I was talking to a guy recently about his investments, because that’s apparently what I do now. We spoke for a little while about his mutual funds, (which, as you can expect, were terrible and expensive), before he dropped the bombshell on me. It turns out he has a not insignificant position in precious metals, particularly silver.
Here’s pretty much how the conversation went:
“You own silver? Like, a silver stock, or mutual fund?”
“No, actual silver. Little bars of it.”
“What do you do, keep it in your safety deposit box?”
“Yeah. Sometimes I take it out and hold it.”
“So let me see if I’m clear here. You own something that not only doesn’t pay you a dividend, but you have to pay to store it?”
“Well, when you put it that way…”
I’ve known this guy for a while. He’s successful, works hard, and has ran his own business. He’s not stupid, by any means. He just fell for the hype one day and decided he was going to load up on silver just in case the Canadian Dollar went the way of Polaroid cameras and beehive haircuts. It was a hedge, to protect his family from the internet’s dire warnings of AN UPCOMING CURRENCY COLLAPSE.
We’ve all heard the same arguments for years. The U.S. Federal Reserve has pumped trillions of dollars into the system, mostly by buying U.S. Government debt. According to the conspiracy nuts, this was supposed to lead to runaway inflation, which would therefore devalue the Dollar. Next step: living in caves. Probably.
This hasn’t happened. All credit goes to Ben Bernanke, because the whole Quantitative Easing worked out pretty much the way it was drawn up.
So right now, precious metals aren’t the place to be. Gold is down, so is silver. Platinum might be the worst performing metal of all. Heck, just about every metal is down from recent peaks, mostly thanks to China slowing down.
So in theory, this would be a good time to maybe pick up some precious metals. The price is low, so y’all should load up now, and ride it up to the inevitable peak, which is apparently exchanging it for toilet paper with one of those guys from Doomsday Preppers.
WHO’S LAUGHING NOW, JACKASS?
But here’s the deal. Gold is a really crummy asset to own. It doesn’t pay you. You can’t really use it to pay anybody for anything, since they’ll just have to exchange it for actual money. And unless you’re a big investor buying thousands of dollars of it at one time, you’re getting a terrible deal when you both buy and sell.
Besides, let’s take owning gold to its logical conclusion. Say a gold bug is right, and the world’s largest economy collapses. The U.S. Dollar is now worthless, and the guy who saved 10,000 cases of cream corn is now in charge. But hey, you’re in second place because you have a fist full of gold.
Explain to me who would hope for such a thing to happen. What kind of person wishes for everyone’s wealth to be destroyed? What kind of person wants to see the world’s greatest economy brought to its knees? Who would rather live in a world with a collapsed currency than the relatively tranquil one we have now?
But hey, at least he’ll have gold. Even though things like bullets, gasoline, and food will be infinitely more important than shiny pieces of metal. I’d rather invest in innovation, entrepreneurship, and the success of American enterprise.
But should you own it?
The thought process of many non-crazy people when looking to invest in gold goes something like this:
Just put 5% of your portfolio into it as a hedge, and forget about it. That way if the Dollar does collapse, you at least won’t be totally screwed.
But I’m not sure that’s good logic either. Firstly, if the Dollar really does collapse, you’ll need physical gold, not paper products. Good luck trying to exchange your gold ETF shares for actual metal as the economy is collapsing.
And secondly, there are plenty of other assets you can own that are inflation hedges. Other, more useful commodities are one, so is real estate. You could even argue short-term bonds are a hedge, unless inflation is super bad. In theory, they should pay a little more than inflation.
Probably the best thing to own in that situation is a house with a mortgage on it. As inflation runs out of control and your interest rate and payment stay the same, you’re in pretty good shape. Just don’t get screwed over when it comes time to renew the mortgage.
So to summarize, should you invest in gold? I’ll let Warren Buffett have the last word on that.
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.