Nearly two hundred years ago, Edgar Allan Poe published a short story by this name in a Philadelphia newspaper. In it, the protagonist discovers coded directions to a secret treasure buried by Captain Kidd—including gold coins. In more recent history, the term has been applied to people who seem to believe it’s always the right time to buy gold. The Dollar Newspaper has ceased publication, but CNBC can be depended upon to spotlight these folks whenever gold prices rise. These interviews make people wonder whether they should have bought gold back then—or, perhaps, should do so now.
When DCM invests on behalf of our clients, we look for companies we believe will increase in value due to their fundamentals—good management, proprietary products, and capital strength. Our Cornerstone strategy narrows the field further by only including stocks that pay increasing dividends as a matter of corporate policy. There are around 4500 individual stocks available for purchase through U.S. exchanges. We pick approximately 30 for Cornerstone and fewer than 90 across all our strategies. Our approach to bond investing is very similar—we put quality first. Our traders buy individual bonds, so our clients don’t have to pay the additional expenses of mutual funds. The only bond funds we own are placeholders, used while we wait for appropriate individual bonds to buy.
Since gold pays no dividends or interest, it’s usually described as a source of appreciation. At least, that’s why those gold “experts” periodically appear on TV. To quote legendary investor Warren Buffett, “The idea of digging something up out of the ground, in South Africa or someplace and then transporting it to the United States and putting it into the ground, in the Federal Reserve of New York, does not strike me as a terrific asset.” The other Warren does have a way with words, and he raises an important issue—If you purchase gold, where will you keep it? You will certainly have paid a dealer markup and also receive somewhat less than bullion value when you sell. In the meantime, you will have to keep it safe.
Here's a chart showing how the price of gold compares to the S&P 500, which represents the 500 largest companies in the U.S., with both contrasted against inflation.
Source: Bloomberg, Jan 2000 – Mar 2025
I notice a couple of things in this chart from 2000 to 2025. First, while gold hasn’t returned as much as the stock index, it has generally gone up, with both easily outpacing inflation. Also, the two lines track somewhat closely. An ideal alternative investment would do the opposite, providing some upside when the stock market drops. You can see that in 2020 and over the past few months, people seem to have been selling stocks and buying gold. However, in 2022-2023, investors were selling both. What do you suppose will likely happen as consumer confidence returns and people begin looking for growth and dividends, again? History suggests that gold will once again fall behind. Remember, most of the talking heads on TV have something to gain when gold is traded. Contrast that with the approach taken by DCM—we are held to a fiduciary standard to align ourselves with our clients’ best interests.
One other reason for owning gold is having the metal available to make purchases. I have some clients who truly fear a societal breakdown and want to have something with which to barter. In that case, I think gold is among the worst choices. If you trim off a tiny shaving to trade for a loaf of bread, won’t the baker know exactly where that flake came from and, perhaps, follow you home and relieve you of the remainder of the bar or coin? When a client envisions this kind of future, I suggest going to a coin dealer, actually, multiple coin dealers, and buying old silver coins. For example, pre-1965 dimes are 90% silver, and even part of one might easily feed a family in a post-apocalyptic situation while not leaving the seller wondering about the remainder of a gold bar.
I certainly don’t have all the answers, especially related to decoding hidden messages that might be found in historical literature or current market movements. What I do know is that DCM strives to identify and manage risks for our clients, including those related to investing strategies. We’re always happy to discuss gold—or anything—with our clients and friends.
Warren Ward, CFP®
Senior Investment Advisor
To learn more about Warren, you can read a brief biography here.
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