Author Topic: Precious Metals  (Read 6466 times)

MilesTeg

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Precious Metals
« on: June 14, 2018, 12:43:58 PM »
Before I start, know I don't give one hoot about what the MMM perspective is on this question (I don't even know what it is, and don't care to); I am asking this question here only because this is a pretty decent place to find knowledgeable financial/investment folks:

We're looking to convert a small portion of our assets (~5%) into precious metals and to maintain that ratio going forward. We're in the lucky/hard earned position of this being a fairly decent sum. We've looked at dealers like Kitco, et al but really have no idea what the most efficient way to go about doing this is (minimize loss due to fees, shipping, etc.). Lots of marketing department driving advise floating around but hoping for neutral 3rd party advise from someone here with experience (or a pointer to such advise).

Thanks!

FIRE@50

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Re: Precious Metals
« Reply #1 on: June 14, 2018, 01:45:42 PM »
Would you mind sharing how and why you arrived at the decision to put 5% into metals? Thanks.

weltschmerz

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Re: Precious Metals
« Reply #2 on: June 14, 2018, 09:53:33 PM »
We're looking to convert a small portion of our assets (~5%) into precious metals and to maintain that ratio going forward.

I don't know what 5% of your stash amounts to, but I would offer that keeping more than $30-50k in physical gold gets difficult.  You can keep some at a bank safety deposit box, some at home, some buried in the back yard, but there is a limit to what you will feel comfortable keeping. I recommend not keeping a set percentage.   Rather, just keep some coins, as an 'insurance policy', and be done with it.  There are a few portfolios, like the Permanent Portfolio, that keep up to 25% gold, but that's crazy.  You can't keep that much physical gold around.

Let's say you have > $2M in assets, and you decided to keep 5% in physical gold.  That's $100k!  Are you just going to keep it at a bank, or some at home?  Don't even think you're going to buy IAU or GLD for the majority and keep just a few coins at home....that's beyond lame.

As far as dealers, APMEX is a good one, check them out.  Don't even worry about selling.  You'll probably just pass the coins on to your heirs.

maizeman

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Re: Precious Metals
« Reply #3 on: June 14, 2018, 10:42:22 PM »
Let's say you have > $2M in assets, and you decided to keep 5% in physical gold.  That's $100k!  Are you just going to keep it at a bank, or some at home?

I mean that's only about 5 lbs of gold. That's what, a 2 x 2 x 2 inch cube?

The financial considerations/concerns are still very real and I wouldn't recommend putting so much of your net worth in what is, essentially, a commodity, but logistically I don't think you'd run into any problems keeping that much gold in a safe deposit box.

Radagast

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Re: Precious Metals
« Reply #4 on: June 15, 2018, 12:09:28 AM »
Maybe ironically but I thought this was one of the best references
https://www.bogleheads.org/forum/viewtopic.php?t=234480
Also https://www.gyroscopicinvesting.com/forum/index.php will have that somewhere.

Let's say you have > $2M in assets, and you decided to keep 5% in physical gold.  That's $100k!  Are you just going to keep it at a bank, or some at home?

I mean that's only about 5 lbs of gold. That's what, a 2 x 2 x 2 inch cube?

The financial considerations/concerns are still very real and I wouldn't recommend putting so much of your net worth in what is, essentially, a commodity, but logistically I don't think you'd run into any problems keeping that much gold in a safe deposit box.
Yeah, an ounce of gold is like a Sacagawea dollar, or a little bigger than a quarter. $100k would be like 80 of those. Not a very big stack. That's why it was the bitcoin of ancient times.

Classical_Liberal

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Re: Precious Metals
« Reply #5 on: June 15, 2018, 02:32:45 AM »
What's the intended purpose of the metals?  I ask mainly to help you determine if you really need to hold the entire amount as physical. Personally I hold metals in my portfolio, but only keep part of it physical to avoid the cost issues discussed in your OP. 

SwordGuy

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Re: Precious Metals
« Reply #6 on: June 15, 2018, 06:18:02 AM »
Before I start, know I don't give one hoot about what the MMM perspective is on this question (I don't even know what it is, and don't care to); I am asking this question here only because this is a pretty decent place to find knowledgeable financial/investment folks:

We're looking to convert a small portion of our assets (~5%) into precious metals and to maintain that ratio going forward. We're in the lucky/hard earned position of this being a fairly decent sum. We've looked at dealers like Kitco, et al but really have no idea what the most efficient way to go about doing this is (minimize loss due to fees, shipping, etc.). Lots of marketing department driving advise floating around but hoping for neutral 3rd party advise from someone here with experience (or a pointer to such advise).

Thanks!

Have you ever noticed that when economic times get shaky, the number of advertisements for gold and silver as great investments skyrockets? 
And how they tout what great investments they are to hold in bad economic times?

Now, let's think about this logically.

They ALREADY own gold.

Bad economic times are just around the corner.

They are spending lots of money to buy adverts in order to GET RID OF their gold.

If they believed their own spiel, they would be spending that advert money to BUY MORE GOLD.

But, obviously, they are doing the EXACT OPPOSITE of what they are advising you to do.

Hmmm.

And that would be why the only gold and silver I own is for making jewelry with for my hobby.

Which, incidently, actually does increase its value if I get good at it...

I wouldn't put 5% of my holdings into precious metals. 

Car Jack

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Re: Precious Metals
« Reply #7 on: June 15, 2018, 06:35:12 AM »
I have bought/sold silver coins.  I had planned to get into gold but just never pulled the trigger.

Buying:  You absolutely want to buy from a reputable supplier.  Apmex is where I would go.  They are transparent with prices right on the website.  You can see the difference by volume and if you would rather use a credit card (which is silly because of the fee).  They are not consistent at giving buy prices, however and you would have to call for that.

Apmex does, at times offer free shipping on amounts over some set $$.  If you are selling back, of course, you pay shipping.

I have sold both to a local wholesaler and to private people found on Craigslist.  Private sales will bring in more money.  Ask before you meet what they're paying.  Set up an initial small amount and then meet.  This is harder to do with gold than silver as it's tough to have only $300 in gold, where for silver, that's a small bag of quarters.

