The Downside
To Investing
In Precious Metals

Dateline: 16 December 2014

Once upon a time (not all that long ago) American money was made with a precious metal content. Those days are gone, and a thin, worn, 90% silver  Mercury dime is now worth about $1.50.

There are people who invest in precious metals, like gold and silver. By “invest” I mean they purchase with the hope that the price of the metals will rise, and when it rises they will sell, thus making a profit. Some of these investors actually do end up selling and making a profit on their investment.

There is, however, a downside to investing in precious metals, and it is rarely discussed. The downside is that when you go to sell your metals, the US government wants a significant chunk of the profit you make. Precious metals are classified as collectibles and, if held for more than one year, they are subject to a long-term capital gains tax on any profits realized when you sell. The tax is currently 28% (the government can raise it at any time).

If you invest in precious metals and lose your record of purchase (i.e., a receipt), then sell years later, my understanding is that your capital gains tax would be on the entire sale, not just the profit realized from the sale.

Also, if you invest in precious metals and hold them for a long period of time, then sell for a profit, you may not be making nearly as much profit as you think you are. When you figure the loss of dollar purchasing power due to inflation over those years, along with the 28% capital gains tax, you could find there was little actual profit, if any. Read A Basic Lesson in Financial Repression to better understand how yearly inflation destroys investment profits in a basic savings account. The same principle applies to precious metal profits.

And then there is the matter of your investment not generating any income for all the years you held it. Some investments do generate a steady income (e.g., rental fees or a dividend). Precious metals do not.

With all of that in mind, am I suggesting that it is not wise to own precious metals? No, I am not. My point is that it may not be wise to invest in precious metals, with the expectation of making a future profit.

It so happens that there are reasons other than investment and hoped-for profit to own precious metals. Many people buy precious metals as a hedge against inflation. A “hedge” is a financial tactic taken to insure against total loss. As explained in My Hyperinflation Series, precious metals have historically been a dependable hedge in a hyperinflationary crisis.

The value of paper dollars always eventually goes to zero, but the value of precious metals never goes to zero. Even in a deflationary crisis (which it appears the world economy is currently experiencing), precious metals will maintain some real value.

Another reason people own precious metals is as a hedge against a socio-economic meltdown. But in the early stages of such a meltdown, precious metals will probably be of little value. A supply of twenty-dollar bills (cash) may prove to be the best thing to have in the early stages of a crisis.

If the collapse proves to be one of epic proportions (and duration), tools, skills, and land on which to live and supply yourself with the basic needs of life (food, water, shelter) will be much more valuable than any precious metals. See my Agrarian-Style Economic Self Defense Plan for more details.

After the epic collapse, as civilization restructures itself to adapt to post-industrial, neo-agrarian realities, precious metals may be a part of the new economy, in which case, having some precious metals may be beneficial. 

Another reason some people buy precious metals is for privacy.  As “collectibles,” precious metals are not conventional paper assets and therefore are not easily “seen” and tracked by the eyes of government and financial institutions.

However, depending on who you purchase from and how much you spend, your transaction may be reported to the IRS. My understanding is that any purchase over $600 is supposed to be reported to the IRS by precious metals dealers (somebody can correct me if I have that wrong). And, of course, when you sell, there are government reporting guidelines that dealers are required to comply with.

Another plus to having some precious metals is that, unlike conventional, dollar-denominated assets, precious metals can not be so easily stolen or mismanaged by banks, brokerage houses, governments, and so on. Institutional theft (of various kinds) is something that we will surely be seeing more of in the years ahead. The infamous Greek bail-in of 2013 is just one example of this kind of theft. 

Many cultures around the world traditionally accumulate and preserve their life savings by purchasing precious metals instead of paper investments. They are more interested in preserving wealth than investing to generate more wealth. People in Asia, India and the Middle East have a long history of this, and they are major buyers of precious metals today. These cultures have a completely different perspective from that of the average American about what what real wealth is. But there are some Americans who have the same mindset. 

