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February 09, 2010

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I agree with your friend. Silver is priced somewhat better than gold right now.

Keep in mind the goal of gold or silver is not to get rich, it's to hedge inflation, deflation and unstable government. As a store of wealth. While not perfect investments it should be part of most people's portfolio.

From my research and personal investing, I posted a blog that goes into details about investing in gold:

http://investorjunkie.com/should-i-buy-gold

I've bought my physical stuff from APMEX. (http://www.apmex.com/) I get nothing for the referral and they have decent pricing.

Right now personally I believe gold is priced slightly high, but long term (10 years) will continue it's bull run. The economic policies (for most G7 countries) are pretty much stating this run will continue.

Trend the past 10 years of the stock market against say gold. It's very eye opening as how much different commodities follow stocks.

I'm not a gold bug. At least from my research cannot find a valid reason NOT to own some in a portfolio. (1% - 10%)

I'm don't have any physical assets either. Now I don't have as much money as you, so I'm what I'm about to say is small scale, but... I've been thinking the same thing. Gold in particular, here's why. India is becoming more wealthy... India people love gold (I've talked to a few Indian friends about this), as their country become more wealthy, will the purchase of gold from Indians will continue to rise???

That said, I'm not buying any gold because the prices give me a nose bleed... I've been thinking about currencies too (a very small speculative position of course, in a few countries... including Mexico). Mexico in particular is a long shot (although the 3rd rich man in the world is a Mexican)... the Chinese Yuan might be the better purchase. It's artificially low, and if the Chinese let it run a bit, it could be lifted quite a bit.

These are risky and I'm not a financial advisor, but they do play in my head a bit. :)

We'll be interested to hear if you decided to pursue any physical assets or not, especially me!!! :)

Oh. My. Goodness.

FMF, I don't know if you realize the size of this can of worms to which you've just popped open. Throughout this entire recession, there has been a mass panic buying of commodities, especially precious metals, throughout this entire recession, all because of some fear for some kind of Apocalypse.

And so are valuations for precious metals. However, let's take a look at the spot price of silver for the past 6 months:

http://silverprice.org/charts/history/silver_6_month_o_usd.png?0.591904711575853

Notice anything? Yes, it's trending down. Why? Because the markets have somewhat regained its confidence. Therefore, I argue that precious metal is not always a great trade. At least, not the way gold bugs talk about it like it can do no wrong.

But what about a complete meltdown of life as we know it? Well, let's take a look at Haiti, shall we? That was pretty close to a total collapse as any, right? You know what is of value over there? Not gold or silver. No, they were trading DRINKING WATER! Yes, water was the commodity of choice during the disaster, not precious metal. And it makes sense. You can't eat gold or silver, you can't hunt with it, you can't defend yourself with it, and you can't even wipe your butt with it.

I can add plenty more to this, but for the moment, I'm going to go eat lunch. Bottom line: Trade commodities if you want, but please don't buy into someone's belief that the end of the world can be mitigated with small lumps of gold or silver.

I have to agree with your second friend...how would you know what physical assets will be worth anything if the economy crashes? Gold and silver may lose out to gasoline...

If I really had those fears, I would make myself as self-sufficient as possible. I'd start a garden big enough to sustain myself and have a pantry full of food. I'd stock up on MRE's. I'd buy a generator. If I really thought the economy would crash and money would be worthless, I'd learn skills like carpentry and plan to fully support myself without the need for money or any physical asset that might be money in the future.

I really hope the world doesn't change to that degree since I hate gardening and am not interested in carpentry.

Eugene --

Opening cans of worms is my specialty. ;-)

"He said he preferred silver because it had both investment value as well as utility uses (in manufacturing) and he felt it would hold its value no matter what happened with the economy."

Tell your friend to look at a 10 year chart of silver. It was $4 not too long ago.

Great topic. I also have all my investments in non-physical assets (stocks and bonds), and was curious as to how physical assets such as gold could play a part in a person's portfolio.

Here's a brief overview of what I found after doing some research. Gold, for instance, is considered safe because it doesn't rely on an issuer's promise to pay (as is the case with a CD).

Since it is an asset other than stocks and bonds, it can be added to a portfolio to offer more diversification. So the whole portfolio is better protected against fluctuations in the value of any single asset.

And as your friend noted with silver, gold is also bought because it's supposed to keep its purchasing power against inflation.

In addition to being a hedge against inflation, it's also used as a hedge against the US dollar. If the dollar depreciates relative to other currencies, the price of gold rises.

You can invest in physical coins, ETFs, gold certificates, gold-oriented mutual funds, and even gold-linked bonds.

In the future, I may consider investing in gold after I educate myself a bit more.

Here's the website where I got my information from. Hope it helps!

http://www.invest.gold.org/sites/en/why_gold/

I agree with the second friend. You can buy silver and gold and resell it...but it would be a hassle in some ways. You have to store it. and then like to resell silver , you would have to own some of the Bars that are recocnized by the dealers. They don't want chunks that someone has melted down. Also you could get burned by this kind of investment. I remember back in the 70's when the Hunt brothers tried to corner the silver market. When the did that the cost of silver was going for about $40 a troy oz. Then after all that blew up the price dropped down to around 5 bucks an oz. And it stayed around there for like 20 years or so. If you had bought back then when prices were up and people thought it was a great investment you would have lost big time. I don't invest in this kind of thing. If I did I would only do it through a fund. or certificates or something that made it real liquid.

I don't buy gold or silver. I pretty much agree with what Eugene said. I don't favor shiny metal as an investment. But if someone wants to diversify and put 5-10% of their assets in metals then I don't see a harm in that. Just please don't put a large chuck of your money in metal.

http://inflationdata.com/inflation/images/charts/Gold/Gold_inflation_chart.htm

this doesn't look like an inflation hedge to me. The value of gold is pretty erratic, inflation adjusted or not, and its current run up since 2001 sure looks like the housing bubble to me. If gold ACTUALLY just holds its value, then we can soon expect another 50% drop in price back to historical averages.
If you're worried about inflation, you can buy bonds that are linked to inflation. If you're worried about society collapsing, learn how to farm. Gold is less effective at both goals.