For storage, I would suggest a few things.  First, don't tell anyone.  Don't tell your wife or your dog or your neighbor that you even have gold.  Buy a fire safe key lock box and leave it where any thief will find it.  Put things that seem valuable in it but have no real value.  Maybe some recent dimes, penny rolls, costume jewelry.  Then buy a small safe that you can both hide and bolt to concrete.  You want this hidden.  As an example, the safe is bolted 3 feet up on a basement wall with shelves in front of it.  Fill the shelves with crap you're storing.  If nothing else, this will make it harder to find for a thief in a hurry.  Any safe can be broken into, so I wouldn't bother with a plutonium grade kryptonite encrusted bank safe.  I mean, guys have chained their truck to an ATM and dragged it away.....

Back to what to buy.  You'll see that what you're buying will be priced based on various things.  The bars...Apmex or Credit Suisse and the like are cheaper than coins.  Part of the reason for that is that they're less desirable than coins.  Things like Krugerands and libtards and mexican gold have different amounts of gold in them.  Know what it is.  I find that US coins tend to be the highest priced, followed by Canadian maple leafs and on from there.  The larger the denomination the cheaper it is.  If you're buying a quarter ounce or a tenth ounce, you're taking a bath on price.  Easy to see on Apmex.

Good luck.  I've been selling off all my silver, which is "junk silver" as I realized that inflation alone is making it a bad investment.  The fact that it's gone down in number $$ value hurts just a bit more.

BobTheBuilder

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Re: Precious Metals
« Reply #8 on: June 15, 2018, 07:17:32 AM »
In Germany there is something called Xetra-Gold.

https://www.xetra-gold.com/en/

1 unit correponds to 1 g of gold, which is actually physically stored in a vault. It is so much like having it in hand that the German tax systems treats those two as equal. That means in Germany you can sell it off after 1year or more without paying any taxes at all on your gains. Which is exactly the same for coins/bars.

You can also let it be delivered to you, which of course only makes sense if you have at least the equivalent of a small bar (50g+)

Maybe there is an equivalent to that in the US?

With silver you will run into the problem that you need large amounts of silver to store the wealth. Also, silver is more related to mining of other industrial metals so the price is more dependent on let's say copper mining volume (they often cohabit the same rocks)

tralfamadorian

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Re: Precious Metals
« Reply #9 on: June 15, 2018, 02:42:14 PM »
Would you mind sharing how and why you arrived at the decision to put 5% into metals? Thanks.
Seriously...  Whats with the attitude? The guy came asking an honest question. Many of the portfolios analyzed at portfolio charts include an allocation to gold. 

So, back at ya:

Would you, FIRE@50, mind sharing how and why you arrived at the decision not to put 5% into metals?  Thanks!

Actually, I thought they asked the question very politely.

To answer your question though it was not posed to me:
1) Capital gains tax rate of personal income tax rate (25%).
2) Paying sales tax on physical purchase (5.3%).
3) Storage/insurance issues if being held for a zombie apocalypse type event.
4) Spread on purchase. (5%)
5) Spread on sale. (5%)
5) Lack of dividends or appreciation.


So in summary, if I decided to buy $10k in gold in my state in physical coins, I would pay $11,300. Suppose that I decided to hold for 20 years with half in my basement in a mustachian hidden safe with a secondary dummy safe ($200 one time) and half in a safety deposit box ($60/yr), which gives a storage cost of $1,400. When it was time to sell the coins, they would be worth ~$10k in 2018 dollars. After the sales spread, taxes and subtracting out the storage costs, I would walk away with $5,725.

Wow! What a winner! Where do I sign up?

tralfamadorian

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Re: Precious Metals
« Reply #10 on: June 15, 2018, 03:32:57 PM »
...Legend has it that this can increase risk (e.g. volatility) adjusted returns for the whole portfolio.

Do you have a source for that? I've seen data that supports the idea that a modest percentage of bonds can increase the overall performance of a 100% stock portfolio but I have not seen the same for gold.

And I do think Fire@50's question was fair and polite because there are several reasons that someone may decide to invest in gold. Is it a hobby like yours? Is it an inflation hedge? There are better inflation hedges. Is it a hedge against my snarky zombie apocalypse or another black swan event? In that case it would be better to dig up the birth certificate for dearly departed great-so-and-so to work on getting your Irish passport and investing in some CHF CDs with that 5%.   

Eric

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Re: Precious Metals
« Reply #11 on: June 15, 2018, 03:51:38 PM »
As to your chart of gold prices, I agree with you that gold is an inferior investment to stocks.  Although, I think the jury is still out regarding whether gold or bonds are better long term -- some would say that keeping up with inflation while not paying any income is a blessing.  And to believers of MPT, gold is a precious commodity (pun intended) since it offers a volatile uncorrelated asset with which to further diversify a portfolio -- Legend has it that this can increase risk (e.g. volatility) adjusted returns for the whole portfolio.

Those same people likely also believe that if they get bumped up a tax bracket, that they'll end up with less money.  Because they're bad at math!  This would cause them to believe that not paying taxes on income is better than paying taxes on it.  In other words, they'd rather have $0 and no taxes than $1 for which they have to pay $.25 to the government.  It comes as no shock to me that most gold bugs are also anti-government.  The two go hand in hand, just like bad math and poor investment decisions.

Classical_Liberal

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Re: Precious Metals
« Reply #12 on: June 15, 2018, 03:53:43 PM »
Do you have a source for that? I've seen data that supports the idea that a modest percentage of bonds can increase the overall performance of a 100% stock portfolio but I have not seen the same for gold. 

What do you mean by "performance"?   It will probably never increase CAGR, but it can reduce overall volatility of portfolio.  Lower CAGR with lower volatility can increase sustainable WR's.  In draw-down phase I would consider sustainable WR "performance", even if my returns are lower.  Someone in accumulation probably wouldn't care about WR, just CAGR.  This is why investing per personal goals, timeframes, phases of life, etc, is so important.

