The DownsideTo InvestingIn 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.
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