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Doug Eberhardt is the author of "Buy Gold and Silver Safely" and a broker/dealer selling gold and silver coins and bars at 1% over wholesale cost.
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  • 5 Reasons Why You Haven't Invested In Gold Or Silver UPDATED 2013 3 comments
    Jan 22, 2013 3:47 PM

    This article is an update of my Seeking Alpha article dated 9/14/2010 of the same title.

    The price of gold and silver has moved higher for 12 straight years and you're not yet invested? Why is that?

    There are many reasons why you are not invested in these metals and most of them reveal how the deck is stacked against you in learning the truth about gold and silver and how they can hedge your portfolio from currency risk.

    This article will reveal the five reasons why you haven't yet invested in gold and silver. Keep in mind, gold and silver are not in a bubble just because their price has moved higher. Long term, it is the U.S. dollar and every other currency that are in a bubble.

    The fact that gold and silver are moving higher despite some intermittent strength in the dollar is quite revealing. What will happen to the price of gold and silver when the dollar resumes its downward trend? More importantly, gold has maintained one's purchasing power over the years even with a stable dollar which buys you less and less each year.

    5 Reasons Why You Haven't Invested in Gold or Silver

    Reason 1: Your Financial Advisor Doesn't Understand Real Diversification, Let Alone How Gold Fits Into a Diversified Portfolio

    When it comes to retirement planning, most financial advisors miss the mark in properly diversifying portfolios. The missing ingredient is the insurance against what most U.S. investors currently own; U.S. Stocks, U.S. Corporate Bonds and U.S. Government Bonds. All of these assets are subject to U.S. dollar risk. I address this further in an article I wrote Challenging Financial Advisors on the Need to Diversify Into Gold.

    For decades, the typical financial advisor diversified U.S. investor portfolios as follows:

    60% Stocks

    30% Bonds

    5% Real Estate Investment Trust (REIT) and Commodities

    5% Cash and other investments

    One's age and number of years from retirement would dictate the amount allocated to stocks. The old adage has been "subtract your age from 100 and that is the percentage you should be invested in stocks." So if you're 55, then 100-55 = 45, thus 45% of your portfolio should be invested in stocks.

    The vehicles that advisors have typically used to invest in stocks would be a mixture of U.S. Large-Cap, Mid-Cap and Small-Cap mutual funds or ETF's diversified among a wide range of sectors, with some foreign exposure. The bonds would be a mixture of mostly U.S. corporate, with some allocated to U.S. Government bonds through GNMA funds or U.S. Treasuries. The cash would be parked in U.S. money market accounts waiting for future investment opportunities.

    What do all of these typical investments have in common? They are all U.S. dollar based and subject to the fall of the dollar.

    Outside of some foreign exposure that could take advantage of currency appreciation in other countries, what in this "typical" recommendation from your financial advisor counteracts the fall of this U.S. dollar risk to your portfolio? The answer; is nothing.

    Financial advisors may add some TIPS that are supposed to be an inflation hedge, but TIPS only follow the manipulated Consumer Price Index (NYSEARCA:CPI) that doesn't take into account real inflation (are prices rising or falling? Or if over 62, has your social security check risen the past few years?) Prices are rising, and the social security payments are based on this manipulated lower CPI number which allows the government to pay out less to seniors each month.

    The fact of the matter is, an investor needs physical gold and silver bullion coins or bars to maintain their purchasing power. NOTE: The investor in precious metals needs to purchase just the type of coins that are a small percentage over the current spot price, not numismatic, rare or semi-numismatic European coins like Swiss franc, British Sovereign or French Rooster for example. Run, don't walk, from anyone who tries to sell you numismatic coins to hedge against the risk exposure your portfolio has to the U.S. dollar.

    When asked, many financial advisors don't recommend physical gold and silver because they don't sell it. I have had many advisors call me and ask them to help their clients because their clients wanted to buy physical gold and silver and the advisor didn't offer it. They may recommend quasi investments in gold or silver like ETFs, but they have their own issues as what are known as "paper" investments. For most, an investor cannot cash those paper products in and request physical gold and silver from the issuer.

    Lastly, many financial advisors don't understand this diversification because they believe that the U.S. dollar and U.S. treasuries are "risk free." They are not. While Treasuries have been strong the last few years, it is because of a complicit Federal Reserve who has been artificially pushing interest rates lower to try and stimulate the economy. To do this they have implemented inflationary programs like Quantitative Easing and Operation Twist which in a nutshell, are programs which find the Fed buying assets that can't be sold elsewhere or trying to stimulate the economy by lowering long term rates so they assume consumers will buy houses and cars. When you throw enough money at something, you can move it temporarily, but if the underlying economy is built on a house of cards like this, these stimulus programs will be tumbling down at some point when the consumer prefers to eat rather than buy a bigger house or car. Besides, banks aren't even lending much these days which defeats the whole purpose of the Fed's programs to stimulate.

