Edit: Sorry for not explaining PM. → Precious metal. (Thanks nirgrahamUK)
While the FAQ about Gold has some good points, it does not really hit the purpose of sylar. The FAQ answers why Gold should be used as money, not why you should invest in it now, although there are of course some implications for the investment question.
Why invest in Gold:
1: Risk of loss: This at least is the most important question to me, I want a minimum of risk. First of all any Austrian should now, there is nothing in the world that can have a steady rising or even stable value related to all other things. Value is in the mind of people and is shifting all the time. So you only can look for the things that are relatively stable, and Gold is quite stable. I am sure more stable than anything else. So what was the biggest loss of Gold? Of course it was when it peaked in January 1980 over $800 after an increase of about 2400%. So if you would have actually bought at the top, which lasted about 10 days! (Before and after it was below 700) and would sell it on the worst possible point directly after the peak, then you would have sold in July 1982 at about 320.
I am not arguing with the low of under $300 in 2000 because it really is just plain stupid to hold an investment after a 2400% increase in 10years followed by a price cut in half for another 20 years! So a loss of about 60% is the absolutely worst that can happen. And if you use the cost average effect (investing on multiple points in time, preferably on dips) and not with a 100% of your savings in one go, and also don’t sell at the worst possible point, then you come to a possible and realistic loss of 20-35% percent that really can happen to you. The 60% loss is as likely as being struck by a lightning!
What about other assets, I think we don’t need to argue about housing. The chance of losing money is at least as big as in Gold. And in stocks the chances are losing up to a 100%! The stock market crashed often enough that one can safely say, you can lose much more there than with Gold.
2: Anonymous wealth: Contrary to everything else, except for cans of ravioli maybe, you can buy PMs anonymously. Housing and real estate is immobile (in German we even call it therefore “Immobilie”) so you cannot hide it. Also stocks, savings accounts and life insurances are clearly allocated to you officially. In case the government needs (and in all likelihood it will) to jack up taxes to keep the game going, they of course will hunt what is most easily to hunt, and the precondition is to have knowledge about who has something to tax: Property, real estate is the number one place. Lots of wealth that cannot run away. And of course all other forms mentioned above are not safe as well.
3: Movability, accessibility: You can easily move big amounts of savings with PMs personally and depending on how you store it you have very easy access in emergencies.
4a: Alternative #1 → Housing: For real estate you need a lot of savings to invest in the first place. Very few people really have that much in cash. Also for the initial investment you have to calculate with at least 10% additional costs for taxes and fees (at least in Austria). There was already a big bubble there. It makes no sense to invest there again before the mess isn’t cleaned up. And the governments do not allow this to happen. In Germany, Austria and Swiss we didn’t have this bubble, but here also the housing market is not a good idea, why: The demography does everything, but it is not looking bullish for housing. Also if there is a crisis you will have following problems:
With rising prices in necessities people will start to move together and share living room, which drives down value of real estate. The government will intensify rent control, so you cannot raise the rent as you would need to keep up with the costs for keeping up your properties value. Since we have quite strong legislation for protection of tenants the problems with “migrant renters” (don’t know if this is the right word for “Mietnomade”, those are people who pretend to be able to pay the rent, but can’t or don’t and refuse to leave) will intensify heavily. Also a recent study of the DIW in Germany showed that more than 50% of landlords there make in fact real losses when accounted for official price inflation!
And finally what most people forget if you buy real estate, you buy yourself work! You need to keep it up, take care about tenants etc. This is for sure always an underestimated factor. If you have your own home or planning to buy it for yourself it is ok. But for moving your paper values into a safe haven I consider it a guaranteed loss for the times coming now. On a site I read that there is no market in the world in which more stupidity meets so much money than in the housing market. And I tend to agree highly there.
4b Alternative #2 Stocks: How many people are traders, and know how to trade in the stock market actually? I don’t, and most people I know do neither. Maybe in the US it is more common to own stocks, but I think that even there most people are not familiar with stocks, are they? Of course you can look out for a Berni Madoff who does that for you. But this is not an option for me. I don’t deny that you can make a lot of money in the stock market, but you need a lot of expertise, and even then this is of course not the rule.