Financial.Velociraptor

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Re: Precious Metals
« Reply #13 on: June 15, 2018, 04:57:02 PM »
I have about 2800 in a numismatic gold coin, 50 dollars face in junk silver, and some MS64+ Morgan dollars (20).  I wish I hadn't bought them.  YMMV.

My older supervisor who is a huge gold bug buys primarily gold bullion.  He has a handful of numismatics but prefers the base metal.  He takes physical delivery.  And also a couple of 100oz silver bars that last I heard, he wanted to sell and use the proceeds to buy more gold.  Can't really advise you here except to note what I know others who are heavily invested in metals have personally done.

tralfamadorian

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Re: Precious Metals
« Reply #14 on: June 15, 2018, 05:13:45 PM »
Further perhaps someone would like to buy something of value now that could potentially keep up with inflation and intends on never selling it in their lifetime which could still be many decades (but they could sell it if they wanted to).  In such a case the asset could be entitled to a stepped-up basis at their death and their heirs will inherit it income tax free!  It would be a shame if the asset paid tons of taxable income instead of allowing the value to accrue to capital appreciation in such a case.

If the purpose is to give wealth to future generations in a decades long time frame, why in the world would they not invest the money in index funds?

I think this conversation has really condensed my reasoning for why I am not interested in gold. Except from the POV of a hobby, there is no purpose for gold investing that is not better served elsewhere.

Bicycle_B

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Re: Precious Metals
« Reply #15 on: June 15, 2018, 05:29:11 PM »
...Legend has it that this can increase risk (e.g. volatility) adjusted returns for the whole portfolio.

Do you have a source for that? I've seen data that supports the idea that a modest percentage of bonds can increase the overall performance of a 100% stock portfolio but I have not seen the same for gold.

Here's a discussion explaining one calculation of how gold can increase portfolio returns. Gold here is compared to bonds as a complement to stocks, but an example is given where the return using gold is higher than an all-stock portfolio.

https://portfoliocharts.com/2016/01/25/how-to-build-a-portfolio-one-asset-at-a-time/

maizeman

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Re: Precious Metals
« Reply #16 on: June 15, 2018, 05:41:24 PM »
The removal of a fixed USD:gold exchange rate in the 1970s (and it's subsequent charge back to free market prices) coincided with a period of stagflation that produced terrible returns for both bonds and stocks. So right now if you include gold as an asset class in historical analyses it reduces failure rates (and/or allows higher withdrawal rates), but it's not clear that there is still a benefit to including it in future portfolios, since the USD cannot go off the gold standard again now that we're already not on it.

I think this conversation has really condensed my reasoning for why I am not interested in gold. Except from the POV of a hobby, there is no purpose for gold investing that is not better served elsewhere.

The one use case I can see for it would be fleeing across international borders in the event of a personal or national catastrophe or war (think getting out of nazi germany before world war II; or perhaps out of Venezuela today). You really could potentially carry several years salary in gold sewn into your clothing, and it'd be enough to help you start a new life when you got someplace safe. The risk of robbery would be non-trivial, but anything you left behind would be lost anyway, so you might as well try.

Short of that type of scenario, I agree with you, gold doesn't serve much purpose as a long term investment from my perspective.

CheapScholar

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Re: Precious Metals
« Reply #17 on: June 15, 2018, 05:59:06 PM »
I'll just say that I've purchased silver and gold over the years from APMEX and I've always been very happy.  I don't buy in high volume, I just like having some precious metal on hand.  And a lot of the coins I purchase are truly beautiful works of art.

I could make an argument that investing in coins is not all that bad.  For example, if you purchased a monster box of silver Eagles from APMEX (not much over spot silver) when silver was relatively low ($13-$15) and then hung on to them and watched them increase for the numismatic value, you could sell them off at a nice profit eventually.

I would never invest in coins/precious metals before doing all the tax advantaged things that we all do here at MMM.  But, after that, coin investing is not as foolish as some on here claim it to be if you have knowledge and invest conservatively.

tralfamadorian

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Re: Precious Metals
« Reply #18 on: June 15, 2018, 06:10:36 PM »
The one use case I can see for it would be fleeing across international borders in the event of a personal or national catastrophe or war (think getting out of nazi germany before world war II; or perhaps out of Venezuela today). You really could potentially carry several years salary in gold sewn into your clothing, and it'd be enough to help you start a new life when you got someplace safe. The risk of robbery would be non-trivial, but anything you left behind would be lost anyway, so you might as well try.

I actually had almost this exact situation in mind when I wrote one of my posts above but didn't articulate it. My spouse was friends with a lady who fled Havana during the revolution with significant wealth in jewelry sewn into her clothes. I can't imagine how terrifying that must have been.

However, I still think it would be much more effective use of time and funds to explore whether a second passport could be obtained easily (ie: through Irish or Italian heritage) and the purchase of cd's or bonds in euros or CHF.

somers515

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Re: Precious Metals
« Reply #19 on: June 15, 2018, 06:29:05 PM »
We're looking to convert a small portion of our assets (~5%) into precious metals and to maintain that ratio going forward. We're in the lucky/hard earned position of this being a fairly decent sum. We've looked at dealers like Kitco, et al but really have no idea what the most efficient way to go about doing this is (minimize loss due to fees, shipping, etc.). Lots of marketing department driving advise floating around but hoping for neutral 3rd party advise from someone here with experience (or a pointer to such advise).

Thanks!

I've heard Kitco is reliable.  Also you can consider ishares Commodities Select (COMT) that has a .48% expense ratio and/or Vanguard Precious Metals and Mining fund (VGPMX) that has a .36% expense ratio.


pecunia

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Re: Precious Metals
« Reply #20 on: June 16, 2018, 09:10:56 AM »
I asked these guys about gold in the past.  I will paraphrase something simple that was explained to me.

It is not passive income.  It is not like an investment in a beat up old house that you can rent out and get your money back.  What's it do?  It just sits in a drawer or a bank vault or something.

