio is to sell the stock to convert it, okay? So my point being is that in a growth situation, a growth type of asset doesn't produce cash flow, but it is appreciating over time. It's going up over time. Now, none of these are bad or good. They just are different. And you need different mixes of them in your portfolio. You can have different mixes of them in your portfolio. There are some people that just say, I'm going to invest in growth. That's it. And that's all they do. They don't care about the dividends. I don't do a lot of dividend investing. Okay. Because I think there's some other reasons and there's some other philosophical reasons that I do that from an investment standpoint and everything. So understand that there's an investment that will be primarily growth investments. Then you look at an investment that produces a lot of cash flow but doesn't necessarily grow a lot because they're distributing the cash flow on a regular basis. These are called income investments. These can be bonds, these could be dividend paying stocks, but they actually have a level of growth to them also. But these could be bonds or cash flowing assets. For instance, I, in part of my portfolio, I, I own trustees. In other words, I'm a lender on real estate. So I don't own the real estate, but I put a loan against the real estate and I get paid an interest rate on it, you know, 8, 10, 12%. It's secured by the real estate. So if they default, I end up with the real estate. Okay, but in the meantime, what am I getting? I'm getting an interest payment, I'm getting the principal payment. So I'm getting cash flow from the investment. It's an income investment. The loan that I give them doesn't go up unless they stop paying. It's just cash flow. So that's the type of investment that you might find. Then. Then there's those investments that are in the upper quadrant that have a fair amount of cash flow and they have appreciation. And those are what I would call blend investments. That, and many of these are going to be things like real estate could fall into that. You could find a piece of property that is in an area where the values of real estate are increasing. So you have value growth, okay? And it's producing a substantial amount of cash flow that's coming out to you. So you've got income. So you could have a blended business, you could have companies or stocks that are more that where, where they're paying out dividends on a good amount of dividends on a subs on a regular basis. But at the same time they're reinvesting the company and the company's growing and the value of the stock's going up. So you have the stock going up and you have dividends coming out at the same time. And it's a beautiful thing. You're getting, you're getting wealth created in the two different ways, cash flow and value. So I tell you this Because I think it's really important to start looking at gold or any investments within this confine. Well, let's look at a gold. Gold doesn't necessarily. It doesn't produce any cash flow. So it's not in a situation where we're going to see a tremendous amount of cash flow. It doesn't pay dividends.

Now, gold does appreciate and it does decline. It goes up and down like a commodity. But what causes that? So let's just look at why gold is attractive first. And let's. Then we'll break this down, and then we can decide whether it should be in your portfolio and at what level. Okay, so I'm gonna go back to the iPad. Let's look at the five reasons that people will typically be attracted to gold. First off, like I said at the very beginning, people see it as a hedge to inflation. When we see that there's inflation, in other words, inflation meaning that.

A dollar will only buy, oh, I don't know, 80 cents of stuff a year later. Okay? So what happens is that our purchasing power of the dollar goes down. What I could buy today for a dollar is going to cost me more than a dollar tomorrow. Okay? So it's seen as an inflation hedge because it is not connected necessarily dollar. Now, the other side, the reason it's attractive is it's not correlated to the market. What do I mean by that? If the stock market's going up, it doesn't mean that gold's going to follow. If the stock market's going down, it doesn't mean that gold's gonna follow. If it's not correlated, the market is independently going up and down based on the supply and demand for the commodity gold. Okay.

Number three is it's seen as a safe haven during bear markets. And what do I mean? Bear markets are when the stock market drops from its peak by 20%, we've been on the threshold and the cusp of that recently a couple of times. Okay. And so what happens is that when the stock market's going down and people are running out of the stock market saying, oh, my God, run for the hills. Oh, my God, run for the hills. Which is a whole nother conversation for another time, they then move. Where do they go to? They go to gold. Well, the demand for gold goes up, the price for gold goes up, and now all of a sudden the value of gold is up because people are moving from the stocks into gold, driving the price up. And it appears as though it's a safe haven for bear markets until people start running Back into the stock market from the gold.

Then the other thing to think about is that people say that the long term returns for gold are really good. We'll talk about that in more detail in a second. And then number five is that it's seen as a real asset. What I mean by this, it's physical. I could go into, into that friend's safe and I could grab the gold coins and I could hold them, I could feel them, I could touch them, I could throw them, I could, I could hold, you know, do, do all that. It's a real asset. And so there's something to be separate because holding stock in a company isn't necessarily a real asset. It's the piece of paper that says you have a right to. Okay. And so it's seen as a real asset. So those are the five things that, that are attractive. But what is, what's the gold standard? Why is it looked at this way? And there's some interesting things in the history of gold that I think will, will start to bring some of this full circle so you understand where some of this comes from. And the first is to understand this, the average. Remember they said they cited long, long term returns. The average return from 1970 to 2021 on gold was about almost 8%, 7.89%. However, at one point, so 19, we were not allowed to hold gold or own gold directly. From 1933 until 1975, we were not allowed to own gold directly. And so what happened is that from 71 to 74 we started to, we went off the gold standard. And now all of a sudden there was, we were allowed to hold gold and all of a sudden the demand for gold went way up. Okay? And when you have a limited supply of something and demand goes up, price goes up. So they drove the price up of gold during that, during the time where all of a sudden we were allowed to hold it because people were starting to buy it and hold it just like my friend did. And in those years, the return on gold was over 48%. The growth, the growth of the value of gold was over 48%. Well, that actually skewed this number up to the 8%. Meaning that if we took those 48% years out, then the actual return on gold is only about 5%. It's only about 5%. So realize that the long term returns maybe are not as great as people say. They can be skewed. The demand was created for gold through monetary policy and legislation. And if you look at gold in general, if we just look at the volatility of gold. It actually is.

