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Gold & Silver Bullion: Insurance, Not Investment

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Gold BarA lot of newspapers and magazines have been celebrating the rising value of gold and silver over the last few years, citing as a reason why investing in gold might be a good idea. A lot of other newspapers and magazines are noting that gold may be overpriced and that a gold bubble has formed. Regardless of who is right, I think it illustrates a fundamental problem we all face every single day.

On a recent vacation to Miami, I was amazed at the number of luxury cars cruising along the highway. You usually see Maseratis and Aston Martins parked outside clubs or hotels, where the valet can keep a very close eye on them, but you don’t usually see them rolling along in rush hour traffic. Most of us would never spend that kind of money on a car and can’t understand why someone else would spend that kind of money on a car. The problem is that you see it as a car, the driver sees it as something else. Maybe it’s a status symbol to support an image he or she is presenting.

Maybe they’re an agent and it’s important, to their business, for them to appear successful and influential. A hundred grand on a car to secure a deal worth a few million is a small price to pay. A hundred grand on something to get you to the supermarket is way too much.

The same is true for gold. Gold has traditionally been seen as insurance. If the dollar were to lose all of its value, you could take your bars of gold to another country and trade them for the local currency. If you’ve heard of it referred to as a “store of value,” that’s what that means. Gold holds its value because it remains stable against other currencies, even if your currency is plummeting to zero. When you buy gold, you should think of it as insurance, not as an investment.

The problem is that this type of insurance, unlike auto or homeowners, is finite. As demand increases because people are worried of a default, the price increases. This attracts speculators who see an opportunity. This is true for any commodity, whether it’s corn, oil, or gold. There are people who buy it because they need it and there are people who buy it because they hope it’ll be worth more tomorrow.

We’re in the period where gold’s price has been boosted by speculators, I don’t think I’m going out on a limb when I say that. If you’re buying it because you want an investment, I’d move on. If you’re buying it because you recognize it’s insurance against catastrophe, then $1300+ an ounce is simply the price you have to pay. If there is a catastrophe, you have something with value that you can take with you. If there isn’t, you’re happy because you’ve retained the rest of your wealth.

Is it any different than car insurance? No one wants to be in an accident. :)

I’m eager to hear your thoughts on this…

(bullionvault)

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15 Responses to “Gold & Silver Bullion: Insurance, Not Investment”

  1. SoonerNATX says:

    my question is… if you buy it for insurance… who are you going to sell it to when you actually need to cash it in?

    • aua868s says:

      Excellent question!…I have always had this question myself. How do you sell gold at a competitive price when you really want to sell it?

  2. cubiclegeoff says:

    As insurance, I could see how it would make some sense to maybe own gold or silver. But as an investment, considering you have to buy it at a decent price and sell it at a decent price (both are hard to do), it becomes less worth it.

  3. Brandon says:

    Did you really write this Jim? The syntax reads like another person wrote it…

  4. skylog says:

    i agree with the idea of this post, and also generally with a lot of what you said jim, but there is also a case for precious metals as an investment.

    i can only speak for my situation, but i have been a buyer/holder of silver for some time and i am only happy with how it has worked out. my average cost is just under 10.00 an ounce. i have recently sold a decent portion of my holdings at a very nice profit.

    that said, to be a buyer at this point is a much tougher proposition.

  5. Josh Levine says:

    Can I borrow gold? I agree that gold prices seem inflated. That’s why I’d like to borrow some. I’ll use it to pay back my home loan and I’ll pay it back after prices go back down. I wonder what the interest rate on gold is.

  6. Mike says:

    I’d rather invest in some nice yielding corporate bonds.

  7. zapeta says:

    I hold a little bit of physical silver and copper. It would be nice to sell it for a profit at some point but I just like the idea of having the physical assets around.

  8. Strebkr says:

    I have a 1oz gold coin. I got it as a gift a long long time ago. It was worth about $500 then and a bunch more now. Its fun to look at it every now and then when I open the safe for something. So, I have some gold, but I wouldnt call my self an investor of precious metals.

  9. govenar says:

    Or maybe there’s a lot of rich people in Miami, and the Maserati is just a fun toy.

  10. Amanda says:

    My investment gold is all through mutual funds and ETFs. I am now planning to buy gold and silver as insurance only – but not in gold bars, only in coins, of varying denominations. In the event of catastrophe, you can always trade a gold or silver coin for something – even in the worst case scenario, people do not turn these down in trade. Deciding on the kind of coin is my next decision – between American Eagles, Canadian Maple Leafs, or Krugerands.

  11. eric says:

    I’m just an average joe about gold/silver investment but even I can hear the hype machine blowing up. I would stay away when all you hear in the media is to buy gold. Bubble alert!

  12. “If there is a catastrophe, you have something with value that you can take with you.”

    Let’s say the worst happens and currency is worthless. So now everyone begins trading gold for food, clothing, shelter, etc – essentially, turning it into a de facto currency.

    Suddenly, a lot of people would be selling gold … wonder what that would do to the value?

    Personally, I’d rather own something that is actually a productive asset rather that something whose price has been set by speculators.


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