The guys explained that maybe, it will allow you to hold your investment against inflation.  That's a maybe.  If people fall a little out of love with gold, it will fall in value.  Let's say one of these sharp tech guys that answer these posts figure out a way to get iit from seawater.  There will be more gold.  It will fall in value.  Let's say there is a big gold strike (finding) in Iceland.  It will be mined.  The supply will increase.  It will fall in value.

What if the economy really takes a dump?  I'm talking catfood city dump.  Nobody has any money.  Old man depression has returned from his journey to other lands.  OK with the old man around, nobody has any money.  Do you think they want to spend their money on gold?  They will spend their money on food.  It will fall in value.

Why put your money on something where the about the best thing it can do is break even?  It was explained to me that putting the money on decent equities such as Index funds will keep the value of that money and maybe make you about 5% per annum extra. 

It was explained that gold has few industrial uses.  It is not like iron, copper or silver.  These other metals have added value because they perform useful tasks for people.  Gold basically just looks pretty.  You don't use it to grow food or for your housing. 

Thanks for the reminder about precious metals.

Radagast

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Re: Precious Metals
« Reply #21 on: June 16, 2018, 10:57:41 PM »
I never trust the arguments of people who post charts that use 1980 CPI methodology.

Once I entered a a whole bunch of assets I was curious about (US, international, small, value, long bonds short bonds, municipal bonds etc I entered about 20 things) into Portfolio Visualizer and made efficient frontiers for various dates. The funny thing was that at no point was gold on any of the efficient frontiers even those starting in the late 1990s and the 2000s. Which means there has never been a meaningful length of time where gold was worth investing in in the US in the past 100 years except a handful of years where the government dictated the price at a below market rate and then only in pointless slips of paper, and then suddenly changed their minds.

But, it can reduce volatility. For as long as I have observed it it has been uncorrelated to stocks and bonds and also for the decades before I observed it. Maybe it can serve a purpose that hasn't showed up in the US recently. I don't see much difference between it and a long term bond that is volatile in price but with a return similar to expected inflation.

I see lots of people say "but if I actually need gold to save me I'd be better off with guns beans and toilet paper" but I have also seen this argument about bonds, international stocks, and stocks not in the S&P500. It should be a designated investing fallacy, the "Zombie Apocolypse Fallacy" which is a false argument that diversification is pointless. Apart from speculative price movement, another use might be that gold would not help you if civilization ended forever, but it could help you out of a temporary lapse in civilization either by you moving to a civilized place or civilization rebuilding around you. For example if your nation lost a war and its stocks and bonds became worthless, at the end you could sell your gold to finance rebuilding which would initially help out your home and eventually make you wealthy.

But the most likely result is that gold will make you less wealthy.

Classical_Liberal

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Re: Precious Metals
« Reply #22 on: June 17, 2018, 12:29:54 AM »
But, it can reduce volatility. For as long as I have observed it it has been uncorrelated to stocks and bonds and also for the decades before I observed it. Maybe it can serve a purpose that hasn't showed up in the US recently. I don't see much difference between it and a long term bond that is volatile in price but with a return similar to expected inflation.

This is it's value, noncoorlation (or SHTF bribe a border guard).  During withdrawal phase, particularly when sequence risks are peaked, a small allocation of gold can really make a difference in a very bad case scenario.  Your point of owning a closed end treasury is valid, but remember the loss of principle value to inflation.  Gold doesn't pay interest, but tends to overcome inflation.  In theory, each has a place.  Make no mistake, holding gold WILL lower returns, but it's a trade off. I'm looking at 8-10% in my portfolio by the time I start withdrawals.  Only a very small portion will be physical due to the costs associated with that, but it will be enough to bribe a border guard :)

I'm fine with being less wealthy in good situations if that means a decreased risk of running out of money in bad ones.

MustacheAndaHalf

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Re: Precious Metals
« Reply #23 on: June 17, 2018, 04:07:06 AM »
@MilesTeg - You might also check out Provident Metals.  I found their costs to be lower than buying from eBay and they also seemed to have well thought out procedures.

You might consider a mix of physical gold and one of the gold ETFs.  That way you have the gold for an emergency, but also in a form that's easier to sell for portfolio rebalancing.

When looking at gold, make sure you look at 1975-2017 rather than including the extraordinary one-time events of 1972-1974.  The returns of gold doubles when you include those extra years, even though those events are unlikely to happen again.

Timodeus

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Re: Precious Metals
« Reply #24 on: June 18, 2018, 01:57:52 PM »
I'll add my voice for Provident Metals. I've bought with them for a few years now, their prices are pretty low and tend to be closer to spot than most. I tend to stay away from ETFs due to fees and to the fact that you can only exchange it with one currency. I store most with GoldMoney.com which sounds a lot like the German firm mentioned above. It is physical gold in a vault of your choosing around the world. The gold is legally owned by you (not an ETF) You can also take physical delivery in a variety of sizes if needed. They also offer some interesting function regarding payments, as in you can pay people through GoldMoney (assuming they have an account) or request a debit card with a currency of your choosing which you can deposit cash from gold sales onto.

Regarding the foam on this thread regarding the value of gold as an investment. With such heated and passionate arguments from both sides, it kind of makes the case for me to buy a little. If things go well and gold becomes irrelevant then I'm only down a little. If our fiat currency does eventually do what all fiat currencies in history have done (inflate away) then I'll be glad I kept at least a small stash in the little yellow metal.

toganet

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Re: Precious Metals
« Reply #25 on: June 18, 2018, 06:40:13 PM »
Regarding the foam on this thread regarding the value of gold as an investment. With such heated and passionate arguments from both sides, it kind of makes the case for me to buy a little. If things go well and gold becomes irrelevant then I'm only down a little. If our fiat currency does eventually do what all fiat currencies in history have done (inflate away) then I'll be glad I kept at least a small stash in the little yellow metal.

