Note: This is not financial advice. I’m not a financial advisor and I’m wrong 100% of the time. Investments are risky and nothing mentioned here should be considered financial advice. Invest at your own risk.
I deal with a lot of people giving me side eye for my interest in precious metals and miners. However, I’m going to take some time here to explain to you the investment thesis – and why now it really a good entrance point.
Gold and silver have been money for over 5,000 years. The paper in your wallet is called “fiat currency”. Many people do not know this, but that paper money used to be a gold certificate. Meaning, the paper could be exchanged for a fixed amount of gold. $20 for one ounce – and had been for over 100 years. Today, our paper money is not backed by gold. It is backed by the faith in it. It has no intrinsic worth.
Over the course of the last 5,000 years – there have been thousands of currencies. Every single currency not backed by gold or silver has failed. EVERY ONE OF THEM.
- Paper money introduced as being more portable than carrying piles of metal around. Widely accepted. Holds governments accountable.
- Governments need to overspend. Disasters. Wars. Great feats of architecture.
- In order to pay for this, you have to debase the currency. Eventually, you un-pin your currency to gold
- Governments print money at will. People lose faith in the currency. The currency collapses.
This has happened many times in our history. It may not necessarily be a currency “collapse” – but interventions need to be done in order to keep the system going. We have had 4 distinct currency eras in the history of our country:
- The dollar backed by gold – 1790-1931. $20 per ounce
Then, people spent wildly in the 1920s and debt increased. Stock market collapses. Gold is made illegal to own by citizens. Citizens given $20.68 for $20 gold ounces. Government turns around and says gold is now worth $35 per ounce.
2. Devalued currency 1932 – 1944. Gold was $35 per ounce. By doing this, it made the gold stores we had twice as valuable.
3. Bretton Woods 1944-1971 – Then, with the Bretton woods accord, gold backed the dollar at 40% until 1971. Meaning, it was a form of fractional reserve. Then, the French called us on it and started exchanging dollars for gold. We were caught printing money out of thin air.
4. “Temporarily go off of the gold standard” – 1971 to present. On average, a currency not backed by gold lasts 8-10 years. We are 50 years in. The only way we were able to survive was to suppress the gold and silver prices through use of the futures market.
What the futures market was able to do was to push the values of commodities down. Without doing this, people would have lost faith in the dollar. Since 1971, all currencies have been paper exchanging against one another. None of them are backed by metal. So when you hear “the dollar is strong” against the Euro, that just means they Euro out-printed the dollar this week. It doesn’t mean anything more than that. Of interest, this is just money supply they tell you about.
Additionally, there have been many currencies in the last 100 years that went to hyper inflation. The most notable historically is the German Weimar republic in the early 1920s.
More recently – think of the Russian hyperinflation of the 1990s. Venezuela today. Zimbabwe – multiple times. There are many countries right now with inflation hitting it. TECHNICALLY, not hyperinflation. But – could be on their way.
So – a gallon of gas might cost $2.60. But there are forces that go into producing that gallon of gas. Inflation hit everything, and that gallon of gas, by the end of the decade, could cost you $26 per gallon. Or $260. Or one hundred trillion dollars.
Debt and reckless spending are precursors to all of this. And, a country can protect from this sort of thing by backing their currency with gold.
Store of wealth
I use this analogy, a lot. Take 2 silver dimes. These were last produced in 1964. In 1964, those two silver dimes would buy you a gallon of gas. Today, if you took those two silver dimes to a coin dealer and got cash for them, you’d roughly have enough to buy a gallon of gas. If gas by the end of this decade goes to $26 per gallon, those same two silver dimes would be able to be exchanged for enough cash to buy a gallon of gas.
So what happens, over history, is when people see inflation coming – they run for the metals. If you have $5,000 in cash right now, the idea is to get $5,000 in gold or silver. If you have a gallon of gas costing $26, you then have your gold and silver that appreciated at the same rate of inflation. So with that $5,000 today, you might get a good used car. In 5-10 years with high inflation, that $5,000 might get you a flat screen TV worth $500 today.
