This article is Part 4 in a short series of blog posts where I will lay out my business and investing strategies at a bird’s-eye level. The Rich Dad books talk about focusing on what you’re good at, but diversifying in terms of the type of asset you own (as opposed to diversifying across industries within one asset class). I’ve taken that concept and applied it to my own passions, as well as the knowledge I’ve gained from all of the reading and research I’ve done over the past couple of years, to determine just what business and investing vehicles I plan to use and how I plan to leverage them.
This article talks about how I plan to augment my investing portfolio in the “COMMODITIES” asset class by purchasing gold and silver coins and bars.
Did you know that, at the time of my writing this, the U.S. government is printing billions of dollars per day? That much might be obvious, but did you also know that most currencies throughout the world are actually backed by the U.S. dollar, so all of that inflation is translated into nearly every economy in the world? This article isn’t about the rights and wrongs of what’s going on in the economy today, but it is plainly obvious that inflation is on the rise, so the cash in your savings account cannot possibly make you rich when it is constantly losing value. That’s why, if you want to be rich, it is important to find an alternate store of wealth.
That is where commodities like precious metals, oil and gas, and even food come in. A commodity is defined by the fact that it has some sort of intrinsic value – the item has some specific consumable value, and it will always have that same value. The great thing about this is that a commodity fills a specific, very important need – people will always want to own and consume the item to fill that need, and because of that, commodities will to some extent retain their value even when the world is falling apart around us.
The Place in My Portfolio
Precious metals – and commodities in general – are not actually an investment. I mean, I guess you could build a business around buying and selling them (like your local coin shop or an oil-drilling company), or you could try and time the market to buy when the item is undervalued and sell when it is overvalued (although that is, in my opinion, speculation and gambling rather than investing). In general, though, commodities are best used as a form of alternate “savings” and “wealth insurance.”
Simply put, you’re not likely to grow your wealth (in terms of purchasing power) by owning gold and silver. However, you are likely to maintain your wealth over time – even as inflation and prices go up. So, if you were to buy an ounce of gold way back when the U.S. went off of the gold standard, it might be worth more dollars today, but when adjusted for the crazy inflation that has occurred since then, you’d be getting about the same overall value back after selling it.
This is due to one feature of a commodity called scarcity. Since only so much gold and silver exists in the world, it can’t be created out of thin air – and that makes it a deflationary asset. Compare this to your national currency, which, if anything like the U.S. dollar, is inflationary by design. Fiat currency was created to give governments control over the economy with the intent of maintaining stable cycles and preventing deflation.
There are good and bad aspects of fiat, and I’m not going to get into them here, but the primary idea is that inflation enforces the velocity of money – people have to buy things, since their purchasing power goes down over time. This is great at a very large scale – it incentivizes consumption and investment and keeps the economy moving. However, it really screws over individuals, because it basically prevents people from “saving” their earnings. Any value you have stored in an inflationary asset like cash can (and usually will) be inflated away over time. And spending all of your paycheck on “stuff” isn’t going to help you get rich – it will actually destroy all of your financial security!
This is why retirement is such an issue in today’s world – people think investing is risky, but they know they can’t just save enough for retirement, because the money they make in their 20s won’t have as much value in their 60s! That’s why everyone should be storing a portion of their wealth in some sort of deflationary asset like a commodity or real estate regardless of their intentions about “getting rich.”
But you don’t own commodities as a “getting rich” strategy. Commodities are better used as a “maintaining wealth” strategy. They act, first of all, as a store of wealth – kind of like a “savings account” that the government can’t steal from simply by printing more cash. Second of all, they can be sort of an insurance policy – a hedge against things like inflation or the people in power (government, big businesses) doing something stupid. That’s not to say the government is bad – just that I like to hold the power over my own life in my own hands. Plus, I was there in 2008, too – and I saw what can happen and what I should be prepared for!
Again, unless you plan to build a business around a commodity, it’s not really an investment. It’s less of an “asset” and more of a savings device. It’s a better store of wealth than a savings account, and a more consistent one than real estate. One ounce of gold, purchased when the U.S. dollar went off of the gold standard, would be worth around the same value today if adjusted for inflation. During times of turmoil, it’s actually worth more and you can sell it at a premium.
Of course, you want to own the physical good – coins and bars, or maybe jewelry. I tend to purchase whatever’s selling at closest to the spot price. After all, I’m buying the item for its precious metals content – if I purchase something at a higher premium because it’s pretty, I can’t guarantee I can find someone else who thinks it’s pretty and will buy it at the same high premium. I can, however, nearly guarantee that if the world descends into chaos, the metal content will be worth something, whereas my dollars will not.
You especially don’t want to be buying shares of gold and silver ETFs or mining stocks and saying that gives you exposure to the “commodity” asset. Those are paper assets – nothing more. They track the stock market (sort of) and are likely to fall along with a stock market crash. These are great assets to own if they fit in with your “paper asset” strategy – but they are not true commodities.
The overall idea is to almost always be buying gold and silver coins with excess savings. This means that, as I receive cashflow from my other investments, I plan to funnel them back into more investments. Any money that is left over after my expenses and purchases of other investments will be used to buy gold and silver in order to save and maintain that part of my wealth. Gold and silver ownership acts as a back-up plan to my other back-up plans — if all of my businesses and investments were to fail, the fraction of my wealth stored in gold and silver would still be worth something. This is unlikely to happen except in catastrophic circumstances, and I’m not much of a “doomsday prepper” guy, but it pays to be prepared.