This is sort of why I have a small portion in precious metals as well, in an ETF and in physical metals.  Whether I think they are worth something in an extreme situation isn't the issue -- it's whether someone else does.  And based on my observations here and elsewhere, there will always be a buyer for gold.  I'll take US dollars, bitcoin, or beans & bullets, depending on the circumstances.

Xlar

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Re: Precious Metals
« Reply #26 on: June 19, 2018, 09:39:38 AM »
...Legend has it that this can increase risk (e.g. volatility) adjusted returns for the whole portfolio.

Do you have a source for that? I've seen data that supports the idea that a modest percentage of bonds can increase the overall performance of a 100% stock portfolio but I have not seen the same for gold.

Here's a discussion explaining one calculation of how gold can increase portfolio returns. Gold here is compared to bonds as a complement to stocks, but an example is given where the return using gold is higher than an all-stock portfolio.

https://portfoliocharts.com/2016/01/25/how-to-build-a-portfolio-one-asset-at-a-time/

Note that all of these charts start in 1972. This artificially increases the return of Au making it seem to be better than it is. Here is a really great thread on the hazards of backtesting with Au: https://forum.mrmoneymustache.com/investor-alley/gold-price-and-the-hazards-of-backtesting/

As you can see in the early 70s there is a crossover with stock prices. This seems to be a coincidental timing of stocks decreasing at the same time that the US stopped fixing the price of Au. This gives the impression that Au is anti-correlated with the stock market similar to bonds. BUT this is pretty much the only time that occurs. Due to the short historical length the data leads to missleading conclusions. The event that caused the anti-correlation with the stock market (the US no longer fixing the price of Au) is not a repeatable event that will happen every time that the stock market crashes.
« Last Edit: June 19, 2018, 09:43:55 AM by Xlar »

Classical_Liberal

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Re: Precious Metals
« Reply #27 on: June 19, 2018, 04:06:55 PM »
...Legend has it that this can increase risk (e.g. volatility) adjusted returns for the whole portfolio.

Do you have a source for that? I've seen data that supports the idea that a modest percentage of bonds can increase the overall performance of a 100% stock portfolio but I have not seen the same for gold.

Here's a discussion explaining one calculation of how gold can increase portfolio returns. Gold here is compared to bonds as a complement to stocks, but an example is given where the return using gold is higher than an all-stock portfolio.

https://portfoliocharts.com/2016/01/25/how-to-build-a-portfolio-one-asset-at-a-time/

Note that all of these charts start in 1972. This artificially increases the return of Au making it seem to be better than it is. Here is a really great thread on the hazards of backtesting with Au: https://forum.mrmoneymustache.com/investor-alley/gold-price-and-the-hazards-of-backtesting/

As you can see in the early 70s there is a crossover with stock prices. This seems to be a coincidental timing of stocks decreasing at the same time that the US stopped fixing the price of Au. This gives the impression that Au is anti-correlated with the stock market similar to bonds. BUT this is pretty much the only time that occurs. Due to the short historical length the data leads to missleading conclusions. The event that caused the anti-correlation with the stock market (the US no longer fixing the price of Au) is not a repeatable event that will happen every time that the stock market crashes.

This is wrong.  Gold values were horrible starting in the early/mid-1980's (exception of 1987 area, what happened there?) and 1990's.  Then increased valuation again throughout the 2000's.  Go to portfolio charts and look at a heat map of 100% gold. 

I'm sick of this argument of the "one off event" coming off the gold standard.  Of course this is true and had an impact.  However, gold is still a non-correlator to equities!  I could make the same argument with bonds.  "Hey, did you know 10 year bond yields spiked to above 13% in the early 1980's!  That means treasuries wont return today what they did back then and that fact artificially changes historical results"  No...Shit...Sherlock...

Yet for some reason people still accept treasuries as a safe haven/non-correlator for a portion of portfolio.

Xlar

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Re: Precious Metals
« Reply #28 on: June 19, 2018, 05:16:04 PM »
...Legend has it that this can increase risk (e.g. volatility) adjusted returns for the whole portfolio.

Do you have a source for that? I've seen data that supports the idea that a modest percentage of bonds can increase the overall performance of a 100% stock portfolio but I have not seen the same for gold.

Here's a discussion explaining one calculation of how gold can increase portfolio returns. Gold here is compared to bonds as a complement to stocks, but an example is given where the return using gold is higher than an all-stock portfolio.

https://portfoliocharts.com/2016/01/25/how-to-build-a-portfolio-one-asset-at-a-time/

Note that all of these charts start in 1972. This artificially increases the return of Au making it seem to be better than it is. Here is a really great thread on the hazards of backtesting with Au: https://forum.mrmoneymustache.com/investor-alley/gold-price-and-the-hazards-of-backtesting/

As you can see in the early 70s there is a crossover with stock prices. This seems to be a coincidental timing of stocks decreasing at the same time that the US stopped fixing the price of Au. This gives the impression that Au is anti-correlated with the stock market similar to bonds. BUT this is pretty much the only time that occurs. Due to the short historical length the data leads to missleading conclusions. The event that caused the anti-correlation with the stock market (the US no longer fixing the price of Au) is not a repeatable event that will happen every time that the stock market crashes.

This is wrong.  Gold values were horrible starting in the early/mid-1980's (exception of 1987 area, what happened there?) and 1990's.  Then increased valuation again throughout the 2000's.  Go to portfolio charts and look at a heat map of 100% gold. 

I'm sick of this argument of the "one off event" coming off the gold standard.  Of course this is true and had an impact.  However, gold is still a non-correlator to equities!  I could make the same argument with bonds.  "Hey, did you know 10 year bond yields spiked to above 13% in the early 1980's!  That means treasuries wont return today what they did back then and that fact artificially changes historical results"  No...Shit...Sherlock...

Yet for some reason people still accept treasuries as a safe haven/non-correlator for a portion of portfolio.

So Au was terrible until the 2000s? So now we remove 30 years as bad data (1970-2000) but now say that the last 18 are great and support the argument to buy Au? Using 2000 onwards seems like a very small dataset...

