Precious Metals – A Store of Value (Real Money)

by FI Fighter on June 21, 2016

in Precious Metals, Precious Metals Updates

Real_Wealth - 1

Well, as readers are well aware by now, I’m kind of a big fan of precious metals (both gold and silver). Over the last year, I have rambled on and on and on and on some more about the merits of owning both atomic element #47 and atomic element #79. To sum it all up, in 2015, I felt like the gold and silver mining stocks were the bargain of a decade, if not lifetime… But all along, I’ve ALWAYS felt that the mining stocks were only suitable for use to play the Greed Trade.

The Role of Physical Precious Metals

In other words, although mining stocks can help an investor amass a great deal of wealth, that game is inherently risky and never a sure thing… Mining companies go bust all the time, poor management teams who make terrible decisions can and will erode value by diluting their shareholders constantly just to stay afloat, unstable countries with corrupt governments will increase taxes or revoke mining permits/licenses altogether out of the blue, etc., and the stocks themselves are beyond volatile (you’re dealing with day traders, algos, big money institutions, etc.)… So, you really have to have an iron stomach and a high threshold for pain to even want to consider adding some miners to your portfolio…

On the other hand, owning physical bullion is the complete opposite of all that; there’s no drama. Acquiring some gold Canadian Maple Leafs, or silver American Eagles, is perhaps the most prudent thing a person can do to preserve their purchasing power; particularly during times of calamity, gold and silver will get to participate in the Fear Trade (flight to safety), which help the assets hold up and outperform almost everything else out there.

For thousands of years now, people have put their faith and stored their life’s work and wealth in physical gold and silver (typically through the means of coins or bars from a verified source); gold and silver are just as much money today as they were back then.

Screen Shot 2016-06-21 at 10.38.31 PM

 

A store of value.

Zero counter-party risk.

 

It’s not gold and silver that are volatile and fluctuating on a daily basis…. It’s the USD, and other fiat currencies around the globe that are unstable

 

Gold is what it is… 1 oz. of gold today will STILL be exactly 1 oz. of gold tomorrow. Ditto for silver.

 

But in a world that is going increasingly negative interest rates, you tell me what you would rather own?

 

A debt instrument? Or real money that has withstood the test of time?

Negative Bonds

How about gold vs. the good ol’ greenback?

From Monetary Gold.

goldvs

purchasing-power-of-the-us-dollar-1913-to-2013_517962b78ea3c_w1500

The above pictures are a little outdated, but you get the idea…

 

Precious metals are an inflation hedge.

The USD is a depreciating “asset”. Same for all the other fiat currencies out there.

 

You can print fiat currencies to infinity (or oblivion)… Well, these days, you simply use a keyboard and input a bunch of binary 0s and 1s to create more “money”… As for gold and silver? If you want more of the stuff, you gotta go put in physical work and dig it out of the ground! You cannot just create more physical precious metals at the drop of a hat, or on a whim, sorry…

Time and A Place

I think readers of this blog can appreciate the role gold has in a modern day portfolio more than most, but unfortunately, in the world we live in today, usually if a person has a nice thing to say about the precious metals, they will be accused of being a conspiracy theory tin-foil hat wearing nut job… Or a prophet of “doom and gloom”…

Just over 1 year ago, I started making the move over into precious metals… and, well, let’s just say that this blog didn’t exactly increase in popularity… No, quite the opposite!!

Anyway, the journey to early FI isn’t about being popular or liked… Sometimes, we do things that others won’t agree with, but that doesn’t mean it’s the wrong move to make, either… As always, you have to simply do what is best for your own unique situation…

In my case, this means owning a good amount of physical gold and silver…

My Visit to the Vault

I’m just about ready to start the next chapter of my life… But before I went ahead and did that, I thought it would be prudent to check up on my vault one last time, just to make sure everything was in good working order before I departed for Hong Kong.

Today, I visited the local vault (private and decoupled from any financial institution!), and I am pleased to report back that the same number of ounces of gold and silver that I counted on my last visit remains the same today… The physical coins and bars in my possession didn’t all of a sudden decide to go crazy and start getting smaller in size… What a relief!!

Same number of ounces…

For me, I couldn’t ask for anything more than that… I have peace of mind that I can go run off to the beach (or elsewhere) for the next year, two, three, or longer… And when I get back home to the states?

I’m 1,000% certain that the physical gold and silver I own will be worth A LOT more (in nominal terms of depreciating USD)! In real terms, this means that I should be able to purchase the same quantity of goods that I’d be able to buy today.

So, all my hard work — blood, sweat, and tears, will have NOT been for naught!

