I have always been fascinated by what motivates people. What motivates Tiger Woods to pursue the goal of being the world’s greatest golfer? What’s the motivation driving Warren Buffett to continue purchasing companies instead of retiring in Tahiti? Or how about the motivation behind the trucks allegedly packed with euros parked in front of the Central Bank in Nicosia?

What is most puzzling is the motivation driving investors to buy or sell their equity positions when research shows that holding an investment over the long-term is more successful than timing the market.

As Business Insider puts it, there’s “proof that [investors] stink at investing.” Its headline is catchy, and the chart shows the evidence, as the average investor has significantly underperformed oil, stocks, gold and bonds in the past 20 years. While, on average, investors returned 2 percent, oil, stocks and gold rose about 8 percent.

After inflation, the average Joe or Jill actually lost money.

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You can easily attribute the meager returns to the emotional rollercoaster that drives buying and selling decisions, but to break the pattern of poor performance, it may be better to understand the motivation occurring on a subconscious level.

Anyone who sat in on a psychology course in university is likely familiar with Abraham Maslow’s classic hierarchy of needs driving human motivation. The most fundamental need is shown at the base of the pyramid. Our physiological needs for food, water, shelter and warmth are of the highest priority. Only after those needs are met, we try to meet our need for safety. After that, we can move to belonging, then our own self-esteem and, only until we feel confident that all those needs are met, can we achieve fulfillment or self-actualization.

I have to thank Christine Comaford, the dynamic presenter and global thought leader on corporate culture and performance optimization, for my proverbial light bulb moment when I connected Maslow’s observations from the 1940s to investors’ reactions to global events today.

I love learning about neuroscience and behavioral finance, so I looked forward to her presentation at a global leadership conference for CEOs that I attended in Turkey. But when I walked into the room, I was impressed with how many like-minded executives were interested in her research and insights.

These executives want to understand why customers buy certain products, why investors sell equities to buy bonds, and why their employees don’t seem to have a level of engagement they once had. Also, I believe leaders want to understand why people don’t feel secure or safe these days.

In a recent post in Forbes, Christine stresses how important it is for people to feel safe, to feel as if they belong and to feel as if they matter before they can get to what she calls the “smart state.” This state is when people have access to all parts of the brain and can respond from choice, rather than the “critter brain,” when one simply reacts in one of three ways: fight, flight or freeze.

The needs for people to feel safe, feel like they belong and feel like they matter “are programmed into their subconscious so powerfully that they literally crave them,” she says.

Her discussion particularly resonates with me today, as I believe governments’ actions around the developed world have perpetuated this lack of feeling safe, inhibiting investors from moving up Maslow’s Hierarchy of Needs and preventing their portfolios from achieving the outstanding returns offered by oil, gold and stocks over the past 20 years.

Now, with the most recent drama created by the triangular powers of the Cyprus parliament, the International Monetary Fund and the European Union, news of Cyprus’ bank seizures is sending shock waves rippling across the entire world. How can investors feel safe when governments have the audacity to confiscate their money?

Ayn Rand warned of such actions in her book, “Atlas Shrugged.” Here’s a snippet that is particularly appropriate today:

“Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values.”

And to her, gold was the objective value, “an equivalent of wealth produced,” as paper is only “a mortgage on wealth that does not exist.”

This is precisely why many gold investors were disappointed that the yellow metal didn’t perform well. While gold’s performance in the short term has been counterintuitive, I plan to stick to my own advice. I simply feel safer with a small weighting in gold as insurance.

Past performance does not guarantee future results.

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It may be time for certain gold stocks to shine, writes Bryan Borzykowski in a Canadian Business article this week. He highlights many of the issues that have come to the surface over the past few years, including the bad decisions made by management, capital cost increases, and the birth of the gold bullion exchange traded fund.

But there’s a sea change occurring, as the industry has had executive turnover and many write downs in an effort to right the wrongs. “If gold companies continue to reinvent themselves … investors could see even better returns on stock than on bullion,” he writes.

We’ve talked about these issues several times, and many were confirmed when Jorge Beristain from Deutsche Bank visited our offices lately. Beristain talked about multiple changes gold companies are expected to make this year to draw investors, including reporting true industry production costs, reining in excessive capital expenditures and ceasing the dilution of shareholders via equity issuance for deals.

I believe diluting shareholder capital has been a major cause of underperformance compared to bullion. Based on U.S. Global’s independent research of 80 gold companies, production among global gold producers over the past four years has increased 14 percent on a cumulative basis. However, on a per share basis, gold production actually decreased more than 9 percent.

Even though we have been in a rising gold market, the economic value per share has been diluted, as gold miners issued shares faster than they discovered the precious metal or faster than they increased their production. As a result, stocks have underperformed.

Not all gold miners have diluted shareholder value. That’s why “with the problems the industry is facing, you want to make sure you’re buying a good business,” writes Borzykowski. As I explained to him, gold companies paying or increasing their dividends is a significant factor that shows a prudent use of capital and fiscal discipline. 

