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The day I was asked if I buy and sell gold

would this buy a bag of gold?

Photo credit: jb

I was recently walking down the street and came across a man with a table set up, right on the sidewalk. He had gold and silver coins on it, each in its own special plastic case. Apparently he was attempting to sell some of his collection. I didn’t engage him, just walked around his table, where a couple of other folks were standing talking to him. 

I’m pretty sure he knew me and what I do, because as I passed by he stopped his conversation with the others and asked “Do you buy and sell gold?”. I politely told him no, that I didn’t deal in metals at all. 

“Wrong move, bud! Gold has outperformed the stock market for the last wawh-wah, wawh, waah…” (somehow he had turned into Charlie Brown’s teacher by this point).

Not wanting a confrontation, I just smiled politely and went on my way. After all, anything that I had to say about the subject was likely to result in a disagreement at best, and possibly turning away his potential customers. 

I don’t begrudge the man for his particular choice of investment. For all I know, he may be very successful at it. He may even have multitude of different investing activities, giving him a well-diversified portfolio. Good for him! It’s just not for me.

Had I taken him up on his challenge, I would have brought out two particular points about why I don’t buy and sell gold:

Gold’s value is difficult to determine. Gold is only worth what a prospective buyer is willing to offer. Granted, in non-coin form there is a somewhat agreed-upon value in the global marketplace for gold, but that value fluctuates (sometimes wildly) and is not relative to the utility of the investment.

On the other hand, stocks have a value based on the future earnings potential of the company or companies. These values also vary (sometimes wildly) as well, but in general the value is relatively constant. One can easily look at the inherent value versus the value the marketplace has put on the stock to determine if it is currently underpriced or overpriced. With gold you don’t have an underlying stream of income (gold produces no income) to help determine its price.

If I were to buy a coin from this man for his tagged $20 price, in order for me to make money on it I’d need to convince someone else that it was worth something more. Chances are, the $20 price is either at or above the retail price for the coin, and since I’m not a coin expert I don’t know the difference. I’m simply taking his word for the fact that the coin is worth what he’s charging me for it.

I could do some research on that particular coin. Once I do, maybe I’ll find that it’s only worth $15 if I were to take it elsewhere (like an exchange) to sell. Or perhaps I’d find that an exchange might be willing to buy it from me for $22.

The likelihood of finding a coin that is underpriced in such a circumstance is pretty low. After all, the guy at the table has been doing this for a while – he knows what he paid for the coin, and he knows what he needs to sell it for to make a profit. He also knows what an exchange will pay for the coin, and he’s priced his coin above that. Obviously he wants to maximize his profit.

So as the buyer of a gold coin, I’m disadvantaged. I don’t know what the coin is worth without taking time to research about it. And going into a transaction without knowing the worth of the item is a big mistake.

The primary difference between gold and common stocks is that in buying gold you are speculating that someone in the future will be willing to buy it from you for a higher price. With common stocks, you have an understanding of the underlying company’s potential to earn a profit, which in turn should result in either a higher future price for the stock, or a dividend paid out to you as the owner of the stock, or both.

Gold doesn’t earn a profit. You must rely on the actions of future buyers and their opinion of gold’s value to determine whether you’ll make money or lose money.

You must store and secure your gold. If you own gold coins or bars, you need to find a place to put it where it will be secure from thieves. You also need to be able to get to it pretty quickly if you find a buyer for your coin. This can result in some significant costs over time. 

Warren Buffett says of gold:

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.

You might need to install an alarm system on your home or office (wherever you keep the gold). And you might have to invest in a safe – something heavy-duty enough that a thief couldn’t just pick it up and walk away. Plus, gold is heavy. It doesn’t take a lot of coins to result in some pretty serious weight – making moving it around harder, as well as possibly requiring structural adjustments to the building where you store it.

Of course, you could always rent a safe deposit box for your gold – but then again, if you’re a prepper you probably don’t trust the “system” enough to put your hoard in the hands of some bank. Besides, once the apocalypse occurs, how are you going to get your gold out of the bank?

On the other hand, with stocks (in non-apocalypse times) you don’t have to find a place to store them (unless you have stock certificates, and that’s pretty rare these days). In addition, pretty much any business day you can buy or sell stocks, and you don’t have to worry about whether your den floor will be sufficient to hold the weight. You also don’t have to worry about being robbed while you’re moving your item from your safe place to the hands of the new buyer.

In the event of some potential apocalypse, I figure there’s little likelihood that pre-event money of any kind will have much value. I think we’ll all have to work out for ourselves how to survive – and carrying around bags of gold is probably not the way this will work anyway. I’m not trying to poo-poo the prepper movement – it’s just not how I’m spending my time. How does that line from Larry Norman go…?

A piece of bread could buy a bag of gold…

Conclusion. The only reason to buy gold is to re-sell it. It’s the valuation issue that causes the most problems for gold. If you can’t find someone to buy your gold for what you think it’s worth, you either have to accept a loss, or wait until another buyer comes along. Sometimes you don’t have the luxury of time to wait. If you need money right away it’s not like you could stop by the grocery store with your bar of gold and shave off a few milligrams to buy your loaf of bread.

With stocks, even though there may be fluctuations in prices, there are also earnings from the underlying company to add to the mix. You might be caught in the same circumstance as with the gold, where the market is lower than your original cost for the stock, but presumably you’ve also had some earnings over time. Since there is economic activity associated with the company, at least you’ve got something earning you money over time, not just sitting there taking up space and costing you money to secure it (as with gold).

Also, with gold you may find yourself in the position (for example) of setting up a table on a street corner to try to attract buyers for your holdings. With stocks you don’t have to go to this extreme. Although, now that I think about it, I suppose that may be some of the attraction to holding gold. You can sell it outside of a systemic marketplace and potentially hide your profits from taxation since it’s likely a pure cash transaction. But I’m sure that doesn’t happen often, right?

Speaking of taxation, (in the US, anyhow) under our current system, capital gains from stock holdings are taxed at a maximum rate of 20%, depending on your overall income (can be as little as 0%). Gold on the other hand, is considered a “collectible” (whether in bars or coins) and is taxed at up to 28%. As with all matters, the tax tail should not wag the investing dog, of course.


  1. David Merkel says:

    My most comprehensive post on gold was Gold does Nothing.

    Gold isn’t an investment. It is storage of value for another day, which in that sense is similar to owning T-bills. Over the long haul, you keep up with inflation, and that is about it.

    I don’t own any gold. That said, of all commodities, it is the most storable, and least sensitive to economic affairs.

    I think it is possible to estimate the price of gold by looking at the marginal costs of production — that gives an estimate of replacement costs. In the short run, the price of gold reacts to the inflation-adjusted cost of carry — what do lose by holding gold versus T-bills. At present that model is not working — but with the Fed creating credit with abandon, long run estimates of inflation are low-ish, and I tend to agree with those estimates, but many think it will be high, and so the price of gold rises for now.

    Thanks for writing this article.

    1. jblankenship says:

      Thanks for sharing your article – thought-provoking, indeed.

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