Of course, if you want to invest in gold and silver, you need to have some idea of the market. It takes far less action to keep up with whether gold and silver is a good purchase than it does with other asset classes. You don’t really need to do much research or understand any underlying statistics. All you really need to do is keep up with current events – just understand the state of the overall economy. If the economy is booming, then gold and silver is a great buy – you’re getting it at a discount, so buy more! If you’re in the middle of huge economic turmoil, you should steer clear altogether – you might even be able to sell at a premium if you know what you’re doing. For example, if you bought gold back in 1980 or 2008, when the spot price was at its peaks, you’d lose money trying to sell today. Any other time – like now, when the economy is said to be getting back on track, but people are still cautious – just buy consistently and patiently, maybe even picking up a little extra during price dips.
Why Gold and Silver?
There are many other items that can be considered “commodities,” and many of them fill much greater needs than gold and silver. However, throughout history, gold and silver have been the items that have maintained their purchasing power the best, despite their uses being limited to “money” and “jewelry” (although silver has some other niche industrial uses).
Economists today will probably tell you that using gold and silver as money is a thing of the past – an archaic device, since we’ve advanced beyond that now. But if you know a little bit about history, you’d notice that there’s a sort of cycle that has gone on throughout the ages: economies fluctuate from using gold and silver as money to fiat currency as money and back fairly consistently. This has been happening for thousands and thousands of years of recorded history.
Usually the transition to fiat is slow and gradual, and the transition back to metals is sudden, harsh, and tends to divide the middle class into rich and poor – those who are fully invested in cash basically lose their entire livelihood, whereas those who have bought other assets actually end up incredibly rich.
I don’t know if our economy is going to fail any time soon, but there are some pretty obvious chinks and cracks in the system right now. In Mike Maloney’s book, The Guide to Investing in Gold and Silver, he points out that, over the past century or so, America’s economy has undergone a drastic change just about every 40 years. Originally, we had gold and silver coins as a national currency. To make storage easier, banks started printing dollars that were redeemable for a specific amount of gold — they were simply an I.O.U. Then, we moved to “fractional banking” — the banks would print a certain amount of money based on how much gold was in their vaults, and simply hope that too many people wouldn’t try to redeem their dollars for gold. Later, after the World Wars, when there was a threat of this happening, it was decided that citizens could no longer get their gold out of the banks — only other nations could do that. So, obviously, the other nations did that — and the U.S. almost ran out of gold. So, the government decided to take the economy off of this “gold standard” — dollars were no longer redeemable for gold at all at this point, and the economy was simply backed by trust in the government.
This may be a very short pattern and may not continue to play out like this, each of these events occurred just about every 40 years. It has now been just over 40 years since the last change in the monetary system, and if something does happen — even if it’s not a drastic change (and I hope it’s not!) — it’s probably a good idea to be prepared anyways.
There are other commodities worth considering, however. In fact, if the world descends into absolute anarchy, things like oil and gas, food, or ammo might end up having much greater purchasing power than precious metals. After all, those fill immediate needs. So why gold and silver? The answer is because they are the easiest to buy, the easiest to store, and the most reasonable to own.
All other things equal, oil and gas would probably make for a much better savings device. Because of the scarcity, and the fact that once consumed, they’re gone forever, prices will actually increase more and more over time, whereas precious metals essentially stay the same. Unfortunately, though, it’s not reasonable to expect most people to be able to buy crude oil and gas and be able to store it safely and securely – at least not without a massive investment! This is why you don’t really ever see anyone “stocking up” on huge amounts of the stuff.
Food and ammo would be by far the best commodities to have in a disaster scenario. However, in terms of purchasing power, they aren’t worth much otherwise – food and ammo are plentiful in every non-disaster scenario, and as such, are basically worthless as a store of wealth in any reasonable situation. However, if you like guns and either go hunting or to the shooting range relatively often, it wouldn’t hurt to keep ammo around, as well. The simple fact is that gold and silver are the most reasonable commodities to own as a store of wealth for most people.
Steps to Owning Gold and Silver
Like I said above, there’s no major strategy. Aside from monitoring the overall economy to make sure you’re not buying during serious economic turmoil, you simply buy some coins and bars with your excess cash. Just make sure you’re buying the right items (physical gold and silver) and you’re storing it safely!
Thus, the steps are:
- Buy Gold and Silver.
Get to It!
Gold and silver are not a “get rich” tool. They’re used as a store of wealth – essentially a “savings account” that won’t get inflated away – and as an insurance policy against the dumb mistakes of those in power. As such, I plan to store any excess wealth (after my expenses, any emergency funds, and my other asset purchases) in the form of commodities like gold and silver in order to maintain my wealth and to protect me against whatever might happen in the economy or the world in general.
Gold and silver is the easiest investment to make and the easiest to understand. There’s not a lot of chance to build wealth, but there’s also not a lot of risk to lose wealth – in fact, it’s safer than a bank account!
That’s why I plan to own physical gold and silver – and why I suggest you have some sort of similar hedging strategy in your investment plan!
This is just Part 4 of the Getting Rich Through… series.