As you all probably know by now, I’m not the best choice for investment advice. However, it really does interest me, since it’s one of the next financial steps I’d like to
stop suckingbecome proficient in. With that in mind, here’s a great guest post from Tony over at Trading Slugger. He’s actually got it so together, he wrote a bookabout it.
Why Gold and Silver Are Great Long Term Investments | brokeGIRLrich
Everyone is investing in the stock market these days. Warren Buffett once said “When others are fearful, you should be greedy. When others are greedy, you should be fearful.” This makes sense: now that the U.S. stock market is in a bubble, you don’t want to be buying at the top of a multi-year bull market.
There’s another wise saying that savvy investors should live by: “there is always a bull market somewhere”. If the stock market bubble bursts, I believe that the next big bull market will be in gold and silver. Here’s why gold and silver prices will soar before this decade is over.
Massive U.S. Money Printing
The U.S. economy still feels lingering effects from the recession of 2008 to 2009. Corporations’ profits have grown primarily through cutting labor costs, which means the the middle class is still hurting. In order to drag up the U.S. economy, the U.S. government’s Federal Reserve has been printing massive amounts of money to pump up the U.S. economy and the stock market.
Inflation in the U.S. is very low right now at 2% per year. This doesn’t make sense because historically, periods of prolonged money printing has always resulted in high inflation. Printing money always comes hand in hand with unintended side effects such as high inflation. So why is U.S. inflation so low right now? Because it takes time for money printing to result in high inflation. In other words, there is a time lag between when the government prints money and when inflation first starts to pick up.
Sooner or later U.S. inflation will start to rise and then spike, just as it did in the 1970s. Although we probably won’t witness double digit inflation as we did in the late 1970s, I think inflation will rise to the high single digits.
Rising inflation means that paper money is worth less. As a result, investors and traders rush to buy physical assets such as oil, gold, agricultural products, and silver that will retain their real value (not just their nominal value). Thus, gold and silver prices go up over the long term as inflation rises because paper money becomes worth less.
Commodity Prices are on the Rise in the Long Term
Commodity prices have started to rise since the late 1990s. Why? Because the developing world is building up its infrastructure. As BRIC economies (Brazil, Russia, India, China) continue to develop, they will do two things:
- Build more public infrastructure. This means a massive increase in global demand for steel, cement, copper, and other industrial raw materials to build roads, buildings, electrical grids, etc.
- The middle class will grow. With a growing middle class, developing nations will consume more and more raw materials and foodstuffs. Thus, global demand for renewable natural resources will rise as well.
The rise of the developing world is just getting started, Incomes in Asia and South America are still far below incomes in developed nations. As a result, global demand for commodities (raw materials and natural resources) as a whole is on a multi-decade rise because developed nations will continue to grow economically. As the saying goes, “a rising tide lifts all boats”. Gold and silver do not have much industrial demand, but because commodity prices are on the whole are rising, gold and silver prices will rise as well because investor and traders often buy commodity indexes.
Gold and Silver Are Much More Volatile Than Stocks
We’ve established why gold and silver prices will rise in the long term. But there’s another reason why you should invest in gold and silver.
Gold and silver prices are much more volatile that stock prices, which is what most investors are used to. “Volatile” means that gold and silver prices fluctuate much more than stock prices. Gold and silver prices can easily fluctuate 30% in a few months. Meanwhile, it would be extraordinary if the U.S. stock market can rise or fall 25% in even a whole year.
As investors, we want to maximize our potential profits. Since we know that precious metals prices are on the rise in the long term, shouldn’t we maximize our profits on this long term outlook? Of course! If you buy stocks, a good year might mean returns of 20%. If you buy gold and silver, a good year could mean 30-40% because such volatility is typical of precious metals prices.
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I am not really sure about Gold and Silver. I think when the financial crisis happened in 2008/2009, people assumed that Gold was a natural safe bet; however, I think they have started to realize there is not much sense in it. I remember hearing one time that the total amount of gold on the planet could only fill an olympic sized swimming pool. How could we use gold as a currency in the future then? I would rather take the volatility out of my portfolio and just actively rebalance a traditional asset allocation mix.
Shannon @ Financially Blonde recently posted…Run Your Own Race
I wonder if the olympic swimming pool thing is accurate. That seems kind of impossible… although stranger things have happened.
