This is a follow up to my piece warning against buying fake gold coins as an investment – a fool’s game indeed.
But there may not be anything foolish about buying gold as an investment, just buying it the wrong way.
I’m not recommending for or against holding gold, but I will point out that gold seldom goes down in price very much but has actually gone up every year in the past decade.
Monetary concerns aside (that is, the value of currencies varies), as a well known gold adviser, James Dines (dinesletter.com) points out, one ounce of gold buys about the same thing today that it did 100 years ago (such as a good mens’ suit), which you can’t say about the dollar.
This issue briefly goes into some background so you will understand a potential concern about owning actual physical gold, but mostly it concerns how to invest in precious metals if you choose to do so.
You didn’t hear about gold during the past 10 years – it isn’t popular among most investment advisors or TV investing hosts. People who invest in gold tend to hold rather than buying and selling a lot and brokers mostly make money when you trade – they really don’t care whether you make money or lose money, just so you keep buying and selling stocks or mutual funds so they get commissions.
In the absence of government intervention gold just keeps quietly going up decade after decade while stocks swing wildly making people anxious to keep trading them.
But the fact is that since the internet bubble collapse in 2000 gold has been one of the most “solid” investments you could make, going up in value every year while the stock averages (as you may have noticed) and even real estate plunged in the wake of the massive banking fraud we all just lived through.
The reason gold (and the poor-man’s gold, silver) have been good investments for, or say 5 or 6 thousand years, is because of inflation.
Now in the U.S. (as in other countries) the government doesn’t want to admit to inflation. That’s why they always want to exclude food and energy (the two things everyone uses every day.) At the very least they don’t want to admit to the real cause of inflation.
It really is obvious though if you give it a bit of thought. Once a government decides it can’t keep raising taxes, it has only one real option since there has never in history been a politician or government willing to reduce spending – they must print more money.
Yes, I know, Republicans all say they are for reducing spending, but what they actually mean is that they want to spend more money on their projects and get the inflation fairy to pay the bill, did spending go down under Reagan or either Bush?
But the Mint can’t just print money if the currency is backed by gold or silver or both unless they obtain a lot more gold or silver. That would be counterproductive when they can instead just go off the gold standard (some people suggest this is mandated in the U.S. Constitution – “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts” Article 1, Section 10, Clause 1, Constitution of The United States of America).
Going off the gold standard by printing more money happened back in the Great Depression and inflation has had free reign every since – remember, a good car cost $2000 in 1955 and a great house cost $10,000. What did bread cost? 15-cents/loaf?
Unfortunately, to make printing money not backed by silver or gold (fiat money) practical the government also had to make private gold ownership illegal (April 3, 1933) or people would just go back to using gold and stop using paper to pay for things.
The important point here is that for the past 3,000 years when governments get into really deep financial trouble they always devalue the currency (print more money or reduce the gold content of coins) and eventually make it illegal to own gold.
In the 1930’s collectible gold coins and jewelry were exempted (did poor people own much gold jewelry?) and probably will be exempt again when Washington officially devalues the currency and again makes gold ownership illegal.
Think it couldn’t happen again? On August 15, 1971 President Nixon ended the dollar’s convertibility into gold (by nations only) which had been the standard behind world currencies after WWII.
The threat of confiscation at the government’s set price is the main reason I am leery of buying gold bullion coins such as the Krugerrand or Maple Leaf. Collectible gold coins are very expensive compared to their gold content and prices vary wildly since it is essentially an “art” market. Jewelry is, of course, always extremely overpriced with markups of 100% common.
So, if not gold, what about silver? The price of silver has always historically been tied to gold, although it goes through cycles where sometimes it is worth more gold and sometimes less.
Right now silver is selling for far less than its historical average 16:1 ratio to gold, making silver cheap (or gold expensive) at the current ratio of about 60:1 (that is, today it takes about 60 oz. of silver to buy one oz. of gold).
There are also lots of ways to invest in silver – despite the big melt down back when silver coinage was taken out of circulation by the U.S. Mint, you can still buy old silver dollars or even bags of “junk” silver which have monetary value – meaning they are legal tender for debts if all else fails.
This week silver is hovering around $17 – $18 per oz vs. about $1100 per oz for gold, making it much more practical to trade silver coins such as an old quarter for something small such as a meal.
It is also very unlikely that the government will try to make private ownership of silver illegal because The Federal Reserve sold most of the U.S. silver reserve when it was trading on the open market for between $20 and $50 oz.
Even if you say to heck with the government and hide your gold remember that selling something which is illegal to own always involves criminal elements. Do you want criminals to know you have a bunch of gold?
Other ways to own gold include buying shares of gold mining companies, buying the gold (or silver) ETF GLD (SLV).
You can even get exotic with PowerShare ETFs UGL and AGQ which generate double the percentage change of the actual metal.
PowerShare ETFs are for sophisticated traders and you can even buy PowerShares which will go up double the rate at which silver (SVL) or gold (GLL) go DOWN.
So, consider investing in gold and silver, but bear in mind that the government may decide to make gold ownership illegal (again) and that right now silver is selling at a big discount to the traditional gold/silver ratio.
Just don’t buy fake gold coins off some TV ad. This is one case where, because of the small margins in legitimate gold and silver sales, inexpensive Internet advertising is more likely to be done by legitimate dealers than expensive TV advertising.