Asset Class: Commodities (Precious Metals)
Original Investment Thesis (7/2018): I will likely keep a precious metal allocation in my portfolio from here on out. I’ve never owned precious metals in my life until mid-2018. I’ve heard all the great investors talk about how it is nothing but a pet rock, has no yield, therefore, it has no value, stocks are better inflation hedges, etc., etc., etc. All I know is pet rocks are not as valuable as gold, gold has definitely had value for several thousand years, and I don’t know of a single stock that has been around for even several hundred years. I am allocating to it mainly as a hedge against fiat currency manipulation and as financial system insurance. Every government on earth is making money out of thin air and it is tied to nothing more than their desire to have more of it to solve whatever problem they are trying to solve at the time. I’m also doing it because almost nobody I know owns precious metals and most people I know think that only kooks own them. Well now this kook does! I heard a guy recently say on Twitter that if you think gold bugs are crazy then you’ve never met a silver owner. Ha! I resemble that remark! Deano also loves an undervalued, unloved asset. An unloved asset…yes…please! Financial assets come and go but precious metals have been around and have had value for thousands of years (and likely for thousands more). They are immutable unlike almost anything else on the planet. I’ll move between silver/gold based on the gold to silver ratio. I’d rather own stocks so if stocks ever get ridiculously cheap, I might/will lighten this up and go heavier stocks. That’s the plan anyway, asset class rotation (AKA ‘market timing’ AKA ‘what you are not supposed to do’). This is a long term holding.
NOTE: In January 2020 I sold my $SIVR ETF position (but kept my physical silver position intact).
Why I Bought Precious Metals For The First Time In My Life!
I didn’t make any transactions in the month of May but I did complete some research that I’d been working on for some time…since 1257 to be exact (760 years)!!! I have never been an investor in gold or any precious metals. I feel like the world is just one big large mess with all the fiat currency printing, artificially low-interest rates, and debt creation that has created one bubble after another. I think we are in an ‘everything bubble’ as we speak where basically every asset class is pegging at extreme valuations. I’ve always thought of gold as a metal and not a good investment. I know that stocks are good investments that create value that is able to beat/outpace inflation. Gold creates no value and is only worth what someone else is willing to pay for it in the future. That said I do regard gold as equal to money and do know it has been viewed as such for several thousand years. It is real, it is finite in quantity, and liquid. So, I knew it would not beat inflation (or the stock market) over time but I wanted to see how bad it would lose. From 1257 to 1791 gold was tracked against the British Pound and since 1791 it is able to be tracked against the USD. From 1257 to 2017 gold has a cumulative return of 30,860%. Prior to 1257 there is data as well that goes back 5,000 some odd years but I wasn’t able to pull anything I felt completely comfortable with. We have CPI (inflation) data back to 1913. The cumulative return of the CPI since 1913 is 2,374% with Gold during the same period being 5,982%. So, if you held Gold during the last 104 years you would have increased your purchasing power versus holding dollars. We have S&P 500 data back to 1928. The cumulative return of the S&P 500 since 1928 is 399,812% with Gold during the same period being 5,982%. So, if you held Gold during the last 89 years you would have done much, much, much, much better to own stocks. I want to own stocks! That said I believe that I also, now, want to own gold…not fake electronic gold…real physical gold (and silver…because the gold/silver ratio actually leans silver right now). Why? Several reasons and most don’t have much to do with returns/price:
Interest Rates Are At 5,000 Year Lows – I believe the world is awash in debt…all of it…the governments, the corporations, the people–$250 trillion or so. All this debt is being serviced with artificially low-interest rates (being systemically manipulated by every Central Bank on the planet all at once). We are the lowest interest rates in all of recorded time (since “loan docs” where stored in clay pots). We recently had the lowest 10-year treasury rate ever recorded July 2016 at 1.5%. So, if the entire financial asset system is valued based on interest rates being at all-time lows doesn’t that make financial assets valued at all-time highs. How will we recreate 5,000-year lows to keep it going? The entire system stinks and something isn’t right. I’ll gladly stay out of debt as one way to protect myself and own some non-financial assets (like gold) as protection. Whether the value of the financial assets is destroyed via inflation or deflation the purchasing power of gold will hold much better than any fiat currency. The western world believes in their financial assets to a fault almost and they’ve only been around for a few hundred years…while gold has been around for several thousand years and held its value.
Fake Money Is Not Real – I also do not want to own anything denominated in a fiat currency if/when the wheels come off. I want to own real things equity in real companies (and I know they will get clobbered in a crisis) and commodities. I found it funny when I was researching cryptocurrencies that a lot of people argued that there were set amounts of it and that additional currency couldn’t just be created out of thin air (like they can be from government’s fiat currency by Central Bankers). It is a primary argument from the crypto crowd. Alas, they are all created out of thin air and can be manipulated by man to their liking (despite what they say they will/won’t do). The US Gov’t has $21 trillion in debt and is running huge deficits as we speak (and they are not the only ones). I don’t trust any of them (cryptos or fiats). Gold has been holding its own as a store of value for thousands of years while every single fiat currency (and civilization) has come and gone. The value of gold is independent of every single fiat currency.