By owning some physical gold and silver coins/bars in my portfolio, I am able to sleep well at night, assured that my purchasing power will be preserved.

That’s the plan, anyway…

Overvalued Money?

But just so readers are absolutely crystal clear, I ain’t no goldbug… Nor am I a silverbug…

 

I can see the value of owning precious metals, but at the same time, as I’ve stated on numerous occasions on this blog, my allegiance is to early financial independence, first and foremost… That’s the ONLY team that I am loyal to!

 

So, there will no doubt come a point in time when the purchasing power of gold and silver are peaking (relative to other assets, not fiat currencies), and it will only make sense for me to start selling. When the right time comes, ideally, I will be able to swap out of some physical precious metals and into some cash flowing, income producing assets (the investments everyone really wants)…

 

There’s a time and place for most everything… I refuse to chase passive income investments 24/7 with no regard for fair valuation!

 

From Macro Trends.

Screen Shot 2016-06-21 at 10.05.20 PM

The Dow Jones to Gold ratio is currently about 14.6. At its nadir, it’s been as low as about 1.30 (January 1980). During the dot-com peak in the stock market, we hit a high of 42.

 

In general, I prefer comparing the purchasing power of the precious metals to other assets, like the Dow Jones index… This way, you can remove the super volatile USD/fiat currency from the equation.

 

So, it becomes more a question of — Would I rather own shares of the Dow Jones, or ounces of gold?

 

At 14.6, I think gold is the better buy…

 

But let’s suppose the Dow Jones to Gold ratio drops back down to the single digit range… Say about 7 or 8

 

Well, then I might be very tempted to make the swap and get into shares of the Dow Jones… Or S&P 500… Or dividend stocks… Or real estate… Or whatever…

 

Don’t forget, there’s a time and a place for everything!

 

And I am a very patient person… I don’t mind staying in physical gold and silver for a few more years if I have to… You all know damn well, though, if Class A real estate ever comes crashing back down to earth again, I’ll be looking to jump back into that with full force!

 

In the meantime, I’m very, very content with parking a good portion of my net worth into physical gold and silver, which are a store of value and thus REAL money!

 

Fight On!

{ 19 comments… read them below or add one }

1 PepeNo Gravatar June 22, 2016 at 4:22 am

Another great post, another one! Jejeje.

I really like your way of thinking, I think the same way as you.

Reply

2 FI FighterNo Gravatar June 24, 2016 at 11:59 pm

Pepe,

Thanks for the kind words and support!

Best wishes!

Reply

3 Income SurferNo Gravatar June 22, 2016 at 5:22 am

Jay,
I just have to say it’s a huge relief to read a blog where the writer thinks for themselves…..and isn’t afraid to have an opinion that goes against the grain. I’m right there with you on paper assets and physical commodities. Bubbles can (and have) show up in any asset. Credit and paper assets are two such bubbles I see today. Tina is a load of crap, but what did you expect from the Federal Reserve. “To everything there is a season”……..
-Bryan

Reply

4 FI FighterNo Gravatar June 25, 2016 at 12:02 am

Bryan,

Appreciate the continued support there buddy! It’s not always easy talking about subjects and investments that most people hate, but I’ll keep trying to keep things “real” here, and share with readers what I’m doing with my own portfolio.

Yeah, I see lots of bubbles everywhere, we can agree on that… I think it’s only prudent to proceed with caution from this point moving forward.

Definitely, there is a time to sow and a time to reap… And sometimes, it might be best to just sit back and do nothing…

Take care!

Reply

5 Investment HuntingNo Gravatar June 22, 2016 at 10:49 am

Hey FI Fighter is the cover photo of your metals stash? If so, that’s awesome. Nice work sir.

Reply

6 FI FighterNo Gravatar June 25, 2016 at 12:02 am

IH,

Thanks! Yup, that’s a pic of my own personal stash.

Take care!

Reply

7 ReepekgNo Gravatar June 24, 2016 at 8:41 am

I don’t know about holding physical gold… it just sits there and is not a productive asset. Like you say all the work to dig it up is done up front, so holding physical just doesn’t mesh with my mindset of adding value and building wealth.

The real insight from your blog is to buy the miners who are creating the value, yet still have performance correlated to gold pricing.

Either way, its a good day in the asset class when GDX is up 5.25% on Brexit nonsense.

Reply

8 FI FighterNo Gravatar June 25, 2016 at 12:07 am

Reepekg,

Yeah, the miners are great, but they are deriving their value from that “unproductive asset”… I don’t quite look at gold in that light b/c to me gold is simply money and a unit of account… It is a store of value in itself, and just by sitting there inside vaults, it’s doing what it was intended to do… All the gold that has been dug up is above ground and there’s a good reason people don’t lose track of it!

