The logic for buying gold/silver?

[Peter M. Eick]

I am trying to figure out the logic of buying gold and silver as an investment.

My premise is that gold/silver are a measure of buying power captured in metal. So gold today is worth $1600 (give or take) and it is not really getting any scarcer or more common. So any change in value is really a measure of the change in value of the dollar. So if the the price drops to $1000 per onz, then the dollar got stronger and oil should get cheaper, silver cheaper and most commodities will get cheaper. Now if it goes to 3200, then the dollar will basically be worth half as much and will best 1/2 of what it did today as it will in the future.

So if you buy that premise, and you buy gold, when you sell it you have to pay capital gains at currently 28% if you exceed the reportable amount and generate a 1099-b form. So you made a gain, but really all you did was hold the buying power fixed against inflation which depreciate the value of the dollar and effectively raised the price of gold. If this happens and you lose 28% to Capital gains, how is this a good investment?

Logically, the only way this works is if you buy small amounts (onz at a time) and sell it in small amounts so you don't generate a 1099-b form and don't pay capital gains. If you do this, then you effectively are holding buying power against inflation and you basically break even and hold your wealth.

But if you do this, you are effectively breaking the law by not paying capital gains taxes which again makes the whole metal play invalid.

The only way I can see you come out ahead is if during the time you hold the metal, there is an artificial scarcity created that is not filled by new mines and the metal becomes temporarily worth more then its inflation adjusted value. This could occur if for example a Cyprus type bank meltdown happens and the metal has value just because you have it. But for this to work, you have to have the demand price exceed the inflation adjusted value by at least 28% which seems unlikely.

So, where is my logic on this flawed? I am really trying to understand the financial play here.

 

[A10]

I know that gold, silver, and copper are supposed to hold intrinsic value, but I invest in blue steel and lead (I know, it sounds contrite but it's true). Their value for me is beauty and function, and I presume that will hold through time. I heard an analogy a long time ago from a good friend: "In 1873 you could get a Colt Peacemaker for a 1 oz $20 gold piece. Same holds true today."

 

[Coldshooter]

Buying gold as a hedge against inflation is a different investment. Gold especially Krands are basically untraceable. I doubt if many buyers are going to be interested in declaring gain on investment when it hits the fan. I see a statistic which shows that an oz of gold still has the same purchase power as it did 30 years ago. For investing for gain I like US gold coins from southern mints Charlotte, Dahlonega and New Orleans. The US half Eagle $5 was the only coin struck at all the mints. Interesting history good value.

 

[beemerphile]

I have some gold in a Roth IRA where moth and tax do not destroy. It has doubled in five years. Gold is a store of wealth, not an investment. Holding cash as a store of wealth is like leaving ice on the table to use later. It is not a substitute for investments having growth potential.

So many people think either/or in situations like this when what is called for is diversification. When given a choice - take both. Some gold, some silver, some stocks, some bullets, some rice, some real estate. Even some paper money. This a case where "spreading the wealth" is a good thing as opposed to giving it to someone who didn't earn it.

 

[pharmer]

Buying precious metals like guns are not the best "investments." They are hedges against unforeseen calamities like the ones looming just over the horizon. I bought a bar of silver for $760 in 1980. For most of the last 33 years it has been underwater investment wise. Inflation calculator says $760 in 1980 would be $2100 today. With silver being around $28 oz, not a raging success. The same $760 invested in 60 shares Disney stock @$13 at the same time, would be worth about $165,000 today (2 4 for 1 splits and a 3 for 1 in this period). I own both silver and guns but not for investment purposes. Joe

 

[max]

Someone once asked me if I owned gold and I replied that I owned lead. My 22lr has appreciated more in the past year than gold.

 

[ladyT]

Its reccomended that 10% of your portfollio be in precious metals. That said the only time gold pays off is a weak dollar/inflation.

If I was to make a reccomendation it would be enough land to to provide food for your family,easy access to water both well and free running, trees, tools, root cellar, guns,ammo, independent power source, cash, then gold,silver and other things. Oh and no debt. If you can do that in the next 5 years I would do it.

 

[looseman]

QE3 was announced on 13 September 2012. In an 11-to-1 vote, the Federal Reserve decided to launch a new $40 billion a month, open-ended, bond purchasing program of agency mortgage-backed securities and also to continue extremely low rates policy until at least mid-2015.


Now imagine what is happening to the value of our dollar.

 

[tops]

Gold is the same as paper money. It has no value other than what somebody says it has. It doesn't matter what the value of land is because it can be used to live on and grow food. Food can be eat and it doesn't matter what the value is. Guns, powder and shot can protect you, your land and food. When it all gets to the bottom line the only thing any good is food, land and guns. Larry

 

[jaykellogg]

Gold only makes sense to me if it is in coins that can be individually sold. Gold is a hedge against inflation. As someone pointed out, the USA is monetizing its debt (printing money to pay the debt). This is bound to create some amount of inflation sooner or later. We saw what the government of Cypress did recently. The Government of the USA did something similar during the great depression. They decreed that it was illegal to own gold, bought it up at $35/oz and then they devalued the dollar. I don't have a "problem" with debt. I kind of like the idea of paying it off with cheap inflated dollars. My current strategy is to invest in real estate. It provides some income. One problem is if I rent something for $12,000 and I pay $6000 interest, it looks like I have made a nice $6000 profit and I pay tax on that. Trouble is I am paying payments and the difference between the payment and the income isn't much. As rents increase that should get better. I had a friend at work tell me that during the depression his father bought houses to rent. The town would not let his father evict people for nonpayment of rent, but insisted his father pay the taxes on the property anyway. His father lost the houses to back taxes one by one.

