My Thoughts on Investing in Gold and Silver
I was asked a few weeks back on my thoughts regarding investing in gold, and I am finally pleased to say that I am able to sit down and write a post about it. But, if you are as busy as I am and don’t want to read a full post, I can sum up my thoughts in a single sentence: “Every portfolio should have some exposure to gold because the dollar isn’t getting any stronger.”
However, I am sure that those of you with the time would like me to elaborate further so I will do just that. But first I want to make sure that we are all on the same page to know what gold really is.
What Gold Is…
Simply put, gold is a store of value and a medium of exchange. There are few things that have been around for 5,000 years but gold is one of them. So are real estate, crops, and livestock as well as people. Google stock hasn’t been around that long. Bonds haven’t been around that long, although some borrowing and lending has been going on but settlement of debts would have been in gold or livestock, etc. The dollar or euro or yen or any other paper currency hasn’t been around as long, either.
You can claim all you want that gold is a barbaric relic. But just because the fact that gold has value is unexplainable or doesn’t make sense, doesn’t mean it isn’t true. I can’t explain it either, but the fact is that it has for most of recorded human history would suggest that it won’t be changing in the next few years. I might even be tempted to agree with those who would suggest that gold really shouldn’t be worth anything, but I can’t fight the facts. So I tend to go with my observations rather than my bias.
Why Own Gold?
Well for starters, it is a store of value. I know that at some point in the future, I will be able to trade my gold for dollars (or whatever the currency of the realm happens to be at the time) and use it to get the stuff I need like food, clothing, or shelter. It may not be the only thing that is useful for bartering, but it is a lot easier to haul around than a cow.
Now there is nothing wrong with keeping a little bottled water or canned food around or ammunition. But I don’t know that I would be using those items for bartering. I would be consuming those items. Personally, I don’t think that the world will come to this, so this isn’t one of the main reasons that I own gold.
Another reason to own gold, is to decrease the volatility of an investment portfolio. Stocks haven’t gone very far over the last decade and yet gold has increased in value by over 6 times! The best “investment” I have made over the past decade has been gold, silver, and GoldCorp stock.
This is the main reason that I started investing in gold in the first place. I studied Kondratiev and his K-waves and looked at the trajectory that the weak dollar policy would take. Knowing that gold would do well in such an environment caused me to invest in gold, silver, and gold mining stocks.
But What About the Gold Bubble?
I can honestly say that I hope gold is in a bubble right now. Why? Because then my other stock investments would do well. My dollar would purchase a lot more gasoline and imports would decrease in price. If gold is in a bubble, then the price should be collapsing at any time and the purchasing power of every dollar I earn should double or triple.
Somehow, I don’t see that happening. In fact historically, gold has done well when real interest rates are negative. This means that interest rates are less than the level of inflation which makes for a loss of purchasing power of paper currency. It only makes sense that gold would do well since it serves as a store of value. What is the point of saving in CDs if you lose to inflation year in and year out?
Since the economy sucks and Ben Bernanke has said that he doesn’t expect to increase interest rates for some time, I think gold will continue to do well. Does that mean that I think you should go all in? Of course not. The time to do that was in 2001-2003. That boat has sailed on. But I don’t think that it wouldn’t be prudent to place a little bit of your portfolio into gold. Of course, the higher the price goes, the closer it is to a top. But I don’t know where that would be. No one does.
Summarizing
I think having some exposure to the gold price (about 5-15%) in an investment portfolio is a good idea and one that will help decrease volatility. I think investors should become aware of the longer term trends by studying long waves and should look into getting into stocks or real estate when everyone is down on them. I also think the loudest opponents of gold are simply miffed that they missed the historic opportunity that was presented in the early 2000′s. Of course, keep yelling bubble long enough and eventually you will be right. I will be looking at the Dow:gold ratio and interest rates to make my assessments.
Readers: I am sure you have some thoughts on investing in gold. I have read several posts on the topic. Please share your thoughts. I would love a spirited discussion. Maybe future post topics will emerge.
PS–It’s kind of nice to be writing this post on a day that gold is up over $58 per ounce.
I couldn’t agree more. It’s good to see someone else who’s into both cash flow /and/ gold. It’s usually all or nothing. I’m all about dividend stocks and precious metals. The two mix together wonderfully.
Thanks for reading and commenting. There is no sense to be all or nothing. Each investment offers benefits that compliment the others.
CFM – good article. I think it’s smart to have 5-15% in precious metals, especially if you agree with the things you list in your article.
One of my concerns is that I’ve seen too many people transition a large (>50%) portion of their assets into gold. This tells me that they’re making decisions based on fear – and I’m not a fan of investing with emotions.