    How will the Fed unload these assets in the future is the unanswered question as they are considered to be the "lender of last resort." So what happens if the Fed is wrong is the type of question no advisor prepares you for. The Fed was wrong in building up the markets that led to the first stock market bubble and real estate bubble and they are trying to blow up those bubbles again with their various easing programs. They will fail again as you can't throw debt at debt and expect growth to come from it except for the favored few who benefit in the beginning of the bubble; banks and investment firms. But we saw what happened to them in 2008/2009. The problems that led us to that financial crisis have not been resolved. For example the sub-investment derivatives the nation's top banks own are more than at the height of the crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act did nothing to curtail the nation's top banks. These banks will have struggles in the future because there are no counterparties to many of these derivatives. Congress and the Fed will attempt to step in again.

    Over the years I have critiqued many advisors including; a CFP, CFA, PhD and financial guru Dave Ramsey and their understanding of gold. I have to realize that these folks are bright individuals. I too was a financial advisor for over 20 years and considered myself bright. I would like to think I learned something over the years and am sharing it with you to make your own good decisions on your investments; to decipher for yourself whether or not gold and silver fit into a well-diversified portfolio.

    Because of this ignorance of financial advisors about the need for gold in one's portfolio, I wrote the book, Buy Gold and Silver Safely.

    Reason 2: The Media Is Biased Against Gold and Almost Always Pro-Stocks

    The media is almost always bullish on stocks and always trying to spin good news out of bad reports on the economy. As long as you are investing in stocks, they have done their job.

    Gold is competition to stocks. Investing in physical gold doesn't do anything for the economy, but it does do something for your portfolio. It makes it appreciate as it has the last 12 years. But more importantly, it hedges your portfolio against currency risk as pointed out in Reason 1 above.

    The media is owned by corporations. Corporations also do heavy advertising on various media as do Mutual Funds who try and get investors to buy corporate stock. It would be a conflict of interest for any media to talk negatively about the stock market in general as they are biting the hand that feeds them. If they say something negative about the economy, then people might pull their money from the stock market and thus owners of stocks could see their value go down. How does this negative talk about stocks help corporations? It doesn't.

    When one turns on the financial media, listen to what they say about gold (they hardly ever, ever, mention silver). I've heard all of them on CNBC and elsewhere at one time or another mock gold. In fact, I have video tape recordings I created of them doing so over the past few years you can find here; CNBC Gold Bubble Video Clips Compilation. Holding the media accountable to what they say is what matters most. Gold can only be mocked when there is an agenda for the mockers to have you invest elsewhere. 12 years of higher prices is a pretty strong case for gold.

    Steve Leisman was on CNBC in 2010 saying "the Fed has a tool box, it's still effective and there is nothing to worry about." Yes Steve, all is well just because you say it's well. We understand. That tool box however is getting empty for the Fed. This should be quite worrisome for investors. They can't lower interest rates any lower, so they have to make up other ways to try and stimulate.

    Reason 3: Our Education System Teaches Us Nothing about Gold, Let Alone Money

    If you have young children or grandchildren, ask them to do some simple math calculations using money. Set up a little store with a cash drawer of $1, $5 and $20 bills, quarters, dimes, nickels and pennies. Pretend you are a customer and you want to purchase items from them (give them some items to purchase in advance). The purpose is, to see what they have learned in school about money. More likely than not, they may know how to add, subtract and even do multiplication tables well, but they don't know how to give change for a $3.33 item when handed a $5 bill.

    While children eventually learn how to make change, they are never taught anything about the Federal Reserve or Federal Reserve Notes, the name printed on the top of all paper bills, let alone what gold used to represent in this country; money.

    Fast forward to one's college education since high school teaches you nothing from an economic perspective and the student is introduced to Keynesian economic philosophy which is all the college professors teach. This philosophy fits right in with keeping the individual ignorant on how an economy is supposed to work, and in order to pass the class, one has to go along with the nonsense they teach;

    · That debt is good (printing money).

    · If there is deflation, print more money (quantitative easing).

    · If companies and banks are in trouble, bail them out.

    Even Harvard law professor, Martin Feldstein was wrong in 2010 when he said the Fed would stop Quantitative Easing;

    There is no reason to expect the stock market to keep rising at the rapid pace of 2010. Quantitative easing is scheduled to end in June 2011, and the Fed is not expected to continue its massive purchases of Treasury bonds after that.

    Since 2010, the Fed has kept up the Quantitative Easing and the stock market is higher along with gold and silver. In December of 2009, Feldstein also called gold "a risky investment," which I refuted here. Gold doesn't change. What it is priced in changes. Most don't understand this.

