"Ask Robert" September 2010 - Answer
On Tuesday, I posted up requests for the second installment of "Ask Robert". Again, I'm thankful for everyone's questions.
There were many questions asking me to speak on gold and silver given the latest pricing, wondering whether it's worth jumping in today.
One question that stood out to me was E'sha Addy's, because the answer to why I invest in gold and silver is actually found in E'Sha's question.
"Where can I park my cash reserves until they are needed. I understand that just having my money in the saving accounts is losing me money with inflation. I don't understand ETF's, but I know you park money there. What do you suggest I do?"
Thanks for your question. And to all who are wondering about gold and silver, I hope this answer is useful for you as well.
As you know I preach the importance of financial education. One of the most important aspects of financial education is understanding the history of money. A lack of knowledge when it comes to monetary history is a huge part of our financial problems today.
For instance, many people are saving money in the bank because they think the dollar is worth something, that it's backed by something of intrinsic value. As my readers know, cash is trash.
If people studied and understood the history of money, they would know that in 1971, President Nixon took the dollar off the gold standard and made it a fiat currency. A fiat currency is one that has value for no other reason than because a government says it does. It can be created out of thin air and requires no reserves to back it up. Today, the dollar is worth less and less because more and more dollars are being printed. In fact, more dollars have been printed over the last few years than in all the years prior—combined.
A student of monetary history would also understand that history is full of examples of governments instituting fiat currencies and that there has never been a fiat currency that hasn't fallen to zero, becoming completely worthless. The same thing will happen to the dollar, maybe sooner than later. Given the amount of dollars that are being printed, I'm personally convinced we'll see significant inflation—if not hyperinflation—in my lifetime.
So, you're question is a smart one because you understand that if you save your money in dollars, you will lose.
Gold and Silver are a hedge
I want to clarify that for me gold and silver are a hedge, not a primary investment vehicle. As I've written before, it is always smart to have liquid investments on hand. Kim and I have a year's worth of income in liquid investments that can be sold quickly if needed.
For many people, their preferred class of liquid investments is either stocks or cash. I find both of those to be extremely risky. As I've already said, cash is trash. It will lose its value and may drop to zero or close to zero very quickly. When it does, assets with inherent value, like gold and silver, will be worth more, not less.
I'm especially bearish on the stock market because, as I explained in my book, Rich Dad's Prophecy, I believe the biggest stock market crash in history—bigger than the one we just experienced—is still coming.
Very simply, the baby boomers are getting ready to retire. They are the biggest age group in the US. Soon, they will begin taking mandatory withdrawals from their 401(k) plans, which are stuffed with stocks, bonds, and mutual funds. As I've said before, the stock market is the biggest Ponzi scheme in history. More money must come in than goes out or it crashes like a house of cards. When the biggest age group in the US begins pulling money out of the stock market, do you think it will go up or down? For my money, the stock market is a bad bet.
I buy gold and silver because for thousands of years they have been true money. I feel safer keeping my money in precious metals rather than in a fiat currency.
How to purchase
I want to encourage you to buy Mike Maloney's book, Guide to Investing in Gold and Silver. In that book he not only gives a more thoughtful and intensive analysis of the history of money than I could ever hope to give, but he also gives some great practical advice on how to invest in gold and silver.
As a brief overview, you can purchase physical gold and silver at a reputable dealer in your area (your Better Business Bureau is a good place to start) or online (do your research). Kim and I also like to buy Exchange Traded Funds, or ETF's. These are basically funds that hold a certain reserve of an asset such as gold or silver in which you can buy shares. So, instead of having to buy a whole ounce of gold at say $1,200, you can buy a share in the gold ETF worth a tenth of an ounce for $120. These can be bought and sold like a stock, making them very liquid and easy to invest in.
There are many people who brag about having a well-diversified portfolio. What they really mean is that they own many different stocks, bonds, and mutual funds. In reality, that is a portfolio stuffed with one type of asset, paper assets. That is not balanced.
A true balanced portfolio will have investments from the four asset classes: Business, real estate, paper assets, and commodities. For me, part of my balanced portfolio is commodities such as gold and silver, among others. They are not my primary investment strategy. But they are much better than holding onto cash.
In the end, my primary investment strategy is what it's always been: cash flow.
For those of you wondering whether gold and silver is too expensive, I say who knows for sure. There is no crystal ball. The better question is what do you trust more, the US dollar or God's money, gold and silver.