Don’t Go “All In” On Gold

"Buying gold is just buying a put against the idiocy of the political cycle. It's that simple"  - Kyle Bass

Picking up where I left off with the last post, I suggested that one could preserve some of one’s wealth against the EVENTUAL decline in the dollar by putting it into precious metals (or PM’s as they are commonly referred to in the blogosphere). So I figure I should clarify that statement with the following points:

Do NOT throw most or all your money into gold and silver. Like I said in the previous post, I don’t expect the decline of the dollar to happen any day now. Most of the people who are telling people the dollar will crash any day now are trying to sell you something, typically PM’s or survival supplies. Hey, fear sells. But if those fear peddlers really believed it, why on earth would they be accepting US dollars for the things they sell? At any rate, it’s never a good move to put all your eggs in one basket whether PM's or anything else. And since gold and silver prices are notoriously volatile and subject to periods of market manipulation (refer to here and here for examples and background), it’s especially stupid to do so with PM’s. I admit there were times I was very tempted to plow more money into PM's a few years back, but once I met the targets I originally set, I grudgingly refrained from devoting more of our cash into PM's and focused on boosting our cash savings further. And considering the dive gold and silver took the year after I'm damn grateful I did so.

Gold is part of a long term strategy, and silver doubly so. If you have a nice chunk of money that you expect you’ll need to spend in the next year or two, it’s best to not put it into PM’s. The downward slide in gold and especially silver prices in the past couple years should be enough to illustrate that point. Silver I see as a better overall bargain at this time than gold, but only if you’re willing to hold onto that silver for the real long-haul, like possibly a decade or more. While my hunch is that the bottom for gold and silver is either here or very close, who’s to say it won’t take a big damn dip right at the time you need to cash it in for whatever near-term future purchase you had planned?

Gold and silver are more about wealth preservation, not getting rich quick or chasing a quick return. While I think there’s a decent chance that one COULD increase one’s real wealth through holding and then selling gold & silver at the right times, it’s best to think of PM’s as insurance first and a means of wealth appreciation as a distant second. Plan on that little pile of PM's purchasing roughly the same amount of goods & services in the future as it does now, and no more. And if your timing is good and you do happen to make out like a bandit, think of it as a bonus.

Numismatic coins are not worth the extra expense. For those of you who aren’t familiar with the term, numismatic coins are essentially collectibles where part of their worth is due to either their history or rarity. Some less scrupulous businesses try to sell these to consumers, using fear to manipulate people into thinking these coins are a better investment. Their rationale goes something like this… in 1933 when FDR outlawed private ownership of gold bullion, “rare and unusual” collector’s coins were exempt from that edict, so if the government decides to again make gold ownership illegal then your “numismatic” collectible coins should be safe from seizure. One problem with that logic is the US government has little incentive to confiscate gold in that manner, as our dollar is not backed by gold and it’s very much against the government’s selfish interests to re-institute a gold standard again. They’re quite happy with the current system that allows them to deficit spend without any repercussions in the short or medium term. And there’s a lot bigger and juicier targets (such as retirement fund) that are far easier to get their grubby hands on should they really want money. But the biggest flaw I see in that logic is that it assumes that same exemption would exist for any gold confiscation in the future. Nothing is written in stone saying the government would have to do the same thing the next time around, and nothing says that your particular collectible would be in that exempt category even should one exist. Now all this said, I do think there is a possibility of a restriction or criminalization of gold bullion ownership in the US and some other nations. But realistically speaking that would only be worthwhile for the government to consider if some sort of partial gold standard were adopted. And I think most Western economies will do so only after every other option has failed, including the IMF’s “SDR as world reserve currency” option.

Don't buy, or sell, if you're in fear mode. In fact I think this goes for buying or selling ANYTHING, not just PM's. I will admit this is one rule I broke some years back, shortly after taking the "red pill" and seeing the instabilities in the world with fresh eyes. In my case it involved buying more PM's during my first purchase than I originally planned. Fortunately I bought at a good price and I refrained from dipping into our emergency savings, but even though it worked out well I had to admit that I reacted too much to the news at the time and should have remained more disciplined.

Do not bother buying PM’s for yourself if you’re not willing to thumb your nose at government. This slightly inflammatory statement I suppose requires explanation. If and when various governments start seeing gold and silver rise dramatically in relation to their currencies, how many of them do you think will sit back and let you reap all the profits when you sell or exchange your PM’s (even if in reality you're merely breaking even when counting inflation)? Even in better case scenarios where one’s currency devaluation and/or depreciation is not crushing and extreme, the government in question will likely see high prices and increased demand in PM’s as a threat to the status quo, and seek out ways to keep people from "profiting" from gold and silver ownership and sales. The most probable reaction would be levying punitive "wealth" taxes on gold & silver bullion sales, such taxes being convenient and more politically-acceptable than outright criminalization or mandatory exchange or confiscation of PM’s. It's a win-win for government, since it would not only serve to discourage trading in PM’s but also rake in a little more money for the coffers. Now to be effective in this regard the punitive taxation rate would probably be set high enough so as to wipe out any real inflation-adjusted gains on the sale. So if you did the smart thing and held some gold just in case, you have three choices. One, you could play the part of the law-abiding citizen and pay those punitive taxes because it's your duty as a sucker... er... patriotic citizen of your nation. But really that defeats the original purpose in buying the PM’s in the first place. Two, you relocate yourself and your PM’s to a nation that doesn’t impose such penalties. Great if you can swing it, but that won’t help you much if you’re a US citizen… Americans are taxed on their worldwide income no matter where they live or where the income was earned (you too ever have the feeling that the US government sees you as a sheep to be constantly sheared?). Three, you can sell some of your PM’s to private individuals and simply not report and comply with these hypothetical punitive taxes. I know some are (at least publicly) aghast at the notion, but it's going to become the accepted norm if and when governments implement new such rules and laws to fleece their people to the point of near poverty for its own benefit. Go to just about any country where they suffered an economic crisis, especially one followed by heavy-handed government taxation and financial repression, and you'll find a country where the average person doesn't think twice about ignoring repressive laws provided a cop or government official is not around. When laws get in the way of making ends meet, said laws tend to be ignored whenever possible. So decide how important obeying the law is to you and whether you're willing to trade on the black market IF the government becomes exceptionally repressive.

So warnings aside, yes, I'm pretty bullish on PM's. Market manipulation may influence things in the short term but I don't consider it a long-term threat or danger (I actually like taking advantage of it... I figure it's been giving me more opportunities to buy at discounted prices). Volatility isn't a problem as long as you're not thinking too much in the short term and don't put all your eggs in one basket. And we've already addressed how to respond to repressive government policies. So if you're in a position where you've already paid down most or all your debt and built a healthy cash savings (at least enough to cover 3-6 months' expenses), then funneling some money to PM's is probably appropriate. But as I said, don't go nuts with it.... the only people who should even consider committing half their net worth or more in PM's should be the wealthy guys who no longer need to work to pay the bills.