Investing in Metals

[HCBailly]

I’ve heard a lot of talk lately about people investing in metals (gold/silver) to hedge against inflation. However, I have relatively little knowledge on the subject, so I have a few questions about it. I tried looking at older topics, but they didn’t seem basic enough for me.

1) How does investing in metals protect against inflation?

For example, let’s say that I purchased $100 worth of gold today and the annual inflation rate was 3%. Does that mean if I sold it in a year, it would be worth $103? I would think that the price of gold is more so based on the stock market, which isn’t necessarily dependent on inflation.

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

Real estate is not my area of expertise and would rather invest my money into my business, if anything. However, marketing to new clients has not shown to generate a positive ROI for me. My thought was that if inflation is going to skyrocket any day now, why not invest in metals?

The problem is that I could only do so at the expense of my cash reserves. People are often telling me that savers are losers and how I need to invest my money if I’m ever going to become wealthy, yet they also tell me that I need to have a solid amount of cash reserves to survive the dips in the market, which sound contradictory to me. How quickly could I sell if I really needed the money? I think I need more information on how this works.

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

Do I read books on the subject or talk to a broker? How do I actually buy the metals? Do I buy stocks, jewelry, certificates? There seem to be a number of ways to invest in metals, but I don’t know where to start, if I should at all.

My main financial goal right now is to pay off my business loan which is not tax deductible, and consuming 25% of my gross income per month, even after modifying the loan. However, my cash reserves are such that it will take me years to pay off the loan, and I’d rather avoid tapping my home equity. Not to mention, that would be rather hard to do right now, anyway.

Business seems to have stabilized now and I’ve made a profit in 4 consecutive months now, so I’m not as concerned with maintaining my cash reserves. It seems that now it might be best for me to invest in metals to hedge against possible hyper-inflation. However, what if I have another really really bad winter? Could I sell the metals fast enough to pay the bills?

I’m not talking about investing for the future, such as when the supply of silver runs out in 20 years. I just want to consider my options, or if I should just hold onto my reserves. My default plan is to save my reserves so that I can ride out this economy. However, if hyper-inflation kicks in, that might not be such a good plan.

Thanks for the info.

 

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[Pinnacle]

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.

 

[kidgas]

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.

 

[randallg99]

very thought provoking questions by HC.... and interesting responses by Pin & Kid-rep+

I have been asked this before and this is the simplest way I can answer it, especially after a mojito o dos.... think of your purchasing power. As cost of goods increase, then your purchasing power (ie discretionary income) diminishes. The value of gold/silver in my mind never fluctuates but rather it's our ability to afford that ounce of precious metal that is determined by our purchasing power.

 

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