StL Pastor beat me to it. Even as an inflation hedge, precious metals have been called into question many times before.

Now, when reading that chart, you do have to take a couple of things into account, such as the Hunt brother fiasco where they tried to corner the market, and the fact that our currency was once backed by the gold reserve.

That said, adjusting the view accordingly, it should also be clear enough to see that gold does not always hold its value when adjusted by inflation.

You know what I think is a better inflation hedge? The humble I-bonds, such as TIPs. It may not be as exciting as gold or silver, but if you want a direct inflation hedge, that's what I would argue for.

That said, I too am OK with having a passive, buy-and-hold portfolio that holds no more than 10% in precious metal ETFs such as GLD. Once the market returns to normal, precious metals should return to its negative beta status, which by the way, is NOT doing that right now. If anything, it's more like running amok right now due to speculation and the abnormal markets influences ranging from a potential liquidity bubble to worries about European sovereign debts. So, buyers beware!

I was watching CNN last night when they were covering Haiti. They interviewed a young man on the street that had just started a new business.
He had a generator running and people were paying him for electricity so that they could recharge their cell phones and other small appliances that used rechargeable batteries.

If it ever gets to that we are in deep, deep trouble.

What's the reason/strategy for investing in them?

Inflation hedge, lack of counterparty risk and portability. They aren't an investment, really, but a place to store wealth independent from our rather broken financial system.

How do you buy them and from whom?

APMEX and Northwest Territorial Mint, but I'd recommend APMEX over NWT any day; NWT delivery times are unacceptable unless a shortage is in effect. I usually buy every 3-4 months, and usually in 100 ounce bars (takes that long to save for the hundred ouncers). If you are considering hold physical, then start with 1 and 10 ounce bars/rounds until you have a few hundred in each, then switch to 100 ounce bars.

Are there alternatives (like buying stock in a gold mine versus buying gold)?

Gold/silver stocks are highly speculative and offer no guarantee that stock value will match metal price movements. But, they are stocks, so money can be made, especially with the market timers making things so interesting. I hold about 10% in mining stocks, myself. As with any other industry, if you don't know it - don't invest in it. If you want to hold paper metal, go for an ETF - but be sure they provide serial numbers for bars in storage. If they don't, you have no guarantee they actually have bars in storage (JPMorgan is notorious for this).

What resources are there to learn more?

I'd start with Kitco, SilverSeek and GATA. There are plusses and minuses for each (the hats worn sometimes have a slight tinnish look to them), but each will give you other places to go.

What are you doing along this line of investing and why?

Again - not investing. Fiat systems last, on average, 75 years; we went off the gold standard in 1934. The K-cycle entered winter last year. Keynesian economics is in the process of imploding. The petrodollar is dead, recycling inflation through China is almost dead and the USD as the global reserve currency is under attack. I don't think keeping 10-20% of my wealth in something that isn't tied to the current system is a bad idea at the moment. Ask me again in 15 years, and I might have a different answer.

I have to echo almost everything Eugene Krabs said. And I will second what the Pastor said about gold or silver not being a hedge against inflation. It tends to get touted as one in tough times but when looked at over the long time horizon it doesn't seem to track with inflation or anything for that matter. In fact, over time its merely a commodity and should track with its long term changing demand for that commodity.

Gold is a common choice because of the historical reasons. Gold used to back the money. Gold has always been the sought after treasure (pirate ships, California Gold Rush, etc.) We just have this idea that gold is some kind of special vault of value. But it's only worth what others are willing to pay for it. Maybe in the future Lithium will be the key commodity as we run out of it building batteries for electric cars. Who knows what will be in demand.

But to get back to Mr. Krabs points, I do not understand why people think Gold has value in an economic meltdown. To me the most useless thing in a meltdown is a precious metal. So everything melts down. Money becomes effectively worthless. So in that sense you don't want money for your gold because it is now worthless. So what do you want? Presumably essential supplies. Who is going to give you essential supplies in exchange for your gold which they have no use for. No one. NO, gold is no good in a meltdown. In a meltdown it's as useless as anything else.

When it might be good is in an inflating economy when people are looking for a store of value. However if that is the case then I see no reason to hold it in bars. A simple ETF should do fine because the system isn't melting down, its just inflating, so there should be no problem selling your ETF shares and getting the money you need to buy the inflated supplies you need to buy.

The problem I have with purchasing something like gold is it is a pure bet. A bet on needing something to offset a depreciating dollar. There is no general uptrend to a commodity like there is with a business. There is no income generation for gold. There is no cash flow. There is no earnings potential. In fact there are often carrying cost (somewhat minor usually but costs non the less). So you are purchasing something, simply to make a bet that your dollars will get worth considerably less and gold will hold its value when they do - you have to be right on both of those bets for it to do you any good too.

I purchase houses as hard assets. Why? (1) Houses are much cheaper than they were 4 years ago. Every other hard asset is much more expensive. (2) If inflation comes wages will eventually rise and houses will come with them when they do. (3) Houses produce income/cash flow/earnings while I hold them. (4) They are purchased with reasonable leverage which increases their cash on cash return (and even if they never appreciate or even go down in value it doesn't matter because they cash flow on day 1).

I am not recommending houses to anyone. But it's the only hard asset that makes any sense as an investment. (that and land that can be rented at a cash flow positive number which is hard to do in the current land environment). Why do I say that? Because houses are a business investment that does what businesses do. It makes earnings and profit that can provide return and from which you can make a business valuation judgement. Commodities like gold or silver are not an investment, they are a bet and have no investment components to them at all, as they do nothing but just sit there and wait for the market to judge them as worth more or less than they were yesterday. No earnings, no income, no business, just a bet. How do you make an effective business valuation on something like that? You stick your finger in the air and hope to gauge the wind correctly.

