I'd like to talk about precious metals investing today and the reasons for doing so.
For whatever reason, there seems to be more strongly opinionated views on gold than almost any other asset. Diehard gold bulls will tell you that owning anything else besides physical gold is utterly foolish while the gold bears will proclaim that it is pointless to own a hunk of metal that just sits there and produces no income. My view is somewhere in the middle of these two, and I will lay out the why.
Gold is the preferred form of money that mankind has chosen for thousands of years. Many other commodities have been used as money in the past such as tobacco, sugar, salt, cattle, nails, copper, cowrie shells and others. Along the way, gold and silver arose as the ideal form of money for most people because of the qualities those metals posses. So what does this mean for us today in 2017?
Well, everything changed for gold in 1971 due to a couple of major events. First, president Nixon took the US off the Bretton Woods agreement, which ended that version of the gold standard. Second, the Petrodollar agreement was created, which ensured that international markets would always use US dollars in oil trading. This deal was brokered with the house of Saud by then secretary of state Henry Kissinger.
The result of these events was that the US dollar would have no connection to gold, and the price of gold would now be set in the commodities futures markets instead of being a peg to a national currency as part of a gold standard. The gold price soared from $35/ounce in 1971 to over $850/ounce in 1980. Gold basically entered a bear market for the next twenty years, and didn't have another good decade until the 2000's.
Reasons To Own
I think it's very important to understand the purpose of precious metals investing and what to expect from investing in it. The main purpose of holding gold is for wealth protection and NOT wealth building. This means that the gold portion of your portfolio simply acts as insurance on the rest of the portfolio. Gold performs as an insurance policy against severe inflation and economic catastrophe. It's the kind of insurance that you hope you never have to use, because if gold is hitting all time highs in a short amount of time then this means the economic conditions at that time would be horrid.
If you hear someone say something along the lines of "Buying gold is the best way to get rich" or "the only way to build serious wealth is to invest in gold", then run away. It's true that gold CAN build wealth if you buy and sell at the right times, AKA timing the market. If one had bought gold in 1971 and sold at the peak in 1980 then they would have done very well, but the number of people who timed it that perfectly is very small. Most people will never be able to time the market perfectly, so planning your financial future on a single trade is certainly not a smart idea!
The way to build wealth through gold is by speculating in gold mining stocks. Gold stocks are leveraged to the gold price, so whenever gold rallies big, the stocks that explore for and produce gold will rally even bigger. These kinds of stocks are extremely volatile though, and should only be considered speculation with money you can afford to lose. I'll discuss mining stocks more in the future.
Conclusion
I see many people in the gold and silver community proclaiming that anything other than physical bullion is a fool's bet, and that they don't trust anything else. To me, this is silly. I'm not against gold at all, but if you don't put any money into interest-bearing accounts, then there is no way you can actually build wealth. Compound interest is the most powerful force in all of finance, and anyone who isn't tapping into it is only making things harder for themselves. Keeping around 10% of one's portfolio in precious metals is a prudent move. You can obviously go higher than that, but just don't ignore assets that pay an income such as stocks, whole life insurance policies, and rental real estate for example. Remember that physical gold is for protecting your wealth, not for building it.
*This post is not intended to be financial advice in any way. It is for informational purposes only.
Sources:
http://thefinancialphysician.com/2013/06/not-prepared-17-signs-that-most-americans-will-be-wiped-out-by-the-coming-economic-collapse/
https://foursignposts.com/2014/09/10/the-petrodollars-creator-iran-greater-threat-than-isis/
http://www.ancientresource.com/lots/ancient-coins/gold-coins.html
https://plus.google.com/+MacSaxe
http://www.anax-capital.com/invest-in-precious-metals/
https://goldsilver.com/blog/gold-and-silver-1970-s-vs-now/