Author Topic: Gold and Silver - Educate me  (Read 3145 times)

Offline SBlakeS

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Gold and Silver - Educate me
« on: April 14, 2013, 09:13:06 AM »
Hi.  I have been a Dave Ramsey fan for a while so it is pretty engrained in me that gold and silver equal a bad investment.  I have a lot of friends that swear by gold and silver but they haven't been able to rationally explain their choice.  Their decisions seem to be solely fear-based.  I have recently become a fan of TSP and view Jack and this community as generally very intelligent.  The way I see it, if this many intelligent people believe gold and silver are a good investment, I must be missing something.  I am not here to argue the issue one way or the other.  I just want some honest, intelligent perspective from people that have a different viewpoint than me.  Please educate me.  Thanks.

Blake

Offline MTUCache

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Re: Gold and Silver - Educate me
« Reply #1 on: April 14, 2013, 11:56:15 AM »
Two entirely different goals here (Ramsey vs. Prepping), both entirely noble and worthwhile, but getting their terminologies mixed up.

The term "investment", as seen by Ramsey is something that's going to make you money.
The term "investment", as seen by most in the prepping community, is something that's going to help you survive an unknown future.
Keeping your current ability to be able to feed and shelter yourself is not the same thing as growing your portfolio, but is probably more imporant.

Precious metals are not an "investment" in the financial sense of the term any more than any other commodity trading or currency exchange. You're not putting your money into somebody else's hands so that they may improve/enlarge their business and give you a "return". You're temporarily parking your money in some (hopefully) stable form of value other than the US dollar. It's still a "gamble" because it does have it's drawbacks (deflation, liquidity, etc), but I don't think many would try to debate that it has advantages over holding straight "cash" for 20+ years. Your personal views on the stock/bond markets may vary, but I don't think there's many who would argue that it's a much bigger "gamble" than those either. Inflation at this point isn't really a question... it's almost a certainty.

Silver/Gold have historically been an excellent hedge against inflation. What an ounce of silver or gold would have bought you 200 years ago is relatively close to what it would buy you now (excluding technological advances, economy of scale, etc). Obviously the same could not be said for a fiat currency that has been devalued by inflation to the tune of 99+%.

Both ideas have the same end-goal in mind... financial stability and security for your family's future. Don't let the definition of a word confuse you. Precious metals, from Ramsey's perspective aren't investments. I feel he would consider them as part of your emergency fund. Most preppers have a different idea about what size/form their emergency fund needs to look like than Ramsey does, but they both acknowledge the fact that it needs to be a HELL of a lot bigger than most peoples' in today's society.

Ramsey's later advice (Steps after paying off debt) are about maximizing your stash of US dollars. This is a great goal, but it focuses on the positives in the long term.
Preppers' early advice (stashing food, having PMs, etc) are about maximizing your survivability. This is also a great goal, and admittedly it focuses on the negatives in the long term.


My take? Do them both. Instead of a $1000 emergency fund, make it $5k, and put some fraction of that into silver/gold. Keep some liquid, make some more static. Once you pay off the debt, own your own home, etc, it's all gravy. Whether you save for your kids college fund, buy a pound of gold, or put in an apple orchard, it's all above and beyond the minimum saving/prepping that most other people never even get to. We all agree that we need to get out of debt and live differently, let's not argue over the semantics about where to put our money in the first few years of that process. Once we've all got ourselves into a great position, we can argue about where to put your "extra" money, but until we get there I think we're all close to on the same page.
Your mileage may vary....  ;)
« Last Edit: April 14, 2013, 12:16:05 PM by MTUCache »

Offline David in MN

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Re: Gold and Silver - Educate me
« Reply #2 on: April 14, 2013, 02:11:34 PM »
Eek! Precious metals are not an investment. They offset inflation, but because you buy a little over spot and sell a little under you will lose no matter what. I guess the experts think that an investment gets better over time. Metals are a "store of wealth". You buy them and they sit. Cash can be inflated, stocks can go to zero, bank accounts may be frozen. Silver eagles will always be silver eagles (just one example).

In the olden days, people didn't trust paper assets as much and liked having a cache of valuables. In the modern era, we are forced to paper through 401ks, IRAs, 403bs, etc. Holding a little bit of commodities are insurance against inflation and a store of the intrinsic value. Perhaps the most valuable part of commodities is the anonymous nature. If I give you a silver dollar for a bag of apples, how does the government know who to tax?

Also look at Bitcoin, you might be surprised. Not hating or recommending anything but you would laugh to see my father's face when we found grandma's trunk of silver coins. It really is a store of wealth.

