Stability Test: Physical Gold vs. Tech Stocks Over Long Market Cycles

MIKE BARNES 0:10

Welcome to America’s Gold Authority Podcast. My name is Mike Barnes. You know, some people call tech stocks millionaire maker stocks, but Cinderella doesn’t always get the glass slipper. About 70% of tech stocks underperform after their IPO. You cannot say that about gold. That’s our topic today. As I bring in a couple of experts, Philip Diehl and Brad Chastain join me. Philip, I want to start with you as the 35th director of the U.S. Mint and president of U.S. Money Reserve. You know, I’ve been burned by a couple of tech stocks in the past, so maybe I’m shaded because of that. But am I wrong in saying that tech stocks aren’t as rosy as a whole as they’re meant to be?

PHILIP N. DIEHL 0:48

Well, it depends on the timing. I mean, if you have the timing correct, and I don’t mean, you know, by days or months, but uh because that’s always a losing proposition trying to time your stock purchases and sales. But if you’re in the right period of time, tech stocks can be extraordinarily profitable. Uh but also they can be you losers, and they can be losers over an extended period of time, just as they can be uh spectacular winners over a long period of time. So that’s one of the reasons why it’s so important that people diversify in their portfolios so that uh you have some insurance in your portfolio against those downtimes.

MIKE BARNES 1:31

Brad, as the uh role you’re in at U.S. Money Reserve, you know so well that tech stocks are so popular because whether it’s the web or streaming videos or now AI, people love it. There’s something new coming along that people are attracted to.

BRAD CHASTAIN 1:45

Yeah, absolutely. Um the problem from the investment side, a lot of times is people, to Philip’s point, um, you know, they the timing isn’t exactly right. A lot of times people see what has happened in the past and assume it’s going to continue when a lot of times the price is already baked in. So when people already kind of uh when people see something that has continually gone up, they end up oftentimes buying high. And then when there’s corrections, they end up selling low, doing the opposite of what uh what they intend to. The those that have made the most are the ones that are in the earliest before people even identify the trends. So to Philip’s point, that’s why diversification is so key, because it is so hard to pick the winners and the losers. And we increasingly see this divergence across the stock market, but especially in tech, between those that are pulling the overall indexes up because a few are doing really well, and then a lot more are lagging behind. And so uh diversification really is critical.

MIKE BARNES 2:46

Philip, I know you’ve done a lot of research and what’s happened with tech stocks in general and also with gold since 2000, and it’s amazing what the difference is. Talk about that and what you’ve seen.

PHILIP N. DIEHL 2:59

Yeah, this this is one of the untold stories, although we’ve been telling the story recently. But uh, the performance of gold against the SP 500 and even against tech stocks generally has been extraordinary over the last 25 years. There’s so much talk all the time uh in the media uh about uh stock prices and how they’ve, especially in recent years, the technology stocks have been setting record after record. And the conventional wisdom is that gold performs very strong and in uh hard times, but you give up something uh with gold when uh during good times, that you want to be heavier in stocks during those good times. And that’s simply not the case anymore. It used to be the conventional wisdom a couple decades ago and has been the conventional wisdom, but um it’s not true anymore.

MIKE BARNES 3:59

Brad, are the numbers skewed at all because of the recession we had in 2008?

BRAD CHASTAIN 4:04

Yeah, there’s a lot of things that changed after 2008. I mean, since 2008, we’ve been in the longest bull market really in history with you know minor short-term corrections during times like COVID, but overall it’s been um just relentless. And there are it’s definitely, I think, skewed in in some ways. What we saw after after um after 2008 was a large financialization that was kind of on the back end spurred by quantitative easing that puts money into the financial system, not so much the the real economy. And that really helped push asset prices up to a large degree. And one of the things that’s been happening for the last really 15 years now, since that, is uh especially within the tech sector specifically and the Mag 7, are corporate buybacks. You’ve seen massive amounts of buying of companies of their own stock, which then further pushes their price up because there’s still there’s fewer shares out there outstanding for the for the for the public to be buying with the same amount of money that flows in for 401ks and things. And that’s something that we’re even seeing to tailor back as we see more capital expenditure spending, especially around AI, those that are making up the largest percentage of the indexes are no longer really buying back their stock, which is it’s but really, I mean, the numbers have been pretty big. It’s been about 2% of the overall stock market has been bought back in buybacks every year for the last 15 years. And that kind of provides a bit of a tailwind there. But as they’ve shifted more into this massive AI spending that we’ve talked about, their free cash flow has fallen, they don’t have as much money to buy back, they’re putting it more into infrastructure. Uh that tailwind is going away. And then you pair that with IPOs coming back. We used to have a lot more. You mentioned IPOs a little while ago, a lot more publicly traded companies. You know, before 2000 and some reforms that took place with the Sarbanes Oxley, there were there were about 6,500 publicly traded companies. That number fell by about 40%. It’s back up a bit now to about 4,700 companies at this point in time, but far fewer publicly traded companies. And now they’re starting to reduce regulations to make it where more IPOs go in. So that’s going to be money that’s spread across a wider variety of wider companies. So the overall market cap for the uh stock market may continue to rise even if individual companies don’t do as well being spread more uh across more companies. Things like um OpenAI, Anthropic, SpaceX are big ones expected to go IPO this year, and these are already huge, huge valuations. Uh that’s their at their current expected valuations, it’s about a five or six percent of the total market cap of the company, of the of the stock market coming online potentially this year. And so that’s very likely to draw money out of other tech stocks that go into purchasing those IPOs at already very high valuations. Um increasingly it’s looking like a lot of the private investment that has taken place since really since 2000 that has pushed these private companies to really large valuations is going to be increasingly able to use the stock market itself and index funds as kind of an exit strategy for those early investors, probably leading to more underperformance, as you alluded to at the beginning, with IPOs and people thinking they’re getting in early when they’re really not so early.