Unlike fiat currencies, you can’t create physical gold out of thin air… And unless one has complete faith in central banks and their policies (which I sure as hell don’t), I don’t see how anyone can dismiss gold’s role in society. Fiat currencies have come and gone like the seasons, but gold has been a constant for thousands of years…

In my own case, I’m only alive today b/c my grandmother had the foresight to accumulate gold over the years, which helped my family purchase the tickets (they wouldn’t take any worthless paper bills) they needed to get onboard a refugee boat to escape the war-torn old country… Americans have a certain mindset, but I am certain just based on my own family’s history that there are certainly other parts of the world that hold gold in very high regard. Still to this day…

All the best!

Reply

9 BeSmartRichNo Gravatar June 24, 2016 at 9:04 am

Gold is up again! My gold stock is doing pretty well. Your gold focused portfolio would be killing it by now!

Reply

10 FI FighterNo Gravatar June 25, 2016 at 12:10 am

BSR,

Congrats on the recent gains! Gold has been a very strong performer so far this year.

Best wishes!

Reply

11 GregNo Gravatar June 24, 2016 at 2:49 pm

Gold was at 250 US-Dollar in the early 2000s, then Went up to almost 2000 US-Dollar and down again to about 1.000.
Now you come along saying this is a fabolous “Investment”?
It doesnt even provide a regular return
Is this a prepper Blog of what???

Reply

12 FI FighterNo Gravatar June 25, 2016 at 12:13 am

Greg,

So what you are telling me is anyone who got in at $250 had a great opportunity to make a lot of profits on that ride up to $1900… That’s almost 8x multiple, how many “investments” have provided that type of return in recent years?

Even with that said, I don’t look at owning physical gold as an “investment” and I never said that… Physical bullion is an insurance policy and a store of value that has zero counterparty risk… If one wants to speculate, the mining stocks are more for “investment” purposes, and those returns will be even more potent since we are talking about leveraged returns.

Sure, you can call this blog a prepper blog or whatever else you want to call it… I like to think of this blog as an early FI blog, but I try and cover a lot of different topics here.

Reply

13 boonNo Gravatar June 25, 2016 at 5:18 pm

Hello Greg,

Gold is money, and money don’t have a yield, risk or return.
Therefore it isn’t an investment.

In this case Gold is not a prep, it’s a hedge.

It’s also important to have tangible wealth like gold, silver, land, real estate, art… etc
Why? Digital wealth isn’t enough, take a look at what happened in Cyprus or Greece few years ago.

Last thing…
Dividend investing is not the only tool available…
Don’t believe me? Read for yourself http://www.berkshirehathaway.com/news/feb03981.html

Reply

14 FI FighterNo Gravatar June 25, 2016 at 9:21 pm

well said, boon.

Reply

15 chillywitNo Gravatar June 25, 2016 at 6:49 am

Although the USD lost 95% of it’s value from 1913-2013, as the chart above shows, it can still lose 95% more in the future. My guess is that will take less than hundred years to replicate this loss if the dollar loses its hegemony in the future. At the pace that foreign central banks such as China, Russia, and India are currently accumulating gold important commodities such as oil might not be priced in dollars any longer. Perhaps they’ll be priced against a basket of currencies, but not exclusively in dollars.

Reply

16 FI FighterNo Gravatar June 25, 2016 at 9:23 pm

chillywits,

I agree with you, but with fiat currencies, who knows when they will “expire worthless”? Throughout history, all fiats have returned to their intrinsic value of zero…

The average life span of fiat is 27 years:

http://georgewashington2.blogspot.com/2011/08/average-life-expectancy-for-fiat.html

“According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency that has succeeded in holding its value. Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes.

The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it’s worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value.

Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero.”

Cheers!

Reply

17 Christian in HKNo Gravatar June 27, 2016 at 8:15 am

Im a big fan of your earlier FI posts . ur finally coming to Hongkers! I work on Kowloon side. Give me a shout once you’re settled in. cheers

Reply

18 FI FighterNo Gravatar June 29, 2016 at 8:38 am

Christian,

Will do! Looking forward to meeting up with you.

Cheers!

Reply

19 Rudy SMTNo Gravatar July 5, 2016 at 7:57 am

Hi Fi Fighter,

another sexy article about gold. Well done.

Yesterday I went down the gold shop and bought US$ 4,000 of physical gold.

Tomorrow I buy US$ 6,000 more.

I realized that it takes much less space than stack cash and fit very well inside the picture on the wall.

I think is safer than a vault.

Reply

Leave a Comment

 

Previous post:

Next post:

Copyright © 2012 FI Fighter