I was quoted recently in AARP Magazine February/March 2015 edition for an article titled Should You Buy Gold? I have been talking back and forth with the AARP editor Eileen Ambrose since July of 2014 when she first interviewed me. I had been telling her then that I expect lower prices in gold as it was trading over $1,300. The article never came out then, and gold fell to $1,142 by Nov. 5th. I was contacted again for a quote on silver and that is what she used for the article. She was kind enough to mention my book, “Buy Gold and Silver Safely.”
The article that Ambrose wrote was primarily geared towards those in their 50’s or older, the target market for AARP. I’d like to address a few of the points that were made in the article. Some I agree with and others that need more clarification.
“Many financial experts warn that gold (and, for that matter, silver, an even more volatile commodity) is just too risky, especially for retirees who need income-producing investments rather than an asset that can swing wildly in value within short periods, or languish for years.
Gold has always had a unique allure, and for the past century it has swung in and out of fashion with investors, surging in times of economic stress or political turmoil. It’s not called the currency of fear for nothing.
In the wake of the 1970s oil crisis and years of high inflation, the price of gold hit a then-record peak of $850 an ounce in 1980. Next, after the Federal Reserve raised interest rates to quell inflation, gold swooned and barely budged for two decades. It took 28 years, until 2008, for the price of gold to creep over $850 an ounce again.”
These are true statements when taken at their face (prima facie). Gold and silver have been known to have wild swings. In the gold bull market from 1971 when Nixon took us off the gold standard, to the 1980 peak, we saw gold during 1975-1976 decline 47%. We are presently seeing a gold decline of 35% from the high in 2011 to today. Silver from its high is down 66%. I had told Ms. Ambrose in our last conversation that I like silver over gold right now based on the gold/silver ratio, but that I still saw lower lows ahead. I think she appreciated the fact that I sell gold and silver for a living but take the opposite side of most gold bugs who scream “dollar crash” or “hyperinflation” to get you to buy gold. I simply call it like I see it.
That said, gold is insurance against many unknowns but the non-fear asset, the U.S. dollar, has also had its fair share of ups and downs. The dollar, for example, was at 98 in 2003, fell to 72 by 2008, a 26% drop and now is back up to 95 as seen in the chart below.
But let’s go just a few more years back and compare even further the volatility of the perceived “safe haven asset” the U.S. dollar. Looking at this next chart you can see the U.S. Dollar Index hit a high of 130 in 1985. The fall from 130 to 72 is a 44% drop. But gold during this time increased 175%. In fact, while gold has broken its 1980 high of $850 since that time, the dollar has not yet broken its high of 130 set back in 1985. If gold is considered a currency like the dollar, it hasn’t been a bad one to own.
Despite the fall in the price of gold in U.S. dollars since 2011, gold is up in all currencies the last 5 and 10 years.
The fact of the matter is, at some points in time gold is where to be. At other points in time, the dollar is. Knowing what point in time to be in one over the other takes some economic understanding as well as some knowledge of Federal Reserve policy.
“By comparison, the S&P 500 index, whose value was cut by more than half from its high in 2007 to the low in 2009, recovered all lost ground by last year and has since reached new heights. “Gold is an emotional investment, and not one that I would recommend for those approaching retirement or in retirement,” says David I. Kass, associate professor of finance at the University of Maryland, College Park. “The price of gold can drop as quickly as it can go up.”
As we can see from the above analysis, the dollar can drop as quickly as it can go up. Gold should not be compared to stocks as an “invest in one or the other.” Gold is an asset that acts as insurance first, and secondarily, a diversified portfolio should have an exposure to the precious metal that has a history of maintaining purchasing power over time. While it is true that gold could be considered a fear asset, many people don’t know how quickly fear can set in. And if fear does set in, stocks aren’t necessarily going to be the place that will maintain your wealth.
There was a snippet in the article relating to Warren Buffett’s comments in a 2011 letter to shareholders about gold where he was comparing it to ExxonMobil and farmland, which produce dividends/crops. It is true gold doesn’t produce anything. But neither does your homeowner’s policy, your car insurance policy, or your term life insurance policy. In fact, each of those ends up being worthless if never used. Gold always has value when exchanged for the scrip of the day. Like any asset, gold is better bought low as well. Many years ago, Warren Buffett bought silver at $4 and sold at $5. Was that a good investment with silver sitting at $16? Sure it was. But I bet he still wishes he had the silver.
Regarding taxes, the article points out that gold has a 28% tax related to any gains whereby stocks only have a 15% tax on gains for most investors (held more than one year). It is for this reason that gold is a great asset for IRA‘s and 401k’s where you don’t have to worry about the tax on appreciation. That 28% tax is applicable to anyone who buys gold and silver and sells at some point in the future for a profit. There are ways even around this tax which I have written a special report about. If you would like a copy of that special report, email us firstname.lastname@example.org and mention “Sell Gold and Silver Tax Free” and we’ll send it to you.
“To protect against inflation, just own equities,” says Meermann. Appreciating stock, over time, has more than kept up with inflation, he says.
I don’t have anything against owning stocks and will be addressing that more in my next book, “Illusions of Wealth.” But like with gold, there are times when it makes sense to be in stocks and times where maybe you should take some profit (or keep a stop). Financial advisors are taught to buy and hold and most hedge fund managers and mutual fund managers can’t beat their indexes. Yet many financial advisors still recommend you buy a mutual fund instead of an ETF or Index Fund because they can make a commission. Or, they put you in a managed portfolio where they take their fee every year. Why do you need to pay an advisor to do this for you? Just buy the Index Fund. But if the world is crashing around you, do you “hold” that investment and just watch your money go down the drain? Of course not. Right now for the stock market I would have a stop loss at 14,000 on the DOW. If conservative, 15,000. If entering retirement, 16,000. If ultra conservative after getting back all you lost in 2008 and not wanting to experience a black swan event again, 17,000. We are presently at 18,000 on the Dow.
If someone is going to try and tell me that the DOW will double to 36,000 before silver doubles to $34, I’ll tell them they’re nuts. Even if silver (or gold) pay no dividends, I’d rather have that insurance and allocate funds to a beaten down asset that I can sell at any time to get “income.”
The rest of the article is pretty straightforward.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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