For someone who can objectively look at including precious metals in their portfolio, I say great! For those running to the shiny yellow stuff out of fear, I’d say talk with a financial adviser first!
Keep up the great articles,
Tim
I don’t know that it is a good idea to have 50% of your portfolio invested into anything. And you make a great point on investing with emotion. It is a very bad idea to invest based upon fear or greed. It will always end poorly.
I have played with the idea of gold but at today’s rate don’t think I could. I also think it may have or be near a peak, although historically it has been higher (price adjusted) still I think it may be coming down next year or so (unless you believe the doom predictions of total us economic collapse). Now silveri may be able to afford and I read somewhere that historically silver has actual had a better growth rate or return (not sure it was awhile ago) so may be a better investment? Something I should look at anyway to diversify.
It is worth looking at. Personally, I think gold has more room to run and would think that the Dow:gold ratio needs to approach 3 before a reversal will occur. I am not sure that the ratio will get all the way to 1, but who knows? I just don’t see gold losing steam until interest rates climb which won’t happen before 2013 unless some jobs get created. Of course, if you aren’t in gold now, then it is a riskier trade than anyone who got in before it hit $1000 per ounce.
I’ve gone back and forth on gold. I’m seeking an early retirement (before 40) by seeking out investments that provide me cashflow (dividend growth stocks). Gold does not pay me dividends, at least not the physical form (which is what I would prefer to own). In fact, not only does it not pay me to own it, like a company does, but it actually requires me to pay out additional costs to hold it (in the form of a safe deposit box or other storage means). The only way I can receive my wealth back from it is to sell it. Gold, in this way, is unlike many other investments (real estate, stocks, bonds, CD’s, bank accounts). It doesn’t actually provide any cashflow at all.
I wouldn’t mind owning gold as a very small part of my portfolio one day. I would probably keep it to 1-2%, and my main reason for owning it would be a SHTF type scenario. A collapse of the modern day economy would make gold invaluable, although I truly believe this will never happen. I think owning a small bit of gold and silver (3-5 oz. gold and 100 oz. silver) would serve one well just in case.
Again, I go back and forth. I like to receive my dividends from stocks that I continue to own. I look at my portfolio like a fruit tree, the branches are my individual positions and the fruit that hangs are the dividends. I pluck the fruit quarterly and the fruit keeps growing. I never cut the branches, so I can keep receiving the quarterly fruit. With gold, you essentially have to cut the branch and sell it whole, thereby never receiving any future fruit. I can pay my bills with my dividends. I can’t pay my bills with my 3 oz. of gold in storage.
That’s my 2 cents (or 1/100000 oz.).
That is the one main argument with which I will tend to agree. It is impossible to get any cash flow from physical gold. Of course, you can invest in gold mining stocks and collect some dividends which I did with Goldcorp for many years. You can also sell covered calls against that stock to enhance the yield. This would tentatively allow one to benefit from an increase in the gold price but the relation is not 100%. There are political and operational risks.
One could use GLD or SLV and sell covered calls to create cash flow. The correlation to the actual price of physical would be much better. You would also be creating your own dividends. This is probably the best way around the fact that gold doesn’t pay any cash.
I have similar view to Dividend Mantra. I would probably invest 2-3% max when the price come down. I’m not in a big hurry and can wait to invest in 5-10 years. I’d rather invest in real estate right now.
That is a great plan. The problem is that many just react and don’t actually have a plan or thought at all. They simply spout out biases and opinions without looking for any facts. There is more than one way to make a profit.
I’m still looking to invest in silver. Silver’s in a great bull market, and every great bull market exceeds its previous highs (in this case, $50).
I would expect silver to exceed $50 nominal within the next several months. That is part of the reason that I started investing in Silver Wheaton stock.
nice post. there are ways to buy into gold with gold miners. good analysis of different ones in seekingalpha. link through my blog.
GLD needs some tax work at the end of year.
Yes, GLD does take some tax work. That is one of the advantages of using tax deferred accounts for that type of trading.
I agree that gold is lighter than a cow lol.
I agree a diversified portfolio is key, not heavily weighted in any category. Nice article.
I think diversification is important and is key to surviving any major economic crisis.
I’m neither strongly against or for gold at the moment! Still watching this with curiosity! Very interesting to hear your perspective CFM!
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Thanks. I hope I offered a little food for thought.
Gold is the only one secure thing to invest ALWAYS. Always keeps it price. Gold dont care about wars or recessions. Gold doesn’t care who is the current president in IRAN.
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True, so true.
Like you, I like precious metals both in physical form and mining stocks. They’re not a huge part of our household wealth, but they’re one are where we’ve done very well over the years.
Don’t know if we’re in a bubble yet for precious metals, the interest hasn’t reached fever pitch yet.
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You sound very wise.