Investing in Gold & Silver For Dummies. Paul Mladjenovic

buy in January 2000, and what would it cost to buy that same item in June 2020? (source: www.bls.gov/data/inflation_calculator.htm)

      Well, well, well. Table 5-1 speaks volumes about the past 20-plus years. How many people knew that gold — a dead rock — outpaced the stock market so dramatically?! Time to break it down:

       Gold crushed it! Generating a gain of more than 530 percent is awesome — who would have thunk it? It beat everything by a country mile.

       Our companion metal, silver, came in second place with a 251 percent gain — not too shabby! (Chapter 6 has the full scoop on silver.)

       Next comes the primary stock indexes. Nasdaq came in at 140 percent, then the Dow Jones (DJIA) at 124 percent, with the S&P 500 index coming up at 113 percent.

       The savings account is there for those folks too skittish at investing and playing the safe route. But safety often means that you settle for a much lower return. In this case, you’re getting an average of 1 percent per year, ending up with 20.5 percent. And it didn’t beat inflation.

       Inflation — our yardstick and the nemesis of savers everywhere — was up 53 percent for the same time frame.

The amazing thing is that the general public barely noticed the blistering performance of gold (and silver, too) during that time frame. The question is, how high can gold go once the general public starts to participate?

      Gold versus stocks versus currencies

      You see in the prior section how gold was the 800-pound gorilla in the battle royale versus other mainstream investment vehicles, but it’s important to measure gold versus its primary competitors such as stocks and currencies. In this, you’re comparing “apples to apples.”

      When you’re comparing gold to stocks, for example, I don’t advocate that you should be 100 percent in one or another. I could put on my “stock hat” and make a strong case for stocks in some economic conditions (such as the 1980s), and I could put on my “gold hat” and make the case that gold is superior in other conditions (such as 2020–2025).

      

The bottom line is I think both stocks and gold are important and needed in your portfolio. The only thing is that you rebalance the percentages of your portfolio between regular stocks and gold-related investments. You keep more in stocks when times are good for stocks and more in gold when times are good for gold. But always have something in gold (say 2 to 5 percent of your investable assets at a minimum), even when it’s not doing as well because it excels as a hedge and a backup form of “portfolio insurance.” Sometimes you don’t see the market crash or financial crisis coming, and afterward, you’ll be glad you were diversified and had some gold and/or silver on hand.

      

Gold plays an important role as money and as a hedge against the issues of government-issued money, which is also referred to as fiat money. As I write this book, all the major currencies — the U.S. dollar, the euro, the British pound, the yuan, the Japanese yen, and other currencies — are losing their value (depreciating) slowly but surely. Some currencies are rapidly losing their value, such as those in Venezuela, Zimbabwe, and Argentina (more to come!). The main reason currencies lose their value is because they can easily be overproduced by the country’s central bank and typically at the behest of the country’s political leaders.

      Because paper currencies are easily inflated, each unit of currency (dollar, euro, yen, and so on) loses value — not so for gold. As the data from the World Gold Council (WGC) confirms, the mining of gold typically adds about 2 percent to the above-ground global supplies of gold. It’s very difficult to extract it from the earth, which is part of the reason gold can retain its value versus central bank–issued currencies. You can use this chapter to find out how gold stacks up as a tangible investment amidst all the investment choices available today.

Part of what makes “money” retain value is scarcity. If it ceases to be scarce and easily created (usually leading to overcreating it), then this leads to its diminishing value. Some gold experts even make it a big point of their speeches that a paper/digital currency will always revert to its intrinsic value, which is “zero.” Gold, meanwhile, outlived every currency in the past two millennia and likely will do so in this millennium. As I write this (August 2020), we’re in the early stages of a precious metals bull market.

Understanding the Gold Market

      For investors and speculators, you must get familiar with two general areas when it comes to gold. The first is the gold market, which consists of demand and supply. This relationship is important with gold, of course, but demand and supply is extremely important in virtually all matters tied to other markets and financial sectors because many of these sectors are inexorably tied to gold. (The second area is understanding what markets and assets are tied to gold and silver, such as currencies and government economic policies.)

      Gold demand

      Who is buying gold, and why? Is demand trending up or not? The more gold that is bought, the more pressure there is on gold’s price to rise, especially if supply isn’t keeping up with demand. For 2019, according to the World Gold Council (WGC), global demand was at a total of 4,389.70 metric tons, down 1 percent from 2018 but still trending upward historically. The following sections cover different types of gold demand.

      

The WGC has a treasure trove of gold data, news, and information for gold investors of any stripe. Renowned experts write in their blogs with timely commentaries and help make sense of what’s moving and influencing gold and gold-related investments. Its main site is www.gold.org, and it has a wealth of information at its “Gold Hub” (www.gold.org/goldhub).

      Jewelry demand

      The largest buying comes from the worldwide jewelry sector (consumer demand). In 2019, the WGC reported that jewelry-related sales for gold was 2,122.6 metric tons, which was down 6 percent from 2018. This drop was due to gold’s rising price in the second half of 2019.

      In terms of who has done the buying, China and India are the primary drivers of consumer demand.

      Central bank demand

      The second area of demand is from central banks that buy gold as a store of value and to diversify their asset and currency reserves. This category of demand hit an all-time high of 667.7 tons.

      What I find interesting about central banks is that they have a love/hate relationship with gold. On the one hand, they hate (perhaps dislike is a better word) gold because it’s a competitor to the currency they issue. When the public buys gold, it’s an admission that the currency isn’t attractive in terms of holding its value.

      But many central bankers do realize that ultimately gold wins over currencies … sooner or later. In this case, the smart(er) central bankers prefer to have gold in their corner to boost their currency. Maybe not always officially but indirectly. If gold can make the central bank of that country strong(er), that in turn boosts confidence in that particular currency. The great tendency has been historically that the East (principally China, India, and other countries) have been, on balance, greater buyers of gold than their Western counterparts. Given the history and endurance of gold,