The Rabbit Hole

On October 27th of last year, I briefly commented on gold (link here). It was worth about $4,070/ounce USD back then and silver was worth about $48/ounce.

Today (I’m writing this on the afternoon of January 18th) gold is close to $4,700/ounce and silver is worth just over $93/ounce. That translates to a return of over 15% for gold and a near doubling in the value of silver in less than three months.

I’m getting calls almost everyday asking me about buying one or both precious metals. Whenever investments go up in value quickly–it doesn’t matter if they’re stocks, real estate, currencies, or rocks–people want them. It happens every single time.

Investment crazes involving stocks are easier to reason people out of. Stocks are companies. You can scrutinize executives, valuations, and business models. But gold and silver are different. They pull you down a terrifying economic rabbit hole.

Before I explain the rabbit hole, two quick points: First, gold can diversify a portfolio and reduce long-term volatility. I am not disputing that. And second, since 1928, stocks have returned ~10% annually vs. gold's ~5.6%. Both facts matter. If you want to decrease volatility, add (or keep) some gold or silver to your portfolio. But adding too much in place for stocks might decrease your future returns.

The rabbit hole? It usually starts with someone sending you a well written but scary essay.* A client recently forwarded me one titled 'The Next Great Depression.' It compares today to the 1930s and concludes history will repeat and that we’re all doomed. I'm not going to link to it because there are so many articles just like it everywhere.

The crux of these essays is that hyperinflation and currency destruction worse than Weimar or Zimbabwe is coming, governments everywhere will go bankrupt, and society will collapse.

But gold and silver, they say, are the only things that will have value when it all falls apart. You’ll survive and prosper if you own it. And everyone who doesn’t will suffer. You don’t want to suffer, do you?

Before you know it, you’re down the rabbit hole. Nothing matters anymore. The collapse is coming. Stocks are terrible, bonds are IOUs that will never be paid back, and cash will evaporate. History or theory mean nothing anymore. The doomsayers and their followers are rooting for the collapse, even though they know they don't actually want it.

Doomsayers have always existed because there's always a market for fear. And subscribe to their newsletter for a few thousand dollars and they'll assuage that fear. Their predictions are wrong, but they never stop coming. I know, I know a broken clock is eventually right twice but come on.

The uncertainty they tell you could be so catastrophic is exactly what provides long-term stock returns. You are compensated (in returns) for the uncertainty you’re willing to accept. It’s called a risk premium. And it's the price you pay for growth.

And look, maybe I'm wrong. Maybe gold goes to $10,000/ounce and I look like an idiot for writing this. I'm fine with that. I'd rather look wrong in the short term than build portfolios around fear.

The end of the world only happens once. Doomsayers want you to think uncertainty means collapse. It doesn't. Uncertainty is the point. It's what drives long-term returns. And turning your entire investment portfolio into a rock isn't the answer.