Metal Investing: Silver years 2000s vs now

[Roland of Gilead]

I think bonds are a productive asset, but not necessarily a good investment. If I buy local municipal bonds, I lend the city (or local entity) money to expand the airport or refurbish the sewer treatment plant. Those are both productive uses. Almost any bond is productive, even if it later turns out to be a bad investment. It is productive because it pays somebody to go out and do something. That is not any different than stocks really, which individually often turn out to be unproductive and quickly fold, but in aggregate succeed. Silver is only productive if put to use conducting heat or electricity or killing little buggies, in which case it loses its currency/bond aspect. Maybe add "convertible" to the list above :).

You are still not understanding what I am trying to say.

You are saying a muni bond is productive because it pays somebody to go out and do something.   When I buy silver it pays for a mining company to go out and mine more.  It pays for CAT to sell them heavy equipment and it pays for the airline to fly employees around.

Yes but silver represents a single point of money entering the system. You buy it once and pay the companies to mine it once. Then it lies around, which is like an ordinary consumer good (maybe not quite, typically consumer goods depreciate, while presumably precious metals maintain their real value). The airport or sewage treatment plant provides an ongoing benefit over the next 30 or more years. You make a single injection of money into the system to fund an ongoing benefit.

But what if the silver is eventually used to make some sort of electrical contact and then it is recycled and used to make a necklace, then years down the road it is used for some catalyst in a fusion reactor?   Ongoing benefit there too.

[Radagast]

I think bonds are a productive asset, but not necessarily a good investment. If I buy local municipal bonds, I lend the city (or local entity) money to expand the airport or refurbish the sewer treatment plant. Those are both productive uses. Almost any bond is productive, even if it later turns out to be a bad investment. It is productive because it pays somebody to go out and do something. That is not any different than stocks really, which individually often turn out to be unproductive and quickly fold, but in aggregate succeed. Silver is only productive if put to use conducting heat or electricity or killing little buggies, in which case it loses its currency/bond aspect. Maybe add "convertible" to the list above :).

You are still not understanding what I am trying to say.

You are saying a muni bond is productive because it pays somebody to go out and do something.   When I buy silver it pays for a mining company to go out and mine more.  It pays for CAT to sell them heavy equipment and it pays for the airline to fly employees around.

Yes but silver represents a single point of money entering the system. You buy it once and pay the companies to mine it once. Then it lies around, which is like an ordinary consumer good (maybe not quite, typically consumer goods depreciate, while presumably precious metals maintain their real value). The airport or sewage treatment plant provides an ongoing benefit over the next 30 or more years. You make a single injection of money into the system to fund an ongoing benefit.

But what if the silver is eventually used to make some sort of electrical contact and then it is recycled and used to make a necklace, then years down the road it is used for some catalyst in a fusion reactor?   Ongoing benefit there too.

Yes, however in its bullion form it does none of those things, and is only a store of value from a single point in time.

[Roland of Gilead]

So if I buy a bond, in order for it to be a productive, I need to find out what the bond money was used for?

If the bond I bought was used by the city or state for some purpose which did not have a lasting, recurring benefit, then that bond was not a productive investment.   For example if a bridge was built with the bond and later collapsed in a storm.

[Radagast]

If you buy a broad bond fund, just don't worry about it. Bonds are productive in aggregate even if not literally every single one is. Just like saying "humans are very good at reproducing" is collectively true even if some humans are not. Just like many companies lose more money than they make, but are productive in aggregate. Whereas with bullion, you know that by definition it is not productive, otherwise it would be called a different name like "heat sink" or something.

[JAYSLOL]

If you buy a broad bond fund, just don't worry about it. Bonds are productive in aggregate even if not literally every single one is. Just like saying "humans are very good at reproducing" is collectively true even if some humans are not. Just like many companies lose more money than they make, but are productive in aggregate. Whereas with bullion, you know that by definition it is not productive, otherwise it would be called a different name like "heat sink" or something.

This. 

[js82]

No one really went into the reasoning as to why non-productive assets are poor long term investments (as a general rule) but I do agree with that assessment. To me it seems fundamental so I don't really know how to defend that stance other than the basic reasoning that's already been given. Productive assets create and non-productive assets don't. If I invest in something that doesn't create, I'm fighting for my slice of pie. If I invest in a bakery, they just keep making pies. You get a pie, and you get a pie, everybody gets a pie.

This is exactly it.  If an asset is non-productive, the only way it appreciates in fundamental value(as opposed to an irrational market blip) is if there is a rational increase in demand relative to supply. Barring a sustained demand ramp, the long-term expectation for an asset like this is that it tracks inflation.  On the other hand, the productive asset generates income, and still exists at the end of the day.

