Why Is Everybody Gaga for Gold Right Now?

Welcome to "The Informed Investor" where we break down the latest financial headlines, bringing in research and insights to help you separate the news from the noise. Welcome, everybody. And if you are watching this, the topic of the day is pretty obvious. We are talking with gold and gold hitting and all-time high. Thank you for joining "The Informed Investor", a show brought to you by Dimensional Fund Advisors who is bringing financial science to investing. I'm Mark Gochnour, joined today by Jake DeKinder, get your bling up a little bit, and Wes Crill, you got a little bling there as well. Almost like what an athlete would wear. Absolutely befitting of me. I always think of you as an athlete. Totally. All right, I'm gonna do headlines, and then we're gonna talk a little bit about gold and where we are here. So, the first headline I want to touch on here, what could stop the gold rally in its tracks, question mark. Not much. Second one, can the gold rush continue, question mark. Warning signs for investors. And then, the third, Bitcoin, gold, real estate are key inflation hedges before the 2026 downturn. All right, gold. Got over 4,000 for the first time, spot price. Mm-hmm. And then, let me give you another number here. From the beginning of 2024 through September of 2025, gold is up a cumulative 87%. That's some phenomenal performance we've seen the last year and a half. And you know, this idea for gold, it's nothing new. It's always been out there, should I own gold? But what do you guys think about some of those headlines? What do you think about some of these recent performance? Well, those are big returns. And some of the headlines you mentioned, people were thinking about it not just in terms of returns but also as a risk mitigation tool. And so, I think those are good things to unpack there. I mean, why are we having, why are we doing this episode? It's because of the returns that you just cited right there. People start talking about stuff when things perform well. We've seen it over and over. And in some of those headlines you read there, you literally could replace that with almost any asset class, anything that's done well. In fact, you could almost read those exact headlines there and just replace it with stocks 'cause people are saying the exact same thing about stocks. All-time highs. All-time highs. Yeah. Is there- Is it overvalued? Is it gonna go down? Should we be concerned? Predictions about 2026, it's gonna fall off a cliff. It's just the same thing over and over, just substitute in a different asset class. All right. Well, let's talk specific to gold here today and a couple I... Let's talk about the framework I think I wanna bring here, which is going to be, should I own gold? And then, if we do determine yes, then how much should I have in my portfolio? So, let's talk about some of the things we often hear about gold. One of them is, in fact, it was on the headline here, it's an inflation hedge. Wes, I'll start with you about the idea of is a gold an effective inflation hedge? Yeah, and without getting into too many of the details, when people think about a hedge for inflation, you want something that is probably not so much more volatile than the inflation itself. Usually get standard deviation of CPI changes. That's been about an order of magnitude lower than the standard deviation of gold returns. Gold is even more volatile than the S&P 500 index historically. So, from that line of thinking, probably not a great hedge the way we typically think about that. Another way people will deal with inflation is defined assets that will outpace inflation. And there, probably fare's a little bit better. But then so do stocks. They've had on average, Mm-hmm. a positive real returns even in periods of time where inflation was above the median. So, it was not totally clear how you're actually managing your inflation exposure. Let me make one point about the hedge piece of it. And then, I think we've got some numbers in terms of what does gold look like, what does stocks look like, all of those things. I do think that people love to throw that term hedge, hedge unexpected inflation. The media likes to write about it. I think some investors maybe think about that or consider that. I would push a lot of investors to say, are you truly trying to hedge, perfectly hedge unexpected inflation, or are you trying to do the second thing which is outpace it? And obviously, if you've got liabilities that are coming up and you need to perfectly hedge unexpected inflation, there are good things to do that. Arguably, gold is not the thing to hedge it with. But I think a lot of, most investors may be fall into that category of I wanna maintain purchasing power and I wanna do a little bit better. So, Wes, I wanna go back to then thinking about gold as an hedge. So, I heard you say a couple things there. One is if it was an effective hedge, it would move in sync, in line with CPI. And the other one would be, if you look at the volatility, the volatility of gold is so extreme, so much higher and lower than inflation, you can't really call it inflation hedge. But, Jake, that's where you're going with this idea of, and I think the media sometimes gets confused. They call it an inflation hedge, but maybe they're thinking about it, it should be more of outpace, outperform relative to inflation. It's also worth noting that when we look at market-based indicators of inflation expectations, they're a little bit elevated right now, but not particularly high, certainly not if you look historically. Yeah. And those volatility numbers you cited. I've got some here, you can get to yours there. But when you look at standard deviation of CPI and we can run it back to 70, 'cause that's when you can take gold spot price back to, Mm. it's crazy when you look at volatility of CPI versus gold versus stocks, or different sub-asset classes of stocks. It's just completely different. Yeah, standard deviation of CPI is around 3% or a little bit less, and standard deviation of gold is over 20%. So, if you look at just those two, yep, one thing moving like this and another thing is moving like that, that's traditionally not what you would look for. And to your point, when the media talks about inflation hedge, they're probably only thinking about, is it correlated with changes in