At issue is that the last 50 years, metals have been out of the minds of most people in the world. We all grew up with fiat currency. But the history books and our grandparents from the depression still understand the value of metals.
But what’s the big deal?
I know, I know – you tell me Bitcoin or your other favorite crypto is going to the moon. Well, it might. But – gold and silver have been money for 5,000 years. You could somehow be hacked of your cryptocurrency and be robbed. Maybe you store it on an exchange and the exchange fails. What if the power goes out during a storm and no one can get on the internet for weeks or months like in Puerto Rico?
I think there is a place for crypto out there, but I see it as replacing paper fiat currency, NOT the precious metals.
What affects precious metals prices?
- Real interest rates – this is the 10 year interest rates minus the inflation rate. They use the CPI index for this. So lets use an example – the 10 year is at 5% interest and inflation is at 3%. This means you gain 2% from the “real” rates. You put in $100 and effectively, you walk away with. Gold has ZERO interest. So in this case, it is a better idea to put your cash into the 10 year. But – imagine the 10 year interest rate is .6% and inflation is 2%? This means you invest $100 and are guaranteed to be returned $98.60. In this case, gold is the better investment.
- Inflation rates – like the above situation with inflation, people hedge some of their portfolio with precious metals. Regardless of the 10 year, if they suddenly see prices go up at the supermarket, inflation is hitting them.
- Debasement of currency/Lack of trust in currency – every single time the government goes into deficit, the value of each printed dollar goes down. Every stimulus bill, means the pie is sliced into more slices. While those 2 dimes may have “gone up” 10x in value from 1962, in reality, the dollar has lost 90% of its value.
- Times of uncertainty – war or conflict has a tendency for “flight to gold”. It is a “risk off” asset.
- Supply and demand – there’s a limited supply of PMs, which is sort of the same argument for bitcoin and the like. With gold, there’s so many tons above ground – and generally speaking, if the price is right, you can buy from someone else. With silver, it is used as money, but has a dual hat with industrial demand – solar panels, electric cars, band aids, etc. Silver is consumed in industrial products and cannot be economically recycled. Therefore, while gold is now found at 8x less than silver in the earth, it is above ground in investment grade at nearly the same amount. Interestingly enough, while silver is 8x more plentiful than gold, gold is valued at 80x silver.
There may be a few other items, but these are the big items I’d look at.
Understanding value to compare asset classes
When you think of investing, you think, “buy low, sell high”. PMs are sort of in a weird class of their own. As prices rise, people then eventually see them catching fire and rush in to them. This then can make the value rise more and you get the FOMO effect – Fear of Missing Out. Bitcoin at $20,000 may be there now.
But – really, as an investor you want to find things undervalued and hold them until they are overvalued – at which, you take that value and exchange it for something else that is undervalued.
Let’s look at 4 items of value:
- Commodities – precious metals are part of this class
- Real estate – land, housing, commercial real estate, etc
- Equities – dow, S&P, etc. These are your common “stocks”
While some may not use cash to value – I like the idea of this in our currency because it can tell you to get in or out of cash. Or – most importantly, if you can see a currency collapsing, EVERYTHING in the other three classes have more value than a collapsing currency. Many people see the dollar on a slide, and whether it is 6 months or 10 years, many agree the dollar as we know it is on the way out.
- So would you rather have $1,882 cash, or $1,882 in gold (one ounce). If the dollar is crashing, this means in a matter of time, it would take more dollars to buy one ounce. Meaning – I’d take dollars and convert to precious metals.
- Would you rather have $30,000 or one share of the Dow? Well, if cash is declining, it’s possible stocks rise because it takes more cash to buy shares. More currency in the system means more demand on a finite level of stocks. I’d take a share of the stocks.
- Would you rather have $300,000 in cash, or $300,000 in land and housing? If cash is declining, this means there will be more printed and with a finite supply of houses, more cash will drive the price up.
So to me cash is not really a good thing right now.
