Can someone explain to me why I should invest in gold and silver?

[DaVinci]

I keep hearing people say "Buy gold. Buy silver". Okay. Why? "Because the economy is going to collapse" is the standard answer given. Okay, so the economy 'collapses', and paper money becomes worthless due to massive inflation. So then what? Most people don't own gold, unless you want to count jewelry. But I can't walk into a grocery store and buy food and hand them my gold wedding band and expect change. They will tell me they can't accept it. There is no system in place to take gold as a payment for anything. So how is an economy where paper money has become worhtless going to function when no one accepts gold and silver coins? It seems much more likely that another paper currency will take the place of the dollar and people will be stuck with a bunch of coins that they can't do anything with.

[TheRobin]

The way I undestand it (which doesn't mean much) isn't that you should buy gold/silver to make it into coins, but rather as a store of value. Seeing as both metals are used in the industry, so you know there will be a demand for it in the future, so whatever new currency will emergy, you'll have buyers for gold/silver and you don't lose the value of your work/savings because it is stored in paper, which becomes worthless.Btw for the same reasons you can just as well buy platinum or other usefull and easy to store metals with a high $/kg ratio.

[Alan C.]

The purchasing power of precious metals has remained relatively unchanged for the past century while fiat currency has depreciated precipitously.

There is no system in place to take gold as a payment for anything.

If/when the value of fiat currency goes to zero, people will require another means of indirect exchange.

[DaVinci]

Gold and silver have retained their purchasing power. So an once of gold still buys the same amount of stuff it did 50 years ago. Okay. But isn't this measured in U.S. dollars? So if an ounce of gold is $1500, that is what I can get for it if I sell it. $1500. When the paper currency implodes, it then stands to reason that I will have to wait for a new currency to be created to take advantage of my gold. Because if the paper money that everyone uses goes to zero then what can I get with my gold? Not paper money obviously. I suppose it could be used to barter with. But owning gold seems contingent on having a paper dollar to tie it to in a society not built to accept gold.

[Nathan]

I have gold and silver coins. People used silver coins prior to 1964.  Any quarter you find that is 1964 or earlier is made of silver.  People used gold coins prior to the nationalization of the currency in 1913.  I suspect that whenever the dollar does collapse, I can simply use the gold/silver coins I have to pay for things, or deposit them in a bank and use some kind of digital currency that represents the gold or silver I deposited.

[lyghtningrod]

1964 coins are also silver.

I used to be paid 50¢ to mow a lawn in the early 60s. Now that same fifty cent piece in worth about $12.5.

Gold was stolen from the citizens in 1933, not 1913

As for investing, I think you should have a certain amount of gold and silver as a hedge against the insanity. Paper money can become toilet paper in a shockingly short time, so having something of value, anything at all, is good. It happens that gold and silver have easily determined weights, and can be used to facilitate exchange better than wheat, or gas or other commodity.

 

[anarky102]

 

The way I undestand it (which doesn't mean much) isn't that you should buy gold/silver to make it into coins, but rather as a store of value. Seeing as both metals are used in the industry, so you know there will be a demand for it in the future, so whatever new currency will emergy, you'll have buyers for gold/silver and you don't lose the value of your work/savings because it is stored in paper, which becomes worthless.

Btw for the same reasons you can just as well buy platinum or other usefull and easy to store metals with a high $/kg ratio.

 

Ditto on this comment. People also generally like gold and silver because it is portable and their is no counterparty risk. Their has been commodities such as lumber that have outperformed the metals in the seventies. While I do follow technical charts, and see potential trouble for value when priced in dollars at times, I also look at the absurdity known as public discourse that we have these days, granted the government has the guns and can do whatever the heck it wants. The toughest part about these times at the moment, is that it is really more about CONSERVING money versus making a windfall.

The irony is that if you discuss metals with your average joe bag of donuts american, they will think even worse of you then some bankster that has looted millions in wealth. But like Henry Ford once said, "If the average person recognized the truth of america's banking system, their would be revolution in the streets tomorrow." However, this is certainly much less of a likelihood given the overwhelming amount of force big brother has at it's disposal. Not that I would even advocate revolution anyway, which is precisely why governments love gun control, in the guise of saving lives, despite billions and billions killed to the contrary.

