Review of Guide to Investing in Gold and Silver by Mike Maloney
Guide to Investing in Gold and Silver
Video Introduction for Guide to Investing in Gold and Silver.net
Guide to Investing in Gold and Silver is divided into 4 parts, focusing respectively on monetary history, the situation the worlds monetary system is in and how it got there, how things will develop in the future and the different ways people can buy gold and silver, including pitfalls to avoid.
One thing that struck me about the book is the emphasis Mike Maloney places on educating the reader about the history of money, and the characteristics sound money should possess. The book starts with the origins of money and the monetary systems of the ancient classical civilizations. The value of this approach becomes apparent as the reader will soon realize that the saying “there is nothing new under the sun” applies to the history of money just like everything else. Mike guides the reader through the debasement of the coinage in ancient Rome, and its origins in the political class making spending promises they could not possibly deliver in order to covet short term popularity. Ultimately the original silver and gold coinage was both debased with lesser metals, the coins made smaller and the same coins re-cast with higher values stamped on them. This increased the money supply but there was increasingly less value attributable to each unit of money (sound familiar?). Closer to the current period there is an overview of the period comprising the classical gold standard during the 19th Century up the First World War, and the subsequent period through Bretton Woods, President Nixon closing the convertibility of currency to gold on 15th August 1971, through the inflation of the 1970’s and the popping of the Dot Com bubble in the late 1990’s. What is disappointing is the predictability of the current problems, and the cycle of hubris and opportunism which lead to them.
The part of Guide to Investing in Gold and Silver dealing with the current situation argues that effectively the value of most financial assets has been falling since 1999/2000. This time comprises both the top of the stock market in real terms, and the bottom of the gold and silver market. This was the time when paper assets were most lauded, and the real money of gold and silver bullion was most un-loved. Mike maintains that in practice falling asset values since then have been disguised by inflation. Although the prices have either gone up or remained static when priced in paper currency, when valued against commodities and gold, values have been falling. Another interesting point Mike makes regarding the stock market is that the value of shares when measured in price/earnings ratios have been falling over this time.
(As an aside to this review, the economist John Williams has an informative site called ‘shadowstats.com’. On this site John Williams maintains that the United States government has been understating consumer price rises, and provides alternative indices which demonstrate that consumer prices are actually rising faster than being officially reported. Although the site focuses on the USA, this dynamic is also likely to be relevant to visitors from other jurisdictions as the practice is arguably widespread).
Mike outlines within the book the soaring government deficits and unfunded liabilities, and how these are being financed via the expansion of the money supply. An important point to grasp is that rising prices are not themselves inflation, but rather a symptom of the inflation/expansion of the money supply.
When considering the future the book emphasizes to the reader the cyclical nature of markets, and that the length of these cycles can range from a few weeks up to centuries. This is an important point as the premise of the book is that the cycle is turning in favour of the real money of gold and silver. Essentially currency will need to be printed to pay the debts denominated in those currencies, which will lead to a loss of purchasing power of those currencies. However, wealth will not so much be destroyed by the diminution of the worlds’ paper currencies, as transferred to those holding other assets, particularly real money (gold and silver). An informative eg given in the first part of the book is that at the end of the hyperinflation in Weimar Germany, a block of commercial real estate in downtown Berlin could be purchased for just 25 ounces of gold. Ultimately when the cycle turns and gold and silver become overvalued against other assets, Mike Maloney advises that gold and silver should be sold to purchase alternative assets. Mike acknowledges a drawback with gold and silver investment is the absence of a cash flow.
Within part 4 of the book there is an informative guide to the options available for people looking to buy gold and silver, their different characteristics and pitfalls purchasers should be aware of when entering the market. Mikes general rule of thumb is that “if you can’t touch it you don’t own it”. Notwithstanding this for persons who do not wish to purchase physical precious metals alternative options are explored. The book cautions though that the gold and silver price are suppressed by amongst other things the practice of selling the same precious metals to different parties, and in the event every party who believes they have a call on gold and silver bullion asked for delivery there would likely be a failure to deliver. Accordingly if eventually you want to take delivery it could be dangerous to delay, as at some future point it may be more difficult to obtain physical delivery of bullion.
I found Guide to Investing in Gold and Silver intriguing and very easy to read, and would recommend it both as a specific text on precious metals investing, but also for people seeking to improve their financial education generally. However, I felt a short term downside of investing in gold and silver bullion is the alleged price suppression directed against them, which could make them unsuitable for investors seeking to frequently trade in and out of them. I felt the book could have recognized this as a danger for this type of investor. The emphasis was very much on the purchase of the physical precious metals and to treat them as a long term hold. I am concerned that without diversity into other assets within a portfolio, the investor could be caught short if they needed to liquidate part of their portfolio to fund other purchases.