Offline MTUCache

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Re: Gold and Silver - Educate me
« Reply #3 on: April 14, 2013, 02:25:24 PM »
I guess the experts think that an investment gets better over time.
Exactly... all these so-called "financial experts" have built their reputations in an environment when owning a home is going to lead to a 5-10% increase in equity every year, where stocks are growing at double or triple inflation rates, so even the costs and fees associated with those investments don't make them questionable.

Come 2008, and this new "non-RE bubble, currency bubble" that we seem to find ourselves in, I'd think most of these guys are re-thinking their advice. They're probably not going to PMs, because they've been so against them, but their going to different kinds of commodities and investments, where their profits are driven as much by tax avoidance as they are by returns and dividends.

In any environment where your Walmart bill is going to double in the course of five years, I don't see how silver could possible be a bad thing.

Offline iam4liberty

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Re: Gold and Silver - Educate me
« Reply #4 on: April 14, 2013, 03:02:17 PM »
Eek! Precious metals are not an investment. They offset inflation, but because you buy a little over spot and sell a little under you will lose no matter what.

My perspective is a little different.  Precious metals are an investment vehicle.  It is a myth that precious metals only keep up with inflation.  When a currency is not coupled to it, precious metals can yield returns that are multiples of inflation.  There can also be times where precious metals lag inflation.

I had the great pleasure of knowing Harry Browne.  He taught me a great deal on investing including the role of precious metals in a portfolio.  There was a survival podcast a month or two back where they scratched the surface of his investment technique known as the permanent portfolio. This is where equal parts of a portfolio are made up of stocks, bonds, gold and cash and this is rebalanced periodically.  What happens is that depending on the economic cycle, each of these assets will experience periods of out performance and under performance.  So, by rebalancing the portfolio every year or so, you are moving assets from their high points into assets at their low points.  In other words, you are always selling high and buying low.  Since the portfolio is balanced, the risk is quite low.   This yields a relatively constant return.  My personal experience over 13 years has been over 11% average annual growth.   This also speaks to the problem of not having precious metals in a portfolio.  Without precious metals, an otherwise balanced portfolio will experience times of severe decline during inflationary periods. The net result is the gains made during times of prosperity are lost. 

There is a mutual fund which has been utilizing much of the logic of the approach, though not exactly due to some regulation issues.  The results are here:

http://quotes.morningstar.com/fund/PRPFX/f?t=PRPFX

Over the last decade, it has averaged a 10% annual return.  Looking at the chart, we can see how it held up relative to other "conservative" allocations during the crash of 2008.  This ability has earned the approach its nickname as the "bullet proof" investment strategy.

There is plenty of information on the web about the permanent portfolio. But I don't think any does as well to explain the logic than Harry's book Fail Safe Investing.  Used copies of it and a kindle edition can be found on Amazon, or a .pdf can be bought and downloaded directly from here:

http://www.trendsaction.com/books/HarryBrowne/FailSafeInvesting/index.php?ulaCartSID=moOwmtaitePoiMDmCUojjrxGe1365971398

Offline SBlakeS

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Re: Gold and Silver - Educate me
« Reply #5 on: April 14, 2013, 07:35:17 PM »
Thank you all for your input.  I can see the value here a little more than before.  So basically, one way to look at it, is that a portion of my emergency fund would be held as gold or silver.  My investments would be made as normal.  That makes sense.  I was trying to look at this as strictly an investment.

iam4liberty, so I guess that, following your advice, my investments could not be in retirement accounts?  If I understand correctly, I would need to have the flexibility to move that money whenever I wanted.  Also, what about taxes?  If, for example, my mutual funds were high and gold was low, I would withdraw some of my mutual funds and purchase gold with it.  Would I not be paying taxes on that as earned income?  It just seems like that technique would have to beat the market and the tax rate. 

Thanks again, everyone for your help.  I still need to do some more research but I think I will probably be buying some silver at some point in the future.

Blake

Offline MTUCache

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Re: Gold and Silver - Educate me
« Reply #6 on: April 15, 2013, 08:51:27 AM »
So basically, one way to look at it, is that a portion of my emergency fund would be held as gold or silver.  My investments would be made as normal.
Exactly.
The biggest difference that I've seen between these two thought-patterns is what does your emergency fund need to look like.

Ramsey's emergency fund (Baby Step 3, not just the $1000 from step 1), is cash on hand to pay for 3-6 months of expenses, and he's doing this after paying off all debt besides the mortgage. This "rainy-day fund" will help prevent you from getting into debt later, and he's assuming that in the long term you're going to be on your feet continuing to work your daily job.

A prepper has quite a different idea about what that rainy-day could look like (yes, this can be interpreted as "fear" based). Not only are they looking at having a few grand in cash around, they're looking at having 3-6 months of food in addition to that, several weeks of water, several methods of self-defense, an alternative location to get to in a local disaster, etc.... in short, a MUCH bigger emergency.