MIKE BARNES 7:39

Brad, I want to follow that up with you about the IPOs that are coming soon to a theater near you, so to speak. Is will that affect indices as we see them in the near future?

BRAD CHASTAIN 7:50

It can, because there and there’s a new regulation that they’re talking about passing. They think they vote on it later this month, and if it’s it’s if it’s passed, then it would be I think June 8th, in fact, is as early as it would go into effect that reduces the waiting period and profitability requirements for companies to be included in the SP. So a company like Anthropic or OpenIAI or SpaceX that doesn’t have this long proven track record that is normally required of companies to be listed on an exchange can get into the exchange a lot faster with much lower requirements uh to be listed there. And then the index funds by default have to buy them if they’re in the index. So if you’ve got a 401k or an IRA that’s invested in index fund, whether you want to or not, you’re going to be buying some of these companies just because the index absolutely has to. So it’s definitely going to, if especially if that law ends up or that regulation ends up changing, uh passing, then it’s definitely going to be a change to market structure. So you pair that less buybacks, more IPOs coming online. That’s kind of a reversal of what we’ve seen in the last 10 years, where it’s become more and more concentrated. So it’ll be interesting to see that play out.

MIKE BARNES 9:06

Phillip index funds are so, so popular, but it’s amazing when you compare index funds to gold.

PHILIP N. DIEHL 9:14

Yeah, that’s right. Um, and I think this is something that uh we ought to focus on a little bit. And I want to turn our attention to uh one of two graphs that we’re going to be talking about here for just a few minutes. And we’re looking at the value of a $10,000 investment that you would have made on January 1, 2000. And what we have first is, of course, the dot com crash that came in March of 2000. And we see a very quick impact of the dot-com crash and the recession that followed. What comes next then, and this is often overlooked in talking about what has happened in prices, is of course uh 9-11. And we see, beginning in Jing in 2000, a three-year decline in the S P 500 index and also the technology sector. Of course, as you’d expect with technology after a dot-com crash, it takes the bigger hit. And what we see is that gold holds its value during the first part of that period and then begins to rise and establish a big separation between gold value and stock values. And so through 2011, of course, the next big event that occurs is the uh global financial crisis. And again, we see the SP 500 take a hit, a significant hit. Technology prices continue to be performing below that of the SP 500. They also take a hit, whereas gold holds its value in the beginning of that period and then begins to accelerate even faster than it had before.

MIKE BARNES 11:06

Brad, when you look at a graph like that, is it kind of good news that, well, at least I’m not upside down with my money, but am I being too spoiled and wanting more and more and more, and I want the best graph possible for me?

BRAD CHASTAIN 11:18

Yeah, I think people have definitely gotten a bit a bit spoiled with the sort of um the lack of overall volatility in the stock market for the last uh really 15 years. Um that’s something that is certainly an anomaly uh in in history, and it’s something that people expect is going to continue. And unfortunately, uh it’s unl nothing is going to continue forever. So um, yeah, you definitely expect to see some reversion to a mean there. But to Phillip’s point, it doesn’t mean we shouldn’t hold tech stocks or or other stocks. Uh in fact, we think we should be broadly diversified across investments. We never know how things are going to perform. The issue is people look at a graph like that. Uh if they’re just looking at tech stocks and not even comparing gold against it, they’ll just see the other one. They’ll think that that’s going to continue to go forever. And then they get too much concentration, they don’t realize how much risk that they’re actually carrying. And that’s why it’s so important to be diversified because eventually that will um head in a different direction. And you want to make sure you have a broad base, especially things like hard assets of gold, as we’re seeing the world changes we’ve talked about so much, to help protect that portfolio and weather that uh inevitable volatility.

MIKE BARNES 12:36

Philip Brad talks about diversification, and your next graph shows that being diversified with gold definitely pays dividends.