You don't want to own pie, you want to own the bakery and the apple orchard.  If you think silver is going to be of stable or increasing value, you don't want to own silver, you want to own the silver mine.  You don't want to own a giant pile of wood, you want to own timberland so you can sell a steady stream of lumber every single year..

Productive assets can still be poor investments if you buy them at the wrong price or they're badly managed, but even an average assortment of them will reliably beat inflation over time.  The same cannot be said for unproductive assets such as precious metals or other commodities.

https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart

 

[Roland of Gilead]

Ok, I think we have sort of defined what is productive and what is non productive.

Precious metals have kept up with inflation over a history of.....maybe 5000 years or so?

This doesn't make them a good or bad investment, it just makes them a reasonably reliable source of insurance against certain situations such as rapid currency devaluation, changes in government, wars, etc.

Bonds right now also just barely keep up with inflation and have less of a protection against currency devaluation and changes in government.  Default can happen....Puerto Rico bonds anyone?

Stocks are the way to go but I cannot fault someone for having some bonds and precious metals in smaller amounts.   Just know that stocks will be doing the heavy lifting.

[JAYSLOL]

Ok, I think we have sort of defined what is productive and what is non productive.

Are you saying these conversations were... productive?  Like I said earlier, I’ve actually got ~4% in silver at the moment (and 1% gold), and I also have ~10% bonds, the other 85% is stocks.  I don’t consider the PMs to be a real part of my investment plan, other than as some insurance/emergency fund. 

[Roland of Gilead]

Ok, I think we have sort of defined what is productive and what is non productive.

Are you saying these conversations were... productive?  Like I said earlier, I’ve actually got ~4% in silver at the moment (and 1% gold), and I also have ~10% bonds, the other 85% is stocks.  I don’t consider the PMs to be a real part of my investment plan, other than as some insurance/emergency fund.

Yes that is a quite reasonable and sound mix I would say.   I have 80% in stocks, 15% in deep covered calls and 5% in cash.  Negligible amount in precious metals, a couple gold coins and some few pounds of silver.   My deep covered calls are what I use in lieu of bonds...they have protection to about a 30% market crash before they start losing money and they have more than triple the return of a medium term bond.

[js82]

Ok, I think we have sort of defined what is productive and what is non productive.

Precious metals have kept up with inflation over a history of.....maybe 5000 years or so?

This doesn't make them a good or bad investment, it just makes them a reasonably reliable source of insurance against certain situations such as rapid currency devaluation, changes in government, wars, etc.

Bonds right now also just barely keep up with inflation and have less of a protection against currency devaluation and changes in government.  Default can happen....Puerto Rico bonds anyone?

Stocks are the way to go but I cannot fault someone for having some bonds and precious metals in smaller amounts.   Just know that stocks will be doing the heavy lifting.

Generally true.  As long as people are honest with themselves about what precious metals are likely to do, how they use that knowledge is their choice.  I just take a darker view of precious metals because of all the precious metal hawkers on "certain networks" trying to push them onto certain demographics - that's something that I find particularly distasteful.

Although I'd argue that other "productive assets" (real estate, land, partial ownership of a company via stock, etc.) also provide an effective hedge against a change in government as well, provided there isn't devolution into anarchy where an angry mob tries to come and take your stuff.  In that case, international diversification is your way out.  That, or stockpiling ammunition. ;)

[MustacheAndaHalf]

If you have piles of metal and plastic, you can't say you have a car - even if a car is made from those things.  Imagining what a metal could do does not make it so.

I'm not sure why "5000 years" is being compared to "recently" as if they are equivalent.  It would be better to compare like time periods, using actual performance data instead of making blanket statements about precious metals and bonds.

Gold had exceptional gains in the 1970s, and bonds in the 1980s, so skip that and measure the last 30 years of bond vs precious metals.

Measuring from 1989 - 2019 :
precious metals : +4.87% / year ...  max draw down -76% (June 2008 - Jan 2016)
interm treasury bonds :  +6.16% / year ...  max draw down -6.47% (Feb 1994 - Nov 1994).
US stock market :  +10.21% / year ...  max draw down -50.89% (Nov 2007 - Feb 2009)

Worse performance than bonds, but higher volatility than stocks.

https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1989&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&asset1=TotalStockMarket&allocation1_1=100&asset2=IntermediateTreasury&allocation2_2=100&asset3=PreciousMetals&allocation3_3=100&total1=100&total2=100&total3=100