Why Are Alarmists Always Trying to Get You to Buy Gold and Silver?

We often hear or read ads where someone is pitching why the “world is going to hell in a hand basket” and if we don’t buy gold, we are going to sink.  The dollar will be worthless and everything we hold in dollars will become worthless.

I don’t feel there is a need to get anxious about the “buy gold and silver” debate, but it is important to look at the pros and cons:

Why is it beneficial to buy physical gold or silver?

I hear financial advisors rail against buying gold and/or silver a lot. I have heard all their arguments against it. The negatives are that gold is a poor investment and that it doesn’t pay dividends. Both can be true, but let’s dig deeper.

In my work as a Seattle conservative investment manager, I try to have an open mind about most subjects and read both sides. I also seek out smart and independent thinkers in the world – those who have had a good track record in the ups and downs of economic cycles. What I have learned from experienced economists like Jim Rickards, Richard Russell, Jim Rogers and David McAlvany is that gold or silver should not be looked at as an investment. Also, Jim Wang, in his article, Gold & Silver Bullion: Insurance, Not Investment, reaffirms that gold and silver should be seen as an insurance policy against the devaluation of the dollar. (1)

For me, I tend to follow what the big money is doing. Here is what seems like overwhelming evidence to me as to why the smart money people are buying gold or silver:

  1. Warren Buffett owns 129 million ounces of silver. (2)
  1. Stanley Druckenmiller just bought over $300 million worth of gold shares (more than 20% of his net worth). (3)
  1. China has accumulated up to 5,000 tons of gold since 2009, when we told them we planned to devalue our currency. Please note: They have not disclosed the exact amount of their purchases yet. (4)
  1. JP Morgan Chase has accumulated between 100 million and 200 million ounces of silver since May, 2011, according to Ted Butler, precious metals analyst. (5)
  1. Goldman Sachs and HSBC took delivery of 7.1 tons of physical gold. They believe demand will outstrip supply in the coming years and see it as a “good buy”. (6)

If all of this is true, why are these people not following the conventional wisdom of not owning gold? I am going to bet they know enough about what is going on that they see owning gold as a smart move. Always be wary of those people who tell you gold or silver are completely not good investments. What is their agenda? Is their bias based on what they can charge fees on? Or do they just not see the role gold and silver has played as a store of value for all of recorded human history?

What is best: gold or silver?

First of all, I believe it is sound to own some portion of either or both. If pressed, my bias tends to go toward silver (at least at the present). This is based on a lot of research I have done. Here are my reasons:

  1. The ratio of gold/silver price is now about 73:1. In the last 20 years the range of that ratio has been about 33:1 to 85:1. Since 1975, the range has been from about 17:1 to 100:1. At the current ratio, and based on historical patterns, it is felt that a ratio of 73:1 makes silver a better value than gold. As this ratio drops, this could change and start to favor gold. But for now, it seems to favor silver. (7)
  1. Silver has numerous commercial applications, including its use in cell phones, cameras and being an excellent conductor of electricity. Therefore, silver is present in numerous electronics products. (8)
  1. If silver were ever needed as a means of currency or exchange for goods and services, it would be much easier to navigate everyday life in ounces of silver than ounces of gold. (9)

What are the disadvantages of buying gold or silver?

When you look at all of recorded human history, you see that all paper currencies have failed.  It is not hard to see the devaluation of the U.S. dollar over the past 100 years to understand this could easily happen to us. Alarmists can metabolize this to an extreme and easily think they need to convert all of their dollar assets into gold or silver.

However, the key is to remember that according to many experts, gold or silver should be considered as an insurance policy. This means one does need to consider other assets, including those that can appreciate in terms of the U.S. dollar – at least in the short run.

There is nothing wrong with owning physical gold or silver. However, I feel there is danger in taking it to an extreme and moving all or most of one’s money into that single asset. I quoted many banks and wealthy people above, and none of them to my knowledge have put more than 20% of their holdings in gold or silver, nor do they recommend anyone else do so.

