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Lip Gloss, GameStop, and Shorting the Market

February 16th, 2021 at 09:31 pm

Lip Gloss, GameStop, and Shorting the Market

GameStop has been in the news a lot this last month, leaving many excited, but scratching their heads.  What exactly just happened?  What does it mean to short a stock?  Can I get in on this action?  Well, let me tell you about a time when I accidentally shorted MaryKay lip gloss and how it is related as well as a bonus strategy for SAFELY shorting the market.

What is a “Short”?

Stock market contracts can extremely intimidating.  Everything is tied up in legal jargon and the word "risk" is plastered all over any honest explanation.  I don't recommend anyone's first stock market transaction being anything other than a stock or mutual fund.

Put in simple terms when you short a stock, you borrow a stock from your brokerage with the promise to return the stock on, or before, a specific date.  You immediately sell the borrowed stock and pray the stock drops in the meantime.  When the stock is low, or when your contract is about to expire, or any other time you wish, you buy the stock back and return it to the brokerage, closing out your position.  You get to pocket the difference between the amount you sold it for and the amount you bought it back at, minus contract fees.

Despite all my "doom and gloom" predictions, I never have shorted any stock or fund.  One reason is that inflation might raise the dollar price of a stock despite the actual value decreasing.  A bigger reason is timing.  When choosing stocks you can hold your position for as long as you want and wait for the profits to emerge.  When you short, you're on a tight time frame.  I don't know enough to call that type of timing.

The final reason is that I'm just not ready for that kind of commitment.  When buying stocks, you can only lose the money you put in.  With shorts, you can lose an infinite amount of money, kind of.  More on that later.

Let’s check out an example to help clarify:

My first, and thus far only, time "Shorting" the Market

I used to sell Mary Kay in college.  It was as bad idea.  I made a spur of the moment decision based on the fact that I could sell my unused inventory back if I decided to quit within the first year.  I planned to get what money I could then quit with only profit and no loss.

Time went on and I was up against the 1 year mark.  I was a lousy sales woman and was extremely busy with Differential Equations homework (YUCK).  It was time to quit.  I made many calls to my unit director requesting information on how to send my inventory back, but she never answered.  The calendar rolled past the date leaving me stuck with hundreds of dollars’ worth of stuff.  Most things I would never be able to sell at a profit.  I sold what I could deeply discounted to friends, then started listing on Ebay.

One listing I made was for "Sweet Raisin Nurishine Lip Gloss".  I had slow internet and a computer glitch which made me believe the listing didn't go through.  I listed it again and unknowingly ended up with two listings.  One sold, and I sent it off.  The second one sold and I realized my mistake.  I had a contract to send someone sweet raisin lip gloss, something that I no longer owned.

It turns out there are a lot of Mary Kay ladies out there in the same boat selling on the Ebay market.  At the time, there was a decent volume of sweet raisin lip glosses selling.  I simply bought someone else's listing that met my specifications and entered in my buyer's name and address.  I’m almost certain it is against Ebay's Policy to flip product like this, but so is not delivering the promised product.  I was in a bind.

Timing and Pricing

I was lucky.  By the time I realized that I had made the mistake and was told that none of the other colors that I did have would suffice, there were new listings selling at even lower prices.  In the end, I earned $0.52 on the transaction (buyer paid $6.5 - $5 purchase from other seller - $0.98 fees = $0.52).

Had instead the price jumped, I would have lost money.  What if a popular singer had declared Sweet Raisin Nurishine Lip Gloss the ONLY thing she would ever put on her lips?  Or another company announced a contract to buy enough Mary Kay lip glosses to put them on back-order for years?  The price could have jumped indefinitely.