Furthermore – you can start to compare asset classes to each other. What is of interest to you? What is important. WHERE do you put your cash? I don’t think there’s one GOOD answer to this. What if you got out of $1 million in cash? What would you do with it?
- Store of wealth – While PMs are a great store of wealth, do you need to lug around 38,461 ounces of silver? Equities can be extremely volatile during an economic collapse
- Doing anything? Gold and silver are great as a store of wealth, but they don’t yield anything. Real estate can be rented. Stocks can have dividends and gain value.
- Liquidity – Having a $500,000 house is great, but if the economy collapses, no one can buy your home. If you have a mortgage, you can’t pay it. Stocks are pretty liquid. To sell precious metals, you need to work with a coin shop or online bullion dealer. The coin shop could be quick, but they might not be able to get you large volumes of cash. Your online bullion dealer might take days or weeks to get you money
So how exactly do you know what to buy? Start to compare asset classes to one another.
For example: Dow to gold ratio – what you can do is look at how many ounces of gold it would take to buy the dow. The dow right now is at 30,000. Gold is at $1882. Divide this out and you get 15.94. Over the last 100 years, the ratio is about 9.8. Currently, this means gold is cheap compared to the Dow. At other times, it has gone 1:1 with the dow. If it were to revert to the mean, that would mean for gold to be equally as valued as the dow, it would be $3,061.
You can do this with a number of things. What I have done below is break out items of importance to me. The question is – if you had $1,000,000 to put into PM, Real Estate, and Equities – what would you do and why? I’m going to bring up some factors below and why.
- Store of wealth (large scale). It doesn’t make sense if you had $1 million to walk around hauling 38,461 ounces of silver. So you want to store a lot of this in something that may store for generations.
- Real estate (primary residence, farm, estate) – this is where you live. If this is paid for and you have zero mortgage, you are ahead of 95% of the world. You can also rent out rooms if need be.
- Precious metals – gold stores wealth more densely than silver. With inflation, this is a great hedge.
- Equities – the most volatile here. You can wake up tomorrow and your Tesla stock goes to zero. Gold and silver, and real estate for that matter, will never go to zero. Stocks can. For that reason, I put them last.
- Store of wealth (small to medium scale). Your housing is covered and you have some gold now. What about storing maybe $100k of this?
- Precious metals – again, the hedge against inflation here is important to me, and every single country in the world will convert your gold and silver into their local currency
- Real estate (secondary home or rental) – this will store wealth, and generate yield on top of it. The problem I run into here is that a secondary property has higher risk, higher mortgages rates, and is not terribly liquid. There’s counterparty risk here that a property you bought could burn down, the neighborhood could go really bad, or tenants could destroy your property.
- Equities – again, these can go to zero with one bad news cycle. Imagine Tesla’s stock if in the same day Tesla was downgraded to speculative buy and Musk dies in a plan crash. This could take your store of wealth and turn it into toilet paper.
- Liquidity. If times are bad, how quickly can you access the financial energy you are storing?
- Equities. For the most part, I can click a few buttons and cash out everything I have in seconds and send to my bank for withdrawal.
- PMs – I can take PMs to a coin shop, but there’s a limit on how much cash they have there. An online bullion store might have a limit of how much they will take, and then you have to ship your PMs to them, which is risky.
- Real estate. If the market is bad, it could take weeks or months to sell, if you can sell at all. In a good market, your house may be worth $500,000. However, in a tough market where no one has a job and no one is lending, selling your house or rental anywhere near “fair value” could prove impossible.
- Equities – if you know what you are doing, you might find some risky investments, good plays, technical trades and turn $10,000 into $100,000 in a year.
- Real estate – if you buy the right rental in the right up and coming area, maybe you can not only have a massive appreciation in real estate, but you could have massive rental income
- PMs – typically, these aren’t as volatile as the above. Volatility is what gives you massive upside, but can also give you massive downside. Silver is far more volatile than gold. Silver and gold equities are multiples more volatile than PMs.