Paper/Digital/Electric Gold Is Not Real – Another weird thing in today’s world is the electric gold market where people buy instruments that represent gold holdings but that are not backed by any physical gold at all–derivatives. Currently, it seems that these derivative markets are setting the price for gold rather than the actual physical asset. There are currently around 171,300 tonnes of gold in the world and is worth around $7 trillion dollars. By contrast, there are 70-100 times as much paper/digital gold in derivative contracts $490-700 trillion dollars. Everything is fine and dandy as long as no one ever demands physical delivery on their futures contracts. But in times of panic they surely will. Warren Buffett has called the 1.1 QUADRILLION derivatives market a financial weapon of mass destruction. If/when it implodes all the paper/digital/electric stuff won’t be worth anything. Companies that have large positions in derivatives will vaporize. BUT the physical metal in the vault will still have value. Another example are ETFs that do not hold the physical asset. The largest gold ETF is GLD and it has a $28 billion in value…not a physical gold bar in site. Not to mention that these are backed by financial institutions that will likely vaporize in a massive financial collapse.
Lots Of Smart Buyers Of Physical Gold – So there are tons of smart groups that are buying physical gold hand over fist. Many speculate that it is due to foreign exchange currency wars (think all the countries that are sick of having to deal in US Dollars to buy oil, etc.). Others believe that it is because people are starting to believe traditional fiat currencies that are not backed by anything physical will eventually have their value destroyed. The IMF already stands ready to replace every country’s currency with an SDR currency (which is a basket of currencies). Others believe that they believe the price is rigged (and artificially low) due to all the paper/digital/electric gold (with price-setting being done on the COMEX). They are basically saying…fine…if you say the price is ‘x’ I’ll keep buying it at ‘x’ and you’ll keep delivering physical at ‘x’ price. Eventually the physical supply dries up and this forces the physical to start setting price rather than the paper gold price…and it will be much higher. I’ll follow the smart money here.
I’ve decided I’m going to do something I’ve never done in my life; invest in physical precious metals. I researched the gold/silver ratio as well and believe silver is actually a better deal so I’ll split fairly equally between the two. I will put this trade on as soon as we no longer own two houses!
I’m sharing my analysis here. If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72
Buying More Silver!
Thinking: Over the past few months I have been buying precious metals. I’ve also been tilting my overall portfolio towards commodity-related exposures. I’ll have more on why about that in future updates but it is basically 1) I believe stocks (and real estate) are extremely overvalued, 2) commodities in relation to stocks are undervalued (and have been underperforming other classes for a good while), 3) if inflation comes it will be bad for stocks at least initially (and probably good for commodities), and 4) if deflation comes nothing will do well (stocks or commodities). Oh…and I believe the world is a mess…did I mention that. Everyone is in debt up to the hilt and we are in the final stretch of a worldwide global debt supercycle. No one knows when that will end but we are definitely in near-unprecedented times in how we are dealing with things (lots of money being printed to keep things afloat in my opinion). I think holding something that has more or less held its own for thousands of years with some part of my portfolio makes sense. I’m not a negative person, I’m not a permabear, I’m not a gold bug…but I am a realist. Like the Cub Scouts taught me growing up…Be Prepared (for anything).
I had a pretty even 50/50 split on my gold and silver holdings. As I’ve added to this position I’ve been adding to the silver side of it. I own physical gold and silver in a vault. But I’ve also been buying some silver coins recently (rounds and most recently 90% junk silver coins).
So why silver? And why silver versus gold? Why precious metals versus stocks (since I’m trying to beat the stock market)?
I listened to a very interesting podcast recently. I listen to many all the time but this one really struck a chord. The Investor’s Podcast episode 213 with guest David McAlvany. So much going on in that episode. Ways to play silver against gold to create income…ways to play asset classes against each other. I put this with so much I’d already been reading on the subject previously and it really has me thinking that precious metals deserve a spot in my overall portfolio.
The reason I’m focusing on precious metals right now (versus stocks) is mainly due to the Gold to Stock ratio is at a low (stocks are expensive) and gold is less expensive compared to stocks than in the past. This ratio is at all-time highs (only higher once in past 90ish years). I believe stocks are overvalued right now (as they are expensive on almost all traditional metrics). I believe this will mean revert (as it always does). I don’t want to have all my money tied up in an asset that is coming back to earth…while it is coming back to earth.
The reason I’m focusing on silver versus gold right now is that the Gold to Silver Ratio is 80+ (silver is cheap in relation to gold). Also the majority of silver miners can’t pull it out of the earth for less than current price.
I also saw a chart in the past couple of weeks where commodities, in general, were at a low compared to the stock market. I can’t find that at the moment but I have on my research list to find it (and others like it) to further my research on this topic (again more to come in future posts).
So I believe silver is a buy. Of course, commodities are extremely cyclical…and extremely prone to boom/bust cycles. So I could be on the exact wrong side of this investment for a long time. Many argue that gold is coming off a blow-off top and has much further to fall. Many argue it is a relic of the past that has no value whatsoever. Many smart minds on both sides of the argument. That is fine I plan to hold all this for a long, long time. It’ll be around long after I’m gone. Of course if the cycles that I anticipate play out I’ll likely rotate in/out a few times in my remaining time on this rock. We’ll see, regardless not a short-term play I’m making here.
In my research I found these options to own precious metals:
- BEST: Physical metals in a vault (like GoldSilver, Goldmoney, Sprott, Schiff Gold) or physical metals for your personal safe (from someone like SD Bullion and JM Bullion).
- NEXT BEST: ETFs with physical backing $SGOL $SIVR $GLD $IAU $SLV
- WORST: ETFs with no physical backing (“paper” metals)
So with the remaining money, I had leftover from my $ESIO – Electro Scientific sale I decided to buy one of the physically backed silver ETFs ($SIVR – Aberdeen Standard Physical Silver Shares ETF). This is not the most optimal way to own it in my opinion. It has counterparty risks, the silver is not actually mine, and the expense ratio is higher than holding it in a vault. Regardless, this portion of the portfolio is likely a more short term position that if something better comes along I’ll sell it and move to that. Time will tell!
I’m sharing my analysis here. If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72