Shorting the Stock Market works almost exactly the same way:

Lets say you think a company is overvalued and will see a decline in the next week.  You could place a short order with your broker for a number of the company's shares (typically 100).  The Broker will give you the 100 shares, which immediately get sold at the current market price.  Part or all of that money is held by the broker/lender as collateral against your loan (margin account).  You have until a set date (anywhere between a few days to months as agreed) to return the company shares.  At this point several things could happen:

  1. You could wait until the price drops to a level you are happy with, have your broker buy themselves the 100 shares with your margin account, then you pocket any extra after fees.  You can set this up to happen automatically with a trailing stop (percentage based) or a limit order ($ value based) so you can buy at or below your threshold even if it is only at that price for a split second.
  2. You could get scared as the price trends upward and try to cut your losses by buying early (also may be done with limit orders or trailing stops).  Again, you'd have the broker buy themselves the 100 shares with your money and any extra you have to put in, pay them their fees, and accept your loss.  
  3. If the price goes up significantly, your broker may automatically buy the shares back to minimize their potential losses in case you can’t afford to buy the 100 shares at the new price (margin call, more on this later).
  4. You could also wait all the way until the contract expires, and have them do the same thing.  If the price went down enough to cover your fees, you'll make a profit, if it went up, you'll lose money.

In my lip gloss scenario, I had a contract that ended as soon as I realized it existed, so I was forced to buy at the current market price.  Had my item been listed as ships within 1-30 days, I could have waited until I found an even lower listing on Ebay at the risk of losing the low prices already on the market.

The good news is you'd never accidentally short the stock market like I did with lip gloss!

Short “Squeezes”

GameStop’s recent behavior is a classic case of what they call a Short Squeeze. 

Imagine that a large group of MaryKay ladies in the know could see a huge demand drop of Sweet Raisin Nurishine Lip Gloss as the product was no longer going to be in future catalogs.  MaryKay ladies everywhere will be forced to sell their Sweet Raisins well below the MSRP and may become desperate enough to sell on Ebay.

That group of MaryKay ladies may start selling contracts to deliver Sweet Raisin Lip Gloss that they don’t currently own, knowing the market is about to be flooded with product.

Imagine also, that there’s a group of Ebay users that are tired of the tricks of these clever MaryKay ladies.  They see what is happening and they start buying up all the Sweet Raisin Lip Gloss they can, causing the price to actually go up.

The Pink Cadillac top sellers, aren’t too worried at first.  They have plenty of days before their contracts expire.  This little price spike is something they can wait out.  They figure there is no way these small players can keep the price inflated for long.  Sooner or later, they will start selling.

Imagine now that the people who bought the contracts from the MaryKay ladies also had control of their PayPal accounts (the brokerage firms). As they see the price of Sweet Raisin Lip Gloss sky rocket they start taking precautions to ensure they actually get their order.  If the price gets close to exceeding the balance in a particular PayPal account, they force the MaryKay lady to buy into the market now or to put more money into the account.  This is called a Margin Call.

The MaryKay ladies who were operating under a small cushion will be forced to buy at inflated prices.  As they struggle to get the product they need to deliver, they cause the price to increase further, triggering more margin calls for slightly more stable MaryKay ladies.  This continues to push the price upward until nearly every single MaryKay lady is unwilling or unable to put in enough cash to wait it out.  Ironically, the ones best suited to wait out the situations, stand to lose the most money.

There’s an old Wall Street saying that markets can stay irrational longer than you can stay liquid.  In other words, you can lose a ton of money even while making good calls.

Now finally, like in the case of many hedge funds shorting GameStop, imagine that these MaryKay ladies “in the know”, who had this brilliant play on a product that was almost certainly losing value, wasn’t just using their own money.  Imagine that they had pooled millions from pension plans that were desperate to find the yields they need to cover their promises to workers.  In the end, the Ebay manipulation group, might have robbed their parents and grandparents.

Quick note: GameStop was a prime target because it showed up in a list of heavily shorted stocks (let’s face it, their current business strategy is dying out) and was traded very thinly, so tiny movements could change the prices drastically.