The P/E ratio (price-earnings ratio) is very bad in stock market now, it’s about at 15. This means it is expensive now. A good P/E ratio is at around 5. Another point is that when you look at the great depression and the stagflation in the 70s, the gold/dow ratio came back down to near 1/1. And I guess it is what will happen this time too. Gold is already outperforming the stockmarket since 10 years, and I guess it won’t stop before it gets near this ratio again. And this is the point to move from Gold into stocks then.
5: How likely is it that Paul Volcker will come out of the fridge and rescue the fiat money system as in the 70s again?: See the answer of BlackNumero: https://forum.freecapitalists.org/t/how-70s-stagflation-ended-and-could-our-present-stagflation-end-that-way-as-well/18427
6: Hyper Deflation/Short squeeze of debt: If you own stocks you are screwed because they crash severely. Housing goes down with it of course. If you have savings accounts or life insurance stuff or bonds, they vanish in thin air (just where they came from). The best thing would be to have all your savings in cash below your pillow. But where and when is this happening? Should you forgo all interest on savings accounts to wait that day? Or forgo your dividends in the stock market? And in fact lose value due to inflation until this event is happing, if it is happening? If you have Gold physically (which is still outperforming the stock market and definitely paper dollars below any pillow until this point), it might lose value (definitely not more than stocks or other assets), but it is still there and safe. For the common man who only has a savings account for sure the best alternative. I don’t care if Inflation or Deflation annihilates my savings. Gold insures me against both. And Mish (Mike Shedlock) is in fact arguing that Gold is cash, and would retain its value.
At least such a spectacular Deflation would shake trust in fiat money and the credit worthiness of the USA that hard, that a return to commodity backed money is very likely to happen then.
7: All fiat experiments in history ended in a big mess. Afterwards a return to commodity backed money was always done. Why should it be different this time? The only question is when. And now we are 40 years in a full fiat system, with severe cracks in it. It is time to play safe.
8: Is Gold a bubble currently, let’s compare it with the 70s bullmarket:
- 70s: 2400% gain in 10 years. About 25 to 30% in the average portfolio was in PM!
- Now: Approx. 400% gain in 10 years. About 0.8 to 1.5% (depending on the source) in the average portfolio is in PM.
- Depending on which price inflation numbers you use the gold price would need to be between 2400 and 6000 Dollars now to reach the 70s high.
A bubble?
I call that hilarious, the FED is buying bonds en mass, but nobody, except Austrians, is speaking of a bubble there.
9: I read an interesting article about the Nash equilibrium. It is a point that benefits all when all do the same. This article argues PMs are in fact a Nash equilibrium. Even if all people invest all their savings in Gold, the value of Gold could only go down in relation to other things when some people would start selling again. If people for example would invest all savings in condoms, then its value would rise extremely of course too. But there is a problem. Why: Entrepreneurs would immediately start producing condoms in huge quantities, because production costs are very low of course, which would lower the value of condoms again, even without people selling their condoms. In Gold such a production increase is just impossible. As a matter of fact, although the price of Gold went up 400% since 10 years, the all-time high of production still was in 2001 and production is steadily declining since then. Ask yourself if fiat money which can be produced by entering numbers in a computer is a Nash equilibrium.
http://www.safehaven.com/article/5205/why-the-global-financial-system-is-about-to-collapse
10: Manipulation: Common Sense and historical facts (e.g.: London Gold Pool in 60s) show that it is very likely that PMs markets are managed by official entities. And they only have an advantage if they suppress the prices of PMs. What happens to supply if prices are kept below the market price over time, should be all too clear within this forum.
Summarized I think for the common man with little savings, physical PMs are the best bet for unstable times ahead, he will never ever lose everything. And the chances of having a good start into a new system whatever it may be are very good with them. Nobody says people should buy PMs for bad times to be able to get food. If you think supermarket shelves will be empty, then buy durable food and land! PMs are there to get your savings through rough times. It is an insurance, nothing more.
Sorry for my bad grammar (I hope that WinWord took care of my bad spelling.. 