Wednesday, July 21, 2010

Is Gold a Safe Store of Value?

Gold Coin Sellers Angered by New Tax Law

Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category and coin dealers have been among those most rankled by the change.

This provision, intended to mine what the IRS deems a vast reservoir of uncollected income tax, was included in the health care legislation ostensibly as a way to pay for it. The tax code tweak is expected to raise $17 billion over the next 10 years, according to the Joint Committee on Taxation.

Once again...

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan, 1966

1. Let's assume gold bought today exactly keeps up with inflation long-term.
2. Let's assume you are taxed at 28% on all those inflationary gains.
3. Therefore, plan to lose up to 28% of your purchasing power over the long-term.

The only way it makes sense to hold gold is if you think it can rise much faster than inflation overall.

Gold averaged $285.73 in June 2000.
Gold averaged $1232.92 in June 2010.

That's a 15.7% average annual return.


The CPI-U was 172.400 in June 2000.
The CPI-U was 217.965 in June 2010.

That's a 2.4% average annual inflation rate.

Gold has outperformed the typical "safe store of value" by roughly 13.3% per year for the last decade, but I'm told greed and leverage have nothing to do with it.

Oxford Asset Management's Gold Leverage Program

This investment is speculative, therefore the above projected prices and returns are based on stated price levels, and should not be understood as guaranteed future prices that will definitely be attained.

Diversified Gold Investment's Leveraged Transactions Example

By making a 20%* down payment of $9,000 and financing the balance**, the cost per bar is only $1,800 (plus fees and commissions) and the investor has five bars of gold in his account instead of one.

Wikipedia: Gold as an investment

This article contains weasel words, vague phrasing that often accompanies biased or unverifiable information.

How can we know this?

Gold is also money, although it is treated by some investors as a commodity.

Gold is not money. Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. I cannot pay my debts with gold bars, any more than I could pay my debts with aluminum cans. I could sell either in exchange for money and then use that money to pay my bills though.

Gold is a commodity. This really isn't open for debate. A
commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market. It is fungible, i.e. the same no matter who produces it.

Using leverage

Bullish investors may choose to leverage their position by borrowing money against their existing assets and then purchasing gold on account with the loaned funds.

There's no mention of what bearish investors may choose.

Leverage or derivatives may increase investment gains but also increases the corresponding risk of capital loss if/when the trend reverses.

What's up with the "if/when"? Is this the one trend that may never reverse? Leveraged investments that always gain? Wouldn't that be a first.


GawainsGhost said...

Ha! I read about this this morning, and I was wondering how long it would take you to point it out.

However, I will quibble with you, Mark. You're mistaking money for currency. The real money is making money, and the real money is in the bond market. Currency is simply paper used for transactions.

You're right, gold is not money but a commodity. It's not currency either. Bugs may argue the point, but it's valid. And irrespective of the fact that now they're being taxed on their commodity speculation.

remy said...

GG and Mark,

I used to own Maple Leaf gold coins. They had a face value of $50. Similarly the Canadian silver coin had a $5 face value. You can use these coins like cash.

The nice thing about silver is that the face value represented ~20-30% of the market value. So in the even of a crash in the price of silver, you still had $5 left...

for the record, I do not own any gold/silver coins/bars anymore. I do not think they are a store of value and I also think the price will fall in the near future.

just my 2 cents...

Stagflationary Mark said...


I am sympathetic to your point. My money sits in TIPS, I-Bonds, and interest bearing accounts. However, a gold bug could just as easily say his/her money sits in gold. A real estate bug could say the same about real estate.

Anti-dollar bugs like to point out that the dollar has lost 95% of its value. That's true but also very deceptive. If stored in bonds it has done considerably better than that. Few would suggest burying fiat cash in the backyard is or was a great long-term plan.

That said, I cannot pay a bill with a Treasury Bond directly. I must sell the bond to someone else in exchange for cash first, use the interest it generates, or wait for it to mature. I therefore don't see bonds as money either, but like I say I am sympathetic to your point.

Stagflationary Mark said...


Great point.

I was going to bring that up myself but my post was already so wordy.

The "junk" silver quarters I owned were clearly money. I could walk into the grocery store and buy bread with them. They were legal tender. In order to unlock their true value, I was much better served selling the silver within them as a commodity though. Further, it would very much surprise me if a 25 cent "junk" silver coin ever trades at 25 cents again.

Like you, I don't think it is a given that silver is good store of value at any price though. I have no interest in buying silver at these prices. Let's just put it that way.

mab said...


Gold is money AND and investment. It's both!

"non-dairy" floor wax, lol.

GawainsGhost said...

Well, I was refering to buillon, not coinage. Still though there are places that would not accept gold coins as payment. But then there are places that won't accept dollars either. The board office is one. It will not accept cash, only checks or credit cards.

Stagflationary Mark said...


Here's what we know.

All that glitters is not gold!
All that shimmers is not dairy!


Stagflationary Mark said...


I wish we'd just move to a cashless society. It is going to happen someday anyway. Money would then be pure digital.

Not sure how to let kids run summer lemonade stands in that world though, so it probably needs more thinking and/or technology though.

It seems silly to me that we still create pennies. What a waste of resources that is. A $6 per hour job makes a penny worth just 6 seconds of labor. I cringe at the thought of how much time is wasted dealing with each penny over its life. It's certainly more than 6 seconds.

GawainsGhost said...

Yeah, when it costs more to produce a coin than the coin is worth, that's a problem.

Currency does serve a purpose though. I just wish we could come up with a more economical way of producing it.

Wooden nickels, anyone?

Troy said...

Japan minted up some gold ~$1000 (Y100,000) pieces back in the day.