People buying gold now are ridding the wave. People rush in at the tops. People who never talked about stocks or bought stocks were talking about and buying NASDAQ stocks in 1999. Thats a warning sign. Now everyone is talking about gold. Gold has been basically $300 per ounce for 25 years. Now in 5 years it goes up 300 percent and everyone wants in. This is what people did with stocks in 1999. Florida Condos in 2006, Tulips in 1600. Gold could keep right on going up. But make no mistake, it's just a bet and you are hoping you can get off the wave before everyone else decides to.

I've held physical gold and silver coins for 5 years or so. I own Canadian and US minted coins (some of my silver is from Mexico now that I think about it). These can be purchased from dealers and directly from the mint.

1. Its kinda fun to have some gold and silver coins.
2. Security can be an issue. But I'm fine having them in a safe and not telling people I have it. (I wouldnt have $1mm sitting around however)
3. Commodity ETFs are a good way to invest in a commodity/to make a commodity bet, but holding gold/silver coins is a very different investment...
4. I own them as a small, last ditch, liquid (can be very liquid), off the grid, holding. I can easily grab 30k of gold and walk out the door. If something happens I'd rather have it than not have it. Like the boy scout motto- be prepared. I also carry a spare tire in my trunk in case I need it.
5. I have some cash sitting around too- being financially secure means being prepared for different scenarios. I have no idea how I will use the gold coins I have until I do.
Again it's just a small amount.

I will also echo some comments Rod made while I was making my post. A hedge is a good word to use in place of my word bet. A hedge is a bet but a special kind of bet used to offset risk somewhere else.

It's also worthing noting that a hedge almost always reduces risk while also reducing overall return ranges because hedges typically have costs or negative beta actions to ones currently portfolio so that it has gains when the rest has loses and loses when the rest has gains.

I am not convinced how well gold performs as a hedge though. For instance:

1. Is gold an adequate hedge against currency risk?
2. Does gold's current price make it a hedge that is worth making at this time?
3. Do you feel concerned enough about the USD to feel there is a need for such a hedge?

I cannot convincingly answer yes to any of those questions enough to make me want to put in place such a hedge. But if you can answer yes to those, then place your bets, er hedges, the dealer is about to deal another hand.

I don't, but if I did I wouldn't buy and store in my house. I would buy a precious metal mutual fund ( http://biz.yahoo.com/p/tops/sp.html ), or buy stock in mining company.

I am not a gold bug. I would not buy gold right now.
“NO, gold is no good in a meltdown. In a meltdown it's as useless as anything else.”

Historical references would strongly disagree with you- this time its different I’m sure. Gold has value because people think it has value- regardless of what you as an individual think its value is. Fiat currency has value because people think it has value. If the world truly melts down, which is completely unlikely, I am willing to bet it reverts to a commodity based economy.

Modest inflation… gold is not a good hedge. Deflation… horrible investment. Hyper inflation… it might buy the goods when cash can’t.

The reason to own the coins are very different than owning gold in a portfolio, such as futures or ETFs.

On homes: Something cheaper doesn’t mean it can’t get cheaper- happens everyday. There can be asset inflation without income inflation. Houses produce income? Rental vacancies are at decade highs right now. Not if you are living in it. In fact they have a huge carry cost. They may cash flow day 1 but do they cash flow day 634? Real estate can produce loses, and leverage amplifies those losses. Any leverage in a deflationary environment is horrible. Gold coins are far more liquid than a home and the transaction costs are far less.

I’ve already stated my logic for holding some coins. In an earlier post.

A friend of mine has done very well collecting vinyl records and art books. Some of these 45 vinyls are worth 4 digits now; so are some of his art books. But he did not buy them as an investment. He bought them because he wanted to own them. I do the same with first print editions of certain books. It could be viewed as an investment since some of these books are pretty valuable, but I buy them because I want to own them. I view such purchases as spending and not as investment. Should I ever get a good return on them, I would consider this a windfall profit, not one that happened by design. That is how my friend looks at his "savvy" investments. He does not mind the increase in value but the return on his investment was not his first idea when he bought these things.

@Tyler,

You say historical references disagree that gold has little value in a meltdown. What are those references? Do you have examples of economic catastrophies where people with gold were able to get what they needed and everyone else was screwed? You said gold might buy the goods you need during hyperinflation but during modest inflation its not that great but you then think its good during a complete meltdown? How does it buy goods then?

Sure 20 years later after things stabilize its possible the world reverts to a commodity based barter type system. But in a true meltdown do you actually think you can exchange gold for things when due to economic collapse there will be a huge shortage of things. The only things it seems you would be able to exchange for things are other things that are also highly sought after and gold aint one of them. Please cite your referenced historical examples of gold being valuable in a meltdown.

Concerning homes I never said they couldn't get cheaper. I specifically said that if they did it doesn't matter cause I make huge cash flow on them. Seriously, the ones I am purchasing are producing cash flows that are equal to 40% of the rent or better and that is after the mortage payments as well. There are plenty of examples of people doing the rental market poorly just as there are plenty of examples of people starting a business and going broke. That doesn't mean its not a business for which you can make a proper evaluation.

Yes vacany rates are at 11% now when they have been at 9% for most of this decade. However I have no problem renting the types of units I buy. In fact I almost always rent them within 2-3 weeks of purchase. I had one that I moved a tenant in the day I closed. So what if it gets a little harder to rent. I can lower my rent 40% and still not lose money. There is a lot of talk out there about how you can pressure landlords into lowering the rent because of the vacancy. For generic and older apartments I think this is definitely true. However it's not universal. I had one tenant ask me to lower the rent. I told him his rent was as cheap as any I charge for those units (I charge the same for all of them) and that I can easily re-rent it so at this time I cannot lower the rent. He signed a new lease at the same rent and kind of even apologized for asking. Believe me, my units will get rented.