Skin in the game is also important. I indicated that companies with executives who own shares have historically outperformed the companies where management did not own stock.

For our Gold and Precious Metals Fund (USERX) and the gold mining companies in the Global Resources Fund (PSPFX), we seek stocks with experienced management that have shown proven growth in production, reserves and cash flows on a per share basis. Over the long-term, these gold companies have historically outperformed.

Over the first weekend of March, Ralph Aldis, portfolio manager of the gold funds (USERX and UNWPX), will be speaking on these issues at the Prospectors and Developers Association of Canada (PDAC) conference in Toronto, helping investors understand the importance of active management in the gold mining industry.

Read Canadian Business article “Gold Stocks’ Time to Shine.”

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

When investing in gold, I often say diverse opinions promote critical thinking and a healthy market. I believe elevated groups of buyers and sellers create a competitive tug-of-war in the bid and ask price of the precious metal.

Last week, we saw the gold bears growling louder and gaining strength, as the world’s largest gold-backed ETF, the SPDR Gold Trust, experienced its largest one-day outflows since August 2011. The Fear Trade fled the sector following the Federal Reserve’s meeting that revealed a growing dissension among some of its members over the central bank’s bond-buying program.

Despite the discord, the Fed is continuing its course to purchase $85 billion of bonds every month and keep interest rates near zero. Ben Bernanke’s plan bloating the balance sheet to more than $3 trillion has been keeping the Fear Trade coming back for more metal.

For good reason, too, as the correlation between the Fed’s balance sheet and the price of gold has historically been very high, at 0.93, according to Macquarie Research. The firm found that for every $300 billion expansion in the balance sheet of the U.S. government, there was a $100 an ounce increase in the price of gold. When you factor in the Fed’s current bond purchases totaling $85 billion per month for the next nine months, the central bank will be adding $765 billion in new assets. “Using the previous ratio, this would compute to a $255 an ounce increase in the gold price,” says Macquarie. By this measure alone, gold would rise approximately 16 percent over the next several months.

On Bloomberg’s Taking Stock with Pimm Fox last Friday, I said that Bernanke will likely keep liquidity high for quite some time, in his effort to meet his goal of lowering the unemployment rate. If the Fed did take its foot off the bond-buying pedal sooner than planned, such a move is apt to shake the resolve of some gold buyers. It’s easy to be confident in gold in times of extreme fear; when the economy improves, one may no longer feel that gold stands on solid ground.

Take another period characterized by extreme volatility and fear, when there was conflict in the Middle East, oil-related inflation shocks, declining value in the U.S. dollar, rising U.S. unemployment and a strong resolve from the Fed to act aggressively. This was four decades ago, after President Richard Nixon removed the gold standard, and the yellow metal climbed to a peak of $850 by January 1980.

Back then, India and China had little financial footing in global markets; gold demand from these areas of the world was about 15 percent of total demand.

Since then, we’ve seen a rapid increase in GDP and incomes, resulting in a dramatic rise in gold demand. According to the World Gold Council (WGC), there’s now an “increasing relevance of emerging markets in the gold market, particularly over the past 12 years.” In 2011, you can see that emerging markets accounted for 74 percent of total bar and coin, jewelry and ETFs gold demand. India and China alone make up 50 percent, and together with Turkey, Vietnam, and Southeast Asia, these countries’ residents clearly “have a cultural affinity to gold,” says the WGC.

To help investors analyze whether gold continues to be a wise investment, I like to refer to the book The Wisdom of Crowds by James Surowiecki. There are four factors to consider whether a crowd is suffering from groupthink or is making wise decisions:

1. Is there a diversity of opinion?
2. Are investors independently acting on their best interests?
3. Is there a decentralization of gold believers?
4. Is there aggregation?

Read Evaluating the Wisdom of Buying Gold to see a summary of each factor for your reference. I believe you’ll find these factors continue to be valid for gold.

Ultimately, the key to gold is moderation. As I said in my book, The Goldwatcher, and often reiterate to investors when I speak at conferences, gold is a volatile asset class and the daily price can be more dramatic than blue-chip stocks. We have always advocated that investors hold a modest 5 to 10 percent weighting in gold and gold stocks. In other words, we feel strongly that an investor should not try to get rich from the metal.

Marc Faber expressed a similar idea in this month’s Gloom Boom and Doom Market Commentary. Instead of selling his gold when the price is falling and buying it back at a lower price, he says he doesn’t stray from his asset allocation approach. He holds a 25 percent allocation to gold, which is much higher than we recommend, and believes that if the price of gold declined, it is likely that his financial assets would increase.

In his closing, Faber reminds readers of the English Proverb: “When we have gold, we are in fear; When we have none, we are in danger.” If the proverb were written today, it might be revised to say, “When we have gold, we are in love.”

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following security mentioned was held by one or more of U.S. Global Investors Funds as of 12/31/12: SPDR Gold Trust ETF.