Gold and The Retirement Crisis

The retirement crisis is upon us. The numbers present a startling picture. A new analysis from The Wall Street Journal shows that “In total, more than 40% of households headed by people aged 55 through 70 lack sufficient resources to maintain their living standard in retirement.”

There are several reasons why this problem has developed. First, many investors saw half their portfolio value vanish during the global economic crisis of 2007/2008. Second, amid decades of wage stagnation, many simply never had the means to save. Third, the disappearance of pensions has put a greater burden on the individual to save more for retirement. Now, approximately 15 million households face an uncertain future. Some have resigned themselves to a sobering truth: they may need to work through their retirement years. One can’t help but ask if things could have been different.

In recent years scientists have taken steps to understand why humans struggle with money. They work within a branch of research called behavioral economics. This area of study suggests that economics don’t only follow rigid rules of supply and demand. Rather, these researchers argue that irrationality drives many outcomes because economics, after all, is the result of human behavior and humans are inherently irrational beings.

Of course, in some cases, like those cited above, the retirement problem is external (wage stagnation, economic policy, etc.) However, many problems are internal stemming from our psyche. That is, our biases and leanings lead us astray. For example, herd mentality is a powerful force which leads most of us to follow the crowd even when the crowd is headed off a cliff. This was a painful lesson for those swept up in the fervor of the dot com boom. Scientist have also learned that we attribute different value and different meaning to money based on its source. Perhaps this is why we often spend bonuses and unexpected windfalls with disregard for the future.

How does a gold investment play into the world of behavioral economics? The answer might be deceptively simple. Conventional investments like stocks and bonds are easy to trade online with the click of a button. This convenience carries a cost. It’s too easy for us to act on impulse. Our emotions have only a short way to travel from our head to our keyboard. Gold, however, is different.

With a physical holding like coins and bullion, investors have a more permanent relationship with the asset. They can hold the weight of their savings and feel its gravity. Moreover, liquidating physical gold presents more steps then those needed to liquidate a stock or bond. Simply put, it’s easier to be a disciplined long-term investor when you’re holding physical gold.

Unfortunately, this benefit is lost with modern alternatives like gold ETFs. These investments, like stocks, don’t offer the behavioral safeguards that come with tangible assets. Additionally, they don’t offer any claim to physical gold and cannot be redeemed for a piece of the precious metal.

As a nationwide retirement disaster looms large, one must ask what needs to change today for those that still have time to make a change and improve their future. A portfolio with exposure to gold is part of the solution. Gold keeps us anchored and has a low correlation to stocks and bonds. In uncertain times investors need more options.