In addition new home and multi family construction rates are at multi decade lows. If this holds for much longer the vacancy rates will start to fall as the population is still expanding. There are no guarantees but as far as hard assets go the housing market is presenting very good opportunities right now.

All your objections are the kinds of things people always say at bottoms. If you wait until vacancies are low and the economy is strong, then the price will be much higher and the cash flow won't be there. You don't make money by making investments when everyone says its the thing to do. Thats when you have missed it. Right now very few people can qualify for financing. The economy is poor. That creates value on the purchasing end. Everyone is saying they wouldn't touch houses with a ten foot pole. (But they couldn't get enough of them 4 years ago). Now you have to be in gold because that is the only thing that is working. Correction it is the only thing that has been working. Which is what causes everyone to pile in and that usually leads to a bubble, (see housing).

To compare with history, the housing market was in a bit of shambles back in the early 90s after that recession too. People were a bit nervous to go into housing then. Things had gotten over built, we were fighting a war in Kuwait/Iraq, the economy was quite poor, and there was a pull back in housing (sounds familiar). Those who bought then bought at amazing valuations and then by 2000 there was no money to be made buying rental properties anymore because they wouldn't cash flow, but people kept right on buying.

For instance, the houses I am buying right now were built in 2007 and sold to investors (they were all rental units) for 310,000 and being rented for 1350 per month. I am purchasing these same houses today for 135,000 and still renting them for 1350 per month and they rent like hot cakes. I assure you the investors who bought drastically overpaid. I assure you that based on the type and value of the property and the type of rent I am getting, I am underpaying, regardless of what the price does in the next 5 years.

You are quite correct that the transaction costs on a home are huge. I have no intent of making any transactions. These things just make money. My intent is to simply let them make money and very good ROI returns at that and over the course of 20 years, most likely there will be very good underlying appreciation too. It's a business plan. You might not like that plan and thats fine. Every business plan has risk. I think this one has much less risk than most but we won't know the answer for sure for a few years. But its a business non the less unlike gold or coins which are merely a bet/hedge. And again, thats fine, I have no problem with placing bets and making hedges. I just think many people miss the distinction between an investment and a bet/hedge.


Concerning leverage in a deflationary environment, sure thats true that leverage is bad during deflation. Yes the economy is not great now. It will probably be a very slow recovery. Inflation will likely be at bay for a while. But the stimulus increases the chance for inflation. But deflation? I am not too worried about that. This government has already proven they will print money at will and as the current Fed chair has said, drop it from helicopters if necessary to fend off deflation and the try to prop up the economy. I don't think there is much need to worry about deflation.

That's a very good way of looking at it, ctreit.

I used to do that when I was in a gun-collecting phase of my life. Unfortunately, because we had 9/11 and the subsequent wars in Iraq and Afghanistan, all the way to recent worries about ammo shortages, my gun collection ended up selling very well.

I certainly didn't buy them to try to turn a profit. I bought them because I liked to shoot them. However, I wasn't so attached to them that I couldn't pass up an opportunity to turn some $$$. I do know a couple of guys who have bought and sold gun parts, and they have done very well in this economic climate.

Apex
I'm sure you are very smart and will do very well with all of you endeavors.

Bernstein provides an intelligent and valuable history of gold in his book, The Power of Gold- I recommend it.

I admire your certainty and confidence in your investments. You seem to have analyzed ever detail.

I worry about everything- occupational hazard.

Apex - I was talking about silver, as that's what FMF started with and is my primary physical metals investment; I own one ounce of gold, and a lot of silver. Most is stored safely outside my home, with a bit secure in my home (mainly to hand out as gifts). I did want to share my thoughts on your questions, if you don't mind:

1. Is gold an adequate hedge against currency risk?

It really depends on the way you look at money; we all know a dollar is a unit of account and a transactional medium, but it's a poor store of wealth - anything that has devaluation/inflation cooked into the mix means that you have to constantly accumulate more of them to maintain the purchasing power of your wealth. Assets tend to hold their value, cash tends not to, i.e. - an ounce of silver buys around 4-5 gallons of gas. Doesn't matter what the "price" of silver is or what the "price" of gas is; an ounce of silver you bought in 2000 for $4 (when gas was $1.00 a gallon) you can sell now for $15, when gas is $2.75 a gallon. Put that $4 in an envelope, you can buy about a gallon and a half of gas. Put that $4 in savings, and you'd have about $7.50 now - enough to buy 3 gallons of gas. Put that $4 in the DOW over the same period, you'd have about $4.25, still not even 2 gallons of gas.

Gold specifically - well, there is a certain nature to gold that has people default to it as the prime asset in uncertain times, which tends to make it the "best" only in the sense that there is a finite amount of it. The same thing could be said for land, silver, rubies, etc, as there is a finite amount of them. I suppose big thing going for gold is it's portability, ability to store a lot of wealth in a small package and it's universally recognized. Rhodium, for example, has the first two, but not the third.

2. Does gold's current price make it a hedge that is worth making at this time?

Depends on how much/quickly you think the money will devalue. We're already buying our own debt - that's one of the final stages before a currency collapse.

3. Do you feel concerned enough about the USD to feel there is a need for such a hedge?

Again, it depends on how much/quickly you think the money will devalue. The recent dollar advance was more a result of end-of-year account liquidations/transactions than any sort of fundamental strength. We already owe more money than exists in the entire world. There are only two ways out of this - we default on our debt, or we devalue. Devaluation, historically, is the preferred choice and appears to be the path we've taken.

