Thursday, July 22, 2010
The Creating Wealth Show,
Jason Hartman discusses some of the disadvantages of investing in gold.
Despite the crowd of investors clamoring to join this gold rush redux, Jason is not a fan. In fact, he likens buying precious metals with investing in insurance since neither meets his standards of a true investment, although they are touted as such. If you want evidence, consider that insurance companies turn around and invest your premiums in real estate.
Few would argue that gold and silver are essentially money. Thus, precious metals are equivalent to savings or wealth stores, not investments, and they are vulnerable to the weaknesses inherent in currency. Paper money is also referred to as "fiat" currency, meaning its value is conferred by authority; that is, it is only secured by a pledge. Furthermore, Jason predicts that "Money is in for a long-term loss in value," prone to inflation and subsequent devaluation – similar to what happens with your investment in insurance.
This discussion is prompted by an addition to Jason's list of disqualifiers that make gold and precious metals a bad investment, bringing the total to 7 reasons:
1. In contrast to property investment, there is no financing, thus no leveraging to allow you to build wealth.
2. In contrast to tax deferment opportunities, there is no tax advantage.
3. In contrast to real estate rental, there is no income potential.
4. Your investment is subject to confiscation; arguments that collectible coins are immune from seizure are flawed since there is no guarantee this protection won't ever change.
5. Precious metals are prone to manipulation by those motivated to suppress their value in order to boost paper money.
6. The myth of superior gold liquidity. This argument fails on a couple counts. Proponents tout the facility of buying and selling gold, but there are hidden costs in offers of guaranteed buy-back of gold purchases. When you are ready to liquidate your investment, you'll be penalized with a 1.5% premium for melt-down value, on top of shipping & handling plus insurance expenses. Real estate actually benefits from its lack of liquidity because combined with higher transaction costs, this equates to lower volatility. In contrast, the low transaction costs and high liquidity claimed for precious metals are a perfect formula for greater volatility.
7. If gold does go up in value, the gain is nominal rather than an actual increase in buying power. This is because when gold appreciates it typically coincides with a devaluation for paper money. Moreover, those gold profits are taxable, in contrast with the "most tax-favored" status enjoyed by real estate investment. By exploiting the 1031 tax-deferred exchange it is possible to trade up tax-free with property for a lifetime. Even if the dollar depreciates, your asset appreciates with inflation and you will have locked in a long-term loan that you repay "for free".