The Importance Of Having Physical Precious Metals

Why I Think It's A Good Time To Have Just A Little Bit Of Disaster Insurance

“Gold is a pet rock.”

“Gold doesn’t have any yield.”

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We have all heard the quotes from various places in the investment world on gold and other precious metals. Investors have been trained for decades to look for other opportunities, be it stocks, bonds, or real estate. I think that we are going to see that change in coming years, and I think with some of the geopolitical uncertainty and questions around the financial system, now is a good time to consider allocating to physical precious metals. My podcast with John Polomny is what prompted this post, and I think having at least a small slice of precious metals is a good disaster insurance policy and a hedge for potential chaos.

Like I have said before, I think we are in the early innings of a cyclical shift in markets. We had a long run of declining interest rates, low inflation, relative peace, and globalization. Now I think we are looking at a trend of rising interest rates, higher average inflation, increased conflict around the world, and deglobalization. To some extent, all of these trends feed into one another. Bringing parts of the supply chain back to America is probably a good thing for most Americans, but it’s almost certainly inflationary, and I haven’t seen a war that wasn’t inflationary. To be clear, this is a view of what I think things will look like over the next three to five years, not what might or might not happen over the next three to five months. Overall, it’s an interesting backdrop for precious metals.

Physical Precious Metals In Chaotic Times

Gold is money, everything else is credit.

- JP Morgan

I’m not going to pull a Peter Schiff and tell you “the sky is falling, buy gold” or one of the guys you see on the podcast circuit talking about the futures market manipulation. First of all, it’s not my area of expertise, and second, I don’t run a gold fund or bullion dealer. All I’ll say is that you should take anything said on the topic with a grain of salt, especially if someone is talking their book. There will always be someone pointing to inflation, real interest rates, or trust in governments as a reason to buy or sell gold and precious metals.

A wise man once said that violence is the only currency that never loses value. In my opinion, gold and silver are a close second. I’m a history buff, and I’m not going to go into some long rant on the history of fiat currencies and money, but I think now is a good time to consider physical precious metals. I’m not talking about price exposure. If you want pure price exposure, you can look up the various Sprott Physical Trusts. I’m talking about disaster insurance.

Disaster Insurance

I’m not a doomer, and I’m actually very optimistic about America’s future over the next two decades. I do think that we are in for a bumpy ride over the next several years, which is why I think it is prudent to have some precious metals on hand. Whether it’s buried in the backyard, in a safe, or in a vault nearby is up to you to decide. Personally, I think it’s important to keep them somewhere where they can be accessed fairly easily.

If the shit hits the fan, are you going to be able to get your precious metals from a vault in Switzerland? If you live in America, probably not. What happens if the electric grid goes down? Again, I’m not trying to be overly pessimistic on the current situation, but it’s worth having a contingency plan with physical precious metals. All of these options have different pros and cons, but there are several things that could make physical metals a good hedge for the current geopolitical landscape.

Geopolitical Uncertainty

The first is the geopolitical situation, which looks like a powder keg waiting for a spark. Some people think that WWIII has already started, which might be a bit premature, but I’m not optimistic about the direction things are heading in Ukraine or the Middle East. Taiwan is another potential hotspot. The second thing is the debt situation here in the US. We are adding one trillion to the debt every three months, not to mention unfunded liabilities like Social Security, Medicare, and Medicaid. Basically, we are stuck in between a rock and a hard place and I think inflating the debt away is the path of least resistance.

Another thing to watch is the potential for a central bank digital currency (CBDC). I think that’s highly unlikely here in America (at least for now), and more likely to happen in Europe in the near future, but that’s a tangent for another day. Another tangent that I don’t have time for is on David Rogers Webb’s book The Great Taking. It’s worth taking a look at his thoughts on the plumbing of the financial system, but I think a mass confiscation of financial assets laid out in the Great Taking is highly unlikely. It would be the equivalent of flipping the financial game board and lead to absolute chaos, but it’s something to keep an eye on. The point is that I think having some wealth stored outside of the conventional financial system is good insurance against some of the potential landmines on the horizon.

Spreads For Physical Metals

Before I get into my thoughts on the big three precious metals (gold, silver, and platinum), I should mention the spreads between the spot price and buying the physical metals. Buying the physical metals is not the vehicle for you if you’re looking to buy and sell with any frequency. You are going to pay a premium to spot prices when you buy, and you will probably be closer to spot or even a discount when (if) you decide to sell. Basically, you get a papercut when you buy physical precious metals, and a papercut when you decide to sell.

Like I said earlier, if you’re bullish on precious metals and just want exposure to the price, the Sprott Physical Trusts are probably a better option with lower transaction fees. For the physical metals, the spreads will fluctuate depending on the product, how much you buy, and several other factors. For example, you will typically pay more for an American Eagle (gold or silver) than a bar of the same size. Ideally, it is something that you plan to hand down to future generations, but physical metals are only a logical choice if your time horizon is measured in years.

