Investing in Gold & Silver For Dummies. Paul Mladjenovic

Investing in Gold & Silver For Dummies

up in bankruptcy. Given that, the stock will go to zero.

In the history of the stock market, thousands of companies went out of business and we witnessed their stock go to zero. Some famous examples are Enron and Bear Stearns, and you can find many others. The Dow Jones Industrial Average (DJIA) has been the most watched stock market barometer for more than a century, and it lists 30 of the largest and most successful companies in the world. Yet the 30 stocks within the DJIA aren’t the same 30 stocks that were first listed in the original average. In fact, only one stock remains (General Electric). The rest either went out of business or were taken over by other companies.

Yes, stocks can fluctuate and can go up or down given the daily interaction of a huge group of buyers and sellers, but if the company’s management team and the overall company itself ceases to perform profitably, then the stock will suffer.

A stock will be only as valuable as the performance of the stock’s counterparty: the company’s performance. Keep in mind that although mining stocks may have counterparty risk (as any other stock), you can mitigate the risk by focusing on the stock’s fundamentals (profit, market, and so on), so check out Chapter 7 for more details.

Bonds

In times of stock market mayhem and economic uncertainty, many investors tend to flock to bonds. Whether corporate bonds, municipal bonds, or what’s considered the safest category — U.S. Treasury Bonds — bonds are considered a safer bet than stocks during periods of economic difficulty such as a recession.

All things being equal, that’s generally true, especially in conventional times as has been the case in recent decades. But 2020–2030 isn’t a conventional time. Regardless, a bond is a perfect example of counterparty risk. A bond is essentially an asset for the bond buyer (basically the creditor), but on the other side of this, it’s a debt that must be satisfied by the debtor. Given this, a bond’s value is only as good as the promise or performance of the payer of the bond. The payer of the bond (a company, municipality, state, or sovereign government) is the counterparty.

Many times throughout history, bonds went to zero because the counterparty defaulted on the legal obligation to pay back any interest plus principal. But now we’re in unconventional times with epic amounts of trillion-dollar, unsustainable debt. During 2020–2030, you will see defaults. Corporate and municipal entities will default and/or pay creditors (such as investors) only a tiny fraction of what’s due. Bonds are paper assets entering a uniquely hazardous time in history.

Gold and silver that you own and hold in your possession aren’t someone else’s liability or promise to pay. There’s no counterparty that needs to perform so that gold and silver retain their value. Gold and silver have their own, intrinsic value — no matter what’s going on in the world or across the financial and economic landscape. That has been true for thousands of years. For more details on buying and owning physical gold and silver, check out Chapter 9 (on bullion coins) and Chapter 10 (for numismatic and collectible coins).

ETFs and mutual funds

In the world of paper assets, ETFs and mutual funds are great, and a neat feature is that diversification is present to some extent in most of these vehicles. I love ETFs and mutual funds, I own them, and they’re indeed appropriate for many folks.

However, ETFs and mutual funds are only as good as the assets they own. If they own successful investments, the fund will do well; if they own failing investments, then the fund will definitely not do well. If a mutual fund, for example, has stocks and bonds, then these investments have counterparty risk. So do ETFs and mutual funds have counterparty risk? Yes!

I think that investing in gold and silver ETFs that guarantee ownership of physical bullion is as safe as you can get within the boundaries of a portfolio held at a brokerage account (whether a regular or retirement account). You still need to be aware of the counterparty risk of the issuer, but it does have greater safety when compared to alternative ETFs. For more details, check out Chapter 8.

Keep in mind that inverse and leveraged ETFs have financial and market risks, but they can be a good way to speculate in gold and silver in the event of a precious metals bull market. Read up on the details of these aggressive vehicles in Chapter 11.

Cash and bank investments

Typically, if you have a savings account, checking account, certificates of deposit, and other bank instruments, these don’t have market risk. In other words, they’re not usually traded in some marketplace and subject to fluctuation, and they don’t go up or down as you normally see, such as in the stock market. You know that if you put, say, $1,000 in a bank savings account in January, you could reasonably expect that money (plus some interest) to be there in December (unless you gave access to that relative who goes on spending binges).

U.S. banks are considered among the safest banks in the global financial arena, but don’t assume 100 percent safety at all times. When times are extraordinarily difficult, the safety of your funds can be an issue. Bank safety was a major issue during the Great Depression, and as you read this, U.S. banks have entered times that may again be considered difficult, so stay alert. If you suspect that your bank has issues, you can find out about the bank’s safety from sites such as www.fdic.gov.

Cash — whether it’s in your pocket, your sock drawer, that crevice in your couch, or any bank or credit union account — is subject to inflation risk. Inflation risk is a form of counterparty risk.

Inflation means that more dollars (or whatever the currency is) are being overproduced so that more dollars are chasing the same basket or goods or services (or, as in the case of bubbles, chasing assets). When more and more dollars are produced, and these dollars head into the purchase of something, that “something” will see its price rise. Monetary inflation (problem) leads to price inflation (symptom).

So, where is the counterparty risk? Monetary inflation comes from the management of the currency; it doesn’t “just happen.” It’s a direct result of the performance of those in charge of the currency. The “managers” of the currency are the folks at the central bank charged with the creation and management of the currency (also referred to as the “money supply”). Those who manage the currency are said to be conducting “monetary policy.” Ultimately, the central bank will generally follow the edicts of the political leaders, and seriously, what political leaders are immune to the idea of inflating the currency? It’s like creating money out of thin air.

It will happen when they want to be popular with the electorate and spend, spend, spend. This is why we have trillions in national debt. This is how entire countries bankrupt themselves. This is why hyperinflation has commonly dotted history’s landscape.

A currency is only as good as the performance of the counterparty, the issuer (the federal government). If the currency is mismanaged (overproduced!), the currency loses value (perceived or otherwise) and (as history shows) often goes to zero (becomes worthless).

Investing in Gold & Silver For Dummies. Paul Mladjenovic