Because that emergency fund is such a different size (overwhelming, in fact), people get paralyzed with what to commit their money to. Depending on what their feelings are on the short-term future (next 1-3 years), they're skipping over the "getting out of debt" (Step 2) of Ramsey's advice and going directly to stocking up their emergency fund.

Silver/Gold is just one area where there's been some specific discussion about that disconnect.  Because Ramsey (and others) have come right out and said that that's not where they would put their Step 4 money, people interpret that as meaning they shouldn't use it for anything (or that the Baby Steps aren't for them).... I think they can peacefully co-exist, as long as you're willing to be a little flexible on how your own personal priorities and goals line up with the order of the Baby Steps.

So... long story short... if that Step 3 emergency fund was going to be $5k in USD, does it really make a difference if you have $4k in cash and $1k in silver vs. $4k in silver and $1k in cash? It could make a difference, but the important thing is that you've already paid off your debt and you're putting something away. ;)

Offline Scottman

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Re: Gold and Silver - Educate me
« Reply #7 on: April 15, 2013, 01:41:01 PM »
" but the important thing is that you've already paid off your debt and you're putting something away."

great post

Offline SBlakeS

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Re: Gold and Silver - Educate me
« Reply #8 on: April 16, 2013, 01:47:18 AM »
MTUcache,
     Thank you again.  I like your view of it.  What I meant by my friends doing things solely out of fear is that they could not convey any rational thought.  I have friends that are saying that they are pulling out of any investments and spending all of their investment money on gold and silver.  I can understand their fear but I think that mentality can really lead to poor decisions.  Thank you for being able to rationally convey an actual benefit to precious metals. 

Blake

Offline iam4liberty

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Re: Gold and Silver - Educate me
« Reply #9 on: April 16, 2013, 07:51:58 PM »
Yep, this is exactly the logic.

Ultimately the secret to financial success is making interest work for you not against you.  This was Benjamin Franklin's main investment advice.  Dave Ramsey has half of the equation right, you have to avoid paying interest to others, hence getting out of debt.  The other half is having others consistently pay interest to you.  This is where Harry Browne's advice is focused; especially about using diversification across investment categories to gain consistency for compounding.

so I guess that, following your advice, my investments could not be in retirement accounts?  If I understand correctly, I would need to have the flexibility to move that money whenever I wanted.  Also, what about taxes?  If, for example, my mutual funds were high and gold was low, I would withdraw some of my mutual funds and purchase gold with it.  Would I not be paying taxes on that as earned income?
 

Not exactly.  The re-balancing every year generally only results in moves of about 5% - 10% among asset classes.  And three of the assets are "paper" assets.  Equity (stocks), bonds, cash (i.e. treasuries/money markets) can all be kept within retirement funds and traded among each other with little cost in most cases.  For various reasons, precious metals should be held out of this mix.  But since this is liquid, you can easily keep this portion out and convert to the other assets (and vice versa) in a non-retirement fund. 

This is usually unnecessary though.  This is because you will most likely be adding to your holdings from your surplus income.  So you can use these new investment dollars to balance out the assets.  For example, if your shy on gold you just start diverting your new investment dollars into gold and stop putting it into the others asset classes housed in your retirement fund.

Also, if a Roth IRA is used as a retirement vehicle, you have even more flexibility in pulling assets from it.

Finally, in one of the Survival Podcasts they went into details of self-directed IRAs.  In this case the investor actually controls the IRA completely and so can switch assets among all the vehicles without restrictions!  I haven't done this yet but am looking into it right now. 
« Last Edit: April 16, 2013, 08:09:39 PM by iam4liberty »

Offline MTUCache

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Re: Gold and Silver - Educate me
« Reply #10 on: April 16, 2013, 08:05:32 PM »
... And three of the assets are "paper" assets.  Equity (stocks), bonds, cash (i.e. treasuries/money markets) can all be kept within retirement funds...
This may be beyond the scope of the original poster's question, and probably worthy of a topic of it's own (I'm sure there are several around)... but I thought it worthwhile to point out that having all of your non-PM classifications within a government/bank-controlled vehicle (one that involves penalties for withdrawal), may not be the preferred "safe" place here.

I'm sure you understand this, and likely all the people posting here, but in today's economic climate a small company-match and some tax deferral probably isn't worth having all of your paper/electronic assets under nearly direct-government control. There are plenty of easy ways to hold cash without any government involvement, and stocks/bonds can be traded in vehicles outside of 401ks as well.

Bonnieblue2A

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Re: Gold and Silver - Educate me
« Reply #11 on: April 19, 2013, 01:07:25 PM »
Thought is to be a very good article as it pertains to gold:

http://www.businessinsider.com/gold-is-not-money-2013-4