But lets look at the heat map for the 2000 onwards. In 2000 the stock market crashes. The value of Au also goes down. Au recovers in 2002 while stocks take until 2003. Bonds are positive in 2000, 2001, 2002, and 2003.

Au then avoids the crash in 2008. This seems to be the only time? Note that bonds are positive in 2008 as well. Is one positive event really worth basing your portfolio off of?

Doesn't this data show that bonds should be what you use to reduce volatility even if we just look at such a small dataset? From 2000-present Au follows stocks for 1 crash and doesn't for the other crash.

Classical_Liberal

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Re: Precious Metals
« Reply #29 on: June 19, 2018, 08:04:49 PM »
I didn't remove that data, I simply pointed out it backs up the assumption gold valuation  is uncorrelated to equities.  You stated this wasn't the case, and it is.
This seems to be a coincidental timing of stocks decreasing at the same time that the US stopped fixing the price of Au. This gives the impression that Au is anti-correlated with the stock market similar to bonds. BUT this is pretty much the only time that occurs. Due to the short historical length the data leads to missleading conclusions.

I don't think anyone "should" own gold, simply stating that it is uncorrelated to other asset classes.  This a very good thing when you are drawing down from a stache. Bonds tend to also be uncorrelated to stocks, but the 4% rule close calls and failures in the 1960's are related to the fact there was a period of poor treasury performance(due to high inflationary pressures) at the same time there was also poor equity performance.  This is VERY bad for someone drawing from their stache, particularly if treasuries were supposed to be the safety asset. Right now Treasuries are at near historically low yield and CAPE is very high.  This is the type of scenario we saw in the 1960's, just say'en.  I can't predict the future, but a small hedge of gold helps me sleep at night, so it's a good asset class for me, even though I know it will lower my long term returns.  IOW, I understand why I want to own it. 
« Last Edit: June 19, 2018, 08:10:05 PM by Classical_Liberal »

maizeman

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Re: Precious Metals
« Reply #30 on: June 19, 2018, 08:48:15 PM »
So I think you folks may be talking past each other a little.

Xlar said that if you exclude the use rise in gold prices from coming off of a fixed price during the 1970s stagflation, there isn't good evidence that gold is anti-correlated with the stock market.

Classical_Liberal, you're saying that gold is non-correlated with the stock market.

These two statements are not necessarily contradictory.

Classical_Liberal

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Re: Precious Metals
« Reply #31 on: June 19, 2018, 08:54:34 PM »
@maizeman

Thanks for the attempt at mediation :)  I think you are correct for the most part. 

vand

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Re: Precious Metals
« Reply #32 on: January 21, 2019, 09:40:23 AM »
Looks like I've finally found the PMs thread..

Just to add that I like PMs as an investment, but more so as a diversification tool and a hedge against paper assets (stocks & bonds). I think they are currently very undervalued by historical standards.

There are lots of myths and half-truths when it comes to discussing precious metals. I know I'm unlikely to be changing anyone's mind who is deeply anti-PM, but there are some good resources on youtube that helped me really learn more about gold. One channel I recommend is belangp's. Even using tools of modern portfolio theory he shows that holding some gold can be used improves a portfolio's risk-adjusted performance:

Here are a couple of his videos which I would like to put forward:

less volatility, superior returns - making the case for 20-25% gold allocation:
https://www.youtube.com/watch?v=K70aQh9ptpU


the only real asset that is negatively correlated with paper assets:
https://www.youtube.com/watch?v=6eUOSh5mxko

(note that myth that stocks & bonds are anti-correlated is only 50% true.. half of the time they move in tandem, half the time they move opposite).

evme

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Re: Precious Metals
« Reply #33 on: January 21, 2019, 03:26:52 PM »
I think they are currently very undervalued by historical standards.

What makes you think PMs are currently very undervalued? I'm not anti-PM, just curious why you think this.

vand

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Re: Precious Metals
« Reply #34 on: January 21, 2019, 04:15:22 PM »
I think they are currently very undervalued by historical standards.

What makes you think PMs are currently very undervalued? I'm not anti-PM, just curious why you think this.

There are a couple of ways you can value gold:

Dow/Gold ratio if viewing gold as a traditional asset
Gold vs Monetary base for those who still believe gold is a form of money

I tend to favour ratios. Commodities as an asset class have been through a fairly brutal bear market in the last 3-4 years, and PMs did not buck the trend here. I in fact, you can look at other ratios like the CRB/Dow ratio which has never been lower and conclude that commodities are at record low valuations.

Unfortunately I have found that when discussing precious metals they tends to polarize opinions in a way that other assets do not, because your opinion of them is intrinsically linked to notions of freedom, liberty, and belief systems. Some people regard them as ultimate long term store of wealth, others regard them as worthless shiny stuff.

NewDay1

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Re: Precious Metals
« Reply #35 on: January 21, 2019, 07:22:48 PM »
What about buying a few coins at a reputable coin shop?  Are they to be avoided?

tralfamadorian

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Re: Precious Metals
« Reply #36 on: January 21, 2019, 07:33:58 PM »

MustacheAndaHalf

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Re: Precious Metals
« Reply #37 on: January 21, 2019, 08:37:54 PM »
There are a couple of ways you can value gold:
Dow/Gold ratio if viewing gold as a traditional asset
Why is that ratio valid?  Why does gold have to grow in proportion to stocks?

Using Portfolio visualizer's inflation adjusted returns for the past 30 years (1989-2018):
U.S. stock market: +7.1% / year (after inflation)
gold: +1.1% / year (after inflation)

vand

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Re: Precious Metals
« Reply #38 on: January 22, 2019, 12:04:16 AM »
There are a couple of ways you can value gold:
Dow/Gold ratio if viewing gold as a traditional asset
Why is that ratio valid?  Why does gold have to grow in proportion to stocks?