So with that above, I’d posit the below formula:
- 50% long term store of wealth – maybe your home and some gold
- 25% medium term store of wealth – maybe a rental home and some gold/silver
- 15% liquidity – stocks, silver coins
- 10% speculative – maybe I have my stocks above that are 401k index funds. Stable. Liquid. Maybe here I am trying to rapidly increase my net worth.
Your percentage may differ from mine. Everyone has their own risk matrix. What I’m trying to show you is where I would put cash if I had to get rid of it. With this, I’m trying to explain not only how to store wealth – but grow it.
For me? I’m not going to get into details, but I have a primary home, I have 2 rentals, some PMs stored offsite, and PM equities for speculation. Within my speculation, I have different risk levels with my PM stocks. For example, major producers are the least amount of risk and I’d put a large amount with them. Junior explorers might have a 10-20x upside, but they can go to zero. Whether you allocate 1% to PMs or 30% – it’s up to you. The above is just an idea of what it might look like.
I’ve shown above items that make PMs move. I have also shown you a place they could have within an investment portfolio. I’d go one step further here and suggest that in times of things going great, that “traditional” equities are a good play (risk on) where metals are a defensive play and mining stocks might recede in value (risk off). What you also need to understand is overall risk to general equities. Could the stock market drop in the next month? If you think this could be a possibility, perhaps you have a higher percent of your stocks as mining stocks?
The stars have aligned for PMs
For about the last year, I have consumed everything you can read, smell, touch, or watch regarding PMs. Probably 3-5 hours a day. For a year. This is a one in a generation move of wealth coming. When reading the below, please keep in mind the list above as to what makes PMs move.
Why PMs now?
- Debt at an all time high of $27 trillion, with another $7 trillion on the fed balance sheet. The fed is printing money to buy corporate debt (junk bonds). All of this money printing is devaluing the currency.
- With all of the money printing, this will have the side effect of runaway inflation. The fed talks about “trying to get” to 2% inflation, but if anyone has been to the supermarket lately, it’s already hit. Where it hasn’t hit is the CPI – some bullshit index they made up which they substitute things in for all the time. While they may target 2% inflation, the velocity of money has gone down over the last 20 years and if the $4.5 trillion capital sitting on the sidelines meets up with the $7 trillion printed money – and confidence in the economy comes back, inflation could run…really hot.
- Low interest. In order to combat runaway inflation of the 1980s, Paul Voelker smashed metals by overnight putting in a 20% interest rate. With a 15% inflation rate, this effectively made the “real rate” 5%. In the 1970s, gold went up 24x and silver when up 29x. The only thing that stopped it was….high interest rates. Today, with $27 trillion in debt, it is hopeless to try and raise the interest rates because we would default on debt. Interest rates will be “near zero” until at least 2023.
- Supply/demand – where silver and gold have been suppressed by the futures markets with “paper” silver and gold, and the opacity of muddy river water, this has kept the price low – but in the meantime it kept price so low that producers have had to slash exploration budgets for a decade. Silver has been hit the worst – and with this, it may be a decade before lots more silver can come online. This year alone is a 350 million ounce deficit. This is after 5 years of declining production with increased deficits. A supply crunch is nearing with silver. Gold may have many countries throwing their worthless currency at it as countries try and hoard what’s available. As currency faith falters, a rush to PMs will ensue. Apparently, when metals reach all time high numbers, people are lined up around the block at every local coin shop in the country.
- Dow at all time highs – stocks are massively overvalued. They are like trying to invest $1 billion in a lemonade stand. No return on your investment, and PE ratios of Tesla at 1300x. 38% of the S&P 500 companies are “zombie” companies with debt so much they have no means of being able to pay it off. Real estate values have melted up. This leaves only the PMs significantly undervalued.
- Dollar falling off of a cliff. As the dollar goes down, it means it takes more of them to buy one ounce of metal.
- Chinese tensions. Trade wars. These types of things can have risk off.
- Real yields promising to be -1% to -3% for years to come.
