Consider this - if your position is not 100%+ of your net worth, then you are actually *long* fiat currencies. A bit like 10 years ago where if you were a dollar bear but still had some dollars, you still lost half of what they were worth over the next 7-8 years. Being 70-80% long a collapsing asset is not much better than being 100% long in it. If fiat currencies fall 90% in value, and you are 100% long gold, then you will not actually make much of a profit in real terms. Most of the appreciation will just be keeping pace with high inflation. Furthermore, in many countries you will be taxed on your nominal gains, so you might actually lose money after tax and after inflation, despite being 100% correct. To ensure profit in the event of a major gold market rally under high inflation in future years, it is necessary to be >100% long gold or somewhat short fiat currency (e.g. by owning real estate with a fixed-rate mortgage, or having other fixed-rate debt). Think about people in Weimar Germany. Did it matter if they were up 1000% per annum in Deutschemarks? Not much, because the necessities of life were up much more. What mattered is their performance versus *sound money*. Therefore, if you are simply long sound money, you won't necessarily make any real return in sound money, you will actually lose because you get taxed on unsound fiat currency gains. One must rely either on gold (or other assets) going up *more* than inflation, or taking on some debt in order to ensure generating real returns in high inflation periods.
The claim that capital gains in gold are illusional because it is merely a sign of monetary debasement is a fallacy in my view. I can't understand how even smart people often fall for this presumption. If C goes from 2$ to 50$ it's a bull market, if gold goes from 300$ to 3K it's a sign of inflation and monetary debasement. That just doesnt makes sence. Oil has dropped 50% in 2 years when gold is up 50%... Where is the inflation? As far as owning real estate being a good hedge against inflation i agree but only untill a certain extend. If you buy a house of 100K and it goes to 500K, you can cash in but if you wish to obtain the same level of quality in residence your new place of living will have gone up just as much erasing most of your "real profit" if you want to buy it. Unless you sell at the top before the crash ofcourse, which is the same for gold only gold has the advantage housing has not which I explained above, as do stocks.
You are missing the point. If you are 25% long gold, for example, then you are 75% long fiat currency. If you are 25% long gold because you think fiat currency is toilet paper (or will become so), then you have 75% of your life savings in something you think is going to completely collapse. That is totally irrational. Regarding nominal vs real gains, let me try to explain it more simply - C could go from $2 to $50 million in a Zimbabwe-type situation - but everything that cost $2 at the beginning could now cost $50 billion. You have still lost all your wealth, despite making huge nominal gains. Therefore it is the gains after inflation that matter. Thus if gold's gains are only keeping pace with inflation, you are not making money and may well be losing it to tax. Whereas if you owe paper money, and it becomes worthless, you just got it for free. E.g. if you borrow 500k today, and buy a house with it, then in a high inflation scenario the 500k becomes equivalent to 1 week's wages for a janitor, whereas a house is still a house. So your debt fell from a real $500k to a real $5, whereas your house is now worth $50 million nominal, 500k real. You just made a real profit of $499,995.
+ 1......big deal if Gold goes to $10,000 an ounce. This simply means everything else has inflated around it too! I think the best hedge is Real Estate. There's a reason why over 70% of the world's millionaires did it thru Real Estate. QUOTE]Quote from Ghost of Cutten: You are missing the point. If you are 25% long gold, for example, then you are 75% long fiat currency. If you are 25% long gold because you think fiat currency is toilet paper (or will become so), then you have 75% of your life savings in something you think is going to completely collapse. That is totally irrational. Regarding nominal vs real gains, let me try to explain it more simply - C could go from $2 to $50 million in a Zimbabwe-type situation - but everything that cost $2 at the beginning could now cost $50 billion. You have still lost all your wealth, despite making huge nominal gains. Therefore it is the gains after inflation that matter. Thus if gold's gains are only keeping pace with inflation, you are not making money and may well be losing it to tax. Whereas if you owe paper money, and it becomes worthless, you just got it for free. E.g. if you borrow 500k today, and buy a house with it, then in a high inflation scenario the 500k becomes equivalent to 1 week's wages for a janitor, whereas a house is still a house. So your debt fell from a real $500k to a real $5, whereas your house is now worth $50 million nominal, 500k real. You just made a real profit of $499,995. [/QUOTE]
So what are you saying? We should put 100% of our money into gold? There are many of us that are savers just holding our money in gold instead of cash. I mean why put cash into a CD at 1.5% when inflation even at historical norms, eats the buying power of your cash? At least with gold you are safe from losing your buying power. I personally do not think of gold or silver as an investment. Its just a way to store my savings.
Well, basically I am saying that in a high inflation scenario, if you hold significant amounts of fiat currency then you are seriously exposed. In hyperinflation (which lots of gold bugs fear), you will lose close to 100% of the value of the savings you hold in fiat currency. Gold is only a *hedge* against hyperinflation, it does not necessarily profit from it. The only real way to profit from hyperinflation is to borrow significant amounts of money. Imagine being in Zimbabwe or the Weimar Republic. If you had 50% in gold, 50% in local currency, how did you do? You lost 50% (your cash became worthless) and you got taxed at punitive rates on your capital gains from gold. Despite having a big gold position, you lost maybe 75% of your wealth (assuming gold wasn't outlawed entirely). Whereas if you took out an 80% mortgage on a mansion in downtown Berlin or Harare, then you actually made a fortune, because your debt became worthless and your asset still had good value. There if very high inflation comes (I don't think it will anytime soon, but it could in future years), you should be heavily in gold but also consider either buying a prime blue chip property, or going into the landlording business. Personally I think it's best to just invest in a prime residence - letting rooms is far less hassle than owning separate rental properties. Make sure you owe at least half of what you are worth. E.g. 75% in gold, 5% cash (Swiss Francs, Singapore dollars etc) emergency funds, 20% downpayment on real estate, 80% of net worth in debt to finance the real estate. Large houses or multi-level apartments are ideal for this, because you can rent out the extra rooms for free cashflow, whilst still maintaining privacy. Rented rooms in your home residence are far less regulated than wholly rented individual properties.
This problem can be solved through gold futures. Effectively borrowing at libor rates(which are much lower and dont carry pre-payment premium and term premiums as mortgage rates) and jumping net gold exposure to above 100%(this is significantly more risky than the alternative which is to above 100% but using RE, its less diversified though). Furthermore I suspect gold does better than real estate during very high inflation. Commodity index futures can be used to diversify
Fixed-rate debt is an interesting part of beating (severe) inflation. Thanks for bringing that up. Ultimately, successful living is about CASH FLOW: How much is being paid out every month; how much is taken in. Positive balances should be at least partially invested in physical metal. Interesting post, Cutten
Fixed rate debt is great in a high inflation scenario. But you better be sure that inflation is higher than your interest payments, and will remain higher for the majority of the debt repayment period. However, given the current situation (low inflation, risk of deflation) I would not be caught dead holding large amounts of debt, especially for speculative purposes.