if PMs shoot up in price...

secondrepublic

Do you expect to make a profit (or become rich)? Or just "preserve" what you already have?

Let's assume inflation is what's most likely to cause PMs to shoot up in price.

But if gold triples to $2,300, isn't it likely that everything else would be going up in price as well? So how are you really getting ahead of the game?

Maybe the answer is that once gold/silver starts going up (due to inflation) its price will be pushed up even higher due to speculation. Let's say inflation would cause the price of "everything else" to double, but gold would triple. There's your profit.

But aren't there better ways to profit from inflation? Wouldn't it make sense to take out long-term, fixed rate debt on an a hard asset? I'm thinking for example of real estate. I own one rental property now, about 2/3 of the mortgage is paid off. If inflation went up, a good play would be to sell PMs (at much higher prices) and use the money to pay off the remaining debt. Or buy another rental property now, fixed rate mortgage, and pay it off later by selling PMs.

Just throwing some thoughts out there... appreciate anyone else's perspective on how to actually make a real profit if and when PMs make their move.

jmski52

Do you expect to make a profit (or become rich)? Or just "preserve" what you already have?

Probably something in-between those choices, but I like to use my pm money on Modern Bullion. I'm willing to pay some premium, and I get bullion plus a potential numismatic item in return. The upside potential is two-pronged.

But if gold triples to $2,300, isn't it likely that everything else would be going up in price as well?

In that scenario, it's only critical not to be buried in paper dollars. Everything else is good. The pms will be fungible either way.

Wouldn't it make sense to take out long-term, fixed rate debt on an a hard asset? I'm thinking for example of real estate. I own one rental property now, about 2/3 of the mortgage is paid off. If inflation went up, a good play would be to sell PMs (at much higher prices) and use the money to pay off the remaining debt. Or buy another rental property now, fixed rate mortgage, and pay it off later by selling PMs.

Once you commit to real estate, it is committed. So, if you are 100% certain of your timing, then it's do-able. It seems to me that we aren't finished deflating the real estate bubble yet. Commercial real estate values are only beginning to crash. If it were me, I'd wait.

Timing is everything. Well, almost everything. There's that other little thing, too. Location, Location, Location. And Timing.

Not time yet. But maybe later for RE. Let me say it again. Not time yet.

roadrunner

But if gold triples to $2,300, isn't it likely that everything else would be going up in price as well? So how are you really getting ahead of the game?

Hard assets, including gold, have typically outpaced the general inflation rate during inflationary periods since coming off the gold standard in 1971. So those people who invested in those types of items in many cases far outpaced the published rate of inflation. It would not be unusual to find many desireable "collectibles" that have increased 50X or more since the mid-1970's (with ups and downs inbetween). Our inflationary periods could be better described as staflationary periods as no two items receive the same inflationary effect. Some prices actually fall. The price of health care and insurance will likely continue to rise during 2009. After the initial shocks, most food prices will likely rise as well.

It's still primarily about maintaining what you have. Fewer than 1-5% of people have probably done so during 2008. But as always, there are significant opportunities to make money on the continuing volatility and unknowns.

roadrunner

MoneyLA

Good question about the relationship of inflation to the gold price.

I remember the analogy that an ounce of gold should buy a good suit.

Today a good suit probably will cost you about $850 (but I can get it for you wholesale).

If gold only matches inflation, then you are correct, you will only preserve buying power and you will not get rich.

But if gold rallies for reasons other than inflation, just as an oil painting could surge in price or shares of Apple Computer could surge in price, then you would come out ahead.

Frankly I would hope that any investment I buy does better than keep pace with inflation. But if it only kept pace with inflation then I would not "lose" while I wouldn't be an "investment winner" either.

like I said, good question.

roadrunner

Frankly I would hope that any investment I buy does better than keep pace with inflation. But if it only kept pace with inflation then I would not "lose" while I wouldn't be an "investment winner" either.

The ability for an "investment" vehicle to peform in a manner that outpaces inflation by a large extent is brought to you through the courtesy of the FED and the removal of the gold standard in 1971. Such opportunities would not be possible w/o a money supply growing at a far faster pace than population growth + true economic growth. Oh thank you FED. Of course the downside to such opportunities is if you're on the majority side where their investments don't keep up with the money supply growth or you hit a Madoff or brokerage landmine along the way

roadrunner

secondrepublic

If you believe we're going to have serious inflation, you ought to take out some substantial fixed-rate debt, buy some assets (preferable income producing assets), and wait. I don't see the logic in just buying a pile of gold and sitting on it. The profit potential just isn't there unless you have a ton of it.

I would love for gold to shoot up to $5000 an ounce. Not so I could sell it and buy bread for $18 a loaf, but so I could sell the PMs and pay off fixed rate debt on the cheap.

fishcooker

The profit potential just isn't there unless you have a ton of it.

That doesn't narrow the investment ballpark much.

roadrunner

If you believe we're going to have serious inflation, you ought to take out some substantial fixed-rate debt, buy some assets (preferable income producing assets), and wait. I don't see the logic in just buying a pile of gold and sitting on it. The profit potential just isn't there unless you have a ton of it.

Believing or knowing are 2 different things. We could have a massive deflationary cycle beginning immediately that lasts for years or not at all. The same goes for various levels of inflation. Toss in whatever other financial crisis could occur along the way, mix, shake, and bake. What asset will best cover the majority of the permutations listed above?

It would take some seriously stout nerves to stock up on debt at this point with the potential to stay within a strong deflationary/recessionary cycle for years. Someone else will have to take my share of the new debt. For what it's worth, those taking out debt in the 1930's and 1970's for homes, commercial buildings, or what have you didn't make out too well unless they were able to finally buy at the bottom (we're not even close yet) and then hold on for many years.

Gold and other such hard assets should do ok for now. If we ever do see $5000 gold, you won't be seeing $18 bread....but maybe 2X its current price. When gold advanced 20-25X in the 1970's you didn't see food prices advance all that much. In the 1930's, gold stocks (the only legal way for the average guy to invest in gold) soared, yet the price of food did not. If gold does rise to a level on the order of thousands of dollars, it will be more to balance the fiat and obligations of the govt, not to reflect uniformly high consumer prices. At $18 bread, we would be well into a bout of hyperinflation where gold would likely exceed levels a lot higher than $5000. It would likely take $5K to $10K gold today just to balance our current govt obligations. That is the basic range for gold that EWer Alf Field has recently calculated.

roadrunner

cohodk

Believing or knowing are 2 different things. We could have a massive deflationary cycle begins immediately that lasts for years or not at all. The same goes for various levels of inflation. Toss in whatever other financial crisis could occur along the way. Mix, shake, and bake. What asset will best cover the majority of the permutations listed above.


Thats why the flight to Treasuries and US dollar, and to a lesser extent PMs. Treasuries are highly liquid and have virtually no transaction cost. Keep 'em short and you really dont have much risk of losing, which cant really be said for any other asset. Are Treasuries in a bubble?, if so then have Japanese bonds been in a bubble for the last 20 years?

Editied to add....If you see $18 bread, you will also see millions of dead people.

garsmith

knowing my luck the price won't shoot up until after I sell.