Are we heading to an Armageddon-like finality? I seriously doubt it. Are we heading to currency collapse? I don't think we can avoid it. Assets win and financials lose in that scenario. But, even though I'm more of a fundamentals rather than a technicals guy, I still only hold about 50% of my overall portfolio in assets with the rest in financials (stocks, ETFs, CDs, paper of all kinds) because while I see it as an inevitability, I don't think we're quite there yet.

Personally, I think we're still in the early stages, so the "price" of gold, silver, whatever, is still "cheap" compared to when it'll top; have any shoeshine boys told you about a great new gold company they heard of? Are the headlines of the WSJ praising gold and declaring it's a 'New Economy'? Are the ones saying gold is in a bubble and doomed to failure being ridiculed by the mainstream economists? No - even if we forestall a currency collapse for another generation (for which our children will LOVE us for), gold is nowhere near a top.

One of the key uses for gold, silver, or other commodities in a diversified investment portfolio is that they offer an asset class that is not correllated (or only very weakly correlated) with the stocks that probably make up the bulk of your portfolio. If you took a close look at most "diversified" investment portfolios, the assets are fairly highly correllated. Commodities are one way to counter this.

@Rod,

I was using gold and silver mostly interchangeably. I think this is mostly appropriate but not entirely sure as I don't know a great deal about how well coupled they are.

Thanks for the comments on the questions. They were interesting and informative.

If you don't mind I would appreciate it if you could elaborate on what you mean by your expectation that we are heading for an inevitable currency collapse.

First, what does a currency collapse look like in your mind. Does the dollar get replaced by something else, i.e. Euro, Wan, etc, as world currency and become a third world currency so to speak, or do all world wide currencies kind of go down together leaving us in global currency collapse where money becomes mostly useless world wide, or something else I haven't thought of.

Second, what conditions lead you to the conclusion that we must head towards this currency collapse?

Thanks.

@Tyler,

Can you give me a synopsis of what the Bernstein book is about. I am interested in learning more about the dynamics of gold but I am not interested in getting it from a "gold bug" if you know what I mean by that, as I would be skeptical of the source.

Thanks.

If you're interested in this topic, read Peter Schiff's "Crashproof 2.0". I invest in metals for the same reason I invest in the S&P: exposure to various asset classes. I hold 10% in metals to guard against the Doomsday scenarios.

As I have stated I am not a gold bug. I don’t own any gold except for some gold/silver coins and was actually short GLD for a time. I don’t find gold bug arguments compelling. I own the gold/silver coins for reasons already stated. In my view, owning gold/silver coins is different than owning an ETF or futures.

Peter Bernstein is not a gold bug and his book does not argue in favor of gold. He was a financial historian who wrote a number of bestsellers- Against the Gods- history of risk, Capital Ideas, The Power of Gold, among others (all are good reads).

I would agree with Bernstein’s general distain for man’s silly obsession with gold. But the fact still remains that people gravitate towards gold in times of uncertainty. Examples when people could have used gold to purchase goods (black markets tend to like gold)- after the fall of the Soviet Union, Argentina, Mexico Peso Crisis (My silver is from this period), Civil War, etc. In times of uncertainty, people gravitate to gold as a currency. I don’t claim to know anything in the future, but does it really hurt for me to have some sitting around? Nope.

If you want a review of the book, I recommend Amazon.com.

In a true apocalypse, commodities such as "ammo", "food", and "water" are key. Gold is worthless; lead is king.

But in a normal scenario: I'm not really a big fan of buying commodities (such as precious metals, oil, or cattle) but they do have a place in some investment strategies because they inversely correlate with other investments.

I recently heard of a man who inherited $5 million and wanted to know how to invest it, not with the goal of growth, but simply with the goal of being able to safely draw a comfortable income from it for a long time. One piece of advice he was given was to put 1/4 into bonds, 1/4 into stocks, 1/4 into cash equivalents, and 1/4 into commodities. The commenter stated that, historically speaking, that portfolio does OK regardless of economic conditions. Those four categories each hedge against each other to some degree, so for someone seeking a low but relatively stable and safe return, commodities are a part of an overall strategy.

As for me... I'm under 30, and aside from an emergency fund, am fully invested in stocks. That's because I'm looking for high growth over a 40+ year horizon.

I thought gold was expensive back in 2003 at $415/oz. I could not see purchasing it today at these prices.

@old limey
Thats a great comment. And points out a great investment strategy IMO. Invest in energy.

Jim Rogers wrote some great books that answer this question. I wish I had read them and followed his advice the day they were published.... he really called it.

Nations come and go.
Gold survives.

MasterPo doesn't know exactly how it would work - trading gold or silver or jewels etc. for food, etc. - but physcal ownership will get you more than paper ETF holdings if the end does come.

@MasterPo

"if the end does come."

You are correct. I am not an apocalyptic kinda guy myself. Not yet anyway. ;)

Am I the only person who dreams of investing in fabulous wine?

At least if everything went belly-up, my evenings would still be pleasant.

I am planning for the "Stuff Hits The Fan Scenario" (SHTF)... I am slowly accumulating Gold and Silver 1 oz coins, and then 90% junk silver. I am *NOT* considering this an investment - just moving my fiat money into 'real' money.... If it happens in my lifetime, or in my kids' lifetimes, our family will be prepared.

As a believer - historically in the Bible, Gold and Silver were *ALWAYS* considered money. God doesn't change.

Haggai 2:6“This is what the LORD Almighty says: ‘In a little while I will once more shake the heavens and the earth, the sea and the dry land. 7I will shake all nations, and the desired of all nations will come, and I will fill this house with glory,’ says the LORD Almighty. 8‘The silver is mine and the gold is mine,’ declares the LORD Almighty.

Other precious metals I am collecting consist of also brass and lead.. if you get my drift.

Foodstuffs, warm clothes, water, etc are also being gathered.