    Reason 4: Your Neighbor Probably Won't Tell You They Bought Gold

    Unlike the euphoria that surrounded the run up to the dot.com bust, when everyone and their neighbor was telling you to get into NASDAQ tech stocks, or in 2003-2006 when they were telling you to buy real estate, most people who own gold today are quiet about their purchases. They don't want the world to know they own gold.

    Gold is a private transaction and should be as the more people who know you own it, the more who may come busting down your door when and if a currency crisis hits. My number one rule from my book is don't tell anyone you own it.

    In reality, the price of gold would be much higher if the owners of it were more vocal. The fact that it is moving higher for the last 12 years straight despite financial advisors, media and little word of mouth supporting it means that it's not just U.S. citizens who are buying, but the entire world is waking up to how gold can maintain one's wealth and purchasing power. Look at what's going on in Europe with debt and unemployment problems. The Euro is on the brink of further declines because Germany can't solve the problems of Spain, Greece, Italy and Portugal alone. The European Central Bank (ECB) is forced to add more debt to existing debt. This can't end well.

    Japan is also in trouble and the Yen has started to depreciate faster because of current government and past government adding more debt to the economy.

    In fact, all currencies are racing to the bottom in a last effort to be more competitive with their export prices.

    Reason 5: The Government Has an Incentive to Keep the Lid on Gold

    If the government was forced to live within its means, something I fully support, then we wouldn't have the budget deficits, wars and other waste that has caused the national debt to surpass $16 trillion and march towards $20 trillion or more in the next 4 years.

    Republicans and democrats both are responsible for where we are. Anyone that thinks this spending will be curtailed at any point in the future simply doesn't understand the nature of politicians. As long as the choice is between the lesser of two evils, it's still evil and they'll still spend. Increased spending depreciates the dollar but at the same time causes things to be more expensive. How are you keeping up your purchasing power? This is what gold and silver do.

    But doesn't spending stimulate the economy? The answer is, it has produced some green shoots, but those green shoots have roots embedded in the earth of fiat dollars. That soil isn't the same soil of our forefathers. In other words, it is not wealth at all, but just more debt which is trying to spark an economy with a wet flint.

    The recent influx of government spending has done little to stimulate the economy and the only reason the dollar is presently not crashing is because during this deflationary credit contraction, people are putting their wealth in what is currently still perceived to be "risk free" assets; the U.S. dollar and treasuries. The current move up in stocks and real estate will be short lived as this move higher is built on fluff created by the Fed.

    At some point the dollar will become weaker. At some point, gold and silver will be double where they are today. At some point, you will buy gold and silver or be left with depreciating dollars and less purchasing power to pay for higher priced items coming in the future. Ask yourself, where would you be today with your purchasing power if you bought gold 12 years ago?

    Conclusion

    Gold is still in its second and longest phase. The professionals will still try and buck you off the gold and silver bull. The dips will come. Holders of physical gold and silver care not that it falls 20% on its way to appreciating 100% or more. One can today even buy physical gold and silver with their IRA, something many financial advisors are not aware of.

    The U.S. government, Congress and the Federal Reserve will never change their colors. Our education system will always have flaws when it comes to helping people understand wealth and money and how to manage it. The media will always be biased against gold. And sooner or later financial advisors will wake up to the risk involved with the U.S. dollar and recommend physical gold and silver for your portfolio.

    Whether it be gold and silver ETFs like GLD or SLV, which are good trading vehicles, or physical gold and silver in your possession, which many prefer because they take control of their wealth, gold and silver represent insurance this day and age.

    You insure your house for fire and insure your car just in case you have an accident. Your portfolio needs the insurance that gold and silver provide.

    10% to 20% of one's portfolio needs to be in physical gold and silver bullion as insurance against the risk associated with the rest of your portfolio having exposure to the U.S. dollar. How else will you keep your wealth and maintain your purchasing power?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Precious Metals Broker Selling Gold and Silver Bullion. Long Physical Gold and Silver

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Comments (3)
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  • Doug Eberhardt
    , contributor
    Comments (2849) | Send Message
     
    Author’s reply » NOTE: Seeking Alpha editors would not post this as an article. They never like anyone to promote anything other than stocks or bonds/forex. Never articles about physical gold or silver. They obviously have never read my book Buy Gold and Silver Safely.
    22 Jan 2013, 05:37 PM Reply Like
  • Soleil11
    , contributor
    Comment (1) | Send Message
     
    I am a newbie gold investor who began in June 2011. All I have experienced is decline in my portfolio. Have I made a terrible mistake here?
    JS
    5 Feb 2013, 02:42 PM Reply Like
  • Doug Eberhardt
    , contributor
    Comments (2849) | Send Message
     
    Author’s reply » Hi Soleil11,

     

    I am not sure what you bought. Could you tell me, and at what price?

     

    Thanks.
    6 Feb 2013, 07:55 AM Reply Like
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