Before a year ago, if you had asked me if I thought gold had any utility, or that I would be buying any, I would have looked at you sideways.
Right now, the ratio of total paper assets (stocks, bonds, derivatives, pension plans, etc.) making a claim to wealth, relative to actual wealth, is proliferating. The best way to describe it is that in a financial crisis, as debts are defaulting and paper assets are getting marked down, there is flight to quality down Exter’s Pyramid. I see the problem in owning nothing at the bottom (gold) and then trying to rush down the ladder to quality along with everyone else at the same time.
Given the current stock market valuations, by buying gold I am “selling high” on paper assets and buying low on what I anticipate other investors will eventually flee to.
Having cash instead of gold is the default for most, but inflation depreciates cash over time. This is why artificially low interest rates push investors into risky speculative assets, because they are looking for a return on their capital. Having short memories, they forget previous bear markets and drawdowns of principal, and the importance of return *of* capital.
Inflation is probably the single most underestimated wealth destroyer. Taking a look at sovereign and corporate debts, buying precious metals is a way of saying “I am not bailing out insolvent banks or governments or bankrupt retirement plans. I am not paying into the Ponzi scheme.” (Of course, one could say that buying gold is entering a Ponzi scheme, but I have perhaps naively bought the idea that no central authority controls the gold market.) When the government buys bad debts to support asset prices, they are essentially converting those toxic assets into Treasuries- thereby devaluing the dollar. This is the moral hazard- big investment banks can try to win big because they know if they lose, they have a price-insensitive buyer to get them off the hook (taxpayers).
The government wants you and your capital in the system, so they can slowly confiscate it over time. Hence my bad joke above about criminal activity and taking your wealth “off the grid.” The government can freeze your bank accounts, whether because you are being targeted individually, or because they need to devalue the dollar to pay bad debts. They may try to associate gold ownership with criminal activity, just as they are trying to do in to the (fascist) push to eliminate physical cash. (Because criminals didn’t exist before Federal Reserve notes.
People sure do love the idea of a centralized power tracking all of their transactions. “I have nothing to hide.” Lol ok, why not put a camera in your room where you and your spouse sleep, “you have nothing to hide.”)
By owning precious metals, not only will the physical properties of the metals resist monetary inflation, but there is nothing to tax. (Cannot tax a pile of coins buried in a hole paying nothing.) The oft-heard criticism “But gold does not have an internal rate of return.” This is a feature, not a bug. It is a commodity that historically solves the coincidence of wants problem. It is not a security that promises a return in exchange for the risk of principal. The long term real (after inflation) return is 0%, and this is acceptable because it promises 0%. This is an easier promise to keep, as opposed to pension plans that promise 7-8% a year and often end up with huge drawdowns trying to make good on that promise.
Jin+Guice wrote: ↑
Mon Nov 26, 2018 10:37 pm
Are there other assets that behave like this that might have advantages over gold?
Silver is gold’s little brother. It can appreciate more in price than gold when there is high inflation/financial trouble because A) it is a smaller market than gold and therefore more volatile, and B) this makes it more prone to potential manipulation (Silver Thursday 1980, and quite possibly JP Morgan in 2011).
The silver-to-gold ratio is historically high, which usually precedes precious metals bull markets. Silver has been dead money and right now *could* be very cheap. If you buy physical silver, you’ll get a better premium if you buy 100oz bars.