Gold and Silver are sound money. They have been for thousands of years. From the ancient Romans to the Chinese dynasties, history tells us that gold and silver have been a trusted currency around the world throughout human history. Why? Gold and silver are a STORE of value, it took physical work to find these metals that exist in limited quantities, and both gold and silver have physical uses. In fact, you can’t build an iPad, a smart phone, or even a smart-bomb without the precious metals. They have physical uses and are finite in their existence. Stocks and Bonds are merely created and therefore, limitless. You can’t build an iPhone with them either.
Now let’s talk about the investment world counterparts to gold and silver. We can talk about stocks. First off, the value of a stock is really a guess of what someone thinks a portion, or a “share” of a given company is worth. This gets based on what someone else is willing to pay for the “share”. It is important to note that there is only a buyer for the share of a stock if someone believes they are able to make money on it. No one is willing to buy shares of a stock that they believe is truly headed to zero. Why does this matter? Because all companies eventually fail, (The world’s oldest company, a 1400 year old Japanese firm that specialized in building Buddhist temples, folded in 2006) they all lose money over time, and eventually all stock goes to it’s fundamental value: $0. Don’t believe me? Do your research, last time I checked (1/23/2013) only 2 of the founding 30 companies that made up the original 1928 Dow 30, are still on the Dow! The rest have either folded, or lost so much value that they got kicked off the Dow and replaced by a much healthier company! Yup, when a company is floundering it gets kicked off the Dow and replaced with a stronger company to keep the Average up!! Unbelievable! The last time this happened was in September of 2012 when Kraft Foods was replaced by United Healthcare, and guess what, Kraft replaced AIG on the Dow in 2008 when AIG nearly collapsed! So, if you are going to own stocks, you better buy low and sell high before you end up getting Krafted, or AIG’d, or Laclede Gas Company’d, or U.S. Leather Company’d, etc. (Yup they all used to be Dow stocks, but no longer….)
Bonds. Bonds generally come in two types. Either a bond is issued from a company, or a government (municipality). Bonds are a debt instrument. They are an IOU. They have no value when the company or government that issued them goes broke. If you want an easy comparison, there were $8.5 billion of municipal bond defaults in 2008, and $7 billion of defaults in 2009. Old confederate money is worth more than these bonds because there are collectors who will pay for prime examples! Orange County, California and Jefferson County, Alabama so far lead the U.S. in large bond defaults. If Orange County bonds can become worthless, then so can General Motors Bonds, oh wait……
By the way, U.S.Government issued Savings Bonds stop paying interest after a set amount of time as well, making them potentially a “poor” long-term investment. If you dig deeper into it, U.S. savings bonds usually fail to keep up with inflation, meaning you lose purchasing power each day you hold the bond! Want proof? Has the cost of gasoline increased at a faster rate annually than the %1.76 that savings bonds are paying? Also, the U.S. Government can suspend the interest payments on any bond at any time. Don’t believe me? From the wwwTreasuryDirect.Gov Website: “Also, marketable securities are subject to bond calls, cases where the Treasury stops paying interest on bonds before the scheduled maturity date. Be sure to note your securities maturity date and check the website for bond calls.”
There are other pitfalls to bonds as well, especially since interest rates are currently so low, but that’s another blog all-together. Remember, debt instruments are just that, someone else’s debt. If they thought the company or project was so great, why didn’t they just invest their own money and reap all of the profit themselves? The truth is the people that issue the debt instruments know that there is always risk and always failure involved, and they save that for the investors, while they suck up the profits for themselves first and pass on the failure to the little guy. Stocks and bonds always fail, only gold and silver are sound money.