A safer way to short

 A Put lets you buy a stock at a certain price regardless of market value.  Typically, you’ll buy a contract that allows you to sell a fixed number of shares at a specific agreed "strike" price (below current market).  Even if the share price drops to zero, the buyer must buy your shares at your request at the predetermined strike price so long as the contract has not expired.  

In my case, I essentially had a “Put” on my original MaryKay inventory, but my one year contract expired before I learned how to use it.

For a fee, you could potentially insulate each of your holdings from things like the huge 50% drops we've seen several times since the turn of the century.  As Robert Kiyosaki (Rich Dad) says, "Professional investors always buy in pairs. One position is for growth, and the other is for protection." ( You should only gamble with money you can afford to lose.  If your stocks are your retirement, it might be worth looking into "insuring" them with puts.

Puts, used in a traditional way, are simply insurance: something that you pay a recurring fee for and hope to never cash in.

Shorting the Market with Puts

If Puts are used on stocks you don’t own, they are a safer way to short the market.  For example, if those clever MaryKay ladies had instead found a patient bulk buyer who was willing to buy up to 1,000 lip glosses at the low fixed price of $6, they could have waited for the prices to drop even lower, bought as much as they could without changing the price above $6, sell it at $6, and pocket the difference. 

It’s kind of like buying fire insurance on a house you don’t own.  It would be a great deal to buy a house after it has already burnt down at rock bottom prices, then turn around and collect insurance money on the original value of the home.  You just have to have the foresight to buy insurance on the house with fire hazards before it happens.  The worst case scenario is simply, you never cash in on the contract you paid for.

Political Side Note:

If you follow financial commentaries for entertainment (let's be friends!), you might have heard the phrase "the Powell Put".  That is referring to the fact that Jerome Powell (current Federal Reserve Chairman) is unlikely to let the stock market tank.  Should it be in peril, he will probably jump in with ever easier “easy money” to push the market back up and save the day.  Because we have money-printing-academics in charge, we are all somewhat "insured" against a crash.

Of course, this will mostly help the gamblers and hurt the savers in high inflation, but hey who wants to reward people for responsible actions anyways?  


Anyways... I hope I clarified market shorting a little better for you.  Enjoy the ride!


In case anyone cares: I lost $3.51 on the other Sweet Raisin sale (buyer paid $7.24 - $7.38 initial purchase - $1.09 fees - $2.28 shipping/ packaging = -$3.51), but that's $3.87 better than losing my whole $7.38 initial purchase!


Disclaimer: I am not a licensed or certified financial coach, planner, adviser, or anything else of the sorts.  I just love figuring out money.  Anything I recommend should be personally analyzed and discussed with your trusted financial adviser.  I cannot be held accountable for any loss or poor performance.

Self-Fund Halloween with Costumes

December 4th, 2018 at 07:21 pm

My husband and I are fairly divided when it comes to Halloween. He’d much rather buy candy, keep the candy, and stay up with a movie. For me, however, Halloween is all about the costumes! Since we are divided on the topic, I decided to do an experiment and let Halloween fund itself. That way, there can be no complaint.

It turns out homemade costumes sell REALLY well. In fact, I might start making two of some costumes for extra profit. So here’s the formula: make cute costumes, sell them 10-11 months later, use the profit as your Halloween budget for candy and such the next year.

Make sure to get good pictures of all the details when you wear it, especially if it is a children's costume. You just don't know if it will fit next year. When you are finished with your costume after Halloween, clean it up, take pictures of any damage, and put it somewhere you will remember it next September. For me, that is in my Halloween box since I get it out early. You might need to put it with your back to school stuff, or fall harvest type stuff, or set a calendar event for next September telling you where it is (my favorite).

Of course, you can always just list it immediately and let it run all year until it is sold, but then you'll have to be watching your eBay notifications carefully and notify eBay of vacations. You don't want to miss your delivery.

