The Time To Buy Gold Is Never

Adam Fischbaum's picture

Monday, April 16, 2018 - 2:30pm

by Adam Fischbaum

Goldfinger is my favorite James Bond movie. Best villain. Best majordomo. Best bad-girl-turns-good-girl. Best one-liners. All of it.

Even funnier is the villain's, the portly Aurelius Goldfinger, obsession with one of the world's worst investments: gold. But, he was a Bond villain. And gold is the currency of Bond villains, pirates, and South African mercenaries.

It doesn't belong in a portfolio.

Now, before the goldbugs come after me with pitchforks and torches, let me share with you a few nuggets (ha!) from Warren Buffett, another guy who thinks gold is a lousy place to put one's money.

Here's his most succinct quote regarding that belief:

"…If you took all of the gold in the world, it would roughly make a cube 67 feet on a side… it would be worth at today's market prices about $7 trillion, that's probably about a third of the value of all the stocks in the United States… For $7 trillion, you could have all the farmland in the United States, you could have about seven Exxon Mobils (NYSE: XOM) and you could still have $1 trillion of walking around money…"

So, let's put that to a test. Here's a five-year chart of the SPDR Gold Trust ETF (NYSE: GLD) that tracks the tick-by-tick price of the shiny yellow stuff that pays you absolutely nothing.

Now, here's a chart of Coca-Cola (NYSE: KO), one of Buffett's Berkshire Hathaway's (NYSE: BRK.A) core equity holdings.

Holding GLD for five years paid you zero. Zilch. Bubkus. If you incurred a commission to buy the GLD shares, even if it was $5 or had annual account fees, no matter how negligible, you are still behind the proverbial eight ball.

And the real thing? Factoring in dividends, the pause that refreshes returned an average north of 12%. All that glitters is not gold.

What about inflation? My answer is: what about it?

Many investors have bought into the notion that gold will retain its value during inflationary times as the purchasing power of fiat currency (those are the paper bills you have in your wallet) declines. However, unless the world goes completely "Mad Max" on us, we're currently not able to go to our neighborhood Walmart (NYSE: WMT) and plink down a few krugerrands for a gallon of 1 percent milk and a box of Kraft mac and cheese.

At least not where I live.

So, thinking as rationally as we can as humans, it would seem that dividend paying stocks would be the ultimate inflation hedge. Here's how.

Let's use defensive papermaker Kimberly Clark (NYSE: KMB) as the example. Inflation has crept into the economy. As a large manufacturer, all of KMB's costs have gone up: wages, input, transportation, you name it! What do they do? Sit back and say, "Meh. We'll make it up in volume"? No. They raise prices.

Typically, in an inflationary economy, wages are also rising, so the manufacturer can comfortably pass the cost on to the consumer. If the company is able to pass those costs on (they make disposable diapers and toilet paper), earnings rise or at least remain steady. This enables the company to maintain, or perhaps raise, the dividend.

As an investor, you purchased the stock for capital appreciation and income in the form of the dividend. If the forces of the market agree that the price of KMB should go up, it looks like your investment has retained and appreciated in value and provided an income stream, which may have grown as well. Meanwhile, gold has literally been sitting there, shiny, taking up space, paying you nothing.

My Kimberly Clark Scenario was completely hypothetical. But that's the aim of investing in stocks.

At the end of the day, it's a choice between fear and hope. Gold is the fear trade. And, as with all trades, good luck. It looks easier on paper.

To paraphrase the Oracle of Omaha, I'll take the toilet paper company with a growing dividend stream any day.

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Adam Fischbaum does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.