Gold and Silver Are Not Investments But It’s Not the Point

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In a world of fiat currency and with the huge push towards socialism we see today in the US, I have begun longing for that warm, snugly feeling of having an asset that won’t inflate away like your savings account or be taken away because someone who has achieved less in their life deserves what I worked my butt off for. Gold is always worth what gold has always been worth. It doesn’t really change in value, but dollars (and other currency) do. It is a weird thought to grasp since we always price everything at its cost in dollars. The explanation that finally let me understand it was this: 200 years ago, an ounce of gold could buy you a nice suit to wear. Today, an ounce of gold can buy you a nice suit to wear. The value of gold has remained constant, but the value of the dollar has gone down over time. Gold is still worth the same “real” value as it always was, but because of politics, money printing, and other interference, the dollar is not worth what it used to be. Go here for some good charts on the purchasing power of gold over time. Gold’s purchasing power began gyrating heavily after the gold standard was dismantled. Is this gold’s value changing? Or is it distortions in the market because there is so much currency devaluation (inflation) happening that price discovery is not keeping up with the huge swings in the currency? It could be that gold is just irrelevant in the world now, but this would be the first time ever, so I am skeptical. If a currency has major issues, Venezuela anyone? the gold you have is a perfect insurance policy because it will exchange into currency in any other country or would easily exchange into whatever the new baseline at its equivalent value after the turmoil is over. Gold is a great insurance plan any financial system.

One more thought to clear up for the world is that gold is not an investment. Gold is money. Dollars are currency. There is a difference. Buying gold is turning one type of purchasing power into another. The great thing about gold is that if you are worried about the purchasing power of the dollar (or whatever currency is where you live), you can turn your dollars into gold that has traditionally withstood changes over time. This means that gold is a store of value, not an investment. No one says they “invested in a savings account” or “invested by putting cash under the mattress.” Similarly, no one says they “invested in auto insurance.” With gold you have a good chance to get the equivalent of whatever you put in if you want to get rid of your insurance policy. Gold hedges against inflation, but is also insurance against problems with whatever currency you use.

Now that we know all about why one might want to own gold or silver, there are some primary ways to “own gold” that we should talk briefly about to be clear:

  • Gold ETFs: These are funds that track the value of gold and almost always operate with fractional reserves. Some of them allocate gold in such a way that more than one person might own the same gold. So you buy a piece of paper that says someone else owns gold that may not be possible to validate, is fractional, cannot be exchanged for gold, and can in cases be owned by more than one person. Where have I seen this before? Oh yeah, the mortgage crisis in 2008, only with MBS instead of gold
  • Gold Mining Stocks: These are standard equities and can be extremely volatile and risky if you do not know what you are doing
  • Purchasing Gold Coins or Bullion: There are many kinds of coins and bullion, but I am only referencing those that are high enough grade that the IRS will not classify them as “collectibles”. I will avoid listing out what that is but if you want to know more it is defined in IRC 408(m)

ETFs and mining stocks are not what I am after with precious metals. Another catch is that if you store the physical metal somewhere (like a safe deposit box at the bank) it can still be confiscated, or in the event of a problem where you want your gold you may not be allowed access. In this way, you are still open to counterparty risk. If I am already driven to the gold, I want to know that it is fully secure, or at least that the problem of its security falls on my shoulders rather than someone else. There are many reasons to own gold, and many to not own it. Really, it’s part of your own personal investment philosophy and it may not align with your goals or assessment of the risks you are hedging against. That is an analysis you need to make on your own.

Many people do not have large stores of dollars laying around waiting to be put to work. Well, maybe they do. A solo 401k may have funds if you are moving out of the stock market because you think it is no longer a safe place to be. My next post will go into that.