There seems to be a lot of confusion about precious metals (gold/silver).
Below I’ve listed four of the most common questions/concerns that I’ve heard in the last week. Admittedly, these are all great concerns that people have, so I’ve tried my best to answer each question without involving too much biased opinion.
Gold is a bad investment because it isn’t like a company that grows in value. Gold doesn’t give dividends and it’s vulnerable to price cycles (meaning the price goes up and down). Why should I buy/own gold if a company is a better investment?
This is 100% true. Gold is a ‘one-dimensional investment.’ The idea with gold is that you buy low and sell high.
The ideal investment would be a stock that rises in price, gives dividends, and steadily increases in value for years – think General Electric.
Gold will never do this. (However, certain gold miner stocks can, which I will share in the future.)
Think of gold as a safe haven for your wealth and a way to diversify your total portfolio.
The best example is to show the price of a custom tailored suit in today’s price versus one hundred years ago… almost anytime in history, one ounce of gold will buy you a custom tailored suit.
Some people are saying gold’s price will crash (down to the $700 range), caused by deflation and a potential US market recession. How do we know gold won’t decline in price?
Predicting the price of anything is a fool’s game. There is no way that anybody can say with certainty that gold will be any price – there are just too many variables to take into account.
However, there are hard facts and historical examples we can look at to see where the price of gold is heading.
In an extreme deflationary scenario, the value of a currency becomes much higher. Today, the US Dollar is the currency that is primed for deflation. That means that we could see the dollar increase it’s buying power in relation to other currencies.
Gold could do the same thing.
You see, many people throughout the world are afraid of their currencies losing value. So, they have been moving their wealth into the US Dollar. But, they have also been moving their wealth into gold.
So, in essence, people are treating the US Dollar the same way that gold has traditionally been treated – a safe haven asset.
While the US Dollar may be a good spot to preserve wealth for now… Gold is the only medium that has been proven over thousands of years.
If the Fed raises rates this month, won’t gold prices decline?
The answer to this question (which lots of people have been asking) is the same as the question above.
So, yes, gold prices could decline in the short term if rates do rise. The long term is a different story.
Any rate change that the Fed does is just a ‘patch-job’ on a failing bull market. Eventually there will be a day of reckoning.
When that day comes the dollar may be significantly impacted, so the argument of investing in gold becomes stronger.
Some big traders, like Soros, have sold some of their gold holdings. Does this mean the price is going down?
Big investors like Soros have sold many of their gold positions because they have made HUGE profits already. Soros had very large positions in Barrick Mining (ABX), which rose over 200% in the past year. Any investor would sell their position after a gain like that.
What you and I don’t know is the physical holdings of many of these famous investors. They may (or may not) be accumulating large physical positions in gold. Many have publicly stated their bullishness on the metal, which is totally understandable when we watch daily news of central banks who print money.
The bottom line is that fiat money is infinite, gold is not.
If you’re thinking about investing in the precious metals market, you still have plenty of time. Gold and silver have seen huge gains since the beginning of the year, but have seen a bit of a pull back in the last couple of weeks.
There may be more of a pullback in the next couple of months, so all we can do is wait to see what happens. However, the long term trend for metals prices is very attractive for any investor looking to diversify their portfolio.
Lastly, gold and silver are great way to start investing. The whole process of purchasing and holding these metals really give you a fundamental lesson about the value of money.
(Here is a ‘no-excuse guide to buy silver,’ which is basically the same process for gold.)