Again, my thought on gold or silver is to own it in balance with other assets based on one’s age, time horizon, risk tolerance, other holdings, and overall goals.  And, complete financial advice should be sought from a competent financial professional.

Ultimately, I feel the use of gold is a defensive strategy, and an important one. However, what do you do about an offensive strategy?  How do you grow your money when you are not being defensive?  I spent five years of my life exploring this question. Out of that research, I built strategies designed to protect one’s assets from the downside of stock market risk, while still growing assets. Check out my conservative investment management in real time performance here.

Citations:
(1) http://www.bargaineering.com/articles/gold-silver-bullion-insurance-investment.html
(2) http://www.cmi-gold-silver.com/small-survival-gold-silver-coins/
(3) http://news.forexlive.com/!/stanley-druckenmiller-bought-a-big-new-stake-in-gold-etf-20150816
(4) http://www.arabianmoney.net/gold-silver/2014/01/22/china-set-to-hike-official-gold-reserves-to-5000-tonnes-next-to-combat-its-growing-internal-financial-crisis/
(5) http://www.marketoracle.co.uk/Article44278.html
(6) http://thedailycoin.org/?p=39702
(7) http://goldprice.org/gold-silver-ratio.html
(8) http://www.moneycrashers.com/silver-vs-gold-investment-better/
(9) http://www.blog.providentmetals.com/gold-and-silver-bullion-investing/what-is-barter-%E2%80%93-how-silver-can-serve-as-a-currency-alternative.htm
Ben Reppond is an investment advisor and CEO of Reppond Investments, Inc., a Registered Investment Advisor in the State of Washington.  Investment advisory services offered through Reppond Investments, Inc., a Registered Investment Advisor in the State of Washington.
This article contains general information only. Ben Reppond nor Reppond Investments, Inc. are not, by means of this article, rendering business, financial, investment, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business or finances. Before making any decision or taking any action that may affect your business, or finances you should consult a qualified professional advisor.

Age Matters: Is Your Stock Portfolio Collapsing and You Don’t Know What To Do?

Conventional wisdom in investing means “buy and hold”. This may include sectors, indexes, bonds, or whatever.  To be specific, it means you buy certain stocks, mutual funds or exchange traded funds (ETFs) or bonds – and then you don’t sell them.  The idea is over time, they will appreciate in value.

History has shown us that while this approach has yielded gains over a period of decades, the month-to-month and year-to-year roller coaster ride can be more than some people can handle.

Why does age matter?

When a person is under age 50 to 55, they are in the accumulation phase of life.  The younger a person is, the less of an impact the roller coaster ride has on them.  During this accumulation phase of life, a person can “dollar cost average” their way into the future.  This means if they invest in somewhat regular intervals, they will invest some of that money when prices are high and some will be made when prices are low.  This tends to average out the purchasing price and helps to grow assets over a period of years and even decades.

Another thing about investing during a young person’s accumulation years, is they have less money subject to the ups and downs of the market. So, as the roller coaster ride takes their money up and down, the financial impact is lower than it is later in life.

However, the older a person gets, this whole scenario tends to reverse itself.  This happens in three ways:

  1. A person who is older has finished or nearly finished accumulating their wealth. There are typically not many, if any, accumulation years left.
  2. Older people usually don’t have enough money to withstand losing 30-50% (or more) in the roller coaster ride of the stock market, and can potentially lose many years of wealth accumulation.
  3. They also may not have the stomach for the ups and downs, or have the years to recover like they did when they were younger.

In a March 1, 2015 interview with Bloomberg, billionaire investor Stanley Druckenmiller said our aging population will present a “massive, massive problem” for the U.S. in the next 15 years, and “…The young people are not going to be talking about cutting back. There will be nothing to cut back.”

Druckenmiller argues, “…the mushrooming costs of Social Security, Medicare and Medicaid will bankrupt the nation’s youth and eventually result in a crisis worse than the financial meltdown of 2008. The government will have to reduce payments to the elderly.”(1)

Of course, we know if serious cutbacks occur there will be few options left – it won’t go well for the U.S. and our growing entitlement culture.