- COVID promising to deliver millions of foreclosures in Q1 2021. Credit cards finally writing off bad debt 6 months after. Banks may see a shit storm in 2021. REITs will fall off of a cliff and collapse – who wants to go to a mall or rent retail space with no one shopping? Travel? Airlines? Cruise liners? While everyone seems to love this 30,000 stock market, no one is really seeing that this is a form of inflation from printing trillions. At issue, there’s not enough profit to justify these valuations. There will be a culling of a lot of companies. Tech will rollover. Once again – where do you put your cash in risk off? Negative rates with the 10 year?
- Technicals are pointing to otherworldly numbers for gold and silver. Many estimates have gold around $3000 in about a year and silver at $50-100. This may sound silly until you realize the faith in our worthless paper currencies will begin to erode, and then suddenly evaporate. Gold has formed what’s called a “cup and handle” formation, and will soar to new highs
- “Green” revolution. As if silver monetary demand isn’t enough, silver used in EVs is 3x what is used in a ICE car. It is estimated at 1-3kg of silver per EV. When you start running the numbers of needing 125 million EVs inside of a decade, you start to look at crazy stupid numbers of silver demand. Being the best electrical conductor, it’s not only important in EVs, but a crucial component of solar panels. What do you think a Biden will want to do with EVs and solar?
While I like the PMs and have some, I like the leverage of a miner on PMs. Check this out.
If a company produces one ounce of silver at a cost of $15, and silver is $16, the company has a profit of $1. However, if silver goes up from $16 to $32, the price of silver doubled!! But, if you are a silver miner, your profit went from $1 to $17 per ounce. Or, a 17x profit on a 2x move in silver. If silver goes to $48, silver has gone up 3x, but the mining company profit has gone up to $33, or 33x.
Now, imagine you buy $20,000 in this company and then a year later the price of silver went from $16 to $48. You took your $20,000 to $660,000. This is the type of leverage you will be seeing upcoming with big money rolling into this sector as PM prices start to go up.
The above was a simplistic view to illustrate how the mechanism works with miners. Maybe you buy silver and triple your money in a year. However, if you buy the right mining stocks and silver goes up 3x, the right miner could go up 10-50x.
Some miners are large producers – these will have lower growth rates. Some are mid tier producers and have higher growth rates. Then you have junior producers who have the highest costs – and with this, are closer to the above example of percent gain with higher moves in price.
While I do have an MBA, my concentration was on management, not wall street finance. That being said, I think if you really understand things, and how they work – gravitate towards that with investment.
My hypothesis is:
Gold and silver will move up astronomically over the next decade on a declining US dollar, faith in the dollar declines, and usage as the world’s currency is challenged. I need to identify a proportionate means of asset investment which capitalizes on a massive run up in gold and silver prices (and other commodities) to come. Be nimble at times to play risk on and risk off short to mid term trades, but have a majority of long term assets in real estate with mid term in PM/metals stocks and rental properties
- Bolster rental properties and make them economical viable while also paying down principal (3 months from completion). Favor paying down principal in a higher proportion to rental properties to increase monthly free cash flows – which can then help pay down principal faster.
