- Gold and silver have shown throughout history that they preserve purchasing power for their holders.
- With all eyes currently on cryptocurrency, I find value in gold and silver. You should own Bitcoin, gold, and silver concurrently.
- Investing in gold and silver isn't "cool" right now, but should be profitable. That's how value investing works.
If you don't own gold, you know neither history nor economics.
- Ray Dalio
In 1792, the United States Congress established the US dollar as the nation's currency and set a price of the dollar relative to gold and silver. This had the effect of massively devaluing the paper Continental dollars which were issued during the Revolutionary war. Throughout history, the story is generally the same, whether it's in the US, the UK, or in other countries. Surprises related to the value of currency and government debt almost always are bad for holders of currency and good for the gold and silver market. I'm an optimistic person, but it's clear to me that the government is spending too much money and will have to address its spending one way or another. This leads us to gold and silver. In a nutshell, the case for investing in gold and silver is that they insure you against the debasement of the value of the US dollar, and/or your home currency if you're outside the US.
Are Gold and Silver a Good Investment?
I consider myself a value investor. In the broadest form, this means that I like to buy assets for less than they're worth. This usually means buying companies for low multiples on their earnings, but it often also means buying any assets for less than the true value. I don't think it's a contradiction that I own Bitcoin, for example, because my analysis points to the fundamental value being higher than the current price, and certainly higher than the price I started buying at in 2020. Gold and silver are cheap along the same line of thinking.
Value investing is more than an investing strategy, it's a life philosophy as well when you get down to it. The value mindset allows you to think independently of hype or what the mainstream media wants you to believe. I also find that value investors are generally much more pleasant people to be around than the rest of the people who work in finance.
Being able to quickly approximate value for various things helps you succeed in many aspects of life. For example, I could tell you that American Airlines miles are worth about 1.4 cents each on average. Whenever I go to book a flight, I shop the miles price vs. the cash price, which helps me maximize the overall value I get for my money. As a result, I generally have been able to use cashback credit cards and strategically spend miles to travel for little out-of-pocket cost.
Housing (the largest expense for most families) is another example of where having patience and a value mindset helps you. I've long felt that master-planned developments in Texas and Florida are a much better value for the money than NYC and Los Angeles, with the ability to do business globally on the internet as the great equalizer. Not having to pay state income tax factors as well. The best time of year to buy historically is winter when houses are at their ugliest, banks and investors want to get properties off their books, and families aren't moving to ensure good school districts for their kids. Now despite the relative value of Texas vs. coastal states, I see people waiving appraisal and inspection contingencies, paying $100k or more over the list price (they don't have the money in cash, this is bank financed, of course), and buying properties they don't really like for fear of missing out. A lot of this is driven by labor and commodity shortages that won't last indefinitely. This won't last, and neither will the meme stock rallies fueled by the same herd mentality. The most heavily shorted stocks in America-the consensus of the businesses with the worst fundamentals, is now down 5.5 percent after being up over 25 percent in early February. Over and over again, cool heads and being able to balance life decisions like what to invest in, where to live, buy vs. rent, whether to take out a mortgage (and how big of a mortgage to take out) win against buyers and sellers who transact on emotion.
Investing in gold and silver isn't "cool" right now. Cryptocurrencies are all the rage, just as tech stocks are all the rage in the stock market. Bitcoin is my largest holding because it has gone up significantly since I bought it and I'm letting it run. But why not add precious metals to your repertoire? It's an easy way to bet against the value of the US dollar, the volatility isn't extreme, and there are both industrial and investment uses. Bitcoin could easily correct, the crypto market is a lot more volatile than the gold market, and it faces at least some level of regulatory risk. Gold, and to a lesser extent silver, are an obvious complement to Bitcoin, rather than a substitute as some people fear. I believe that the best route to success is to make plenty of bets on ideas where you feel there's some upside and to let the winners run. Having a 10 percent allocation to precious metals, with some cryptocurrency allocation on top of it as well helps protect you against monetary decisions that you have no say in that affect your wealth. Investing in stocks, bonds, gold, silver, and Bitcoin concurrently means you're aiming for the middle of the green on your approach shot, rather than firing at a back pin sloping down to the water, as crypto bulls who are all-in are doing.