Why is this a concern right now?

Economies all over the world are slowing down.  Stock markets in every country outside the U.S. are experiencing sharp declines.  Currencies in the same countries are also dropping dramatically.  Finally, the U.S. is joining the ranks of those who are exiting stocks and mutual funds.  The U.S. stock market is now dropping and no one has any good answers about how or when it will get back on track.

The concern right now surrounds the further risk ahead.  Jim Rogers has been a successful investment manager over the last 50 years. Rogers noted that when the Cyprus economy collapsed, the government actually went in and seized money from personal bank accounts:

“It’s been condoned [now] by the IMF, the European Union, and everybody else in sight; that a government in need, can take assets. We all knew they could tax us…but this is the first time that I’m aware of, that they’ve gone in and taken bank accounts. They took gold from people in the U.S. in the 1930′s…but I’ve never heard of them taking bank accounts. [Now] they’re doing it. So be careful [because], now they can take your bank account under this precedent.”

When asked if bank account confiscation will be going worldwide, Rogers said:

Well, it’s now in their bag of tricks, but yes, they can do anything they want to now. I for one am worried and I’m taking preparations. Who knows if I’m right or not, but I’d rather be safe than sorry as all of those people who had money in Cyprus have learned. They thought they had a normal bank account…but now it’s been [taken] with the sanctions of many governments and institutions.”

“If people have money in any account, anywhere in the world…cut it down to under the guaranteed amount. They might take that too someday when things get desperate, because the precedent has been set, but that’s where I would start if I had money in the bank anywhere in the world.” (2)

What can I do to help protect my money?

Jim Rickards, in his book The Death of Money, recommends three general ways to best position your money:

1. Get possession of some physical cash.

  • The amount of this can vary based on where a person has their money invested right now. I try to work with people to figure out an allocation, how and where to get it and where to store it. Ignoring this component is not wise – period.

2. Look into gold or silver.

  • Financial planners and those who are tied to the investment industry like to disparage gold or silver ownership. Don’t let people tell you gold or silver are bad investments. They are not investments; they are an insurance policy against out of control printing of money, which our Federal Reserve has shown they are more than willing to do.
  • Observe what the most successful investors in the world are doing. For example, Warren Buffett owns 129 million ounces of silver, and he is not selling. The Chinese government has acquired 3000 to 5000 tons of gold in the last 6 years. No one really knows how much because they haven’t yet disclosed it. This is an estimate. Finally, Billionaire Stanley Druckenmiller just acquired $300 million worth of gold shares.
  • An ounce of silver costs somewhere around $16 today. It is wise to start accumulating some.

3. Invest in a strategy that is designed to not take the wild ride down when the U.S. stock market collapses again.

  • I spent thousands of hours researching this question. The output of that research and the investment strategies I designed are found on my website at reppondinvestments.com. Details of backtesting and real time performance are on that site.
  • Be smart and think for yourself. Look for ways to help avoid the next roller coaster ride down.  The case is being made stronger and stronger that buy and hold investing may not work on a consistent basis for investors nearing the end of their accumulation phase.

“Don’t focus on making money. Focus on protecting what you have.” – Paul Tudor Jones, famous money manager (4)

This article contains general information only. Ben Reppond nor Reppond Investments, Inc. are not, by means of this article, rendering business, financial, investment, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business or finances. Before making any decision or taking any action that may affect your business, or finances you should consult a qualified professional advisor.
Citations:
(1) http://www.bloomberg.com/ – March 1, 2015 – “Stan Druckenmiller Sees ‘Massive’ Problem Caused by Aging”
(2) http://www.worldordernews.com/- April 5, 2013 – Government Took Gold In 1930, Now Theyre Taking Bank Accounts 
(3) The Death of Money, by Jim Rickards, pg. 298-300, published April 2014
(4) Paul Tudor Jones, founder of Tudor Investment Corporation, http://www.forbes.com/profile/paul-tudor-jones-ii/