One benefit to mention is counterparty risk, which is a crucial benefit of gold and silver but one that is rarely mentioned. It’s a risk that maybe only one out of ten financial pros mention or think of.Gold and silver belong in a diversified portfolio.
That’s right. Most financial professionals exclude gold and silver as they discuss diversification. Their diversification is principally among paper assets (such as stocks, bonds, exchange-traded funds, and mutual funds), and the only hard assets they typically include are real estate and personal property (cars, collectibles, and so on).
Of course, this isn’t true all the time. At the height of major economic crises, a plurality of financial professionals do mention gold and silver, but all things being equal, they usually leave them out. Good and bad times do change often, so of course, your portfolio should adapt. But no matter how good or bad times get, possessing some gold and silver will always make sense to some degree.
When times are bad, gold and silver excel as players in your portfolio. But when times are good, gold and silver make sense as hedges or as a form of insurance because bad times can return in sometimes unexpected ways. Using these eternal metals as a form of insurance (at a minimum) is a powerful reason to keep some because paper assets can become problematic before you know it. Why?
Gold and silver allow for privacyIn this day and age, when privacy is at risk given how easy it can be to get details in public records or splattered on the internet, your assets and other holdings are a public display of your potential wealth. There are plenty of folks out there that you should by wary of; whether it is thieves or snoopy relatives, there are plenty of reasons to guard your privacy. This is where gold and silver can shine.
If your neighbor lived in a mansion and you lived in a very modest home, you could easily and privately store a fortune’s worth of gold, for example, in a drawer and no one would be wise to you. The purchase of gold and silver isn’t easily detected by the world at large, and when the day comes to sell them, you would only need to report the gains on your taxes. But so many nosy folks would have difficulty finding out about your shiny stash of precious metals.
When a country changes political parties or entire political systems (either through votes or violent means), it means that a segment of the populace has a reason to flee. Heck, in some parts of the world, political regimes seem to change with the seasons. A person’s ability to be mobile was part of survival. In today’s unstable world, mobility becomes a plus again. You can carry thousands of dollars of value with a few gold coins very easily. Of course, silver is valuable, but a sizable amount is very heavy and not as portable. But both can come in handy because gold can pay for large transactions and silver can pay for the smaller ones.
Now another person can chime in with, “Paul, there are many things that are portable wealth — copper is a great example!” But copper is about $3 a pound. Even $100 worth of copper is just too heavy and unwieldy to even carry across the street, never mind another part of the country or the world.
Yet another person will say, “Physical cash is very portable, and you can easily put a debit card or a checkbook in your pocket.” Hopefully, folks will have both cash and precious metals, but remember another drawback of both physical and digital cash. Physical cash is portable, but it does deteriorate physically over time, and its value can decline over time due to inflation. Digital cash is great in the age of internet technology, but what happens during a blackout? Even in dark times, you have metal in hand!
Given that, the government (both the federal and also the state and local authorities) open the spigots of spending to address this deficit. Ultimately, this will cause inflationary pressures and other unforeseen problems. What should retirees do given this dilemma? Buy gold? Gold will retain its value and help boost wealth when the retirement funding crisis hits.
Note: Silver has many of the features of gold, but it doesn’t tend to share “safe haven asset” status due to its dual nature as both a monetary metal and an industrial commodity.
Gold’s strength stands up very well to most of those potential systemic risks. Gold has been a safe haven asset since humanity first started using it thousands of years ago. It survived numerous and endless wars, chaos, and economic crises, and its unique nature will most likely carry it through the next batch of worries. Of course, if we’re talking about humongous meteors coming our way or if our planet careens toward the sun . . . uh, don’t sweat the economy.
Yes, humanity invented paper currencies, but paper currencies were subject to the political whims of government corruption time and time again. When you give politicians and central bank bureaucrats the power to create “money” out of thin air, how soon do you think abuse and greed set in and money is overcreated?
This “flaw” in man-made paper currencies leads to overproduction of currencies and the inevitable collapse of the currency itself. This is why the most common collapse in human history has been a currency collapse. Literally thousands of currencies have collapsed since (and during!) ancient times. I can confidently predict that most (all?) of today’s currencies will collapse, especially given historic and massive problems tied to the crises unleashed during the COVID-19 pandemic of 2020 and the fallout from it.But as sure as night follows day, gold will outlive today’s currencies. When a currency collapses, it reaches the value of zero. However, gold (and silver, too) will most likely always have value, so the attraction and attachment to gold will continue. Got gold?
But the record is clear that gold holds its value very well. Gold actually did well during high-profile deflationary periods such as the Great Depression during the 1930s and in the aftermath of the 2008 financial crisis.
When the world population surpassed 7 billion (circa 2010 give or take a month), gold was in the general range of $1,000 to $1,200. As the world population is near or at 8 billion people (give or take a city block), gold is around $2,000. Silver had an average price around $15 (or so) back then, and in the summer of 2020, silver was around $27 per ounce.
The point is simple: More people on the globe means more overall economic demand. Couple this dynamic with the fact that currency production (dollar, euro, yen) is growing even faster than the population means an environment conducive to rising gold and silver prices.
Goods and services go up for two basic reasons: “supply and demand” and overproduction of the currency that filters down to consumer markets. Price inflation is the condition where “too many dollars” are chasing a finite basket of goods and services. So really true inflation isn’t about goods and services being more expensive; it’s about the currency being too plentiful and too cheap!Gold and silver do well in an inflationary environment because precious metals aren’t subject to being overproduced in a nanosecond the way currencies are quickly overproduced. The Federal Reserve (the central bank of the United States), for example, was able to create trillions of dollars during the global COVID-19 pandemic of 2020 with a few mouse clicks.
Gold and silver can see their supply increase only through the hard and slow task of mining. New gold and new silver are added to aboveground supplies at the annual rate of only 2 percent (give or take a hundredth of a percent). So, when dollars (or yen or euros or whatever currency) are overproduced, gold is overproduced at a much (and I mean much) lower rate. A currency (to retain value) has, by dint of creation, to be scarce to keep its value. Given this, gold and silver tend to be fantastic inflation hedges and very important in a portfolio when the risk of inflation grows. As I write this, the risk of inflation is indeed growing.
The Federal Reserve, in an unprecedented and far-reaching effort, was producing currency in an unbridled fashion, attempting to rescue as many asset classes as possible. The newly minted digital currency went to stocks, mortgages, junk bonds, and many other venues on the financial landscape.
The net effect is reinflated financial bubbles greater than at any time of modern history. The problem with bubbles is that they don’t keep going up endlessly. Factors such as demand and supply (which are indeed evident in both the economy and in financial markets) do in fact puncture bubbles, which ultimately collapse, ending in tremendous and pervasive financial pain for those on the losing end of failing and falling investments.
But as you know by now, gold, especially physical gold, is virtually impossible to inflate. It takes tremendous effort to extract even a single ounce of the shiny metal from the ground.
Keep in mind that gold is a better guard against bubble possibilities than silver.