[LFReasons]

 

Gold and silver have retained their purchasing power. So an once of gold still buys the same amount of stuff it did 50 years ago. Okay. But isn't this measured in U.S. dollars? So if an ounce of gold is $1500, that is what I can get for it if I sell it. $1500. When the paper currency implodes, it then stands to reason that I will have to wait for a new currency to be created to take advantage of my gold. Because if the paper money that everyone uses goes to zero then what can I get with my gold? Not paper money obviously. I suppose it could be used to barter with. But owning gold seems contingent on having a paper dollar to tie it to in a society not built to accept gold.

 

It's not that society is not "built" to accept precious metals as money, or that there is even any particular practical impediment to doing so. In fact, it has to be prevented from happening via legal tender laws, because precious metals are a shield against the various games that governments play with currency to loot their livestock. If the dollar crashes, people aren't just going to stop trading and lay down and die. They will barter, whether it's strictly legal or not. And when it comes down to that type of situation, ANY commodity, any physical good, will be much more valuable than IOU tokens. It's just that most other commodities can rot or go bad, and require a lot of storage space for a comparable amount of value.

[SteveRG1]

The value of silver can never, ever go to 0...unlike paper money or stocks.

The opportunity silver presents right now, IMO, is that it's likely that it's severely undervalued relative to real supply and demand. The market is being heavily manipulated at the moment in a downward direction. Markets can't be manipulated indefinitely. So silver is not only a good home to store your wealth in this uncertain time, but there's a good chance to actually reap a decent windfall profit off of it (in real value, not just relative to paper money). 

And I'm putting my money where my mouth is here. Literally every penny I save is currently going into silver.

[Metric]

 

I keep hearing people say "Buy gold. Buy silver". Okay. Why? "Because the economy is going to collapse" is the standard answer given. Okay, so the economy 'collapses', and paper money becomes worthless due to massive inflation. So then what? Most people don't own gold, unless you want to count jewelry. But I can't walk into a grocery store and buy food and hand them my gold wedding band and expect change. They will tell me they can't accept it. There is no system in place to take gold as a payment for anything. So how is an economy where paper money has become worhtless going to function when no one accepts gold and silver coins? It seems much more likely that another paper currency will take the place of the dollar and people will be stuck with a bunch of coins that they can't do anything with.

 

Just imagine that you lived in Venezuela when you made this post, and had $10,000 at that time.  If that $10,000 was sitting in a local bank, as of today it's worth roughly $6,666 in terms of international buying power.  If that $10,000 was in gold in your personal safe, though, it is now a lot more valuable in terms of the local currency, but is roughly the same in terms of international buying power.

Point being that if you own gold, it doesn't really matter if they replace an old, dead currency with a new devalued one designed to fleece you for some percentage of your savings and keep the government solvent.

[SimonF]

I would not consider precious metals an "investment" because their value is unlikely to increase. On the other hand they are an excellent store of your surplus value because their value is also unlikely to decrease (substantially).You can of course trade in some gold or silver for paper money to go shopping now, and that will probably remain so even when the states false money fails and gets replaced by something else.So long as people want gold or silver it will be tradable for paper currency. Long term paper currency may get replaced by electronic currency like bitcoin.

 

[Alan C.]

I would not consider precious metals an "investment" because their value is unlikely to increase. On the other hand they are an excellent store of your surplus value because their value is also unlikely to decrease (substantially).

I think that this is the proper way to consider precious metals, and Peter Schiff also holds this view.

[SteveRG1]

Well, if you look at the potential losses if you tie your money up in the stock market or in paper currencies (theoretically possible to have 100% or near 100% losses), then even a 0% return looks pretty good and you could consider it a strong investment in this climate.

[SteveRG1]

But if you then take into account the likelihood that something like physical silver is extremely undervalued due to market manipulation, it does begin to look more like a true "investment" in that it's likely to see a return of real value when market forces eventually win.

[suomipoi]

 

This Book gave me alot of usefull information about investing in gold and silver. Mike Maloney also has seems to have plenty of videos on youtube. The book gives you the big picture of what's going on and the videos are more specific. Take in account that He is a seller of gold and silver product so that could have some impact on the truth factor of what he is saying.

 

Inflation makes it hard to see the true value of some good. You can avoid this by measuring relative worth of 2 things.

Measure silver/gold in terms of how many stocks of DOW you can buy. How many ounces does it take to buy a bushel of wheet etc. That way it's easier to see the real purchasing power of your metal.