I wish I knew of a "safe" investment that would protect for inflation and provide a small additional return. I am not sure there is such a thing.

 

[Old TexMex]

University of Texas went to around a billion and a half in gold bullion(not shares) last year. (It went up from 1450 to 1800, then came back down.) That accounts for about 20% of the outfits holdings. So I followed their lead. Those guys can't care less about politics other than knowing which side their bread is buttered on, and they aren't selling yet.
My silver has certainly gone up, but the aussie dollar went from .50 in 2000 to 1.04 nowdays. That was pretty impressive, but it was just the result of a fallin US dollar.
Australia is pretty expensive now, and taxes are pretty high.
"something of value...."

 

[BobC357]

10 Year Gold Prices

10 Year Silver Prices

I trade through Monex and prefer silver.
I NEVER play with margin! I only have physical possession when I'm playing.
I prefer silver because I can have more ounces per dollar. Thus, a $1 increase in silver and a 1000 oz bar is a $1,000 increase. That same $1 increase in Gold is only $20 (20 oz bar for almost the same price). Even if Gold moves at $10 when Silver moves at $1, the ratio between the two is about 56:1.

Due to new fiscal cliff legislation, capital gains & dividend tax rates are increasing from 15% to 20% for singles earning over $400,000 and couples earnings over $450,000.

Individuals making in the $36,250 to $400k range will see their capital gains continue to be taxed at a 15% tax rate. Meanwhile, earners in the lowest two income tax brackets will pay 0% on investment income.

There will also be an additional 3.8% investment income tax applied to singles earning over $200k and couples earning over $250k. The purpose of this new tax is to help fund Medicare.

I would guess that most of us on this list aren't in the $400K plus bracket so, the rates really aren't that bad.

I would always hold for the long term even though I do short term trades in Silver when the market is volatile (it's a fun side hobby).

Anyway, I don't have any annuities, stocks, bonds or CDs making anywhere near the gains that the metals have turned over the past 35-40 years.

Choices as other have mentioned.. All kinds of Gold/Silver coins (don't forget about the 90% silver US coins) and bars (large and small). Both are liquid, easy to store and generally always go up (don't buy high and sell low!)

There is always somebody willing to buy and sell and prices are set by the global metals markets.

 

[Kinman]

I might be old school but I have no interest in gold stocks or investing in gold that isn't either physical or backed by physical gold. The beauty of holding gold is that a one ounce coin has the same current value as around $1500 and depending on when you bought that coin depends on what your investment is worth. If you bought gold in the not to distant past when it was around $500 an ounce you have basically tripled your money, but you have to sell...alot of people have trouble selling their gold and silver. At the time I bought some I had the money sitting in a savings account where it was drawing next to nothing in interest, I dumped the bank and bought Kruggerands, a much better savings account. You have to be willing to let go of your investment if you go that route. My wife doesn't understand my line of thinking, when I trade a Krug I paid $500 for a couple years ago for a cherry C-code Browning Hi-Power I'm laughing, she says "That krug is worth a thousand dollars and the price is going up' I told her "I don't care, its just my savings account." I drop into the gold store to sell a Krug and get three times what I paid for it, the guy says "Better than money in the bank, ain't it?" You got that right, but your timing has to be right...Back during the Hunt brothers silver fiasco I got caught buying silver on the way down...had to hold onto that stuff for years but the way it usually goes, its value came back up much better than money in the bank. The part I like best about investing in precious metals is unlike stocks and bonds...you got something in your hands, it will always be there and will always have a value regardless of what happens to the economy. Guns, Tools, Gold you can't go wrong.

 

[BJoe]

P.M's, precious metals, really aren't for INCREASING wealth, more for protecting you from major loss.

 

[BJoe]

Gold is the same as paper money. It has no value other than what somebody says it has. It doesn't matter what the value of land is because it can be used to live on and grow food. Food can be eat and it doesn't matter what the value is. Guns, powder and shot can protect you, your land and food. When it all gets to the bottom line the only thing any good is food, land and guns. Larry

Actually gold has held value for 5000 years from Egypt, to Africa, to Mexico. Probably be OK for the next few years also.

 

[Peter M. Eick]

Thanks for the comments.

So in general I had it right. Metal is good for holding value not gaining it. I have not really invested in metals much (other than a bunch of lead and copper) so I will keep watching and learning.

 

[deralte]

You buy it so someone else can get rich and when it drops in value the seller will more than likely have gotten rid of all of his gold and silver.

