Tuesday, May 2, 2017

Precious Metals Vampires

Pretty regularly, I get breathless emails about buying gold or silver, because either intentionally or because of gross incompetence, the banksters are going to destroy the world economy, and we are going to be reduced to eating rats to survive.  The ads you see on cable TV (at least on Fox News) are a bit more subtle, but still preaching the same message: buy gold or silver now to make big profits and protect your wealth.

This is a a scam.  Let me explain.  Gold and silver are not investments; there is no return on your gold or silver except for increases in prices, and neither metal reproduces (unless you have the rare organic gold).

At best, gold and silver are inflation hedges.  If there is a 10% inflation of the money supply, your gold or silver  will likely appreciate in value 10% relative to the dollar.  But you are not going to get more than inflation related gain.  If demand for either metal increases (say, from $1200 to $1500 per ounce for gold), you may get a net gain of 15% (25% appreciation minus 10% inflation), but such a growth is only likely if lots of people suddenly start buying gold in such quantities that it increases the inflation-adjusted price.  In practice, war is one of the only certain causes of gold price increases.

Gold prices over time:
There are two big peaks on this chart: one when I bought wedding rings in 1980; the other in mid-2011.  If you bought $2100 of gold in 1980, in 2001, it would be worth $373, and that is inflation-adjusted.  Similarly, $1697 of gold bought in August, 2011 would be worth $1216 today (again inflation-adjusted).  Yes, buying at the lows and selling at the highs would be very profitable, but similar investments in stock mutual funds would have given similar results with less risk.

In December, 1979, the Hunt brothers tried to corner the world silver market, driving up prices to $102/ounce and losing $750,000,000 in the process as the price plummeted, eventually losing all the billions their father (an oilman who brought his lunch to work and drove a beat-up pickup) had left them.  By 2001, it was back to $5.76/ounce, a historically typical price.  There was a similar run-up and collapse like gold in 2011.  A personal story: my sister and brother-in-law had a small quantity of silver coins inherited from our Depression-era mother.  They were trying to sell it some months ago when silver was briefly $20/ounce.  Now it is $16.84/ounce.  Some precious metal nuts said to keep it because it had to go up.  Glad they sold it at $20/ounce.

For people with nothing, buying precious metals as a economic collapse idea might make sense, but even then ammunition and guns makes more sense: these have practical value in a Mad Max world.  While gold and silver have very real industrial uses, they are pretty well useless to most people except as a currency.  Ammo and guns are immediately useful to everyone in a post-apocalyptic world.

Buy cheap guns, by the way.  Many years ago, I talked with a guy who came to America from post-war Germany.  In the postwar chaos, he said his wife's jewelry was more useful than gold bars.  (I was too polite to ask how he obtained gold bars.)  "Have you ever tried to get a haircut with a $50 bill?"  Today, substitute $100 or $500 bill.

What is driving this gold and silver madness?  Yes, these are both very pretty metals when polished.  (With silver, plan to do it regularly.)  Some of this people with limited understanding of economics and finance.  Some of this is the gold and silver firms, cashing in on fearful people   If you are dirt poor, gold and silver are highly risky inflation hedges.  If you are obscenely rich, they are bad investments compared to your multimillion dollar survival condo and 100,000 rounds of 9mm.  If you are middle class, keep putting money in your 401k and maybe buy an extra 1000 round case of 9mm occasionally.

The sky is unlikely to fall.  Do not reach 65 relying on a piddling Social Security check.  You want half a million minimum  in your 401k when you retire.
My wife reminded me of the Twilight Zone episode where the criminals steal an armored car of gold and spend a 100 years in suspended animation waiting for the heat to die down.   When they wake they have to get out of Death Valley on foot.   The last survivor tries to get help by offering a gold bar to some passers-by.   The wife says, "Wasn't gold worth something once?"

The larger issue here is fear.  A lot of people spend their lives in often irrational fear.


  1. Yep.

    I put some money into precious metals some time ago, explicitly as an inflation hedge. It wasn't an excessive slice of my net worth, I didn't expect it to appreciate substantially and it has not. As of now I'm underwater, but not particularly bothered. Not making money on an inflation hedge seems like the more desirable outcome.

  2. To me the constant pushing of people to buy silver and gold is simply so the present owners of gold and silver can sell out. My joke to people who wanted universities to sell their coal assets before Al Gore made the stocks worthless was who would buy something that they knew would soon be worthless. In order to make a profit from "investing" in gold and silver you have to have someone willing to buy it from you, in the future, for more money then you paid for it.

    Many years ago Silver had extensive usage in photography in the developer fluids. Now that we use digital cameras its industrial usage is significantly smaller: Hence its major loss in value. My father owned silver coins, but for the historical value of them,not as an investment. If we had sold the bulk of his collection the year after his death we would have made a few thousand more in money then we did because we waited until after Mom passed away (when we no longer had the choice of waiting). Of course buying silver coins at that time was less expensive, allowing me to easily complete some 20th century coins sets for my siblings to remember dad's hobby.

    And if I was to carry anything as an emergency stash for money, it would be some loose, synthetic saphires. Most people would never know the difference, they are small and lightweight.

  3. Damned sorry to hear that. I had almost $200 poised to invest in The Silver Boom, but I hesitated to invest quite that heavily.

    He who hesitates is sometimes found, eh?

  4. Until and unless I can walk into the grocery store and can buy food with the gold I don't believe we will ever see metals as money as the apocalyptic's believe. I doubt they would even take coins and then the most they would give you is currency face value (a hell-of-a lot less then metal value). If the grocery stores are gone (I do garden, but nevertheless) then we have an all out collapse anyways with mass killings....

    Now if dollars truly become worthless it is over...we have a total collapse anyways and it won't matter for those of us in the cities. The best one could hope for as killing as many has he can before he is killed (even with a gun in each hand who can stop 10's or hundreds or more trying to get your food).

    This is all about metals dealers making a profit off of fear.