 

Example of dow/gold Ratio

Note that this chart is outdated.

You can see that in 1980 one stock of dow could be bought with one ounce of gold. Then in 1999 gold was the most undervalued compared to stocks it has ever been (42 ounces to buy one stock). The average of this chart is 12.5 so if you buy above that line you are likely to have your gold appreciate in value compared to stocks. Currently the ratio is somewhere near 7. When/if the ratio goes below 3-4 it might be a time to start trading your gold for stocks or other things.

The benefit in this graph is that inflation doesn't affect this chart. The value of a good here is only determined by the relative value of 2 items. Therefore this makes it easier to buy stuff that is actually underpriced.

[Hannibal]

then what can I get with my gold? Not paper money obviously. I suppose it could be used to barter with. But owning gold seems contingent on having a paper dollar to tie it to in a society not built to accept gold.

 

 

You're storing your wealth in gold, because noone can print more gold and make it worthless. It is not a cash replacement - although it could be in future - it is simple a store of wealth. In Zimbabwe if you had a fortune in the bank, denominated in Zimbabwean dollars, you'd now be stone broke, and have a few South African rand in your pocket.

 

If you kept your fortune in gold, you could now convert that gold to South African rand and buy a big shiney yacht.

 

Lets say the currency doesn;t collapse at all, but we just have 10% inflation for a couple of decades - when you decide to spend your gold, which would currently buy a yacht, in 20 years you could still buy a yacht. If you kept your wealth in paper money instead, you'd only be able to buy a yacht about 2 thirds of the size!

 

 

I think before you think about buying the bullion, you should have a read-up on money, what it is, where it comes from, and it's nature & relation to real wealth.

 

[Lowe D]

The price of gold reflects the real interest rate, mostly.  Real interest would be nominal interest minus inflation.  The lower the real rate, the higher the price of gold.

Considering this, gold is worthwhile to include in a long term portfolio, as a way of dealing with a high inflation and low nominal interest.  Harry Browne fleshed out a lot of these ideas, and you can check out some writing on the subject here.

 

EDIT:

A safeguard in investing is to diversify among different asset classes.  It isn't wise to have all one's savings in a single asset, like commodities (e.g. gold).  That is, as long as you're a mere mortal.

[DaVinci]

 

The price of gold reflects the real interest rate, mostly.  Real interest would be nominal interest minus inflation.  The lower the real rate, the higher the price of gold.

Considering this, gold is worthwhile to include in a long term portfolio, as a way of dealing with a high inflation and low nominal interest.  Harry Browne fleshed out a lot of these ideas, and you can check out some writing on the subject here.

 

EDIT:

A safeguard in investing is to diversify among different asset classes.  It isn't wise to have all one's savings in a single asset, like commodities (e.g. gold).  That is, as long as you're a mere mortal.

 

 

I still don't understand what having gold as an investment as part of a portflio is supposed to do for me? People keep saying "Inflation makes things cost more, but gold has retained it's value." Okay. So the point of gold is to buy low and sell high? Because that seems like the only practical application. Just holding it forever seems to not make sense.

[Alan C.]

The purpose of having precious metals in your portfolio is to insulate your wealth from currency debasement.

[DaVinci]

 

The purpose of having precious metals in your portfolio is to insulate your wealth from currency debasement.

 

 

Right, but eventually you have to sell your gold and trade it back into paper money. Otherwise it is just going to sit in a box in a closet.

[Alan C.]

Is it a problem if you have to do that?

[DaVinci]

 

Is it a problem if you have to do that?

 

What? Have it sit in a closet? Yeah, If I'm spending money on something that I will never be able to use and just stick it in a closet never to look at it again. It would be like if I bought Picasso paintings because they appreciated in value. But I can't go to the store and buy food, clothes, or emergency medical aid with a painting. I would have to sell the painting for paper money at some point to benefit from having it. That's my problem with people who talk about gold as a store of value. Eventually you will have to sell it for paper money to get use out of it, and all the paper money you spent to get it in the first place could have been used to fix up your house, or pay off your car, or buy food, etc etc.

[Hannibal]

 

 

Is it a problem if you have to do that?