Gold and Silver Valuations Vs. Other Assets
1. Gold should appreciate in value roughly equal to the growth of the global money supply. I'd forecast roughly 4 percent annual returns to gold in this case against a global basket of currencies. Gold gives you optionality in the case of currency devaluation though, which means it effectively serves as a form of monetary insurance that can pay off 50 percent or more if the US dollar is realigned to make the national debt easier to pay. If you study history, this has happened more than you would think.
2. Silver has not appreciated as fast as gold has against the dollar. The ratio of gold to silver in the earth's crust is apparently about 17.5-1. Historically it has traded around this range, although I don't know if this should continue going forward. The current ratio is around 70-1, which is down from over 100-1 before the pandemic. Bimetallism is historically where you could convert gold to silver to fiat currency at fixed exchange rates. Some economists, most notably Milton Freidman who laid out his case in his book Money Mischief, have advocated for bimetallism. Freidman's idea, which I know will shock my readers (wink wink), is that governments manipulate the money supply to tax their citizens without knowing it. If you buy this and buy the link between gold and silver, then silver is probably at least somewhat undervalued, currently.
4. You usually should add about 50-70 basis points annually for bond rolldown to arrive at your total return estimate. This means I'd expect 2-3 percent annual returns over the next 10 years for the aggregate bond index (AGG) at current prices, depending on what interest rates do.
5. Bitcoin is a wildcard. I'm not going to try to predict the Bitcoin market other than to say I think that Bitcoin is more likely to appreciate than depreciate in value.
Current Gold and Silver Prices & How to Invest
Gold has sold off since the pandemic lockdowns began. Speculation over what sort of chaotic monetary policy would be implemented reached a fever pitch as lockdowns were implemented, and it seems that while the Western world is still in quite the mess, the worst is likely to be avoided.
This could represent a buying opportunity for gold. The best way to buy gold, in my opinion, is to buy the iShares Gold ETF (IAU). The SPDR ETF (GLD) is more popular, but the fees are lower for the iShares product, which in turn outperforms a little over time. There are a lot of conspiracy theories out there about gold ETFs, I don't buy them but if you really do buy into them I'd probably prefer stockpiling .223 ammo rather than gold.
Silver has seen a similar track but has performed better than gold lately. This is one good reason to diversify. I don't have higher frequency data for the price of silver so will share the ETF price, which tracks silver. The most popular way to buy silver is the iShares Silver ETF (SLV).
I think an overall 7 percent allocation to gold and a 3.5 percent allocation to silver via ETFs is prudent and reasonable. Like I mentioned before, Bitcoin is all the rage, and currently represents over 10 percent of my portfolio. If you don't own any, I'd advise buying into Bitcoin over time and aiming for a 3-5 percent initial allocation. Currently, the easiest way to buy Bitcoin is the Grayscale Bitcoin ETF (OTC:GBTC) if it's trading under NAV. I own my Bitcoin directly through BlockFi because they pay me interest on it. Both are good options.
GBTC currently trades for an 8.5 percent discount to its net asset value. There is a 2 percent annual fee for it, but this isn't terrible compared to the fees on Coinbase. The issuer has the ability to buy back shares which should help equalize the NAV in the long run. If they convert to an ETF, this could also help equalize. In this case, the resulting fees would be lower and you could buy a dollar of BTC for 91.5 cents. The premium shouldn't get too out of whack and I expect it to decrease over time.
Overall, I think allocating 7 percent to gold, 3.5 percent to silver, and 3.5 percent to Bitcoin make sense and will help protect your purchasing power against anything the government might do with fiat currency. Stocks will generally provide most of the returns to your portfolio over time, but precious metals help protect your portfolio against known unknowns, therefore justifying an allocation. If you consider yourself a value investor, I think you should like gold and silver right now.
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Analyst’s Disclosure: I am/we are long IAU, SPY, SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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