Stuck In Stowe

by Kevin

If you’re anything like the majority of people who read this blogumn, you still haven’t put a significant portion of your net worth into precious metals – if any at all.

And if you’re anything like the majority of people in America, you probably haven’t given any serious thought to the idea of doing so either.

Sure, gold has tripled in the past 10 years, and so has silver – but being a smart investor, you know that you can’t buy past performance.

The fact that they’ve tripled means that they’re probably forming a bubble -  just like the housing market 18 months ago, or internet stocks 10 years ago.

Right?

Well, that brings me to the first reason you should buy gold and silver today.

1) Gold and silver are nowhere near bubble territory.

In order for an asset class to approach bubble levels – that is, levels way beyond anything you’d call normal, you’d expect at least a good chunk of people to be heavily invested in it.

Looking at real estate, we experienced a good 5 years of massive growth, and hundreds of thousands, if not millions of people became real estate speculators.  You had people quitting their jobs to flip houses.  People were taking out new mortgages against the increased “value” of their house. If you weren’t at least thinking about dabbling in real estate, then you were a fool.

In 2005 Time magazine ran this huge feature story called “America’s House Party” – it’s mostly about how people were getting rich from real estate.

Or think of the mania surrounding dot-com stocks in the late 90s.  Everyone was a stock tipster.  Everyone had paper profits from pets.com.

It was the new economy, built perpetually on the magic of the internet.  No one understood it, but everyone had undying faith that it would last forever.

Of course, in both these examples, there was a period of time to get in and get out to make legitimate profits.  Real estate was a great, safe investment for decades.  If you bought internet stocks in the mid 90s instead of the late 90s, you probably got into some good deals.

But gold and silver just aren’t there yet.  Not one person in 100 owns any gold or silver at all.  When that number is closer to 10 people in 100, then we can talk about a bubble.

Of course, just because gold and silver haven’t hit bubble levels doesn’t mean that you should buy them.  I’m just tackling that objection first, because it’s probably the most common.

So, if we can agree that the bubble argument is kaput, I’ll move on…

2) Gold and silver are still historically cheap.

Oh boy this one’s going to be a little bit trickier to illuminate.  I’ll just rattle off as many metrics as I can:

The inflation adjusted high for gold is $2200.  Gold would have to double to reach that point.

Silver is selling for less than 1/10 of its inflation adjusted high.

Sometimes it’s better to compare apples to apples.  After all, gold and silver are commodities, so let’s compare them to commodities.

Oil is the most traded commodity on the planet, and the gold:oil ratio can tell us something about the relative cost of both.

For reference, the long term trend is that an ounce of gold typically buys between 15-20 barrels of oil.  Today, an ounce of gold costs $1106.  Oil is $73 per barrel.  So, right now an ounce of gold buys just a smidge over 15 barrels of oil.

At its height, an ounce of gold bought over 25 barrels of oil.

The silver-oil ratio isn’t as widely used, but I can tell you that it currently makes an even greater case to buy silver right now.

And one more quick metric: the long term trend is for currencies to lose value against commodities.  This point is irrefutable, and universal.  Even with the advent of massive technological improvements, the efficiencies of modern engines, computers, mass production and capital – the trend is that commodities cost more today than they did yesterday.  So, the end-game for the gold vs. the dollar is that you’ll eventually be able to trade an ounce of gold for an almost unlimited supply of dollars.  Even if you buy into a gold bubble.

That brings me to my final point:

3) Gold and silver are money.

This point might be the most difficult to understand, but it’s also the best reason to own precious metals.

The idea of money has been changed from “a store of value” to “a piece of paper I can trade for stuff.”

But paper isn’t money anymore than it is steak or corn or oil or steel.

Gold and silver are ideally suited to serve as money, just like corn and steak are ideally suited to eat, oil is ideally suited to power internal combustion engines, and steel is ideally suited to use for construction.

Paper is a proxy for money – just like a gift certificate to buy beef at Omaha Steaks isn’t beef itself, but rather a promise that you can redeem it for beef at anytime.  In the meantime, if you wanted to trade your gift certificate as if it were beef, that would be fine.  But that gift certificate is not in itself a piece of beef.  That’s what’s happened with money.

The public perception of money used to be gold, silver, or a piece of paper representing gold or silver.  Now, people associate paper with money, which it is especially ill-suited for, because it’s extremely cheap to produce.  Even the fanciest paper costs pennies per page to make.  So…imagine if you had to trade paper for other commodities.  You’d have to trade literal tons of loose-leaf to pay for groceries.

With gold on the other hand, you could pay for several months’ worth with one small coin.  Silver – or even copper for that matter, are better money-commodities than paper.

Why are gold and silver “good” at being money?  To quote Doug Casey, and just about every Austrian economist, gold and silver are money because they have the unique properties of:

Durability, divisibility, recognizability, portability, scarcity (the difficulty of producing more of it), and a value-to-weight ratio that is neither too high nor too low.

This unique set of attributes are the qualities you want in money.  All commodities have these qualifications to one degree or another, but no other commodities have them as much as gold – and to a lesser extent, silver.  So, the market will continue to use gold and silver as money until one or more of the qualifications change – or until we find something else that works better.

Right now, gold and silver are not viewed as money – but this mass confusion is only temporary.  As little as 50 years ago, ALL Americans viewed precious metals as money.  You could still trade in dollars for silver until 1971.  The transference of the idea of money will eventually change.

History is on the side of gold and silver.  If there was a brief period of the Roman Empire’s history when they scrapped gold and started using stone tablets as money, we would view it as the exception, not the rule.  We’re in a similar time in history right now.  Just because people are confused about their money today doesn’t mean it will last forever.

So go buy some whenever you have paper laying around that you want to get rid of.

May I suggest kitco.com and blanchardonline.com

I don’t have any affiliation with these companies, but I’ve bought from both of them, and both offer buy-back guarantees for anything you buy from them.

This entry was posted on Monday, February 1st, 2010 at 6:31 pm and is filed under gold. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.