It’s time to wake up and accept what you, as an investor, are in some way already aware of. Today, dollars, euros or yen in the bank earn you no interest. Increased volatility and correlation across financial markets and asset classes ensures most traditional investment strategies are somewhat redundant, and, the big developed economies are in a currency devaluation race to export their way out of mounting economic concerns. This impossible climate is underpinned by a justifiable fear of counter-party risk, and a looming systemic risk that investors should be all too aware of after the turmoil of 2008 and 2009. Ask any market ‘pro’, making a semi-decent return these days is a very tricky business, and for your average Joe, this should be a distant second behind actual wealth preservation.
Wealth preservation is the discipline of preserving the purchasing power of your wealth over time. Essentially the idea is to ensure that: firstly you don't lose any money, and secondly your wealth will buy you the same goods tomorrow that it does today. This means protecting yourself against the ravages of inflation, which is a form of ‘stealth wealth-erosion’. And you don't need government statistics like the CPi (US) or the RPi (UK) to tell you that inflation is everywhere you turn. Do you pay more today than you did a year or two ago for groceries and clothes? Of course you do. We all do. Just look at some indicators from 2010: corn, wheat, oats and soybeans are up over 40 per cent and cotton is up over 90 per cent.
So, what do you do? How do you protect your hard earned money against volatile markets, failing banks and inflation? In one word - gold. In two words - gold and silver. Many will argue that gold and silver prices are at a record levels, in bubble territory, and have no real practical use other than being shiny metals... blah blah blah... They have been making those arguments since gold was around 800 USD per ounce in early 2009 and it’s now 70 per cent higher and in floating at around 1,400 USD. In fact, had you bought gold only 10 years ago, you would have paid around 275 USD per ounce and you’d have made a 500 per cent return, outperforming most asset classes for the same period. Silver has run from around 5 USD in 2000 to the 30 USD mark today. What most people can't seem to get their head around is that gold and silver are actually money, and they always have been!
The use of gold as money dates back to 4000 B.C. when the Egyptians used gold bars of a set weight as a medium of exchange, the Sumerians had done this even earlier with silver bars. Gold coinage was first produced in 700 B.C. The process of turning physical gold into paper money began when goldsmiths, who used to store gold for a fee, started to issue receipts for their storage. Receipts were more convenient to carry around than actual physical gold, so it wasn't long before people became accustomed to the idea of paper as money. The point is that gold and silver have functioned as money in one form or another for 6,000 odd years, or up until August 1971 when US president Nixon closed the gold window. Those paper receipts were gold, because they were redeemable for gold, just as the dollar was before 1971, before we came off the gold standard. So, what you need to understand is that our current fiat currency system with the American dollar as the worlds reserve currency has only existed for 40 years, whereas gold and silver have been money, across multiple empires and continents, for thousands of years.
This historical context presents the prudent, rational, and awakened investor with a significant wealth preservation opportunity and thus by default a ‘relative’ wealth creation strategy: gold and silver. Today, investors are questioning the credibility of governments and central banks in the management of our global financial system. Investors are concerned about the sustainability of our financial system as we know it, and the surge in gold and silver prices is evidence of this.
For those of you who just can’t get there and say, "It’s too late, we've missed the move", or "They are at all time highs, how much higher can they go?" Let me tell you that it’s just a psychological barrier that you have to break through. Think about this: If gold can go from 35 USD to 800 USD in the 1970s (over a 20-fold increase), and it took 350 USD to purchase in 2003 what 35 purchased in 1971, (I've adjusted price per ounce for inflation), then why can’t gold go from 350 USD in 2003 to 8,000 USD in 2013? [Rationale from James Turk of Goldmoney.com]
Silver is only the silver lining - all roads lead to gold. Gold and silver are the answer to all questions. Go out today, buy a safe, stick it in your house, and stuff it with some physical gold and silver every month. It’s your best insurance against what could be a very costly restructuring of our global financial system, which seems more likely to happen than not. For those of you that are interested, I have summarised my top 12 reasons to buy physical gold and silver below. Stay hungry, keep curious and above all, good luck.
12 Reasons to Buy Physical Gold
1. Gold preserves purchasing power (an ounce of gold today buys the same amount of crude oil it did 10 or even 50 years ago).
2. Currently there is no positive carry opportunity cost to owning gold (when you adjust the deposit interest on your dollars, euros, yens, for inflation, you get zero interest, so you are not foregoing any bank interest when you invest in physical gold as opposed to cash).
3. In the 1930s gold made up around 20 per cent of the allocated assets in the world, in 1980s it was 26 per cent and today it’s 0.8 per cent, therefore it can only go up.
4. No counterparty risk: you don't have to worry about some bank gambling your gold down the toilet if it’s sitting at home in your safe.
5. There’s no foreign exchange risk.
6. When adjusted for inflation gold was at 2,000 USD per ounce back in 1980.
7. There is now considerable evidence pointing to "encumbered gold" in paper gold or ETFs... meaning there could be 100x more paper gold than there is actual underlying gold, which is, after all, what gives the paper its value.
8. There are legal ownership issues related to ETFs and paper gold, meaning the underlying gold that corresponds to the paper assets, is loaned to investment banks by the central banks who actually own it.
9. The smart money has already started switching out of paper gold into physical (David Einhorn's Greenlight Capital did it back in 2009), and many more will as awareness of the risks associated with paper holdings grows.
10. www.gata.org
11. The song, ‘Gold’ by Spandau Ballet.
12. "You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold," George Bernard Shaw
12 Reasons to Buy Physical Silver
1. More silver is consumed each year than is produced, therefore, global above ground stocks continue to be depleted significantly.
2. Silver is scarcer than gold: there is about five times more documented gold above ground than silver.
3. Proven silver reserves are significantly less than existing gold reserves.
4. The British Geological Society stated that silver would be the first element in the periodic table to become extinct.
5. Many central banks have already dumped their silver reserves in the market: the US government has sold off all its 5 billion ounce reserves, and announced a few years back it would have to buy silver on the open market.
6. As with physical gold, there’s no counter-party risk and no foreign exchange risk.
7. It’s the poor mans gold, meaning its more affordable therefore potentially subject to a large demand base.
8. It kills werewolves.
9. Silver is money. Why? Apart from the fact it’s a store of value, transferable and scarce, it’s also been money for thousands of years and always will be.
10. Silver has strong demand arising from industrial applications - photography, electronics, batteries, healthcare, computers and Internet tech are just some.
11. China, the world’s third largest exporter of silver has in recent years significantly decreased the volume of its exports to satisfy growing internal demand. I am betting China will keep growing.
12. Gold is at its all time high, silver is still 50-odd per cent off its all time high of 50 USD per Troy Ounce in 1980.
Please be aware that the author is long physical gold and silver, and this article is in no way endorsed as an investment recommendation or as a replacement for advice from an accountant or personal finance advisor. People who choose to pursue particular products or services mentioned above cannot hold the author or the publisher liable for any losses and/or other problems experienced thereof.
