Paul Mladjenovic - Investing in Gold & Silver For Dummies

A currency is only as good as the performance of the counterparty, the issuer (the federal government). If the currency is mismanaged (overproduced!), the currency loses value (perceived or otherwise) and (as history shows) often goes to zero (becomes worthless).

I hate to burst your bubble, but real estate is loaded with counterparty risk, too, even though it’s a hard asset. What if the renter doesn’t pay? What if the area has problems and no one wants to live there and whoever is there is leaving? What if the managers of that area (such as a municipal government) malfunction and the area becomes very unattractive due to crime and other social ills? What would happen to the value of your property?

Whether an area “goes bad” or worse, there’s chaos or war, these are real events happening right now across the globe. If you still aren’t sure about counterparty risk with real estate, then I can’t help you, but a trip to a neighborhood next to Chernobyl may.

Okay, do I really have to convince you of the risks of these vehicles? Futures and options are speculative vehicles that come with their own set of risks. They certainly have counterparty risk but also market risks to be aware of. I suggest you find out more in Chapter 12(futures) and Chapter 13(options).

Cryptocurrencies are the new kids on the block, and many are touting some of their benefits, especially compared to conventional currencies. Bitcoin, for example, tries to maintain its digital scarcity, which can be an advantage in maintaining its value, especially because regular currencies are being overproduced as I discuss in the earlier section “ Cash and bank investments.”

The problem with these are risks associated with electronic hacking and … wait for it … electricity. Electronic hacking means that someone with enough technical prowess can get into your digital stash of cryptocurrency and take it. There have been cases of folks seeing their accounts go to zero. Also, these currencies are totally reliant on electricity, which makes them worthless during a blackout.

Given this, cryptocurrencies may not technically have a strict counterparty risk (such as a currency, stock, or bond) because there isn’t a specified, identifiable counterparty (such as a government agency or corporate entity). The risks are more attached to digital piracy and associated risks such as electricity.

Keep in mind that no investment or asset is without risk, as you find out in Chapter 4. Everything has risk. Life itself is risky. Getting out of bed is risky. Heck, I got out of the bed on the wrong side this morning, but my bed is next to a wall (I moved it away from the stairwell).

Gold and silver certainly have advantages (from a risk point of view) when compared to many assets, paper or otherwise. But gold and silver have risks, too. Here are the two major ones:

Theft: If you own physical gold and silver, it can be taken from you, so find out about safekeeping ideas. Resources in Appendix Acan help.

Government seizure: This can be an issue given the type of government it is or if the times are risky. During the Great Depression, gold ownership by private citizens was banned as Franklin D. Roosevelt’s administration implemented gold confiscation. Also, governments that are communist or socialist commonly seize private property (it’s called “nationalizing” or “socializing”).

The bottom line is that the prudent investor learns about the benefits and risks of as many common investments as possible and applies reasonable strategies of diversification. Yes, have a diversified mix of stocks, cash, mutual funds, and so on, along with some gold and silver. For investment approaches and strategies with gold and silver for your situation, head over to Chapter 3.

Chapter 3

IN THIS CHAPTER

Distinguishing saving, investing, trading, and speculating

Figuring out which approach to take with your portfolio

Making some other important portfolio decisions

In Chapter 2, I give you a big reason why gold and silver deserve a spot in your personal portfolio: They lack counterparty risk. In good times and bad, gold and silver can deserve a modest or relatively small spot (but definitely some type of presence). But for 2020–2030, given how perilous these times will be for many traditional investments, gold and silver (and/or related investments) may deserve a more prominent presence.

In this chapter, I principally answer two basic issues: How much gold and silver you should consider, and what to do in various approaches such as investing and speculating. After all, a conservative investor should approach gold and silver differently from an aggressive investor or a more daring speculator. Fortunately, gold- and silver-related vehicles are varied, and some vehicles could be a good fit for you.

Long ago, the question was gold, and the answer amounted to yes or no. Well, that’s the good thing about today’s world. The choices are now varied and something can be right for you. I devote a chapter to every distinct related investment vehicle. Check out Parts 2and 3for more information.

Before you dig into the rest of this chapter, make sure you understand the crucial differences between the following terms because each is distinctly different, and I make an excruciating effort in using these terms appropriately.

The classical, economic definition of saving is “income that has not been spent,” but the modern definition is “money set aside in a savings account (regardless of the interest rate) for a ‘rainy day’ or emergency.” Everyone should have a savings account with money that is safe and accessible just in case you encounter an unexpected interruption in your cash flow. In fact, you should have at least three months’ worth of gross living expenses sitting blandly in a savings account or money market fund.

Although precious metals in the right venue is appropriate for most people, including savers, you need to have cash savings in addition to your precious metals investments. A good example of an appropriate venue in precious metals for savers is buying physical gold and/or silver bullion coins as a long-term holding (see Chapter 9).