2 books to read on our monetary system

1. Money and Wealth in the New Millennium - Norm Franz - norm is a Christian whom worked in the financial industry. He believes God is going to come after the "dishonest weights and measures" set up within our fractional reserve banking system. I bought the book 'used' from amazon - it came as a new one....

2. The Return of the Great Depression - Vox Day (voxday.blogspot.com - his economics stuff is great to read) - a christian libertarian, and an austrian economist - vox day clearly shows how the economy is going to crash and crash hard... it's a tough read. He's been calling various things for years..

be prepared.

Yes, I think people DO need to study the Great Depression, and how-- believe it or not-- but having attached the paper currency to a gold standard actually slowed down economic recovery, and perhaps may have even helped turn the 30's recession into a full-blown depression.

That reason being is that because the economy at the time had shrunk so rapidly, they were in a deflationary state. Household purchasing power was drastically reduced, and yet, the cost of living remained high, due to inflexibility of the gold standard. For better or worse-- and this in case, worse-- the Federal government could not control the money supply to try to stave off the deflation.

There are numerous academic studies that have already been done to try to shed light on this matter. Here's one example on the NBER (written by Ben Bernanke):

http://www.nber.org/chapters/c11482

In that page is a link for one of his chapters in PDF, which is free to read. In that PDF, you will see that Bernanke goes into painful details studying various other countries that have experienced a similar negative effect in their economic recoveries due to the gold standard. He also noted that their recoveries have also sped up once they decoupled their paper currencies from gold. In other words, the negative effects of the Gold Standard and the Great Depression was not a fluke. Contrary to what many gold bugs don't seem to understand, everything has a trade-off, including gold and the gold standard.

Granted, there is a lot more to this aspect of the debate, but it's just something what I really want people to think about: If gold is really that great, why did most of the civilization on this planet turn away from it? Is it truly some kind of global conspiracy? Or is it because paper currency has its redeeming qualities? Can gold really do no wrong?

Invest in a nice gun (or 2, or 3, etc) and some lead bullets and you'll be all good if our economy ever completely crashes!

Janet-

You're not the only one!

I have a bunch of wine but that's an investment in fun vs. a financial investment! I also have some winery investments but again I not hoping for massive returns.

You know the gold run is over when Esquire Magazine runs an article with this title...

"How to Invest in Hedge Funds Like the Big Boys

The best way to seek refuge from the coming storm of inflation is gold. But not in the way you might think."

To give you guys an idea of what I was up against (and what people on the streets were screaming), take a look at this:

http://www.goldstockbull.com/articles/peter-schiff-on-fast-money-calls-2000-gold-in-2009/

That right. It's none other than Peter Schiff. On Fast Money. Calling $2000/oz gold. In 2009.

Back then, gold bugs were literally coming out of the woodwork from all over, not just because of commentaries like that one, but because of the recession and all the fear and uncertainty at the time surrounding gold fever.

I remember fighting a losing battle back then, cautioning people to be careful about jumping into $1000/oz. In times of record-high valuations, people should be selling, not buying. To me, this included silver as well as copper. But I think people were gripped with fear and greed at the time....

Of course, gold could still hit $2000 some time in the future. Who knows. For now though, it peaked at $1200 before retreating down to $1060.

@Apex:

"I was using gold and silver mostly interchangeably. I think this is mostly appropriate but not entirely sure as I don't know a great deal about how well coupled they are."

Silver is a bit different than gold - silver is consumed and gold really isn't. The last numbers I saw stated that 97% of the gold ever mined in the history of humanity is still aboveground and circulating. We've consumed almost all of the silver (consumed as in unrecoverable) we've mined to date; we have little reserves and hardly any new mines cropping up. For silver investors, it's the metal that covers you both ways; it maintains purchasing power like gold, but also has an investment angle to it.

"First, what does a currency collapse look like in your mind."

Weimar Germany. Zimbabwe. 4th century Rome. The US after the Revolutionary and Civil Wars. Turn of the century Argentina. These are great, and well documented examples of currency collapses.

"Does the dollar get replaced by something else, i.e. Euro, Wan, etc, as world currency and become a third world currency so to speak, or do all world wide currencies kind of go down together leaving us in global currency collapse where money becomes mostly useless world wide, or something else I haven't thought of."

The dollar would get replaced by something else, just like it's been replaced before. I have no idea what we'll call it, though (in my mind, I just refer to them as NewBux). The dollar would certainly lose it's status as a global reserve currency - like the British pound before it, the Spanish Dolar before it, etc. It would once again just be the money we in the US use. The spiral down in currencies... could happen. I'm less leery about that as the central bankers across the world don't seem to be as arrogant about their currencies as we are about ours, and have been taking steps the last 6-8 years to divorce themselves from the US economically. If the USD falls, it'll hurt the world, but not as bad as it'll hurt us.

"Second, what conditions lead you to the conclusion that we must head towards this currency collapse?"

Historical references mostly:

1) Every nation that adopts a fiat currency has suffered a currency collapse. Every one - no exceptions, no "it's different this time". People tend to forget this because the system will survive past the generation that creates it, so by the time the collapse is looming, everyone is used to it; thinks it's "normal".

2) When a nation devalues it's currency, loss of confidence in the currency is held. Again - every nation throughout history, no exceptions. A currency collapse is a result of loss of confidence, not necessarily the raw printing of the currency. Once purchasing power is reduced, people don't want to hold the currency anymore (if you held a stock that was slowly losing 3-5% of it's value every year... would you still invest in that stock? Or if the government offered a bond at a negative 3% return - would you buy it?)

3) When a nation's accounts turn negative, that nation is headed for a collapse. Just like a person can live off of credit cards for a while, a nation can live off of debt for a while, but eventually that nation's credit rating will deteriorate, leaving no more credit and a lot of bills to pay. If they don't produce something that someone else wants to buy, the have no choice but to default/devalue ("declare bankruptcy") to manage those debts. Usually, these nations' import/export business collapses and they tend to be economically colonized by the creditor nations (we did this in the 40's and 50's with Central America, the Middle East and parts of Asia).