A final reason for having precious metals could be the fun and satisfaction that comes with collecting something as a hobby. Precious metals in the form of coins have been collected by people for generations. Unlike collections of things like stamps, baseball cards or beanie babies (remember them?), precious metals have an intrinsic value and can be sold very easily if the need ever arises.

In the final analysis, there are several reasons for owning precious metals. But purchasing precious metals as in investment may not be such a good idea.

That's the way I see it. As always, I welcome your insights and comments on this subject.

People in India buy precious metals (primary gold) in the form of jewelry.


Sunnybrook Farm said...

I think that having metals (even workable iron, copper, lead, gold, silver) are a long term asset, I don't really want to call them an investment as it implies that they will be exchanged for some dollar value. There may not be a dollar or IRS by the time these metals are put to use. I would suggest accumulating things that can be used in the next age.

John D. Wheeler said...

One clarification: if you're investing in rare coins or bars, you're correct about the 28% collectibles tax rate. However, if you invest in US bullion coins, whose value is determined solely by their precious metal content, you only pay the regular capital gains rate, which is lower than your normal income tax rate.

This advice can not be used to avoid tax penalties (Circular 230 notice), so you should consult with a tax professional regarding your individual situation.

Anonymous said...

I own precious metals as a form of financial insurance. If the economy melts down, or the dollar becomes worthless, my cash and investments may go to zero. But the Precious Metals will still have value to help me rebound into the new future.

As for capitol gains, there aren't any until I sell, which I won't do. My heirs are under instruction that this is insurance, not a paid vacation. I'll find a way to come back and haunt them if they spend it.


SheilaG said...

All I have done is, buy property, prepare to be self sufficient, and collect enough silver to pay property taxes in the future if needed.
One thing that many need to consider is, that the Government can, and most likely will, take all of the silver and gold everyone has, and not give you anything in return, or no more than the face value of the coins. It's been done before, and will most likely be done again.
That's why I only consider the silver I collect to be a "face value" amount. Yes I do hope to be able to do more than use it at face value, but that will only be seen in the future. This way, if I have enough to cover a couple years of property taxes, then I may be able to recover by the time the smoke clears.
I put all my trust in God first, since He has shown me that people can't eat silver, but we can grow food on our land, then the smart thing to do is, learn to garden as best you can, and save the silver for those who think it has value. Especially if that turns out to be the Department that I pay my property taxes to.

To me, without God, all is lost.
I believe it's time for us, AS A NATION, to call on Him.

nothanks said...

The tax rate on precious metals is only 28% if you're in the 28% tax bracket. It also depends if you held them a long or short time.

I sold my silver stack i bought in 2008 in January 2013. I had some of my receipts, I paid very little in taxes. It wasn't anywhere near 28%.

Jonathan Sanders said...

SheilaG: If you believe that face value is the way to go, consider the Canadian Silver Maple Leaf that is $5 face value per oz, as opposed to the Silver Eagle that is $1.

I think the likelihood of government seizure of PM is small, since our currency is not backed by it, as it was when FDR sat on his throne. He confiscated the gold, then raised the price in order to increase his ability to spend, IIRC.

I have never considered Silver an "investment", since it basically tracks inflation. It is simply a tool to preserve and pass on some wealth. Maybe some of us will begin to use PM as barter even without a collapse. I would gladly accept 1 oz silver rounds in place of Andrew Jacksons when dealing with an individual...
-Jon S from Indiana

buddeshepherd said...

I've invested in scrap metal in the form of old farm equipment.

Anonymous said...

I have a bank that I keep my investments in, but neither have to do with money or precious metals which are only worth what someone thinks they are worth. I invest in heirloom seeds that could be traded or planted and harvested for personal use or barter/sell. The compound interest on a single seed could never be equaled by any investment service.

Everett R Littlefield said...

I have accumulated some silver coins over the years, and they will only be used in the future to trade to someone who has an item or labor, that would be of value to me. Or I just may give them one at a time to people in need!