Using Portfolio visualizer's inflation adjusted returns for the past 30 years (1989-2018):
U.S. stock market: +7.1% / year (after inflation)
gold: +1.1% / year (after inflation)

Many investors use ratios to determine relative prices. We can look and see that gold is currently at the sort of similar valuations that it was in previous periods like 1929, mid-late 1960's, and early 2000s. Holding gold during these times would have seen a very good return in the subsequent 10 years (better than stocks).
Does that mean that the next 10 years will perform similarly? Not necessarily. There are no guarantees. Past performance is no guarantee of future returns. But we are using past performance as a guide for our expected returns. It's an educated guess, that's all.

Using 7% past return of the stocks market as a guide for expected future returns is flawed. Future expected returns are a function of current valuations. you have to determine how expensive stocks are (hint, they aren't cheap) and how that will impact the long term expected return.
 
« Last Edit: January 22, 2019, 12:08:45 AM by vand »

theolympians

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Re: Precious Metals
« Reply #39 on: January 22, 2019, 01:48:05 AM »
OK, I'll jump in......A relative of mine purchased a bunch of gold coins after 2008. He no longer trusted the stock market.

With stocks/mutual funds/etfs you own shares of something. You can daily check the value of your portfolio. If they pay dividends, you can own more shares, increasing value. If you need money, you can sell a portion and transfer the funds into cash.

How do you get money out of gold? It sits there in the safe. I don't see it as money, no store I know of accepts it as currency. As a gold owner, and I need money, how do I turn the gold into US dollars? A coin shop???????

I am not completely against PM, people do seem to pay for them. I am just unclear as to the method.


Classical_Liberal

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Re: Precious Metals
« Reply #40 on: January 22, 2019, 02:39:40 AM »
« Last Edit: January 22, 2019, 02:54:10 AM by Classical_Liberal »

vand

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Re: Precious Metals
« Reply #41 on: January 22, 2019, 02:41:07 AM »
OK, I'll jump in......A relative of mine purchased a bunch of gold coins after 2008. He no longer trusted the stock market.

With stocks/mutual funds/etfs you own shares of something. You can daily check the value of your portfolio. If they pay dividends, you can own more shares, increasing value. If you need money, you can sell a portion and transfer the funds into cash.

How do you get money out of gold? It sits there in the safe. I don't see it as money, no store I know of accepts it as currency. As a gold owner, and I need money, how do I turn the gold into US dollars? A coin shop???????

I am not completely against PM, people do seem to pay for them. I am just unclear as to the method.

There is a presumption in this that your ultimate aim is to acquire more dollar wealth (or whatever your local currency is), but a part of gold's attraction is that it is a store of value outside of traditional currencies and so provides diversification and protection against the very worst case scenario, ie currency destruction like we are currently seeing in Venezuela, Argentina, Russia (are you so sure it can never happen in the US when you have a govt that continues to spend 4 dollars for every 3 dollars it takes it...?) Fiat currencies all die eventually. A 3% loss of purchasing power may be acceptable year on year, but when the currency dies it tends to accelerate towards the abyss. One old line that is often trotted out is "Put 10% in gold and hope it does badly."

OK, so much for doomster scenarios. Physical gold has high transaction cost and liquidity issues associated with it, that is true. Accumulating physical gold with the aim of trading it for more dollars at a later date is really not what gold is about.  However, from a portfolio balancing/investing point of view there are other options. You can buy the GLD etf for example, which is just as liquid as any equity. And/or you can invest in gold miners, which are a leveraged play on gold prices.
« Last Edit: January 22, 2019, 02:47:15 AM by vand »

MustacheAndaHalf

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Re: Precious Metals
« Reply #42 on: January 22, 2019, 09:08:50 AM »
There are a couple of ways you can value gold:
Dow/Gold ratio if viewing gold as a traditional asset
Why is that ratio valid?  Why does gold have to grow in proportion to stocks?

Using Portfolio visualizer's inflation adjusted returns for the past 30 years (1989-2018):
U.S. stock market: +7.1% / year (after inflation)
gold: +1.1% / year (after inflation)
Many investors use ratios to determine relative prices. We can look and see that gold is currently at the sort of similar valuations that it was in previous periods like 1929, mid-late 1960's, and early 2000s. Holding gold during these times would have seen a very good return in the subsequent 10 years (better than stocks).
Does that mean that the next 10 years will perform similarly? Not necessarily. There are no guarantees. Past performance is no guarantee of future returns. But we are using past performance as a guide for our expected returns. It's an educated guess, that's all.
Do you have a specific source for why gold and stocks should have a ratio?

Using 7% past return of the stocks market as a guide for expected future returns is flawed. Future expected returns are a function of current valuations. you have to determine how expensive stocks are (hint, they aren't cheap) and how that will impact the long term expected return.
I didn't say anything about future returns.

But since you bring it up, future stock returns mostly ignore valuations.  According to a Vanguard white paper, there's only a 0.40 correlation between current P/E values and stock values 10-20 years from now.
https://personal.vanguard.com/pdf/s338.pdf

vand

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Re: Precious Metals
« Reply #43 on: January 22, 2019, 03:04:13 PM »
There are a couple of ways you can value gold:
Dow/Gold ratio if viewing gold as a traditional asset
Why is that ratio valid?  Why does gold have to grow in proportion to stocks?

Using Portfolio visualizer's inflation adjusted returns for the past 30 years (1989-2018):
U.S. stock market: +7.1% / year (after inflation)
gold: +1.1% / year (after inflation)
Many investors use ratios to determine relative prices. We can look and see that gold is currently at the sort of similar valuations that it was in previous periods like 1929, mid-late 1960's, and early 2000s. Holding gold during these times would have seen a very good return in the subsequent 10 years (better than stocks).
Does that mean that the next 10 years will perform similarly? Not necessarily. There are no guarantees. Past performance is no guarantee of future returns. But we are using past performance as a guide for our expected returns. It's an educated guess, that's all.
Do you have a specific source for why gold and stocks should have a ratio?

Using 7% past return of the stocks market as a guide for expected future returns is flawed. Future expected returns are a function of current valuations. you have to determine how expensive stocks are (hint, they aren't cheap) and how that will impact the long term expected return.
I didn't say anything about future returns.

