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Buy gold and silver?

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The typical advice from financial advisers to clients is to put their money into an index fund, getting a combination of: low commissions and lowered temptation to try an beat the market. In general, this is still good advice. but... 
... it is based on a key assumption that the future U.S. performance will be pretty much like the past.  Stocks can be hurt by inflation, but their prices inflate too. And, couple that to an unwritten assumption that statist governments have an incentive to subsidize the most common vehicle of investment. 

A true hyper-inflation type scenario is different. But, since such  situation has not really occurred in U.S. history, a financial adviser will never advise you to plan for it; not qua financial adviser. A few economists might be willing to predict hyper-inflation in the U.S., but they're basing their advice on a theory that has not been borne out for a century. 

One can compare the DOW vs. Gold, but looking at the DOW "priced in gold", how many ounces of gold would it take to buy the DOW. 

Source: https://www.macrotrends.net/1378/dow-to-gold-ratio-100-year-historical-chart

A big problem with this raw chart is that the price of gold was fixed in the U.S. from the great depression all the way to Nixon. So, the relatively bad performance of the DOW during the 1970s was gold shooting up in price from many years of pent up legal binding.
Given that legal context, one really ought to look at post-1980 data. Which gives us this portion:

Since 1980, the only time when one could have bought gold and still be better off than the Dow today was the years between 2000 and 2008. Notice that this is pre-Great recession, pre-housing-crisis, not post. Why? because the factor at play was the DOW rather than gold. It was the DOW that was shooting up. 

Since 2009, the DOW has shot up again, far beyond its previous highs. Since about 2012, the price of gold has not followed. Consequently, the DOW has risen significantly in gold terms. if you think the DOW is in a new bubble, then that might be an even better (as in history-based) reason to buy gold than a hyper-inflation scenario. 

However, betting against the stock market averages is something that a typical financial adviser will not recommend because it is usually a way to under-perform.

My personal view on gold is that if I own it, it will likely under-perform the stock-market over most multi-decade periods. Personally, I don't see a complete break down of the U.S. system during my lifetime. I'm also aware that in a complete breakdown, either the government or some thug is likely to take my gold from me, and to prevent that it may become necessary to hide it and not actually use it... making its value theoretical. But, as I said, I don't expect anything even close to this scenario in my lifetime.

 I think gold is a decent multi-generation asset, if you want to buy some to leave to your grand children. Even here, buying something like a rental property is likely to have better returns, because it is a true investment.

Finally, if you do buy gold, beware of the scammers out there. Companies that hype the coming inflation etc. are dicey. Many of them  try to convince their customers to buy coins that are not near 100% gold. So, if you do buy physical gold, stick with regular U.S. Gold eagles and the like.

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  • 1 year later...
On 5/20/2019 at 4:19 PM, Doug Morris said:

I sometimes get solicitations encouraging me to buy gold and/or silver as a hedge against economic uncertainty and volatility.

What do you think?

I don't buy gold.  It is too expensive for most people.  I buy silver, which is much more affordable and widely available.  I also work in copper, stainless steel, mild steel, brass, bronze and other metals.  I love metal. Civilizations are built and rise on the quality of their metals.

If you are going to buy, number one rule is: take delivery.  Do not play the paper game.  Take delivery of your metals and find a safe storage for them.  And plan to sit on them for a while.  They don't make money quickly.  But that is not the purpose of my having metal anyway.  My purpose is, first of all--I just love the stuff-- and second, to have denominations on hand in case of an economic collapse, so that I have something to trade with for whatever might be around to trade.  Pennies are good to collect, so long as you get them 1982 and previous, as they are made of copper.  Nickels are actually nickel silver and are worth about seven cents.  Half dollars, quarters and dimes 1964 and previous, AKA "junk silver" are made of silver.  You can buy these in bags on ebay and other sites.  There are good deals all around if you care to look for them.   Right now, silver is at $27.60 per ounce.  It's still a buyers market--so grab some and love it.  I don't go anywhere without a few ounces of silver and copper in my pocket.  I love the reactions I get from friends and acquaintances who hold an ounce of silver in their hand for the first time and don't want to let it go.  They can keep it if they want, but they'll have to give something for it!  I ounce met a beautiful Chinese woman when I live out West.  She was on her way home to China and wanted a souvenir, something genuine American.  I pulled out a one ounce Indian/Buffalo engraved bullion from my pocket and said, "It doesn't get any more American than this!  The silver was mined right here in Nevada, engraved here in Clark County with a Native American man and native bison."  She didn't even blink.  Her eyes fixated on that piece like a deadly laser.

"What do you want for it?"

"One hundred dollars."  She reached into her purse without hesitation and pulled out a crisp one hundred dollar bill, handed it to me and snatched up the bullion with her beautiful and sure hand.  Some people just know goodness and value when they see it.  At that time, silver was selling for around eleven bucks an ounce.  I took the money I made and spent it all on more silver bullion.  And the celestial lady took home a perfect souvenir.  Silver has that kind of effect on people.  Gold, too.  Go to Southeast Asia and see all the gold shops around.  They are insane about their gold.  

My favorite way to buy is ten ounce bars and one ounce rounds; easy to store, east to transport, easy to spend, as you can see.  I always buy bullion and keep away from the numismatics, save for a few Morgans and silver Krugerrands I Iove to have.  I always scour my change and take out the real pennies, the nickels, and the junk silver, though the junk silver is near impossible to find like that anymore.  Most of the copper I get is 10 gauge (around 3/16") scrap from work.  I take up small scraps and make pieces of jewelry out of them and sell them.  Copper and silver are my two favorite metals.  Copper is anti-bacterial, anti-microbial, anti-viral.  Copper kills bacteria and viruses in minutes and much of it on contact.  Copper kills Covid-19 in about four and a half hours.  Copper is the most widely used metal and is so plentiful we have used barely 1% of the available copper in the earth.  Copper should be covering all door handles, lab surfaces, hospitals (to their credit, hospitals are starting to realize this and put more and more copper in hospitals.  Stop buying that stupid hand santizer and get a little tube of copper or copper trinket to carry with you or wear around your neck.  Roll it around in your hands to sanitize them.  Soldiers during the Bronze Age would take the bronze shavings from sharpening their swords and save them to apply to wounds.  They didn't know why this worked, but when they did this they did not get a deadly infection.  Today we know it is because of the copper in the bronze that the infection was killed.  Brass works the same way.  Bronze is copper and tin.  Brass is copper and zinc.  Both are mostly copper.  The ancient Celts were master metal workers and created objects the best we have today would find impossible.

Buy precious metals?  You betcha!

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