The Truth About Buying Gold And Silver

Every day, the radio airways and cable news broadcasts are filled with advertising from "gold bug" companies who are trying to convince you to buy both gold and silver.  There are dozens of them: Goldline, Lear Capital, Rosland, Merit, and so on.  All of whom claim that, by holding these precious metals, you are being protected against inflation as a result of massive government spending and the devaluation of the dollar, or, protected against another recession, depression, or stock market crash. 

The problem is that all of those claims are bogus. The proof of that is in the chart below, which shows the combined price of gold and silver which has been adjusted for inflation in today's dollars:

Click on Chart to Zoom

As you can see, these two metals have a history of spiking in price, but once that price hits some "tipping point", there is a long and painful slide downwards.  This happened in 1980 when gold hit a high of $850 an ounce or nearly $2,000 when adjusted backwards in today's dollars. By 2001, just before the next spike upwards, gold hit a 20-year low at $250 (unadjusted); or about $325 (adjusted).  During that 20-year slide, holders were paid no dividends; probably weren't savvy enough to hedge against their losses; and, most likely got stuck with relatively high storage and insurance costs to protect their investment. Worse, if you did buy gold in 1980 at its high, you are still underwater (see graph) when adjusted for inflation.  Just the opposite of what buying gold was supposed to do.

What none of the gold bugs are willing to tell you is that, in 2011, gold and silver both hit respective nominal (unadjusted) highs of $1,904 and $49.50 an ounce.  Today, gold is trading around $1,300 or down $600 from 2011.  Silver is even worse off  with today's price near $20; and, that's a loss of more than 60% since its 2011 high. All indications are that these prices will continue to slide; just as they had done in the 20-year period after the 1980 spike.

I guess what really bothers me about the gold bug ads is that they make all kinds of unproven claims and predictions.  For example, Lear Capital is running a current ad that features Eric Sprott; a billionaire Canadian hedge fund manager.  In that ad, Lear offers any callers a report by Sprott that predicts that gold will exceed $2000 an ounce sometime this year and that silver will be at least $50 an ounce by the end of the year.  Well, that's the same claim Sprott has made every year since 2011.  In fact, in 2011 he predicted $2155 (Canadian) for gold and $64 for silver before the beginning of 2012.  While close in 2011, none of Sprott's predictions since, have been anywhere near being true.  My guess is Sprott is holding a lot of gold at a loss, and by hyping its price potential he can cover those losses and find an escape hatch.  While Sprott's claims seem outrageous, there are a bunch of people predicting that gold will hit $5000.  Just Google it and you won't believe how many, and for how long they've been making that prediction.

Lastly, these metals have big liquidity problems. There's a lot of dealers out there who will sell you this stuff.  Try selling it back to them; especially when the prices are falling.  Try finding buyers on your own.  In either case, you will have the cost of shipping to the buyer, and the additional  cost of hefty shipping insurance.


References:

Chart Perspective – Gold: 100 Year Historical Prices: http://www.gcasset.com/chart-perspective-gold-100-year-historical-prices/

What Happened to the Gold Price in 1980?: http://buying-gold.goldprice.org/2008/01/what-happened-to-gold-price-in-1980.html

Sprott On Gold In 2012: http://katchum.blogspot.com/2012/05/eric-sprott-on-cnbc.html

Sprott On Gold In 2011: http://www.jaggards.com.au/news/medusa/article_75.asp