Interesting…the 3rd thread about this in less than 4 days. Although there wasn’t much useful response in those, I recommend checking those out.
1.) ditto with dave
2.) The best method of overall investing is, as Jim Rogers says, to be a contrarian. Or, in Buffett’s words: “Be fearful when others are greedy…but be greedy when others are fearful.” Just because you’re not long on the dollar doesn’t mean you should be shorting it.
3.) Let’s be clear. When people talk about “investing” in precious metals they are using more of a turn of phrase rather than an actual term. “Investing” literally means to actively purchase an asset or item with the hope that it will generate income or appreciate in value. (I personally go a step farther and say that an “investment” is strictly supposed to generate income…purchasing something based on anticipated appreciation is “speculation.” Most people understand and use that term, but they also have no problem calling something bought on speculation an “investment”. I prefer to make the distinction and at least always clarify “speculative investment.”) Either way, this is different from “saving”…which is essentially just underconsumption.
Investopedia states: “In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.”
Typically, gold and silver are not purchased with the notion that they will appreciate in value. And they are certainly not purchased with the idea that they will generate some sort of income. They are purchased because they are a true money. They are a true store of value. Granted, the value of these metals may appreciate somewhat over time, as more and more people turn to use them as a store of value (or even as a currency), however this is not historically the case…and this is certainly not something most metal buyers are thinking when they move acquire it. They may think they are “making money” (aka “earning a return”) when they see the price go up in terms of the dollars that they gave up to get the metal…but when the price of everything else goes up too, there really is no real return there. What they have done is effectively traded their devaluing fiat currency for a real store of value, and thereby effectively preserved their wealth. They have “saved”…not “invested.”
So gold and silver are good stores of value…they are not necessarily good “investments”. And while it is quite possible that gold could become the reserve currency (the world would be much better off), I highly doubt it. There are many powerful countries that would love to enjoy the same benefits the U.S. has over the last 65 years. So no, I don’t think it is a good idea to buy the metals because they might become the reserve currency…it’s a good idea to buy them because they are real money. There’s no better way to save than with real money.
As far as why to buy precious metals as opposed to spending your money on something else, that’s really up to you to decide. It literally is the same as asking “are there any reasons to save your money instead of investing it?” Of course. One of the main ones is your tolerance for risk. The other would be your ability to make sound investment choices. Obviously if one or both of those is quite low, you’d probably be more inclined to save rather than invest. That would mean buying gold and silver bullion.
4.) Again, I would be ditto with Dave. I forgot where it was that I read it (probably Lessons for the Young Economist), but I remember Bob Murphy saying something about how understanding economics won’t necessarily make you rich, but being ignorant of it has a very strong chance of making you broke. I think a better analogy than the one about math would be something along the lines of saying it’s like you should expect most mechanics who can build a car from scratch to be world class racecar drivers. Just because you understand how it works doesn’t mean you necessarily know who to work it.
Milton Friedman stated it quite clearly here, when a girl asked him why K-Mart was doing so much better than Sears, to which he replied “If I knew that, I’d be in a different business.” (You can’t help but love that man.) But the point is, to be a good investor you have to have good business acumen. And to have that, you have to have at least some basic understanding of economics (at the very least, on a micro level.) But to be an economist you don’t have to know a thing about business. (As most economists sadly prove every time they open their mouth). So while being a great business man will probably mean you have some basic economic understanding and decent investing potential, being an expert economist offers you almost no such guarantee.
Now, of course, as a good business man, the more and better you understand economics, the better of an investor you can be…especially over the long term, as guys like Schiff, Faber, and Rogers illustrate. But as an economist, to be a good investor…well, as Friedman said: “you’d have to be an expert in a way I’m not.”
5.) In the broad sense, to put it generally, Austrians better understand how the world works. It isn’t necessarily any particular tool or set of tools…it’s more a superior methodology and theory. They have a more accurate way of viewing and interpreting the economy, and in that way, they are better able to understand what effects will occur as a result of certain actions. Specifically, Austrians understand that there is a capital structure at work in the economy…that goods don’t just appear out of nowhere because there is a demand. Mainstream models just clump everything together into a “capital” category, whereas Austrians recognize that there is a very complex and sophisticated process by which raw materials are mined, refined, wholesaled, marketed, sold, and consumed. This has enormous implications on the way events and data are interpreted, forecasts are made, and how policies are regarded.
Bob Murphy actually gave a full talk on how only the Austrians understand interest rates. This again has huge implications on virtually every aspect of how the economy is understood and what cause and effect relationships are seen. This is closely related to the overall Austrian understanding of the money supply. Here’s a great interview with Jeff Tucker and Frank Shostak in which the economist talks about how Austrian theory combined with an analysis of money supply make for an excellent forecasting model. Shostak has a pretty good record of saying things will happen and then getting to see those predictions come true relatively soon afterward.
So, I hope this helped at least somewhat. Check those top two links to the other threads, and feel free to ask any other questions. It’s what the forum is here for.