If I had a brain I would have cut $1000/mo out of my living expenses and picked up one a month over the past two decades.

Nothing like having a single coin that can cover a month's expenses!

And it also has $770 worth of gold (20g), too. Face value is worth $1150 tho.

Quite an oddball piece of money. Back in '87 it was only worth $700 in face value and $300 in bullion value.

Stagflationary Mark said...


Wooden Nickel

25 cents or best offer? Seriously? Note that the shipping is $1.75, lol.

Stagflationary Mark said...


Nothing like having a single coin that can cover a month's expenses!

100,000 pennies would do just about the same thing. Just imagine how popular you'd be at the grocery store each week, lol. ;)

GawainsGhost said...

Okay, plastic pennies, anyone?

This is what most people don't understand about money. P < P + I.

Principal is (always) less than principal plus interest. Appreciation is not interest. It's simply inflation.

Prices go up, prices go down. The value of currency fluctuates. But P is always less than P + I. That's why the bond market rules the world.

Stagflationary Mark said...

From the opinion stated as fact category...

Are Gold and Silver Losing Their Luster?

In the long-term, gold and silver will prove to be two of the best investments in the market.

600 years of long-term silver price history might argue otherwise.

600 Year Chart of Silver

I'm not saying that the last 600 years of history will repeat, but to think that inflation adjusted silver prices MUST go up over the long-term from here and that a silver investment at these prices is a "sure thing" rings all sorts of alarm bells in my head. Let's just put it that way.

getyourselfconnected said...

Wow, that silver chart bears striking resemblence to a US dollar chart/ via purchasing power!

Unless your long term outlook is 200 years I would suggest looking ahead the next 10 or 20. As telomeric shortening has yet to be beaten, I will pass on the 200 year window.

"Money" as defined is anything anyone will take in exchange for goods or services. Sex charts must be a rock solid uptrend! Or pot, or cocaine, or engine work.

Anyone see C-beams glitter in the dark at the Tanhauser Gate?

Stagflationary Mark said...


"Money" as defined is anything anyone will take in exchange for goods or services.

That is not money as defined. Money must be "generally accepted". You cannot "generally" pay your bills with "anything" that "anyone" would accept.

Unless your long term outlook is 200 years I would suggest looking ahead the next 10 or 20.

Had I looked ahead 10 to 20 years the last time silver performed well for a solid decade I might have been similarly convinced it was a sure thing. The early 80s were a horrible time to be buying silver as a long-term safe store of value though. I'm not saying that it is a given that silver is a horrible investment at these prices, but there is certainly a risk that it is.

It's especially risky if China is not nearly the economic miracle it is portrayed to be.

mab said...

It looks like hyper-deflation for computing devices is accelerating.

And it's not just computing devices. Heart surgeries and cars for ~ $2K!

Stagflationary Mark said...


Sibal turned to students and professors at India's elite technical universities to develop the $35 tablet after receiving a "lukewarm" response from private sector players. He hopes to get the cost down to $10 eventually.

Call me silly, but it doesn't exactly inspire me to load up on Apple's stock.

Stagflationary Mark said...

mab (& remy),

Sorry about that! I had a late night misfire. I've clearly stayed up too late again. That previous comment was intended for mab.

mab said...


Call me silly, but it doesn't exactly inspire me to load up on Apple's stock.

Apple could very well be "Tickle Me Elmo" on steroids. The long term price trends for technology are down. Apple is all about "marketing buzz" and anti-Microsoft/establishment sentiment. Now that Apple is larger than Microsoft, they are the establishment.

Not something I would invest in long term.

dearieme said...

When you, blogger, refer to "My money sits in TIPS, I-Bonds,.." I tend to say that we in Britain have a rough equivalent to "I-Bonds" called Index-Linked Saving Certificates. Well we don't now. The government's savings arm has withdrawn them from sale, citing excessive demand. I infer that lots of people fear inflation and that the government isn't too keen to sell them protection from it.

Stagflationary Mark said...


Now that Apple is larger than Microsoft, they are the establishment.

Remember that 1984 Apple commercial using the Orwell theme? They've become the dream!

Stagflationary Mark said...


The US government recently reduced the amount of I-Bonds we can buy by 83%. At first it struck me as an inflation scare, but I think it might be more than that.

1. I-Bonds are better than cash in deflation as they can never go down in price.
2. They are tax-deferred up to 30 years but the government REALLY needs the revenue right now.

Was this also true of Index-Linked Saving Certificates? I'm curious.

Stagflationary Mark said...

I should have said, "at least as good as cash in deflation".

Better still, I should have said at least as good as cash in all environments. They go up in value during inflation and can never give up any previous inflationary gains during deflation. Fantastic investment if we were to continually toggle between inflation and deflation.

dearieme said...

Funny you should mention that: ours too "go up in value during inflation and can never give up any previous inflationary gains during deflation." In fact, even in deflation they pay 1% per annum interest. They are also tax-free. Unfortunately they only last for five years. Fortunately, although newcomers can't buy them now, old hands can roll over their certificates when they mature. No doubt that'll be stopped too, soon.

Anyway, it's more evidence for my belief that everything is much more fragile than the man-in-the-street supposes.

dearieme said...

By the by, chapters 3 and 6 of this might interest you.

Stagflationary Mark said...


Fortunately, although newcomers can't buy them now, old hands can roll over their certificates when they mature.

Hmmm. What could be more fair than that? Those old hands sure are crafty. What will they think up next? Borrow money from our unborn grandchildren through massive deficits to prop up the old hand economy and old hand standard of living? No wait. That's already been done. Never mind.

Stagflationary Mark said...


I posted your link for all to see.

dearieme said...

I hope it does no harm.