 

What? Have it sit in a closet? Yeah, If I'm spending money on something that I will never be able to use and just stick it in a closet never to look at it again. It would be like if I bought Picasso paintings because they appreciated in value. But I can't go to the store and buy food, clothes, or emergency medical aid with a painting. I would have to sell the painting for paper money at some point to benefit from having it. That's my problem with people who talk about gold as a store of value. Eventually you will have to sell it for paper money to get use out of it, and all the paper money you spent to get it in the first place could have been used to fix up your house, or pay off your car, or buy food, etc etc.

 

 

I think the question was aimed at the turning it back into paper money part    What's the weird issue you've got with selling your gold when you want to liquidate it? That's kindof the point, lol.

[SteveRG1]

Regardless of whether you consider gold or silver as an investment or just a "store of wealth" is kinda irrelevant, too. It's just an asset like anything else. Investing is all about keeping your value stored in under-valued assets that will appreciate and bring you greater wealth. There's a Doug Casey interview somewhere where he talks about how there are very few true bargains in the world right now (meaning most traditional investments are over-valued). PMs, especially silver, are undervalued right now so that's where you want your money.

In a free market, PMs would probably operate as just a store of value and nothing more. But in the state bubble-driven economies you have to speculate and play the fluctuations in order to keep and grow your wealth.

[Alan C.]

Have it sit in a closet?

If you have cash (in excess of what you need to live on) sitting idle in a bank account then you're wealth is being slowly siphoned away via currency debasement. The purpose of buying precious metals is to prevent this.

Eventually you will have to sell it for paper money to get use out of it, and all the paper money you spent to get it in the first place could have been used to fix up your house, or pay off your car, or buy food, etc etc.

Americans used silver coins in the past as currency and they didn't need to exchange them for paper to buy stuff. If Federal Reserve Notes become worthless then gold and silver will be used for commerce. People won't wait acound for the State to create another currency so that they can buy groceries.

In the meantime, it's not a big deal to exchange gold and silver back into paper to make a purchase.

[ribuck]

If you have cash (in excess of what you need to live on) sitting idle in a bank account then you're wealth is being slowly siphoned away via currency debasement. The purpose of buying precious metals is to prevent this.

In the long run, cash loses purchasing power.
In the long run, gold and silver maintain purchasing power.
In the long run, stocks greatly increase their purchasing power.

If you're investing long term (at least a couple of decades), it makes no sense to buy precious metals.

The price of precious metals is quite volatile. It tends to skyrocket when there is financial instability, and plummet when stability returns. In the short term it can make sense to hold precious metals, provided you buy them before the instability hits, and sell them before stability returns.

Before buying gold, take a look at the following chart:
Historical gold price in USD and inflation adjusted gold price in USD
Pay attention only to the red (inflation-adjusted) line. See how there are many times when it would have been a really bad time to buy gold? The really good times to buy gold were prior to 1973, and from 1997 to 2006. If you buy now, you are helping someone else realise the gains their gold made between 2002 and now.

If you think that financial instability is going to get even worse than it is now, it could still make sense to buy gold, provided you sell before stability improves. If the western economies crash badly, gold could still do well. But the reason I won't invest in gold at this time is that if western economies crash badly, private ownership or use of gold might be prohibited or heavily taxed.

[suomipoi]

 

In the long run, stocks greatly increase their purchasing power.

 

If by purchasing power you mean more benjamins then you are right. On the other if purchasing power is measured by the amount your bejamins can buy stuff then stocks values are not increasing in the long run as a whole. If you look the price of Dow compared to gold from 1900's to 2000's you can notice long cycles there. The stock prices don't go up forever, but there is a saturation point. Once that is reached then the price (measured in goods) returns down. The misconception that stocks in general appreciate in purchasing power is the result of inflation.

 

But then again you could pick good stocks which provide good returns on a certain timeframe. e.g. 1980-2000.

[ribuck]

If by purchasing power you mean more benjamins then you are right.

No, I used the term "purchasing power" to mean what could be bought, i.e. after adjusting for inflation. For the same reason, I referred people to the inflation-adjusted line on the gold price graph.

If you look the price of Dow compared to gold
from 1900's to 2000's you can notice long cycles there.

Those are indeed very long cycles, but to my eye the overall trend looks upwards.

In Jeremy Siegel's book Stocks for the Long Run, he tabulates the real returns (i.e. after discounting for inflation) of stocks, gold and bonds from 1871 to 2001. The average annual real return for stocks was 6.8%, but for gold was actually slightly negative at minus 0.1%.