CPI? That in and of itself is maybe necessary but not sufficient to be an inflation hedge. One other thing too and then we can move on, but they slot a lot of things into that hedge inflation piece of it. I hear it with gold, I hear it with other commodities, I hear it with cryptocurrency, I hear it with real estate, and just on all of those understand of, is it the right tool? Yep. All right, let's talk about some of the volatility and give some examples. And in this case, dry down. Meaning, where have we seen some of these big drops in gold historically? And I think you have some numbers on sort of an annual basis what that looks like on a one year number. Yeah, if you're at it as maybe a source of stability for your portfolio, you might be disappointed just to look at the historical returns. Because if you look over calendar year observations, gold has been negative, about 40% of those. That's twice as high as the S&P 500 historically. So, that's something to keep in mind that if that is your ultimate use case for it, it might not tick the box. Longer periods of time? Well, look, you can slice and dice the data anyway, but here's a couple things that jump out to me of you can get some longer negative runs for stocks. In fact, you can find some 10-year periods where the S&P 500 is negative, okay? You can find the same thing for gold. Once you go to the 15-year period, I don't have one in absolute terms, in nominal terms for stocks where there's a negative 15-year. I got one for gold and it's negative 3.6% annualized over a 15-year period. 20-year, I got nothing for stocks. I got negative 4.3% annualized, negative over 20 years for gold. That's a long, long run. And that's tough to sort of grow your wealth, meet your financial goals, and do all of those when you get a string of returns like that. Yep. And that's what we're talking about with these huge price swings up and down and they can be long periods of time when you see those negative returns. Let's go back to the outperformance conversation though, and I'm gonna read a couple numbers here and comparing return of gold Mm-hmm. spot prices relative to CPI. So, this goes back to 1970. Jake, I think you mentioned that one. That's when we first started getting a good spot price Mm-hmm. for gold here. So, from 1970 through June of 2025, over that time period, CPI was 3.9%. In gold, actually was up 8.5% annualized. Now, if you think about then in terms of growth of a dollar, so if something cost a dollar back in January of 1970, today that would cost $8.60, or I should say as of June, 2025, Mm-hmm, mm-hmm. that would cost $8.60. Now, gold though over that time period grew to $94. So, that's what we're talking about this outperformance. But then, the question is, I liked what you said a little bit earlier, which is, hey, depending what you're trying to accomplish, what's the best solution for that? So, let me throw another alternative out here. If you're thinking about outpacing inflation over time, and that's, I'll just use the S&P 500, look at stocks. So, over that entire time period, the annualized return of the S&P was 11% and that growth of wealth would've been $322. So, again, what's the right tool for the job? You often refer to it that way. And in this case, if you are looking to outperform inflation over time, stocks seem to be pretty effective at doing so. And I love the fact that you put it in the growth of wealth of dollars, 'cause again, you throw some of those returns out there and we talk about this, but you get, I think people get deceived by annualized returns versus a growth of wealth or actual dollar, right? You tell me maybe 11% versus 8.5%, whatever the gold S&P numbers are that we're talking about here. But then you tell me, you tell me 94 bucks versus I think over $300, right? That makes it real for people. Some of the things we hear about gold too though is it's a safe haven. Meaning somehow, it's just going to be good in the economic environment that I'm in. How do you think about that? There is this sort of classic trade of the flight to safety and I think when that takes place, when things get volatile, when people get concerned, people do, from time to time, move into gold. You see with individual investors, you see with institutions, you even can see it with central banks and maybe they're holding it because it's a flight to safety, maybe they're holding it for diversification. There's a lot of different reasons. Now, the one thing, let me make one point. Let me make one point here. Just one. Did you like that? How many? How many? Did you like that? Just one point. There's something about gold and humans. You cannot deny that. You go back thousands and thousands of years. People have wanted to own it. They've wanted to bury their loved ones with it. They like jewelry, they like shiny stuff. We're joking about this stuff. But humans and gold, there's some type of relation. You're drawn to it. And I don't think you can deny that. I think, before, we were talking about, well, the demand for gold goes up and down. I think likely the demand for gold is always going to be there. And by the way, that's okay, 'cause it can be sentimental. You may have a piece of jewelry. It may make you feel comfortable. There's an emotional side of it. I just think you have to push yourself to say, putting a big chunk of my money in it as an investment, is that what I wanna do? You mentioned the demand part. I think that's an interesting point. And maybe some of the really strong recent returns we've seen from gold were due to, maybe some additional demand that we haven't seen. I know when we were talking about this subject, you mentioned some central banks starting to diversify their reserves exposure and maybe adding in some gold. So, if that was pushing up prices, that could be one, potentially one reason why we've seen really strong performance. But that also starts to undermine the argument that this strong performance is going to continue. I look back just previous instances where you had a 12-month return of around 40% for gold. That's happened a number of times previously. And in the next 12 months, on average, gold's spot price return was actually negative. So, it's debatable whether this can continue going forward. The can continue thing is interesting too, 'cause now you're getting almost into a, like an expected return