Looking at today, the structure we had in place to offset the negative effects of our Keynesian system (Bretton Woods, the petrodollar, the Chinese recycle) have all but gone away. Nothing new has taken it's place, which is why the Fed is qualitatively easing (devaluing). This will work for a while, but not for long. It's also the last step before the nation in question starts laying out inflation in currency terms, i.e. - printing currency with more zeroes on it.

Could something happen that forestalls this for another generation? Sure - we could find a yet unknown resource that we have a lot of that nobody else has that everyone wants. Another world war could break out. Some bright economist could be right now working on a Grand Unifying Theory of Money that will change everything. But until that happens, I'm keeping a close eye on what's going on; the last thing I want to be is surprised and unprepared for when it happens.

@Eugene:

You are clearly a Keynesian. You should consider at least looking at the Austrian or Chicago School theories. They may offer you some insight into some of the unanswered questions from the Great Depression, like why it took so long after the Fed tightened - in 1928 - and so long after we went off the Gold Standard - in 1934 - for the Depression to end? FDR pumped billions into the domestic economy, a Keynesian tactic, and it did nothing; it took WWII and Bretton Woods to bring the US back to prosperity, and it was Bretton Woods specifically that led to the boom of the 50's-60's. Bear in mind, I'm not a Chicagoan/Freidmanite/Monetarist, but I do study competing theories to gain insight. I just happen to believe the Austrians are right about this one.

Oh - and I can answer you about the gold standard: people turn away from hard currencies when they want to spend more than they have. They go back to them once the mobs burn down the palaces and chop the heads off the ones who left them with the bill. It's happened over and over throughout history. In a nutshell, people are greedy.

I should clarify something - the Bretton Woods agreements had a lot to do with the rest of the world giving up their gold standards this time around. The rest of the world didn't think they were going off a gold standard, they thought they were creating/participating in a brand new global economy (each dollar they held was backed by gold, so the dollar was "as good as gold" for pegging the local currencies to). WWI and by extension WWII was argueably a product of the regional trading blocs of the 19th century (which would take WAY to long to cover). It wasn't until 1971 that we yanked the rug out and made the rest of the world truly fiat; once that happened, many nations opted to float currency freely (remove the dollar peg), because they wanted to have the priviledge of inflating debts away too.

Rod, what an excellent response. Thank you for that. And yes, I've been branded a Keynesian before, although I am aware of the Austrian school of theory as well. I think what I've failed to be explicit about is that I do not believe that simply removing the gold standard alone was enough for an economic recovery. But rather, I believe it was a catalyst necessary to speed up recovery, and more importantly, at least prevent a recession from worsening into a full-blown depression.

But at the end of the day, I too agree that true economic recovery still requires fundamental growth. It was true back then, and it is still be true now. I've even commented about that in earlier threads.

Dollar devaluation (by controlling money supply) isn't pretty by any stretch of the imagination, but like Morphine out in the battlefield, it has it uses. And I say this knowing full well that it's hardly a solution to the problem at hand. But I advocate it nonetheless, because there, at least you have an option.

Finally, please realize that not everything about fiat currency has to be bad. Fundamental growth and a responsible control over said money supply can restore and maintain its values once the economy recovers.

In the end, right or wrong, I do not believe human beings have to always succumb to their basic instincts of greed and mass hysteria. We are capable of more than that. For all the times our economy and other economies have failed, I like to think that we've also triumphed more often. We just don't always sing its praises because that's what we expect and define as a "normal" economy.

Who knows, maybe you're right that every economy with fiat currency has suffered some crisis from time to time, but it doesn't happen often either. So long as there are responsible and competent people at the helm, fiat currency can and does work.

MasterPo will also add that physcal owner ship of gold, etc. is still an unregistered and untracable asset.

That means Uncle Obama can't tax it or confiscate it!

"Finally, please realize that not everything about fiat currency has to be bad. Fundamental growth and a responsible control over said money supply can restore and maintain its values once the economy recovers.

So long as there are responsible and competent people at the helm, fiat currency can and does work."

History disagrees with you, Eugene. If there were even one example of a fiat currency that was a success, then I'd be happy to concede that human nature could be overcome in matters of economics, and we just needed to find the right conditions to encourage it. But, just like every time you drink to excess you get drunk and consequently acquire a hangover, fiat currencies always fail. Wishful thinking doesn't change that. Since we went fiat, not one penny of purchasing power has been restored from the pre-fiat levels. Either we're busting, and we need more dollars in circulation to recover, or we're booming and we need more dollars in circulation to support the boom. The curve is never on an upswing - the best it does is even out slightly on the downside. The problem is in your last statement there - "responsible and competant people". True, if you have an immortal, incorruptable person in charge of a fiat currency then, yes, it'll work just fine. We aren't immortal, nor are we incorruptable. Desperation creates fiat, hope for the future creates central banking, short sightedness allows corruption and misdirection and obfuscation causes collapse. Why is the Fed terrified we'll actually audit it? Wouldn't a "responsible and competant" person want transparency in something as fundamental as our currency? The system is no secret, numbers are published regularly - why try to hide the basis?

But, I digress. I agree that humans do not always succumb to their baser instincts. I just believe that to assume they will never succumb is naive. There is always an emergency, always a justification. History has shown us over and over again. And every time, it's "this time it's different":

- "We'll not return to John Law."
- "Our national debt, after all, is an internal debt, owed not only by the nation but to the nation. If our children have to pay the interest they will pay that interest to themselves."
- "We're all Keynesians now"

even Keynes himself, "Lenin is said to have declared that the best way to destroy the Capitalistic System was to debauch the currency. . . Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose."