This agrees with the convention wisdom: that gold is a great store of value, and a great hedge against financial instability, but is not a productive investment in the long run.

 

[Lowe D]

@ ribuck

Stocks outpace precious metals on a long enough time scale.  On short time scales that may not be the case.  Take 2000 to 2011 for example.  An investment portfolio should take this into account, considering you have no way of knowing with certainty what time it is, economically.

I wouldn't want to be depending on the hope that everything's swell for stocks, in the decade I retire.

 

@ OP

The idea behind most investment portfolios is you hold X% of asset A, Y% of asset B, and Z% of asset C.  You set some bands around those percentages, and when the value of an asset, say A, goes above/below its band, you sell/buy it, back to its set percentage (X%).  That way you're constrained to sell when it's "high," and buy when it's "low."

I think you should check out that link I gave you to Crawling Road.  The guy who maintains that blog has written on the subject.  There are other resources out there for do-it-yourself investing, including bogleheads.org.

[meeri]

As previous posters have argued, gold and silver can be better than holding your money in cash at a time of high inflation and low interest rates.

Gold and silver are not 'investments' as such - they do not generate cash flows, like a business does through dividends or bonds do through interest payments. This is probably the reason why someone like Warren Buffett doesn't buy bullion.

So if you decide to buy gold and silver you speculate that the price of bullion will increase, and the price of fiat currency will decrease in the future, which can be a perfectly valid thing to do. But you are foregoing the cash flows you could be earning at the same time from other investments, such as stocks.

 

[Libertus]

As previous posters have argued, gold and silver can be better than holding your money in cash at a time of high inflation and low interest rates.

Gold and silver are not 'investments' as such - they do not generate cash flows, like a business does through dividends or bonds do through interest payments. This is probably the reason why someone like Warren Buffett doesn't buy bullion.

So if you decide to buy gold and silver you speculate that the price of bullion will increase, and the price of fiat currency will decrease in the future, which can be a perfectly valid thing to do. But you are foregoing the cash flows you could be earning at the same time from other investments, such as stocks.

Everything in this reply is correct. Welcome first poster!

[Existing Alternatives]

Each asset in the investment portfolio has a purpose, which is usually determined by investor’s personal economic outlook and investment horizon. For example, gold is preferred when your outlook is negative (economic-collapse type of negative) and your investment horizon is long; Common Equity (stocks) is preferred when your outlook is positive and inflationary with an unlimited horizon; Cash works when your outlook is deflationary or horizon is short, and so forth.

Investment decisions are highly personal and dependent on one’s level of comfort with the tools available. And ultimately, any combination of the assets may work for an individual portfolio. My feeling is that majority of members on this board fall into the category of “economic-collapse type of negative” outlook, hence, gold would be an appropriate asset to hold (in a portfolio along with other assets).

The reason why gold is generally treated separately is that historically it has been used not only as a store of value, but also as a valid currency. This historic notion is what gives its value, nothing else. Industrial and jewelry uses has very little to do with it. If tomorrow, everyone decides that sea shells store value better than gold, or if someone uncovers huge deposits of gold somewhere, the value of gold will plummet to virtual zero. Gold buyers bet that the probability of either of the events is negligible.

Silver is less reliable as a store of value for two reasons: there is more of it, and, most importantly, investors (such as central banks, which are by far the biggest holders of gold) do not see it as such. Having said that, some investors use both gold and silver as speculation vehicles betting on short term price fluctuations.

And yes, there is a system in place for accepting gold as payment – it’s called barter. You can generally trade anything for anything. Under these conditions gold is used as a common denominator in the exchange. And yes, in the absence of paper money, you can always offer your wedding band as payment for your groceries – I’m sure storekeeper would be more than happy to accept it.

[Josh F]

Everyone is into precious metals, but I prefer storing my wealth in noble gases.  Krypton retains its value and also has the intrinsic value of being able to defeat superman.

 

Bad jokes aside, if you're preserving your wealth in general fine art and collectables have a good track record as well.  If the goal is specifically to preserve wealth in the event of some kind of epic disaster (which might be a tiny bit paranoid, just had to say it) then go for guns, they retain their value well in a normal market and will skyrocket in value in the event of something more epic/paranoid.

[P. Mason]

What else are you going to put in your pirate chest?