argument on why you would expect to get a return for something you invest in. And this is the classic one we go back to of like, companies, they produce stuff, they deliver services, right? You invest in them. There's an opportunity to grow over time. And with gold, there's not, right? It's not doing anything, it's just sitting there. It's really just a supply-demand argument, what someone's willing to pay. But there's really no expectation that it's gonna be anything but gold. And that's different than when you invest in companies. Yeah, it's speculation, right? Well, so a couple things jump out to me. One is going back to the idea of maybe central bankers are doing something a little bit different, so it's different this time. Maybe, maybe not. But then I go back to what you're talking about, which is they may be a totally valid personal reason people want to own gold or jewelry, or paintings. I got a gold ring on right here, an actual gold ring, but not these gold rings. But the other one then is thinking about gold as an investment. And I liked where you guys were just talking about that there's no real earning stream or dividends, or anything associated with. Gold, it's core to this. I call it a hope strategy. I hope the price goes up in the future and then that will be my return if that is what happens. Mm-hmm. Yeah. So, we go back to it then and just to say, hey, be clear on what you're trying to accomplish, and then find the best solution for that. So, if somebody says, I do wanna own gold and whatever reason that we just talked about here, how do you think about how much to own? How much exposure you have, I love that discussion because it's really tough to tease out too how much and understand how much you have, right? Is it in the companies that may be on the producing side of gold, in the mining business, right? Is it people that might... There's companies out there that using gold in terms of different technologies, right? And so, do you have exposure to that? This reminds me a little bit of the conversation that's taking place right now with AI. Everybody wants to get a piece of the AI action and yet we know, like truly understanding what's your exposure to AI is a really tough thing to calculate. So then, you say, do I need to have more of it? And I don't have an answer for you on gold. I really don't. Yeah, yeah. Well, it's such an individual decision. Yeah. Probably depending on your circumstances. Yeah. I guess there's one other thing related to gold and is just, there is some industrial use from gold. Not a lot, but I think you actually have done some work without getting your PhD, didn't you? Yeah, I was just thinking about that. In grad school, there was a lot of analysis on using gold, nano structures made out of gold as a drug delivery mechanism, 'cause you can, this is gonna sound real nerdy, but you can functionalize it with other molecules that can help treat various conditions. So, they've all kind of moved on to stuff like nano diamond at this point. But it was very well-accepted Oh. by the... Maybe this is the reason why people love gold so much, is it's relatively inert, widely accepted by the body. That's interesting. So, stuff doesn't really bond Yeah. to it that easily. You can get stuff to bond to it, but your body doesn't see it necessarily as a foreign body when it enters. Most things, your body will reject and yeah. Huh. That is interesting. That was really nerdy, but that's all right. That's why we have you on the show. Totally. It's not just my good looks. Well, I was thinking James Bond. Was it... Goldfinger. Goldfinger. Goldfinger And then, Goldmember in the Austin Powers one. That was, yeah, I got confused which one was which, Goldmember. Yeah, Goldmember was very obviously a spoof of Goldfinger. I mean, Olympic medals gold. Why is it the top medal? Again, there's something about it. I'm not fighting that. Also too, you talked about how much to go into it. And I think we've brought this up with some other things, whether it's cryptocurrencies or a different thing. I do think there's behavioral side of it that for whatever reason, if having some gold coins or having a little bit of exposure to it, that you feel better as an investor, okay, I'm not really gonna fight you on that. It's when you start saying it's 5%, it's 10%, it's 15% of my portfolio, that's when you gotta really answer some substantial questions before you make that move, in my opinion. The other thing, I'll just wrap up here with Golden. I think this was a journalist decades ago, came up with this analogy, but imagine there's some Martian out there in outer space looking down on Earth. And yet, this continent over here, everyone's down underground digging out this rocks and stuff. They come up with a shiny object, put it on a boat, ship it across to another continent, and they bury it down in a vault underground. Mm. Humans are strange, man. They probably scratched- You can't fight that one. This is kinda odd. Yeah. Again, know what you wanna accomplish, find the right solution. It gives you the best chance of accomplishing that goal. Now, a couple things coming up here. I wanna highlight, Jake, you are doing a webcast with Professor Cochrane. That is correct. November 11th. He's fantastic. Fantastic. If you haven't seen one from Professor Cochrane, Hoover Institute, we've done several over the years. Tune in for that one because a lot of things that are probably on your mind around what's going on in the economy, what's going on with growth. a lot of the things we talk about in this show, he's gonna let it rip. That's gonna be a good broadcast. And to register for that, in the show notes, there will be a link to register that, Mm-hmm. if you wanna watch it live. And then, of course, we'll be posting this two-dimensional YouTube channel Yep. as well. And then, the last thing we want to highlight is the next topic coming up is we are going to get with some professional financial advisors and they're going to walk through the different stages of life when it comes to money matters, the things you absolutely want to get right, and the things you absolutely want to avoid when it comes to the best chance of your money growing over time. So, thanks for joining, everybody. And be sure to tune into that November 11th webcast with Professor Cochrane and Jake. Have a fantastic rest of the day.