 

[cmore]

In my opinion buying gold is more for a SHTF situation.
in such a world a 24K gold necklace could be broken up small
enough to use as payment. a car maybe , a gun a place to camp etc.
I believe ammo will be the defacto payment of choice for small purchases
like chickens , etc

 

[rwsmith]

Invested in silver

I knew people that invested in silver when the Hunt brothers tried to corner the market. Lesson, beware of artificial and manipulated prices.

 

[Mike7.62]

I am trying to figure out the logic of buying gold and silver as an investment.

My premise is that gold/silver are a measure of buying power captured in metal. So gold today is worth $1600 (give or take) and it is not really getting any scarcer or more common. So any change in value is really a measure of the change in value of the dollar. So if the the price drops to $1000 per onz, then the dollar got stronger and oil should get cheaper, silver cheaper and most commodities will get cheaper. Now if it goes to 3200, then the dollar will basically be worth half as much and will best 1/2 of what it did today as it will in the future.

So if you buy that premise, and you buy gold, when you sell it you have to pay capital gains at currently 28% if you exceed the reportable amount and generate a 1099-b form. So you made a gain, but really all you did was hold the buying power fixed against inflation which depreciate the value of the dollar and effectively raised the price of gold. If this happens and you lose 28% to Capital gains, how is this a good investment?

Logically, the only way this works is if you buy small amounts (onz at a time) and sell it in small amounts so you don't generate a 1099-b form and don't pay capital gains. If you do this, then you effectively are holding buying power against inflation and you basically break even and hold your wealth.

But if you do this, you are effectively breaking the law by not paying capital gains taxes which again makes the whole metal play invalid.

The only way I can see you come out ahead is if during the time you hold the metal, there is an artificial scarcity created that is not filled by new mines and the metal becomes temporarily worth more then its inflation adjusted value. This could occur if for example a Cyprus type bank meltdown happens and the metal has value just because you have it. But for this to work, you have to have the demand price exceed the inflation adjusted value by at least 28% which seems unlikely.

So, where is my logic on this flawed? I am really trying to understand the financial play here.

Your premise about gold/silver, or precious metals (PM's) is flawed. PM's are not an "investment" they are money. The ultimate money.

Money has three properties to be called such. They are:

1. A unit of account

2. A medium of exchange

3. A store of value through time

The paper currency that we euphemistically call money, the Federal Reserve Note, is worthwhile on the first two, but sadly lacking in regards to the last one, which is the most important.

PM's become an "investment" when they are let out at interest, the same as paper notes.

In answer to your question, I would most definitely buy PM's now, as it has been decisively proven over the last five years that contract law is dead in this country and indeed, worldwide. The investments and "money" that you think is your property, if it is in the banking system isn't yours at all. It is the governments according to the recent decisions made IRT financial assets and bank deposits.

(note to moderators-this is in no way political, it is economic, and not aimed at either political party or figure, as all are guilty)

A few examples are the GM bailouts where senior bondholders were thrown under the bus in favor of other unsecured creditors. I won't go into the particulars of Chapter 11 v. Chapter 7, but they are different as to seniority of creditors.

Another example is MF Global and the (dis)honorable Jon Corzine who literally stole $1.2 billion of customer segregated funds, and is still walking around free for various reasons.

A third is the US Seventh Circuit Court of Appeals recent decision on Sentinal v. Bank of NY Mellon, again concerning customer segregated funds.

The most recent is the Cypriot banking debacle where unsecured depositors had anywhere from 40% to 100% of their deposits "requisitioned" in the closure of two Cypriot banks.

I won't go into the particulars, but the bottom line on ALL of these is that the assets that you think are yours are not considered to be such by .gov or the financial sector. Everything, including bank deposits, 401k's, IRA's etc., are not considered yours, but can be hypothecated and rehypothecated at the whim of the custodian or their clearinghouse, and used to make their bad bets good, and there is not any recourse for you.

In that type of environment, there are literally only a few things that you may hold that are outside of the system and beyond reach of the financial powers that be and .gov. Those items are PM's, currency, and other hard assets of value that are IN YOUR POSSESSION. I cannot emphasize that enough. ANYTHING not physically held by you is subject to counterparty risk or confiscation.

That is the virtue of PM's. They are insurance against a collapse of the system. They are universally recognized as having value, they maintain purchasing power, and they are untraceable. Other things such as firearms usually do the same, but are not as fungible as PM's.

If you want to "trade" PM's, do so in the paper markets using ETF's or futures contracts, not in physical. My personal opinion is that you will have your a** handed to you by the bullion banks and hedgies, as they play with information that you're not privy to. For speculative investment, you can try the mining shares. They are at all time lows and losing money because the cost of production is above the spot price, and as as been said before, the best time to buy is when there is blood in the streets, but again, that is speculative at best.

The bottom line is that if you trust the promises of politicians and the honesty of bankers, save in the vehicles that they encourage. If you do not, save in something that has a proven track record of holding value through time, and has a history of being money for 5000 years.