Yet here we are. I think if Keynes were alive today, he'd be appalled at how far we've gone - this economy is not the economy he envisioned. Inflation is the hidden killer and he knew that. Boosting aggregate demand via government spending or encouraging consumption were supposed to be temporary measures, never the foundation of the economy (his paradox of thrift was geared towards investing money versus saving it, not spending your savings on ephemerals). Investment is still the main driver in growing economies; the starting point at which an economy can grow.

But I digress again :) That's talking economics for you - it's hard to focus on one thing, because everything is interrelated.

@Rod,

Thanks for the response. Lots of econ theory in there and some of it admittedly a bit over my current economic familiarity, but very interesting non the less.

I have one question about a comment you made concerning fiat currencies. You said:

"people turn away from hard currencies when they want to spend more than they have."

I am not sure I quite understand why this would be the case. It seems like it's credit that makes this possible, not whether or not a currency is backed by a hard asset. Can you explain that a bit?

@Rod

One more set of questions if you will indulge me.

You said:

"Every nation that adopts a fiat currency has suffered a currency collapse. Every one - no exceptions"

How certain can we be that it's the existence of the fiat currency itself that leads to the currency collapse and not the choices of the nation themselve or other economic factors. Or you arguing that the existence of the fiat currency allows for economic choices to be made that lead to collapse that couldn't be made without the fiat currency. That seems plausible and seems like perhaps that is your argument. If it is could you explain what those kinds of choices are and why a non fiat currency prevents them?

Following from that, are there examples of nations that did not adopt a fiat currency that did not have an economic collapse of their asset based currency system?

@Apex:

1) The whole point of having an asset backing a currency is to limit the amount of currency that can be printed (which is sort of backwards from how we got to here - paper money was effectively a receipt for an asset back in the beginning). A nation would print a fixed amount of currency in relation to a fixed unit of asset, i.e. - $20 for one ounce of gold. If the nation wished to print another $20, they needed to acquire an ounce of gold, either through trade, tax or getting lucky enough to find some in the ground. If they couldn't acquire that gold - they couldn't print the money. In most cases, this is unacceptable, because the "need" for the additional currency to be printed outweighed the need to have a stable currency (nevermind that maybe the nation in question should have saved some currency in reserve - much like a person should have an emergency fund - to answer that "need" for the extra $20 to be printed, but people are greedy and they want money now). So, the nation removes the backing and just prints. Times are good for a while, even great, but then the devaluation trap springs on an unwitting public. You can have a fiat currency work, but only if you manage it as if it had an asset backing it (which is to say, you only print under certain circumstances that are never taken advantage of, like GDP growth or government issued debt.) But, people are greedy, and any system a human can design will contain loopholes that another human can figure out (like using inflation to grow GDP to print more money, or have the government rubber stamp increases to the debt ceiling.) A little known fact - the permanent debt ceiling for the United States was set at $400 billion dollars once we went fiat - sort of a "check and balance" to ensure we wouldn't get out of control with debt, which is a BIG concern under a Keynesian system. Everything above that was authorized by Congress as a "temporary expansion of the debt limit", but after 19 of such extensions and breaking a trillion dollars in debt, the government stopped reporting the distinction between the two because it was drawing too much attention to the fact we were breaking our own promise to ourselves. Just another example of the misdirection and obfuscation I mentioned earlier.

2) Well, you have me there. Not all currency collapses are caused by fiat currency, even if all fiat currencies collapse. Spain in the 1600's is an excellent example of that; gold from the New World flooded the Spanish economy. So much that they had a gold glut - inflation ran rampant (think $50 eggs or $200 loaves of bread). That was an asset backed system that broke down. But, that is an abberation; asset backed systems usually work, while fiat systems always fail. Nobody yet has come up with a system that works perfectly, and a lot of people try; I believe one day we will nail the economic system that will take all the factors of human nature into account. But, until we come up with it, would you rather have a system that is imperfect in the short term but mostly works in the long term or a system that works well in the short term and usually follows predictable paths to destruction in the long term?

It is the choices that a nation makes that cause a collapse - it is fiat currency that makes it very easy to make bad choices. There is *always* an emergeny or a justification; it's always "different this time". In this regard, you just have to look at the past and draw your own conclusions as to how it'll play out in the future. Economics is really a subset of social anthropology with a lot of math. The "Free Market" is just a shorthand phrase for the Human Condition; the observed and recorded tendancies and traits of groups of people. It certainly is possible that a group of people will overcome their greed, but it's not likely, and we shouldn't count on it as an economic basis.

I believe Switzerland has never suffered a currency collapse. At least, none that I am aware of. It was also the last nation to go fiat, in 1999, but still maintains gold reserves in relation to currency outstanding (sort of like we did back in the mid-20th century - a fiat currency that is managed as if it was on a gold standard without gold convertability.)

Rod, I'm at work, so I confess I will not be able to answer your question fully. But you have to understand that I don't go around thinking that governments can do no wrong when it comes to monetary policies. I've never made such proclamations, and even Keynes himself has warned about governments abusing his idea.

But what I'm reading from your posts, and I could be wrong, is that you're saying governments can NEVER do RIGHT with monetary policies. If so, I would welcome you to take a look at the Swiss Franc, regardless of whether it's before or after their gold standard (which I admit isn't too long ago).

Even in the US, there have been those who have tried to tame the economic dragon. Gerald Ford made battling inflation as one of his campaign slogans, and Reagan had his Reaganomics. On a related note, many administrations from as far back as Truman have also tried to reduce the national deficit. Regardless of whether we think they succeeded or failed, I think it's at least fair to say that they tried.

That said though, I definitely agree that governments have shied away from the gold standard with much more sordid reasons. And that certainly does not help the case that a country can operate on fiat currency. I believe that it is possible, but perhaps I am too trusting with people and idealistic. I too have been accused of that before as well. Thanks for the conversation. I will re-consider my position.

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