Gold: Pet Rock Or God’s Money?

While gold ($2,352.80/oz) has been an afterthought for most investors for decades, I don’t think that will be the case for the coming decade. I’m still thinking we could end the year in the $2,500/oz ballpark, and longer term I think we go a lot higher. I could go into central bank buying, the lack of trust in governments, or any of the other things that could be a factor for gold in more detail, but I think a lot of signs point to a higher gold price in coming years. Overall, I think it’s a pretty good setup for gold bulls, and I think we are in the process of gold being remonetized.

It’s not an overnight process, but it’s worth watching a couple interviews of Luke Gromen to get his take on the path for gold (and other commodities). I’m not here to tell you gold is going straight up and to the right, but gold is God’s money. It always has been and it always will be, and I don’t think you have to be a rocket scientist to figure out that gold will hold its value better than a fiat currency like the US dollar longer term. While I think it makes sense to have some physical gold exposure, I think we are going to see silver and platinum outperform gold over the next several years.

Silver: Industrial or Precious Metal?

The answer is a little bit of both. There are other people that can go into the supply and demand picture in more detail, but at some point silver priced in dollars heads a lot higher. Some investors point to supply issues, increased demand from solar, or other factors, but I don’t think we will get a bull market in gold without silver participating to some extent. When that happens, and to what degree is anyone’s guess, but I don’t see a future with gold at $3,000/oz and silver staying stuck in neutral at $30/oz.

For investors looking at physical silver, the spreads can be a bit painful, but if you’re planning to hold it for years instead of months, I think it’s worth a look. In a worst case scenario, you probably won’t be exchanging gold for a tank of gas and some food. Silver is probably the logical choice for smaller day to day transactions. I like the risk/reward for silver around the current price around $30/oz, and I think it’s a matter of time before we see all time highs in terms of dollars. That might take years, but for investors with some patience, physical silver is worth considering. While I think silver probably has more upside than gold, I think the most interesting physical metal for speculators is platinum and the other PGMs.

Platinum & PGMs - Speculation + Insurance

Gold and silver get the lion’s share of attention from investors focused on precious metals, but I think platinum could have the most upside of all three. Platinum and the other platinum group metals (PGMs) have a huge gap between supply and demand. South Africa and Russia are the two largest producers of PGMs by far. Unless you think we are approaching mass-EV adoption, the gap between supply and demand makes for an interesting risk/reward setup. The PGMs are more scarce than gold, and most of the demand comes from catalytic converters.

As far as physical metals go, it’s probably easier to look at platinum ($994.80/oz) versus the other PGMs like palladium ($944.80/oz) and rhodium ($4,725/oz). If you think ICE engines are going to be around for years if not decades, it’s worth taking a look at all of them. The major investable platinum group miners are located in South Africa, which creates some uncertainty for investors, even if there is huge upside if platinum prices start to run. Platinum (and other PGMs) might not be as useful as silver or gold for bartering in a worst case scenario, but I think the setup is the most interesting of the precious metals from a price asymmetry perspective.

I have talked a bit about disaster insurance, and I think buying physical PGMs is somewhere between insurance and speculation. I wouldn’t start with the physical PGMs before gold and/or silver, but it’s an area I’m watching closely. I think platinum will catch up and pass gold if we get a bull market for precious metals, but we will have to wait and see. At the end of the day, there’s a reason the platinum tier on credit cards are above the gold tier.

Conclusion

I’m not the guy who will sell fear and then drop a link to an affiliate bullion dealer at the end of the post, and I’m not going to tell readers what they should do with their resources. For me, I think it is a prudent approach to have at least a small amount of physical precious metals on hand for the off chance that we do enter a more chaotic time. I’m bullish on the metals to varying degrees, and I think using a vehicle like one of Sprott’s physical trusts makes sense for investors looking purely for price exposure. For more octane on the upside, the miners are an interesting option.

I’m not a “prepper”, but I have started to take steps to prepare for some of the unlikely outcomes that could be on the horizon. I think we could be heading into a chaotic time, and having some physical precious metals is just one aspect of being ready for whatever may come. However, I don’t think it makes sense to go overboard where the only way that a strategy pays off is the worst case scenario coming to pass. That’s how you end up in the middle of nowhere on a compound with a stockpile of bullets, bullion, and MREs.

I think that we’re in for a bumpy ride over the next couple years, but longer term I think America will be in great shape if we make it through the next several years in one piece. The only problem is that the path from here to there looks like it’s filled with twists, turns, and landmines. That’s why I allocate a small slice of my investments to physical precious metals, like gold, silver, and platinum. My thoughts on physical precious metals can be summed up in one sentence:

I would rather have precious metals and not need them, versus needing precious metals and not have them.

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Disclaimer

You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

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