Thread: Investing in Metals

1) How does investing in metals protect against inflation?

The specific metals in question are gold and silver. Gold, in particular, has been used as money since money was created after the inefficiency of the barter system was recognized. The price of gold has nothing to do with the stock market. The price of gold in US dollars is a reflection of how much a single dollar is worth. In the 1930's, the price of an ounce of gold was $20.67, today it hovers around $950. That is a reflection of how much wealth we have lost, because our currency is not backed with anything. The chief difference between gold and dollars is that gold is finite. There is a certain amount of gold in supply in the world. If you are familiar with what inflation is and why it happens, it should make sense that this finite supply is what prevents the inflation of gold. Gold cannot be replicated like dollars. The fact that the dollar (a paper IOU) is not backed by a hard asset means that it represents debt that cannot be repaid. During the gold standard days, the dollar was redeemable in gold, and therefore, the debt that the dollar represented would be satisfied once redemption of the gold backing it took place.

2) When is it appropriate to invest in metals as opposed to other income-producing assets?

When some of us speak about investing in gold or silver, we are not making an argument similar to stocks vs. real estate, for example. Based on #1, gold and silver are wealth preservation investments. Investing directly in gold/silver does not produce income because the commodities themselves are stores of wealth. They don't build your wealth, they preserve it. They keep you from losing it. Now, gold/silver stocks, etf's, and funds are the means of building wealth that is backed by gold/silver commodities. In answer to your question, it is ultimately ALWAYS appropriate to invest in these metals. Other metals are debatable because it depends on their industrial uses.

3) How can I learn more about buying and selling metals?

Read a book that I am reading right now called Gold: The Once and Future Money. This book is about the history of money. Along with visiting websites that deal with buying/selling such as GoldSilver.com (Mike Maloney's (a rich dad advisor) site). Google the names Peter Schiff and Marc Faber. This is a start in the right direction.


More answers to your questions as you need them.

HCBailly,
Pinnacle does a good job of answering your question on how gold protects against inflation. Essentially, gold has been recognized as having value by humans for thousands of years and that's just not going to change (it must be in our DNA or something). The bottom line is that inflation is a monetary phenomenon reflecting the supply and demand of currency. Assuming the quantity of a given product remains stable, then the price of that product will rise and fall with the availability of the amount of dollars (in the US case). The problem is the supply and demand of most products (oil, corn, blue jeans) is in flux at the same time that the amount of currency and credit is in flux.

As mentioned, gold is a store of wealth (aka purchasing power). I have several articles on this on my profile at hubpages. Real estate also tends to keep pace with inflation over long periods because its prices respond to availability of current and credit, population supply and demand. Real estate is contracting because credit is contracting and we had an oversupply of available real estate. But typically rents, construction costs, etc track economy wide inflation. Businesses can grow greater than the inflation rate due to organic growth and increasing market share which is why stocks and bonds can outpace inflation. Eventually, though, unless the business opens up new markets, growth stagnates and should track inflation unless something better comes along in which case the business dies.

You can buy gold online through various websites. I have used apmex.com in the past without any problem. There is quite a spread that you have to pay so you shouldn't be trading in and out frequently. You can sell back to apmex or there are usually local coin dealers who buy and sell silver and gold.