I don’t know, the apocalyptic worrywart in me trusts standards like gold and silver over everything else in way. I just don’t ever think the return will be as good as it will be with lots of other things.
Its off a little. actually all into 3.42 Olympic swimming pools. Still gold is such an interesting study in human minds / culture (I think very little of gold). But nonetheless thought this article would prove interesting.
http://www.numbersleuth.org/worlds-gold/
I looked into adding Gold to my long term savings strategy this summer. I found a reputable Gold dealer and he was very informative. It is like you say, very volatile. When I was speaking with him Gold was nearer $1,300 an ounce and I believe today it is closer to $1,200. Much of the price variance is associated to the deflated value of the dollar so Gold could prove a worthwhile long term investment against a devalued dollar situation. That said I would only have a fractional percent of my total investments in it. I am still on the fence about buying it. It seems you can sell at a profit without paying taxes because its not tracked unless you are doing large purchase/sales amounts ($10K +) but I bet you may have IRS scrutiny declaring any long-term loss. I haven’t looked into the tax implications yet. Great post. You brought Gold to my thinking again. I need to make a decision once and for all.
LeisureFreak Tommy recently posted…Letting Go of Summer
I guess that it never hurts diversifying your retirement portfoliowith some gold,I have started on my own during this year and I know that the value of gold will keep growing no matter what is being said right now,also I should point out that it doesn’t have to be a major investment since it doesn’t give quick value,it’s real perceived value comes across the years in time of crisises.
Precious Metals IRA Man recently posted…Private Bullion Gold IRA Review
I tend to disagree. I don’t feel it’s a very good inflationary hedge; weren’t there studies that showed that gold value didn’t rise at the same rate as inflation, especially before the 70s? And more importantly, I have to sell it to profit. That being said, I do own hard assets in the form of investment-grade gemstones, but that’s because I like them as much as they are an investment.
And another thought that’s not so much directed at the author, so much as a musing: if, like the more extreme gold bugs predict, the US dollar collapses and we’re reduced to bartering or whatever, who would actually accept gold as payment for something? If the US dollar collapses, I can imagine the world would be in a terrible situation in general and not many currencies will have value at all, thereby making gold the de facto ‘currency’. So let’s say I’m selling a pound of coffee and looking to trade with someone. Would I rather accept a .999% pure gold coin or a half gallon of gas? I don’t know about you, but the gas is actually useful, so I’d go for that. I can’t eat the gold or fuel my car with gold or start a fire with gold. So when you follow the case for precious metals to its logical end, what’s the real point of owning it?
DividendDeveloper recently posted…Dividend Stock Analysis – PNR
Wow, I hadn’t thought of that, but you’re right. If there is some major economic collapse, things that have function will far surpass things that don’t in bartering.
I heard rumours saying that gold will reach 2000 USD an ounce by 2016,if that’s true,then I will make it 20% of my savings.
tom@bestgoldira recently posted…How to Buy Precious Metals ?8 Killer tips you must know
Maybe I should read everyone’s comments before I put my own =p haha I agree with DividendDeveloper!
Bridget recently posted…Canadian Personal Finance Celebrity Series: Lesley-Anne Scorgie
Here is an article talking about gold and inflation (aka not really correlated at all) http://www.forbes.com/sites/danielfisher/2013/08/08/gold-not-much-of-a-hedge-for-anything-unless-youre-a-centurion/
Honestly it SEEMS to make intuitive sense that inflation / money printing / gold would be correlated, but history does not bare that out. Essentially gold only went crazy in 1970’s due to oddities of international finance scheme (Bretton woods which lasted from 1944 – 1971is when Nixon ended convertability of US dollar to gold). Most people don’t realize it was practically illegal to own private gold between 1934 – 1971 in the united states. http://en.wikipedia.org/wiki/Gold_Reserve_Act
Great post! I’m really enjoying these investing posts you’re doing!!
I 100% agree with the increasing prices of commodities being a great reason to keep your eye on them. People have also made big mistakes — my fiance owns silver (like an actual box of coins) that he bought a few years ago, and price has been so down he hasn’t cashed them in… which is a shame because that money would have performed way better in a ETF or even a savings account (at least savings accounts don’t go negative!)
