Investors face a challenging environment. Decades of falling interest rates force them to choose between earning poor returns in bonds and speculating on asset prices. Retirees may not be able to sustain their lifestyle. Institutions may not be able to remain solvent. In addition, debt levels have skyrocketed, and there is a growing risk of default.
To address these challenges, many people look for safety by buying gold, or other hard assets. They think that by making a dollar profit on their gold investment they are “investing” and protecting their portfolio.
However, this way of thinking about gold confuses investing in gold with gold investing. Below we explain the traditional approach of Investing in Gold and then introduce something new: Gold Investing.
Investing in gold usually refers to buying the metal. However, buying gold is unlike any other kind of investment. Once purchased, the metal just sits in a vault. Warren Buffet humorously described this:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
The purpose of buying gold is to wait for its price to rise. Investopedia argues this in Investing in Gold:
Gold has underperformed compared to the S&P 500 in the 10-year period ending Jan. 26, 2018… however, gold trounced the S&P 500 in the 10-year period from November 2002 to October 2012, with a total price appreciation of 441.5%, or 18.4% annually.
Each new gold buyer hopes that gold will go up. Armed with fresh capital and patience, he takes over the same gold trade from the seller. The previous investor is getting out because gold has gone up enough, gone down too much, or hasn’t gone anywhere. It’s an endless cycle of churn, each investor buying gold to try to make a buck.
In Monetary Metals’ view, this is perverse. And it gets worse. Gold speculation is a bet on the decline of the official currency. Some gold analysts go so far as to cheer for each potential new calamity in the news, Headlines have shouted how a US government debt default or North Korea war would be “good for gold.”
Most people don’t want to bet on the price action, much less see a collapse. This is why investing in gold is not popular in the mainstream.
In any case, this is not really investing. Investing finances a productive activity. By contrast, gold trading is just speculating. It finances nothing, and the profit comes from the capital of the next speculator. Speculation is a zero-sum game, a process of conversion of one party’s capital to another’s income. Central-bank fueled speculation is really a process of capital consumption.
Investment, however, enriches everyone. The entrepreneur uses the capital to grow a profitable business. The investor earns a return on his money. And the consumer benefits from new goods and services.
Gold investing is not about selling one’s gold, any more than conventional dollar investing is about selling one’s dollars.
Like conventional dollar investing, gold investing deploys capital into a business to increase production and grow profits. The difference is that the capital is gold, kept on the books and payable to the investor in gold.
The amount of gold paid to the investor is determined based on the amount of gold invested and the agreed rate of return. For example, a 100oz investment at 3% yields three ounces of gold per year. The payment does not depend on the price of gold. It is not a set dollar amount, and the enterprise is not merely buying gold.
One advantage to the investor is that the yield on gold investments is not subject to any government interest-rate manipulation. When governments drive their respective currency to near zero interest rates, this affects the yield of every dollar-denominated investment but not the yield on gold-denominated investments.
This is because of a key difference between the dollar and gold. The dollar is a credit, not a positive value. A dollar is not a thing. To own a dollar is to be a lender to a central bank. You are enabling the central bank to bid up the price of the bond, which pushes down the rate of interest.
A dollar does not enable hoarding (this is no accident). Gold does. Gold offers everyone a real choice whether to invest or to hoard. People do not invest gold for zero interest. The interest rate in gold is set in a market, by people who are free to take their gold home. Gold interest is not subject to monetary policy.
Gold investors are getting a fair rate set in a free market, unlike dollar investors who may get little return for the risks.
We believe that everyone should hold some gold coins as insurance against unexpected events or expenses (similar to holding physical cash). However, gold held at home does not grow. It is not a long-term wealth accumulation strategy. Gold is money, and you cannot become rich by merely holding the money you already have.
Monetary Metals® offers gold investments, that is, products which provide a Yield on Gold, Paid in Gold®.
Those who invest in gold look at the price, which is how many dollars they will be paid to get rid of their gold. Whereas gold investors look at the interest rate, which is how much their gold will grow every year. Any bullion dealer can exchange your 100oz of gold for $131,000*. Monetary Metals’ gold fixed income investments can give you 2.5oz of gold interest.**
We also have a hedge fund that provides uncapped potential returns (but also the risk of loss). It is for accredited investors only.
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