Where Will Gold Be in 5 Years?

Key Concepts

• Gold as an Asset: Discussion of gold's characteristics as an investment, its historical role, and its current market position.
• Business Strength: Evaluation of gold's inherent qualities and the businesses built around it.
• Management: Assessment of the "management" of gold, considering its inherent nature and the marketing surrounding it.
• Financials: Analysis of gold's financial performance and valuation, considering market speculation and underlying demand.
• Future Performance & Safety: Projections for gold's returns over the next five years and its perceived safety as an asset.
• Diversification: Gold's role in a portfolio for reducing overall risk.
• Speculation: The impact of investor sentiment and market hype on gold's price.
• FUD (Fear, Uncertainty, and Doubt): The marketing strategy of selling gold as a safer alternative during times of economic uncertainty.
• Unallocated Asset: Gold held without physical possession, often through financial instruments.
• Physical Asset: Gold held in its tangible form.
• Counterfeit Risk: The possibility of acquiring fake gold.
• Reserve Currency: The role of a currency (like the US dollar) in international trade and finance.
• Position Sizing: Determining the appropriate allocation of an asset within an investment portfolio.

Gold's Business Strength

Dan Caplinger rates gold's business strength at a 9 out of 10, while Jason Hall rates it at a 6. Dan emphasizes that gold is "good at being gold," highlighting its 4,000-5,000-year history as a chemical element (AU, atomic number 79) used in jewelry, industry, and increasingly finance. He points out that its longevity and consistent function are unparalleled by most businesses.

Jason, however, focuses on the businesses built around gold. He acknowledges gold's current market-beating moment but argues that owning businesses through the stock market has historically yielded better long-term returns. He views unallocated gold as a fine diversification tool but not necessarily a "superior asset."

Management

For management, Dan scores gold an 8, while Jason scores it a 6. Dan's higher score stems from his perspective that gold, as a physical asset, is inherently simple to manage. He notes that while it requires some care (safe deposit box, protection from theft/damage), it has minimal "management fees" in the traditional sense and is largely "what you see is what you get." He contrasts this with complex businesses requiring extensive SEC filings to understand.

Jason's lower score is influenced by his observation that gold-focused businesses often leverage "FUD" (Fear, Uncertainty, and Doubt) in their marketing, portraying gold as a safer investment during high inflation or stock market bubbles. He believes this marketing can profit from investors who buy into the narrative, even if gold's long-term track record doesn't always meet those expectations. He acknowledges that if one owns gold for a specific, understood reason, it's "hard to goof it up." He also mentions the "counterfeit risk" as a management consideration.

Financials

Dan rates gold's financials at a 7, while Jason scores it a 4. Dan's score is influenced by gold's recent performance, which he sees as a positive. He acknowledges the current narrative of gold as a hedge against growing US government debt and the potential threat to the dollar's reserve currency status.

Jason, however, is more critical, stating that the fears driving gold's valuation are not necessarily backed by its current financial realities. He points to significant investor speculation pushing gold's price well above the floor supported by industrial and commercial demand. He believes this makes gold's business model and financials less compelling now than in previous years.

Dan agrees with Jason's assessment of speculation but emphasizes that financials are often backward-looking. He sees gold's recent performance as a "plus" for his score. He reiterates that gold can serve its purpose for diversification and as "extreme event insurance" but cautions that speculation is a factor to be aware of.

Future Performance and Safety

Dan's Outlook:

• Expected Return (Next 5 Years): 0-5%
• Safety Score: 4 out of 10

Dan's low return expectation is based on the significant price surge gold has already experienced, with prices exceeding $4,000 an ounce for the first time on the day of taping. He believes a 5% annual return would lead to prices between $5,000-$6,000 by 2030, with a possibility of speculation pushing it higher. However, he also warns of a potential "equally abrupt downturn" following a spike, similar to historical patterns.

Jason's Outlook:

• Expected Return (Next 5 Years): 0-5% (same as Dan)
• Safety Score: 3.5 out of 10

Jason's safety score is slightly lower than Dan's to reflect his greater concern about gold's volatility. He cites historical examples:

• 1996-2003: Gold peaked in 1996 and took until early 2003 to recover, gaining only about 8% over that period (less than 1% annually). It was down for approximately 80% of that time, with more than 20% drops.
• Late 2011-2019: Gold peaked in late 2011 and took over nine years to recover to that price. It was down more than 20% for most of that period, with a 40% drop at its lowest point.

Jason argues that gold's image as a "safe, uncorrelated asset" can be misleading when it's at a peak, fear-driven price. He expresses concern that the current market might be approaching such a peak. He stresses that this doesn't make gold "unbuyable" but highlights the importance of "position sizing" and understanding what one aims to achieve with gold in a portfolio. Buying gold solely to "do really well and make a ton of money" can lead to "messed-up expectations" and periods of significant decline.

Overall Score and Alternatives

Anand Chokkavelu concludes that Dan and Jason have given gold a low overall score of 5.4 out of 10.

• Jason's Preference: Jason prefers Bitcoin due to its ease of ownership, lower fees, and quicker conversion to cash.
• Dan's Preference: Dan prefers Platinum, noting it trades at half to a third of gold's price, which surprises Anand who historically considered platinum more expensive. This leads to a discussion about the "golden rule" and the "platinum rule" potentially needing reevaluation.