Is Gold a Good Investment? (Part 2)

“The commander of the imperial guard took away the basins, censers, sprinkling bowls, pots, lampstands, dishes and bowls used for drink offerings—all that were made of pure gold or silver.”
– Jeremiah 52:19


In the United States, the gold standard ended in 1933 when the federal government halted convertibility of notes into gold and demanded that all privately held gold coins and bullion be turned over to the government. According to a report prepared for congress, Brief History of the Gold Standard in the United States, the federal government “nationalized” the private gold stock. Executive order 6102 threatened citizens with huge fines or jail should they be caught “hoarding” gold illegally.

Gold belonging to U.S. citizens was systematically confiscated and turned over to the government by May 1, 1933 in exchange for $20.67 per troy ounce. By January 1934, the price of gold had risen to $35 dollars an ounce.

The Gold Reserve act of 1934 created a “quasi-gold standard” that allowed gold to be traded with other central banks, but did nothing to re-establish U.S. citizen’s ability to convert gold domestically. Efforts such as the Bretton Woods conference of 1944 and the Smithsonian Agreement of 1971 attempted to establish new exchange rates of dollars to gold, but such rates proved impossible to maintain. Richard Nixon suspended the convertibility of dollars into gold and ushered in the era of “free-floating currencies” no longer tied to the price of gold.

Today, no countries use the gold standard as the basis of their monetary system, although some (including the U.S.) hold substantial reserves of gold. Citizens can buy and sell gold as they wish. But should they?

Should YOU invest in gold?

Last week, we started examining whether or not to invest in gold using the 7 Principles of Prosperity.  Please see “Is Gold a Good Investment, Part 1.” This week, we continue to explore how gold measures up to the principles of Prosperity Economics.

Prosperity Principle #4: Focus on cash FLOW, not net worth.

The aim of gold or other precious metals in a portfolio is usually to increase or protect net worth – not cash flow. You might be able to one day sell bullion or coins for more than you paid for them, but purchasing gold won’t increase your cash flow in the meantime. If anything, you have decreased your cash flow because your coins are sitting in the safe rather than being put to work for you!

We recommend that you put your dollars to work, grow them, and use them to purchaseincome-producing assets. Focus on creating value and producing streams of income, not speculation and accumulation.

Even if the dollar was abandoned and our country transitioned to a different currency in the future, there will always be value in food and a place to live, regardless of whether they are paid for in US dollars, Euros, pesos, gold coins, digital bitcoins, or a new currency.

Prosperity Principle #5: Stay in CONTROL of your assets.

Does purchasing gold increase your level of control?  Nope. It only ties you to commodity prices, which are no more predictable than stock prices. Like stocks, purchasing gold is based on speculation, or guesswork. The value of gold, silver, or any other commodity is determined by the market, and prices can fluctuate in very unpredictable ways.

Some analysts argue that gold functions more like a currency than a commodity,  and there is good evidence for that, as well as historical precedence. However, wide price swings are common, no matter what currency is used to measure the value of gold. But whether gold is a commodity or a currency, the market determines its  value either way.

And here is where speculation  gets tricky… Historically, gold tends to rise when the dollar falls. One might say that gold has been a great hedge against inflation, from that perspective. But post-2008 crash, has the price been driven up artificially high by hyped-up fears of hyperinflation? Quite possibly. There has been much talk about a “gold bubble” recently, and in 2013, gold fell a hefty 28% as equities rallied. Whether or not  gold is still in a bubble since recent substantial declines in the last two years, the fact remains – the price of gold cannot be predicted or controlled!

What about silver? Other precious metals are less stable and valuable than gold, and we do not recommend purchasing silver or other metals, as they aren’t as effective as a hedge against currency inflation. A “silver bubble” popped last year, with prices dropping a shocking 36%. Silver plummeted from above $30 an ounce to below $20. (It was nearly $50/ounce in 2011, and again in 2012!) Financial analysts scrambled for explanations as to why silver prices fell so far.   The Motley Fool noted that silver’s “horrible decline” affected both gold and silver-related stocks, which left some investors suffering “big losses in what was an incredibly strong year for stocks outside the mining industry.” For investors who bet on the stability of precious metals last year, it was a losing bet.

Therein lies the problem with speculation. Even when the arguments sound logical or the financial prophets have been right before, many predictions are flat-out wrong. We believe in investments which have reliable, predictable, even guaranteed rates of return.

Gold’s history as an effective hedge against the dollar may make an argument for holding a small amount “just in case.” Yet because buying gold is speculation that doesn’t produce cash flow, we don’t recommend holding large amounts of gold in your portfolio (not more than enough for a new months’ expenses as an additional emergency fund.)

Gold stocks? Bullion?If gold is to be held as a hedge against a potentially falling dollar or stock market, purchasing gold stocks will be counter-productive. And if the purpose of gold is to provide potential stability in case of an economic meltdown, bullion stored in a faraway vault will also do you little good.

We can recommend focusing on a sustainable lifestyle such as growing your own food (you don’t even need a yard to grow food in an aeroponic tower garden  – that’s an affiliate link to the one we use and recommend) and communicating with your loved ones to prepare for the much more likely emergencies of life.

Prosperity Principle #6: MOVE your dollars through assets, not just toassets.

Does money MOVE through assets? In the case of bullion or coins, the answer is obviously No. The assets are stagnant and purchasing them actually stops the flow of money and causes assets to accumulate rather than move. The hoarding of assets in a vault, safe, or bank account causes the velocity of money to grind to a halt.

Prosperity Principle #7: Multiply your money by making it do many jobs.

Does gold MULTIPLY the jobs your money does? Again, no, purchasing precious metals only employs a single use of your money, purchasing the gold. And the gold performs limited functions as well, as a hedge against the dollar and an asset that can be bartered or sold to provide liquidity in the future. (We think having liquidity now is even better, but again, this is a personal decision.)

Gold is historically a valuable and  reliable asset, but it fails to measure up to almost all of the Principles of Prosperity. That doesn’t make it a “bad” investment, necessarily, but it does mean that it leaves a lot to be desired for investors committed to keeping control of their assets and using them to create cash flow.

Should you invest in gold? Are there any safe havens besides gold? We understand why some clients are drawn to hold some of their assets in the form of gold. Distrust of banks and the stock market is at an all-time high, and many people do not know where to put their dollars where they are safe, or if the dollar itself is safe! The US dollar is not our country’s first currency, and it may not be our last. But you can never go wrong investing in things that people want and need in every economy, regardless of the currency.

We encourage our clients to find solutions that work with the proven 7 Principles of Prosperity. We can show you how to store cash where it can earn a guaranteed rate of return – tax deferred – and be collateralized at will (perhaps to purchase cash flowing real estate or other assets). We have solutions for cash flow vehicles that earn our clients reliable, predictable, very competitive returns. And for our accredited and suitable investors, we have a growth alternative that earns money regardless of what happens with the stock market, the housing market, energy, technology or politics.

If you’d like to discuss any of these alternatives to the usual mutual funds and 401(k), simply send us an email  and let us know how we can help you. We are your Prosperity Partners and we look forward to hearing from you.

LISTEN: to a follow-up discussion as Todd Strobel from Guide to Financial Peace interviews P4P’s Kim Butler about the pros and cons of gold as an investment. Part 1 and Part 2 of “Is Gold a Good Investment?”

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