Everyone seems to talk about gold and silver in the investing world, but what’s the big deal? Gold and silver don’t pay dividends, aren’t liquid enough, and cost money to store and protect. Why on Earth would we want to invest in these old-style investments?
Gold and silver are great ways to diversify your investments, hedge against inflation and the US dollar, and prepare for the zombie apocalypse. There are also many ways to gain exposure to gold and silver, so deciding your goals is a must before jumping into the precious metal markets.
As always, I am being rude. Welcome to the Become a Bonafide Investor series (part I, part II, part III, and part IV), where we look at bigger picture market forces that affect our investing theses (plural for thesis—I learn something new every day). Okay, now back to gold and silver.
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The world has valued gold for an extremely long time—civilizations used it as currency in the earliest times. Here is one of the thousands of articles on the history of gold as a currency. I recommend everyone read about the history of gold because it is vital to our investing thesis. Bitcoin also shows some parallels to gold as a reserve currency.
One of the major events in the history of gold is when US President Richard Nixon took the US Dollar off of the gold standard. This move meant that the Federal Reserve could print money on a whim—and it has. This is where understanding the money supply via M1 and M2 comes in handy.
Basically, M1 and M2 show us how much physical money, and money in checking accounts, etc., is floating around in circulation. Having high M1 and M2 does not necessarily lead to inflation. However, we define inflation as too many dollars and too few products, goods, and services.
Currently, that is what is happening in the US, exactly. The money supply is high from over-printing, and the supply is weak. What goods are available are being bought at fast rates. When companies restock these products, they cost even more than earlier—Inflation.
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So why the dialog on inflation? One of the main reasons to invest in gold (and silver) is to hedge against inflation. There is not much above-ground gold in existence. They say all the gold can fit into three Olympic-sized pools (don’t quote me). So as the Fed prints more money, the world uses more dollars to buy the same brick of gold. The price of gold rises.
Here is the 20-year chart for gold, courtesy of BullionVault. You can see it spikes during times of economic hardships and recessions. After our removal from the gold standard, when things get hard, we print more money. Gold will be great to have in these times. But should we hold gold and silver at all times? And how should we keep it, physically, on paper, or remotely?
I am an investor, so I hold silver at all times. I keep a safety deposit box at a local bank and insert coins on a regular period. I am not hunting for capital gains or to make a quick turnaround profit. Holding precious metals is an excellent way to diversify for the future.
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There are five types of people who hold precious metals: the investor, the trader, the doomsday dude, the collector, and the conspiracy theorist. You just have to pick which one you are and go with your gut. I will have to explain the five in a separate article; I have too much to write today.
To be honest, my topic may have been too broad from the start. I’ll break down how to invest in gold and silver in the following article in the series. For now, let’s dig deeper into hedging.
Many people consider gold its own asset class, separate from real estate, business, commodities, and stocks. We like to diversify into these different asset classes because they should all react differently in critical moments in time.
Let’s look at the pandemic in 2020. In March, all of the above classes went sour at the same time. Businesses closed, people were scared to show homes, oil had a price shock due to politics, and stocks fell into the crapper. But they all recovered differently.
Gold went up in price fast due to fears over excessive money printing. The housing market has a bull run, especially if you already own a house (or three). Gold has remained steady, businesses are rebounding as new companies pop up daily, and oil has made a comeback (saving my Exxon Mobil stock).
The idea of using gold as a hedge is sound in theory. When (not if) paper assets tumble, gold should remain steady or rise. Suppose you need cash, sell gold instead of selling your paper assets for a loss.
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Now, digging a little deeper, it may not work this cleanly. Gold and silver now have huge ETFs that buy precious metals by the tons. When stocks fall, these ETFs may fall as well, making the ETF managers sell their physical stocks. This may cause gold to have a price shock, along with paper assets. But, that is a topic for another day.
So, gold should be a hedge to paper assets, real estate, business, and commodities. How about protection against inflation? I genuinely believe in being a well-rounded investor, so gold is an excellent hedge against inflation as a total investor.
We know we can’t hold cash as a hedge against inflation. We want to own real estate because we profit from the price of land, homes, and rents going up. Commodities also go up with inflation because of the demand for oil, goods, production, and services. Businesses can slow down during inflation because the cost to borrow money is higher. Stocks also slow down for the same reasons as businesses.
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Gold can serve as a cash substitute. As more money flows into the economy, our gold bars will increase in value. Again, I am using (unrealized) capital gains from gold to offset inflation—I am not selling my gold unless something is super-terrific or super-terrible.
Think of investing as an All-Wheel drive vehicle. The tires also have their separate suspensions. As we drive off-road, each tire works independently to keep our car stable and balanced. But, we need all four tires. Gold, real estate, business, paper assets, and commodities are the tires.
Conclusion. I know I went off the deep end on this one. I usually try to break it down as best I can. But gold has so many different meanings, theories, and stories. It is a fantastic asset, along with silver.
I will go into the ways to invest in gold and silver in the next episode of Become a Bonafide Investor. It is an honor and privilege to be able to write for you every day. I look forward to talking to you all and sharing my version of the world of money. Also, be on the lookout for my Become a Bonafide Real Estate Investor series as well. Thank you for reading!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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