- Secure housing needs and funnel trades and short term profit taking (and FCF from rentals) towards paying down principal. Refinance at low rate to reduce housing costs (completed)
- Secure PMs in a secure off-site location in case banking sector has problems and to hedge against possible massive inflation while storing financial energy in a product more secure than cash (complete)
- Leverage PM prices in mining stocks to rapidly increase net worth and to transfer massive gains into real estate and revenue generating entities to hedge against possible massive job losses and industry losses in this country (complete and re-adjust periodically)
- Explore the possibility of buying land for long term hold (not begun)
- Explore the possibility of buying a business or passively investing for long term growth – only once items 1-5 are complete. Could buy more rental units, in cash. (researching)
I feel we are at an unprecedented time in our country’s history. With debt spiraling out of control, we are witnessing the end of the US dollar in this cycle, as we know it, as the world’s reserve currency. As most people in this country have been conditioned to worship fiat currency, the notion has not dawned on them yet to start to move to precious metals. Many are not even understanding that we have had several versions of our dollar – and that this version could be coming to an end. Other cultures such as the Germans, Russians, Turks, Chinese, and Indians over millennia have understood the role of gold, silver, and the preservation of wealth. As they have moved into the PM circles over the last 15 years, the United States still lags behind – either unable to respond or unwilling to undercut their stranglehold on the world’s reserve currency. Rivals have stepped up recently to challenge US authority, such as the Chinese, and they are thought to have 20,000-25,000 tons of gold reserves. It is thought the US has 8,000 tons of gold reserves, but the last audit of such was in 1954. Meaning, no one knows if indeed there is gold in Ft. Knox. The US for many years has suppressed gold and silver through usage of the futures market, and it is now coming to a point where this is about to be a dam that is bursting. Unknowingly, for years foreign adversaries have used our banks to extract precious metals from our exchanges. When the music stops with the COMEX futures, gold and silver prices will start to march much, much higher. This may rise in tandem with a rising dollar or a falling dollar. It may rise in tandem with the dow – or rise on a falling dow. When the collective “oh shit” moment happens and the rush to PMs starts, I will have already established a base to watch the greatest wealth transfer in history.
In the short to medium term, miners will be an extremely attractive buy. Tech money that was chasing 1300x PE ratios will roll into large gold producers at 13x PE ratio making killer profits. All of this will continue for some time…..
It’s also possible things get pretty bad and nations nationalize their mines. Not yet, at least. This is why it may be imperative to have points to take profits at the end of legs up.
At some point, it’s possible our fractional reserve system is at risk of collapse. Many do not realize so many of our assets are “re-hypothecated” so that many people may have the same claim on the same asset. It is said that with the metals investments – there could be up to 500 claims per ounce. Banks today can lend out, for example, 10x what they have in deposits. So if they have $100 million in their reserves, they can lend out $1 billion for 10x. The fear is with a rapid loss of confidence in fiat, cash will be withdrawn from institutions in a form of “bank run”. In an extreme example, money is taken out to leave $1 million and banks have $1 billion lent out – making that 10x now a 1000x. Additionally, the $1 billion lent out is at super low interest rates and defaults can start to occur. With low reserves, a massive fractional reserve issue, and no one paying loans, this will lead to a systemic collapse of the fractional reserve lending system – which will be replaced with a flock to a gold – backed system. Instantly, our military can no longer be paid for, lending and growth of everything stops, and this may lead to 90-95% of the stock market imploding. This can only be staved off by massive, massive, massive bail outs of the banks to provide liquidity from the central banks – but by this time, it may be too late and this is where you get $250 gallons of gas. Money will be worthless.
Competitors to us may back their currency with gold – and by doing so, will start provide competition to the dollar. This may have the net effect of flooding the market with excess dollars, collapsing it almost in a month. Cryptocurrencies are coming, and while that may replace paper fiat – it is still a form of fiat. Those cryptos backed by PM will have the best advantage to survive. Banks may go under – and will no longer have the means of lending out at 10x holdings – which is why central banks have been hoarding gold the last 10 years – especially China and Russia. Pressure will mount for “sound money” to pin our currency to a gold backing. The problem is, we are wayyyy over-leveraged. If we did that, we would have something like $156,000 per ounce gold – which is pretty much telling as to where we have gone from a country that once had gold pegged to $20. As we continued to spend out of control (and use that money to build our tanks and missiles), the natural price of gold should have gone up with the dollar moving up – but our suppression of this has kept it at $2000 or below. This would have a net effect of all spending, suddenly stopping. Velocity of money – near zero. System collapse. Those with hard assets prevail.
Overall, our long term system is sketchy, at best, 4-5 years out. In the short to mid term, my goal is to use gold/silver stocks, on leverage and with options, to add to my speculative investments. These profits are then meant to pay for primary and investment housing, to de-lever me from any debt whatsoever. If everything collapses in 4-5 years, the idea is to have PMs, housing paid off, and the potential for rental income to come in to the 2 properties without a mortgage to put food on my table. I will have no debt 3 years from now – as a goal.
My only hope is that everything can last 4-5 years.