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Gold Is Your Life Insurance

Commodities / Gold & Silver 2019 Jul 26, 2019 - 11:14 AM GMT

By: Jared_Dillian

Commodities I have always secretly wanted to work at a precious metals bullion dealer. I love gold. And silver and platinum. I love them philosophically, and I also just like shiny rocks.

But if you think about it, trading metals is a really weird business.

Say you are bullish on silver and want to speculate on it, thinking it will appreciate in price. You can buy the ETF, yes, or you can buy silver miners, but the most straightforward way to invest in silver is just to buy coins or bars.



The most popular coins come from the U.S. Mint, but you can get coins from other countries, too. The most popular silver bars for retail investors are the 100oz bars, which are typically manufactured by one of a few silver refiners. Asahi is the new standard, after Johnson Matthey sold its gold and silver refining operations to them in 2015.

Anyway, you can go to a bullion dealer, tell them you want a 100oz bar, and they will charge you the spot price of silver per ounce, times 100 ounces, plus a small markup.

So you buy it, and now you have a shiny rock. It is satisfying to have shiny rocks, especially the 100oz silver bars, which make you feel like a baller.

But the shiny rocks don’t do anything. You aren’t going to use them to sew a button, wash your car, or paint your ceiling. They just sit there. You hold them for a while, and if the price goes up, you are supposed to sell them.

But most people don’t sell them, and then the price goes back down, and they end up in an estate sale, and the dealer buys them back at a discount.

Paraphrasing Warren Buffett, someone watching from Mars would be scratching their heads.

There really is nothing more useless in the world than a shiny rock. But we love ‘em.

The Bigger Picture

I am not going to get too deep into the philosophical reasons for owning shiny rocks, but briefly:
  • In recent history, the government has had a habit of abusing its currency.
  • Most governments abuse their currencies.
  • Gold, is an objective store of value, while the dollar is a subjective store of value.
  • Big deficits will probably be monetized. Some lunatics want to inflict Modern Monetary Theory (MMT) on everyone.
  • Inflation is trending higher, measured and unmeasured.
  • Trump is literally going to take over the Fed and do what he wants.

That is my elevator pitch on holding precious metals.

I have a theory that computers started to suck when dumb people started to use them. The same is also true of precious metals, which turned into a speculative football in 2011.

Those geeks are gone, and only the die-hards are left—the shiny rocks passed from weak hands to strong hands.

Gold prices have hit new 5-year highs, which did not get a lot of attention in the financial press.

Precious metals also improve the risk characteristics of your portfolio.

In a 35/55/10 portfolio—with 35% equities, 55% bonds, and 10% commodities—it’s not unreasonable to allocate the entire commodities portion to gold and silver. Most other commodities have a pretty high cost of carry.

And there’s a general rule of thumb that you should have 5–10% of your portfolio in gold, anyway.

A Hedge on Your Life

Here is the key point: Gold isn’t an investment; it’s a hedge. And it’s not a hedge on your portfolio. It’s a hedge on your life. It’s a hedge on this place turning into Mad Max Beyond Thunderdome.

So if the price of gold goes up a lot, you might be happy, but you will probably be unhappy about political developments in this country, including your marginal tax rate, and lots of other things.

I’m not saying that we’ll someday be reduced to a state of nature where people barter for cans of condensed pea soup with Silver Eagles. The more likely scenario is that things will mildly suck and the price of gold and silver will be a lot higher.

I spend most of my time thinking about how things can go wrong rather than how things can go right. That’s how I’m wired. If I see Mel Gibson running around outside with a chainsaw, I’ll probably be financially fine.

People buy insurance on their houses, cars, and even themselves, but they won’t buy it on their portfolios. Seems strange to me.

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Jared Dillian writes The 10th Mana free weekly newsletter for contrarian investorsEvery Thursday, he delivers a torpedo of incisive commentary that crushes consensus thinking and exposes the true workings of “Mr. Market.”  Subscribe now!

By Jared Dillian

© 2019 Copyright Jared Dillian - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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