Has a long term unpredictable value because its value is highly dependent on how much demand there is for the commodity gold. In other words, when people are deciding hey I want to buy it, it's driving the price up. And when they decide I don't need it anymore, I think there's better places for my money to be. They, they sell it and it drives the price down. So the, so the value of gold is constantly going up now, just like a stock. But the difference is a stock has operations behind it. A stock is an operating company that can create profits, that can grow profits that are profits can go up more each year, which drives the value up. Not. And what's driving the value up then is not just simply demand.

It'S the, in what they call intrinsic value to the stock. Well, gold doesn't have that. The only value that that is derived from gold is a social construct of acceptance by the public. If we decided there was a whole tulip mania way back in the day, if we all of a sudden decide eh, gold is out of favor and we start to get rid of it, it will have no value. Now not likely that's going to happen. But we see gold go up and down. So what's driving the returns on gold are isolated moments of demand, more so than operational growth. That is generating cash flows, that is generating profits. And so I don't, I'm not saying not to have gold. I just want you to understand and go fully informed into the investment. If you're going to do it. We say it's a safe haven. You want to hold it during inflationary times, you want to hold it during a bear market. But understand what's happening, the dynamics that are happening is that when we see things becoming problematic, we're going into a bear market, people start to sell. That means that more sellers than buyers in the market, where are they going? They're going to cash or they're going to other assets, commodities like gold. Well that automatically drives the price up because the demand just went up. There's a disproportionate demand than there is for supply, which drives the price up until it stops. When the bear market reverses and people are moving back into the market, now all of a sudden the price drops. That's what gives the volatility to gold. And in fact if you look at the volatility, the standard deviation of gold, it is actually much more volatile than then some of the investments that you're getting into. Just like I Said, I'm not telling you not to do it, I'm just telling you to, to consider it. So where does gold belong? Let's just look at where gold belongs in your portfolio.

Understand that it is a static precious metal. It is. What is. You have one, one bar of it, one coin of it, whatever it is, that's all you got. It doesn't grow in size, it doesn't grow in weight, it doesn't do anything. It's static. You will never get cash flows out of it. So when we talk about that matrix, okay, and you're looking at cash, there is no cash. And the only way that you have value is if others are going to buy it from you.

So there are no dividends, there are no operations, and there is no possibility of profits from the gold unless you sell it. And like I said, the values derived by a social construction of acceptance that it's a valuable commodity. If it falls out of favor, they, it could literally go to zero. It'll not happen in our day. I don't see it happening, okay? And it is no longer backing our currency, so it isn't connected to the dollar. And then the last thing to realize is this. When I get a stock certificate or a stock.

It'S in the ether, it's in my account or I have it in a safe. But in order to hold gold as an investment, there's actually a cost to hold it and keep it secure. Okay? This friend has it in a safe, he has to lock it up. He's got to be careful about if it gets stolen, someone breaks in the safe, people know it's there. You know those kinds of things. There's a cost, it takes up space. If I'm going to put it in a safety deposit box or a safe at a bank, there are costs to holding the investment that might exceed the cost of being in another type of investment that is producing cash flow to pay for those costs. So even though there may be costs to holding real estate, I might be paying a management fee for managing the property. The property's paying for that. And in net of those fees, I still make money. So I tell you this because before you start thinking about, hey, gold's a safe haven, cash everything out and let's move to gold.

I want you to think about it. I want you to realize that, look, there may be a place in your portfolio for gold, but it may be a small place. In order for you to figure that out, you need to go through.

With a strategic financial plan. You need to understand where it might fit in your, your asset allocation, your asset diversification, okay? Because until you do that, you're just arbitrarily flippantly making portfolio decisions that may or may not support your financial strategic plan. And so before you listen to the media, before you listen to social media, before you get caught up in all those people that are touting, buy gold, buy gold, buy gold, do your own thinking, do your own research, do your own consultations, do your own investigation and make sure it's right for you. There's a place for it in portfolio, but it may not be a big place. Some people, it might be a big place, but in most cases we just need to understand it is not the solution that they try to make it out to be. When you watch those commercials and all of that stuff, and I know that we're going to see a ramp up of this as we see uncertainty in the market, more volatility, the inflation, all that stuff, and they prey on the fears. And all of a sudden you say, I got to get gold, I got to get gold, I got to get gold without thinking through it. Now, great, there's value in it and there's validity in it. But do I want to put everything in gold? I wouldn't. That's just me. But I'm not giving financial advice here. I'm not giving investment advice here. I'm given just information for you to consider if you're going to build your portfolio. So if you're at that space, if you have that place, here's what I think you need to think about is look at your risk tolerance, look at your risk capacity, look at your risk requirements. I'm going to do a whole video on that whole thing of understanding risk in investing. And I'll make sure that we hook it up here so you can make that happen. Make sure that is part of a strategic financial plan and that it fits. And make sure that you do it fully informed, fully understood of all the pluses and the minuses, the pros and the cons in doing it. And that's it. Everything we do is about being an intentional, conscious, aware. And if you do that, then we, we bear it all. We're good. All right. I hope that this helps. I hope that gives you a bit of a perspective on gold in a different way, that maybe you weren't thinking about it. And that opens your eyes to some of the things to consider when looking at investments and the kinds of investments that come into play. So if you have questions or anything comes up, do me a favor, send me a note, send me a dm. Or if you want to ask me a question and leave me a voice question, go to askmelnow.com and let me know. We'll bring it on the show. I might even bring you on the show. And let's make it happen. All right? Until we get a chance to see each other in another episode.

Always, always strive to live a life that outlives you. Cheers. See you soon.

Thank you for listening to the affluent entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

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