Gold: the Slowest Risk Money Can Buy

Posted on November 29, 2021

By Paul Vanguard, for BullionMax.com

Gold is pretty much synonymous with risk-free investment. The kind of track record it boasts has warranted that no entry point is wrong. And whatever the entry point, it still boasts plenty of upside on every corner. But to truly understand how difficult this is to achieve for an asset, we should examine Nick Maggiulli's recent analysis of two very different types of investing risks: Fast risks, and slow risks.

Maggiulli defines a fast risk action as one that can have an immediate and devastating effect. In other words:

Fast risk is the stuff that makes headlines. It’s the things that we are warned about everyday:

Don’t drive without a seatbelt.
Don’t cheat on your spouse.
Don’t use too much leverage.


Think about the consequences…

· You're severely injured

· You get a divorce, break up your family and lose 50% of your assets

· You go broke

In contrast, a slow risk is unlikely to have such an immediate effect. Instead, slow risks end up accumulating in the long term, and can result in equally catastrophic outcomes. Worse, you don't see them coming.

There's a simple, rather intuitive (yet distasteful) analogy Maggiulli uses to illustrate the differences between fast and slow risk:

Heroin vs. cigarettes. Heroin is fast risk. Cigarettes are slow risk. Heroin tends to kill people quickly (especially in the event of an overdose), while cigarettes tend to kill people slowly...on average, it takes roughly 25 years of smoking to develop fatal lung cancer. It’s no single cigarette that causes the cancer. It’s all of them that do.

That's about as clear as it gets!

Now, here's why this is relevant…

Financial assets have risks

Virtually every asset has both types of risks, with expected candidates on extreme opposites.

Stocks are a prime example of fast risk. The S&P 500 could drop by 20% tomorrow, to say nothing of newer, untested equities. Yet Maggiulli argues the index is likely to be considerably higher 30 years from now.

On the other hand, we have the U.S. dollar. Investors think of cash as "safe" because of its negligible volatility compared to assets like equities or even bonds. But cash drops almost microscopically in value daily thanks to the corrosive force we call inflation. Consider holding all your savings in cash over a 30-year period, say, from the 1950s to the 1980s. You'd learn what loss of purchasing power means the hard way.

How does gold measure up?

Now, Maggiulli is a financial advisor and such folks simply don't recommend physical precious metals. There are a number of reasons why (we'll discuss this another day). Essentially, he completely neglects the role of gold bullion and its place on this fast/slow risk scale.

The notion that the S&P 500 is a good place to park money in the long-term while expecting some returns is easily dismissed. Comparing the performance of $100,000, adjusted for inflation, invested in the S&P 500 in 2000 versus a 6% annual compound rate of return? Well, we'd call that suboptimal. The stock buyer who dipped in 20 years ago is still far from that goal because of two bear markets. The investor that dipped in in 2007 reached the goal recently, but is likely to be left in the same position on a 20-year or 30-year chart due to future bear markets (which will happen, probably sooner than most people think).

So even in markets where fast risk is the norm, compensation for the risk you're taking, especially in times of high valuations, is thin on the ground.

In markets where slow risk is the norm, such as fiat currencies, fast risk is likewise never absent. This week's example: the Turkish lira, down 42% this year and 15% in a single day.

What this really boils down to is counterparty risk. Stocks, bonds and currencies are all issued by a third party that sets and controls their value in various ways. All paper assets are promises to pay something, at some unspecified future point. Their value waxes and wanes with the credibility of the promiser.

Even bitcoin, which has been lauded in recent months as a decentralized inflation hedge, still requires quite a few parties to deliver on its promises. If nothing else, a cryptocurrency transaction requires a working internet link (and by extension electricity, working data streams, functioning exchanges and an entire global infrastructure).

Physical gold is notably free from these issues and these needs. Market manipulation aside, there's almost no way to drive the price of gold downwards. No policies, malpractices or black swan events will threaten to undermine the asset itself. You can't print more of it. Gold never misses analysts' profit estimates, or suffers from accounting scandals. As far as we can tell, gold's value hasn't "collapsed" during recorded history.

That's why physical gold may be one of the only investments that can truly be considered risk-free. Gold can underperform compared to risk-on assets like stocks (but never more so than cash). Over longer stretches, gold can and will outperform stocks by a significant margin.

In a sense, physical gold simply doesn't belong on Maggiulli's fast/slow risk scale. It's either such an incredibly slow risk that it simply isn't comparable to other assets, or it simply is a financial asset like no other.


Paul Vanguard is a lifelong precious metals enthusiast and a proud member of the BullionMax team.