PHILIP N. DIEHL 12:44

It does. And this uh this graph steps back a little bit and looks at the entire period from January 1, 2002, uh just earlier this week. And what it shows is uh there is a sharp drop-off in gold prices in 2011. There is a peak that has hit there. That rapid uh rate of rise we see before 2011 really can’t be sustained, and so we see a couple-year drop-off there. Uh but uh we see that gold has retained a value well above the $10,000 that uh that we had originally uh uh invested. And it uh remains at about $2,500. That $10,000 investment would still be worth about $2,500 even at the end of that drop. Whereas if you look at technology stock and the S P 500, they don’t recover to $10,000 until you get to about 2012 or 2013. After that, what we see is a general rise in assets at an accelerating rate until we hit the wall of the pandemic. At the end of this period of time, you can see how much more gold is worth after 10 years. It’s about $163,000. If you’d invested $10,000 in January 1, 2000, it’d be worth $163,000 today in nominal dollars. And you’d see that uh technology sector as well as the S P 500 would be lagging significantly below uh and behind gold.

MIKE BARNES 14:37

That’s a pretty nice return. Brad, when I look at that graph, and if I’m gonna be impulsive, I’m like, I want to sell everything and buy gold. But what do I need to talk to my financial planner about? Because I need to stay diversified, correct?

BRAD CHASTAIN 14:50

We do want to make sure we stay diversified, yeah. Uh having all of our eggs in any one basket is is something that we always want to be careful about. It goes back to that timing thing. You never know exactly what uh will what will happen over the time frame that you’re looking at. But yes, if if you’re just chasing returns, that’s the wrong strategy in general. Uh what we want to do is make sure that our financial picture is designed and our investment picture is designed to give us our the best chance of reaching our goals, not take the you know, the maximum amount of risk in stock market or the maximum amount of protection and what people typically think of in just a savings count or sticking mattress uh money under a mattress. There’s a balance of risk-reward there that is really important to match up along with your long-term objectives. And um, when you talk about investing for the long term, living in retirement, inflation is something that’s really important to consider. Things are gonna cost a lot more 20 years after we’ve retired than the day we retire. As we draw money out, if we take a significant hit and we’re taking money out at the same time, it takes a lot longer to recover than somebody who’s still saving and investing or somebody who’s not even touching their accounts. So it becomes even more critical to focus more on protecting, but it’s still at the same time being able to keep pace with our increased cost of living as well. So a diversified portfolio is really, really important, but gold becomes a uh a much more important part of that as we get into that stage and we focus more on that combination of both protection and maintaining purchasing power to make sure that our our needs are met.

PHILIP N. DIEHL 16:26

In a fair comparison like this, you have to include dividends in the comparison, and especially the reinvestment of dividends, so that you’re getting that multiple return uh from uh the dividends. And yes, dividends and the reinvestment of dividends is included in this graph. So this is a fair comparison between gold and stocks. The other thing I want to talk about is uh what do we mean by diversification in terms of gold? How much gold are we talking about ought to be in a portfolio? On average, the American portfolio has around 3.8% of its holdings in gold. 3.8%. Uh so it’s a very small amount on average. Um the recommendations today have changed. Since last October, there are a growing number of advisors who are upping their um their recommendations for what percentage of a portfolio ought to be held in gold. There are major uh advisory firms like uh uh Yardeni, JP Morgan, uh Investing Haven that are estimating uh or targeting prices of $8,000 to $10,000 an ounce within the next three and a half to four years. Uh, you know, these are not companies that sell gold who are estimating this. These are name brand advisors who are recognized around the world for their expertise. And returns like that are going to be very hard for stocks and bonds to keep up with in the future. So I I really impress on uh viewers to uh take a hard look at gold and insist on your financial advisors doing that with you.

MIKE BARNES 18:31

And Brad, from what Phillip said there, I think that a lot of people are going to see these AI stocks coming soon with the IPOs and go, ooh, I could be a millionaire because of this, but there’s a lot of risk despite the reward that could come.

BRAD CHASTAIN 18:45

Yeah, absolutely. Like you, like you said, a lot more often than not, IPOs end up dropping after they become IPOs. If you think about the nature of what is happening there, these are private investors, venture capitalists that are ultimately cashing out their investment to the to the world. They’re putting it out on the market, saying, okay, we we we invested, we grew, now we think it’s worth this much. They can have investment bankers come alongside and help them evaluate it and get the best price they can. It’s ultimately their exit strategy to the rest of the world. If they were in it to hold it forever, they wouldn’t necessarily uh put it out in the public. And there are some IPOs that go public and they’re able to use those funds and uh and grow and continue to do well, but very, very frequently it is the cash-out structure for um for the private investors. And so the public investors, the retail investors end up get getting caught holding the bag.

MIKE BARNES 19:38

Well, I think that you’ve both shown that diversification is the key, especially with gold and the future that that precious metal has. Thank you so much, Brad Chastain and Philip Diehl, for joining me today. Thank you, Mike. Thanks, Mike. That is all the time we have for today’s episode. On behalf of all of us here in the U.S. Money Reserve Studios, thank you for tuning in. If you have any questions or you want to learn more about today’s episode, you can call the number in our episode description and speak with one of our friendly account executives. They will be more than happy to answer any questions you may have about precious metals and the strategic role they can play in achieving a secure and comfortable financial future. I’m Mike Barnes. We’ll see you next time on America’s Gold Authority Podcast.