Irrational Allocation and Gold

Americans own far less gold than they should. Less than .5% of American consumer portfolios are gold. Although gold provides countercyclical safety to the market and has grown consistently in relation to the dollar and performed not dramatically differently from the S&P over the last 25 years, Americans still only allocate a tiny portion of their assets into gold. This is an anomaly in human history as gold has long been one of the most commonly held stores of value, but it is also irrational, given the standard rules of portfolio theory. There are several factors that push people away from gold despite its obvious advantages in any portfolio. There is a surprising social stigma against owning gold and assumptions are made about people for choosing to purchase it. Government tax rates on gold are restrictive in comparison to other assets. The public is also extremely uneducated on the unique role gold can play in any portfolio.

The choice to purchase gold can get someone labeled a gold bug. People often think that holding a decent amount of your portfolio in gold means that you are a conspirator or think that the economy is going to end. Gold owners are put in the same category as preppers and flat earthers. Non-gold owners assume that buying gold signals a lack of economic understanding. They think that the continual growth of equities will not stop until the end of time and that owning gold is an expensive price to pay for holding to fringe ideologies. Gold would provide its highest return in a time of market collapse, so gold owners are unfairly viewed as rooting on the downfall of the market. Questions about storing gold will inevitably follow when gold ownership is mentioned. Everyone has a story of a crazy uncle who lost his gold or had it stolen by burglars. Owning gold has a potential to make someone criticized as a conspiracy theorist at worst and a thinker at best. Dropping money into the S&P is one of many ways to hold money, but it is by no means the only way, and owning gold must be more socially accepted before regular people will start buying it at a rational level.

Gold is classified as a collectible, and thus taxed at an extremely high rate. It is taxed beyond the rate of normal investments and is thus often seen as only viable as a long-term investment. While gold is an effective long-term investment, the capability to sell any investment quickly gives owners flexibility. The fact that gold owners are forced to hold over a longer period of time than they would be with an equivalent asset makes them more likely to choose something other than physical gold. It is easy to speculate as to why gold is taxed at such an unfavorable rate. It provides a compelling alternative to the dollar, and if not taxed so aggressively, could lead to a reduction in the value of the dollar. No one owns gold as a collectible and categorizing it as one is disrespectful to gold owners. Sound money will always be a competitor to unsound money, and only a high tax rate can shift people away from choosing the obviously better option. The state’s initiative to reduce public holding of gold has worked, and the public consciousness must be reset towards a more optimal allocation of resources.

Most financial advisors do not recommend gold as a significant part of a portfolio and most consumers are unaware of its unique benefits. Retail investors of high risk tolerances will put their money into crypto and speculative stocks. More conservative investors will choose some combination of the S&P and bonds. The heavy correlation of most stocks and commonly purchased assets only becomes clear in times of great crisis, the times when people should have already bought into gold. Having a safe haven in your portfolio does not become necessary until it is too late. Index funds in different industries are often not different enough to help weather a macro storm like 2008. People simply do not know the radical counter market price movement that gold has in the most drastic scenarios. The institutions that educate people have interests that prevent them from advocating for the purchase of gold. Financial advisors are compensated through the management of equity and bond portfolios, not through one-time purchases of physical gold. Brokerages have no product to sell once someone buys a bar. The incentive structure of the entire financial education system points away from gold, and the average investor never questions why.