Investing in Disturbing Times – Gold and Silver

Investing In Disturbing Times – Gold and Silver

Look around you, does anyone seem to know what is happening to the global economy and investment climate?

First of all, by investment, we are not talking about speculation. Currency trades, individual stock picks, options or commodity plays, which are high risk/high return and have a time frame of less than 5 years are speculative trades. Investments have a longer time frame and involves someone sitting in front of you using terms like ‘asset allocation’, ‘beta’ and ‘sharpe ratios’.

In this world of fiat currencies, investments are necessary to outpace the inbuilt inflationary   characteristic of cash, be it dollars, euros or ringgits.  Goldbugs are saying that anyone that does not have maximum exposure into Gold are doomed!!! Bit melodramatic, to say the least, and ensures we will end up with a Gold bubble, of all things.

So, what are the options for the average Malaysian who wants to grow his wealth over the next decade or three?

Gold

The current darling of the panicky masses deserves first mention. First of all, physical Gold is not an investment. Any asset that generates an income stream, like dividends or rental income, is an investment. Gold does not reproduce, it just sits there like a dollop of butter and looks pretty. But it is an excellent holder of value, and with fiat currencies everywhere we turn, gold is the ultimate safe haven in a inflationary world. Physical Gold is supposed to be a part of your wealth or portfolio regardless of investment climate or market conditions, but it is not meant to be the only asset you own, unless you want absolutely no growth in your net worth over the longer term. The current hoopla is turning Gold into the next asset class to form a bubble.

I have recommended Gold all the while, and still do, but not ETF’s or weird ‘plays’. If you don’t own any Gold, preferably in the form of jewelry, please get some;if you already own Gold, start looking at other stuff. Gold has been mined for a hundred thousand years, and purchases the same amount of goods today as it did during the time of Caesar. It is not edible, can’t be turned to lead, can be carried away by thieves unlike your home, generates no income except capital appreciation; if that is what a bubble is called nowadays, and will not protect you from werewolves and vampires. Only Silver can do that.

In the previous post, Gold vs Stocks, I showed some charts. The first chart was taken from a column in the perennially contrarian website, one of my long time favourites, The Daily Reckoning. But it seems that even contrarians become right wing someday, and that day has come. When a chart that has been ‘curve-fitted’ to push a certain agenda, in this case trying to paint Gold as having tremendous upside against stocks when in reality it has strengthened 50% above its 100 year average, during which time the dollar was pegged at 35 dollars to an ounce for nearly half the time, then we have to take any advice from the goldbugs with a grain of salt.

Another problem with Gold is this. Governments can make private ownership of Gold illegal or prohibitive. America did this after the last Depression, and Bank Negara Malaysia changed the legislation to make the purchase of Gold from unlicensed sources illegal for Malaysians back in 2007, and details of the purchasers to be recorded, before the bear market and the steep rise in gold prices, why would they do that????

Resign to the fact that governments will always control money, be it paper or Gold.

What to do if you have zero Gold holdings and are getting nervous now? Quietly buy some silver, it is the forgotten ‘noble’ metal. It comes out of the ground at a ratio of 16:1 to Gold but is now valued at about 55:1. It tends to lag behind Gold, has far more uses, and unlike gold which rarely gets destroyed, Silver is actually destroyed in certain uses. I have been telling people to buy Silver from when it was just nine dollars to the ounce. Good thing I listen to  myself sometimes.

Bottom line, own Gold and Silver as a part of your legacy and as the ultimate safeguards against total anarchy/hyperinflation, but not as investments per se, because that they are not. How many percent of your wealth you ask, speak to your financial advisor.

Jeevindra Kumar

Part 2 follows next.