What Would You Prefer: Gold Or Paper?

In this article, the author makes a simple yet powerful comparison between a gold investment and paper based investments. What was the yield of typical paper based investments in the past decade vs gold or silver (which are mostly criticized as they don’t pay interests or dividends)? Which are the inherent risks and what to expect in the coming years? Obviously there will be a time when gold and silver will be overvalued, as it goes with each wealth cycle. However based on the current evolution we are still far away from that point.

Investment Return Since 1/1/2000

    • Gold (The Road Less Traveled)
      • Gold up from $285 to around $1,750 – about 15% per year compounded for 13 years
      • Silver up from $5.40 to around $33.50 – about 15% per year compounded for 13 years
  • Paper (The Road More Traveled)
    • S&P 500 Index: down from 1,469 to about 1,430 – approximately no change in 13 years
    • NASDAQ 100: down from 3,700 to about 2,700 – about negative 2.4% per year compounded for 13 years
    • US Dollar: down from 0.8 gallons of gasoline to about 0.3 gallons of gasoline
    • US Dollar: down by about 60% in terms of retail food prices

Bankruptcy & Insolvency

  • Gold (The Road Less Traveled)
    • Gold & Silver (real physical metal – not paper promises) do not declare bankruptcy and have no counter-party risk. True for 5,000 years.
  • Paper (The Road More Traveled)
    • Lehman Brothers | Bear Stearns | Enron | AIG | General Motors | MFGlobal | Zimbabwe | Greece | United States | Hundreds more

Safety vs risk

  • Safety with gold & silver
    • Physical Gold and Silver – cannot be “printed”
    • Investment demand increasing
    • Central Banks are now net buyers
    • Huge demand for gold and silver in China, India, and Russia
    • Chinese government encourages ownership of gold by its citizens
    • Mine supply flat or barely increasing
    • US and Canadian governments mint gold and silver coins
  • More risk with paper
    • Paper investments have counter-party risk.
    • Will governments or corporations pay on their promises?
    • Will stocks collapse if the economy weakens?
    • Will a derivative implosion crash the economy?
    • Will Congress spend the dollar down to a fraction of its current purchasing power?
    • Will consumer price inflation destroy the middle class of Europe and the USA?

Future expectations

  • Gold’s future
    • Gold and silver prices will increase substantially as the Dollar and Euro decline in purchasing power due to excess spending and Quantitative Easing (debt monetization or “money printing”).
    • Fear of inflation and loss of confidence in paper money, governments, and political promises will drive gold and silver prices much higher.
  • Paper future
    • The dollar has lost about 98% of its value since 1913 and much of that loss occurred since 1971. Do you see anything that will change the trend toward continued monetary debasement?
    • Fear of inflation and loss of confidence in paper money, governments, and political promises will weaken the purchasing power of the Dollar and the Euro.

Further reading on the expectations of the silver price? Please read Silver outlook for 2013.

The author recently published an eBook “Survival Investing With Gold & Silver.” It’s available on this website, from Smashwords, and from Amazon Kindle eBooks.

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