I trust some commodities more than others and gold & silver are not on my favorites list. I realize my position is unpopular and practically everyone disagrees with me, but from how I see it, the idea that we need gold/silver to physically back up our money is outdated. Money doesn’t exist on the gold standard anymore — money is numbers in your online bank accounts that’s moved around by electronic transactions. Gold/Silver will buy you nothing, no one needs it anymore. I can’t ever see myself bargaining with gold in a world where fresh water is a scarce resource.
Bridget recently posted…Canadian Personal Finance Celebrity Series: Lesley-Anne Scorgie
I think gold has a place as percentage of a diversified portfolio. Since my husband and I are nearing retirement, we’re at the stage where advisors recommend not being as heavily invested in stocks anyway. We allocate across stocks, bonds, cash (US and foreign) and precious metals — similar to the “permanent portfolio” concepts from Harry Brown.
Jean @ NearlyRetired recently posted…Weathering the Retirement Storms: The 2 Critical Keys
I have been out of school now for three years, so it’s great to read about investing again! Seems like I better buy myself some gold and silver! However, even though they might be able to bring about a greater return, they could also bring you a greater loss since they are so volatile, right? I guess there are always two sides to any investment.
Charlee Anne recently posted…Ramifications of Using Credit to Buy Things You Can’t Afford
They’re great investments on the very long term.
If you want to get rich fast, they might not be ideal.
I liked Kiyosaki’s points on silver. It’s a great asset.
And on the very long term like more than 10, 20 years, gold will certainly outperform any fiat currency. Also because there’s a small natural inflation, which erodes the value of currencies. Even if there is no crisis, a 3-5 % yearly inflation is likely. Then, I ask you: what happens to your money?
Good article, useful tips 😉
I’m not sure aiming to get rich fast is ever the way to approach investments. 😛
Everyone knows precious metals are part of a well rounded portfolio, and every prudent investor has diversity even within their metal’s position. They real question is the percent to allocate to the metals. Easy…it should be the exact amount, where you have the balanced emotions of “I should have bought more” when it goes up, and “I never should have bought that much” if it goes down.
The hard part is remaining humble…for those of us who bought a truckload when Obama was elected. Watching the price fluctuate from $1500 to $1200 and back again just causes yawns and a certain smugness that’s hard to quell.
Gramercy Man recently posted…Why Invest in Gold
I love how volatile gold can be. This is a really smart investment and one that can’t be taken away through a simple hack. My wife and I are always looking into new investment options and this is one that has peaked our interest for a long time.
Mel, my husband and I have both heard good things about investing in gold and silver. We are starting to consider trying it out. We already have a few silver coins. Is there any way we could find out the value of those coins?
You know what? I don’t actually know a lot about coins, but J$ over at Budgets Are Sexy is super into coins and he’s even got an additional site for them: http://cointhrill.com
He might be worth asking about your coins!
Oh wow, it seems like there’s plenty of benefits when investing in gold and silver. This is something that I’m thinking of doing to becomes a gold and silver buyer. I wonder though, if someone like me were to do this, what things would I need to do beforehand?
It is an interesting idea that I can buy into gold and silver as an investment and as long as other countries continue to grow, so will my investment. I love the idea of nations working together for the good of everyone. However, I didn’t even realize that if the middle class can grow in other nations, then it means that gold and silver prices in the U.S. could go up.
I like what you said about the ability of gold to retain its value over time. My friend loves to buy gold and he really got me into it. It really is a stable investment.
True Gold and silver don’t tarnish. They don’t run out of functions too. Meaning, they are needed in any part of the world and they are timeless. While it is a stable investment, one should consider stocks too, as an addition or alternative to his investments.
Jackie Bolen recently posted…Moving to Canada, An Update
Right now silver and gold are a great investment again. I saw the silver price has risen 22% compared to last year. So in any way its a better investment than putting your money in a bank at 0.5% interest. Good article, and everyone should try it out at least with some money.
Either the gold is overpriced or the silver is under priced, these are too much far a part on their price range. I mean silver is used everywhere, and silver jewelry is 30% of the market probably..
Anna recently posted…rose gold initials
It was interesting to read about how many developing countries are on the rise which will lead to increased values of metals like gold and silver. My mother-in-law has a lot of old gold jewelry that she doesn’t wear or use anymore. She’s thinking about finding a reputable professional that might offer her money for this.