But since you bring it up, future stock returns mostly ignore valuations.  According to a Vanguard white paper, there's only a 0.40 correlation between current P/E values and stock values 10-20 years from now.
https://personal.vanguard.com/pdf/s338.pdf

Its entirely reasonable to expect a long term relationship. Gold is extremely rare; it takes a certain amount amount of economic energy to even extract it out of the ground.

Radagast

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Re: Precious Metals
« Reply #44 on: January 22, 2019, 08:24:03 PM »
I know its already been posted in this thread, but I did an in depth look at the subject here:
https://forum.mrmoneymustache.com/investor-alley/gold-price-and-the-hazards-of-backtesting/
I included a comparison of gold against other real assets (CPI-U), its cost to mine, and a link to a zerohedge article about its real price history since the year 1200. Right now gold is about 5 consumer price indexes, which is well above its average since it was set free on the market. You can't use gold prices before 1974 because the government set their value by force, and thus not indicative of relative gold prices today.

All the gold miners have enough money that they are investing in capital projects that will lower their cost to produce in the future. Of course a global crises could send gold high in spite of that. But I see no reason to think it is an unusually good time to invest in gold.

ChpBstrd

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Re: Precious Metals
« Reply #45 on: January 25, 2019, 01:17:15 PM »
I would think TIPS would do better as an inflation hedge and volatility reducer. They are mathematically linked to inflation, pay interest, and are far less volatile than metals. Plus the buying, selling, and holding costs are astronomically lower, while liquidity is better. To me, the odds of a TIPS default are lower than the odds of people in India changing their wedding customs over a 15 year period, or of a new mining technology, or of the replacement of gold with cryptocurrency, or of a meaningless 50% drop in gold's price which is driven by speculation anyway.

In a Venezuela, Syria, or Nazi Germany situation, having a Swiss bank account with a few thousand in foreign currency and a passport would fly you out of the country over the heads of the people having their clothes patted down for coins or their homes ransacked by soldiers/rebels. The coin collector hobby shop will not be open. The "using gold to bribe border guard" scenario makes for good dramatic storytelling, but the many times more common scenario would be people with seed capital outside the failing country quietly using those funds to emigrate - often travelling first class on the way out and leaving behind those people who are attached to physical assets such as real estate or hard-to-safely-transport gold hoards (Also note how loss aversion to wasting physical assets can affect people's decisions to escape in time).

So if these are the goals the OP's question is kinda like what's the best way to make a suboptimal decision. I guess my answer is compare coin prices, negotiate, get a safe off of Craigslist rather than paying retail, and invest the savings in a Swiss bank account CD ladder.

tralfamadorian

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Re: Precious Metals
« Reply #46 on: January 25, 2019, 03:22:08 PM »
... invest the savings in a Swiss bank account CD ladder.

Not to jump on your post specifically but it made me think about what I've read concerning the difficulty for Americans to open a foreign bank account. I ran into this in a obtuse way when I was hearing about American slow travelers and thru hikers having issues opening up bank accounts in the countries they were staying in.

Evidently FBAR is a giant PITA for foreign banks and many responded by closing accounts owned by Americans and/or denying new accounts- even Americans working for foreign companies living in those countries and going to the branches in person. If that's happening, what chance do we as relatively small fry (compared to multi-million dollar deposit customers) have of successfully maintaining CD accounts outside the US?

Given the hurdles, I'm tempted to consider the real estate as a bonds equivalent approach given how much more simple it is to purchase.

Mostly a hypothetical concern at the moment but in the future I would like to diversify outside of US real estate and investments in US bank accounts and brokerages.

Thoughts?

maizeman

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Re: Precious Metals
« Reply #47 on: January 25, 2019, 05:10:59 PM »
In a Venezuela, Syria, or Nazi Germany situation, having a Swiss bank account with a few thousand in foreign currency and a passport would fly you out of the country over the heads of the people having their clothes patted down for coins or their homes ransacked by soldiers/rebels. The coin collector hobby shop will not be open. The "using gold to bribe border guard" scenario makes for good dramatic storytelling, but the many times more common scenario would be people with seed capital outside the failing country quietly using those funds to emigrate - often travelling first class on the way out and leaving behind those people who are attached to physical assets such as real estate or hard-to-safely-transport gold hoards (Also note how loss aversion to wasting physical assets can affect people's decisions to escape in time).

I agree with this reasoning. At the same time, the issue tralfamadorian points out with the trend towards increased difficulty in opening foreign bank accounts for americans is definitely real.* That's not an argument _for_ buying gold. I'm just not sure what an effective and generally accessible strategy is right now if you're worried about the nation either collapsing (Venezuela), erupting into civil war (Syria), or turning into a totalitarian nightmare (Nazi Germany).

*Although anecdotally it seems to be worse in the EU than most other parts of the world.

WhiteTrashCash

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Re: Precious Metals
« Reply #48 on: January 25, 2019, 05:25:46 PM »
If you are going to put money into gold and silver, you may as well just buy some cryptocurrency. It's basically the same thing. The value of it comes from expecting someone else to want to buy it from you. There is no intrinsic value to any of it. Ask a pawn shop owner if you don't believe me.

Classical_Liberal

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Re: Precious Metals
« Reply #49 on: January 25, 2019, 06:34:13 PM »
If you are going to put money into gold and silver, you may as well just buy some cryptocurrency. It's basically the same thing. The value of it comes from expecting someone else to want to buy it from you.

Except that precious metals have a 10,000+ year human history as a store of value.  Crypto has a very poor track record as a store of value over only a decade. 

Remember, all stores of value, no matter if we are talking real estate, PM, equities, bonds, etc... They are all merely a social contract between individual humans or human social organizations. Unless, of course, they can DIRECTLY provide for your needs without additional input or trade (ie permaculture garden).  The stronger the social contract, the better chance that it holds value in the future.  There is a reason people still raid the tombs of ancient royalty, their store of value in the form of art and gold still have value today.

For those of us who have some gold in our portfolio, the fact that it does not provide returns is actually a feature of the investment, not a failing of it.