When that magical time comes around, create a quality eBay listing with great detailed pictures. Be very clear which parts of the costume they will be getting. You don't want the buyer thinking they are getting the full outfit if you are only parting with the accessories or be surprised when the Captain Hook wig isn't included. If you list it early enough, you can ask a high price and wait. I like the “or best offer” feature since it shows me what price most people are wanting it at. If it hasn't sold at two or three weeks before Halloween, I’ll lower the price to just above the best offers I received and send a notice to those who sent the previous offers. If it doesn’t sell in a couple days, I’ll accept an offer. I’ve learned from my limited experience that people don’t really go for multiple costume sets (one size fits all adult couples costumes may be an exception). You will probably make the most money listing separately even though it means you will be paying more shipping.

Here are my numbers:

note: visit my

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Halloween Costumes for under $1 post for details on the costume creation prices.

Peter Pan (2015):

Captain Hook:
Sell Price= $35.50
Costume Cost= $6.16
Shipping Cost= $10.38
PayPal Cost= $1.33
eBay Cost= $3.55
Total Profit= $14.08

Costume Cost= $0.00
Not for sale.

Sell Price= $9.00
Costume Cost= $0.00
Shipping Cost= $2.64
PayPal Cost= $0.56
eBay Cost= $0.90
Total Profit= $4.90

Peter Pan:
Sell Price= $7.50
Costume Cost= $0.25
Shipping Cost= $2.83
PayPal Cost= $0.52
eBay Cost= $0.75
Total Profit= $3.15

Total 2015 Costume Profit (2016 candy budget): $22.13
Actually spent on Halloween candy in 2016: $19.94

Cinderella (2016):

Grand Duke:
Sell Price= $10.00
Costume Cost= $0.50
Shipping Cost= $3.34
PayPal Cost= $0.59
eBay Cost= $1.00
Total Profit= $4.57

Fairy Godmother:
Sell Price= $27
Costume Cost= $0.75
Shipping Cost= $7.25
PayPal Cost= $1.35
eBay Cost= $2.70
Total Profit= $14.95

Costume Cost= $0.00
Not for sale.

Sell Price= $9.50
Costume Cost= $0.25
Shipping Cost= $2.77
PayPal Cost= $0.58
eBay Cost= $0.95
Total Profit= $4.95

Prince Charming:
Sell Price= $9.50
Costume Cost= $0.00
Shipping Cost= $2.92
PayPal Cost= $0.58
eBay Cost= $0.95
Total Profit= $5.05

Total 2016 Costume Profit (2017 candy budget): $29.52
Actually spent on Halloween candy in 2017: $22.07

Make sure to see
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Halloween Costumes for under $1 for more costumeing fun.

Happy costuming =)

Where to buy your Precious Metal Investments

March 27th, 2018 at 05:09 pm

This is part 4 of Milly's "Precious Metals for Beginners" series. For other parts see:
Part 1:

Text is Why you NEED Precious Metals in your Portfolio and Link is
Why you NEED Precious Metals in your Portfolio
Part 2:
Text is Silver vs. Gold and Link is
Silver vs. Gold
Part 3:
Text is Coins? Bars? ETFs? What form of Precious Metals are right for you? and Link is
Coins? Bars? ETFs? What form of Precious Metals are right fo...

Where to buy Precious Metals
Once you know what you want, now it's time to go shopping in one of the following locations:

Pawn / Coin Shops
This one is, of course, the most fun.  It's like a treasure hunt to drive between several shops looking for gold and silver.  You also have the advantage of seeing what you buy, holding it in your hand, taking it home that same day, and looking at those shiny proof coins that you shouldn't buy.

Probably the best reason to go to a coin shop is you get to talk with people who have been watching the market and touching the coins for decades.  Some of the things I'm sharing with you right now came from talking with these experienced businessmen.

The biggest problem is that you'll end up paying a lot more for these precious metals.  Local shops have a hard time competing with online companies operating all over the nation and even internationally.  Their expenses are much higher and so are their prices. Even if you find a good deal, all that driving also adds to the premiums.

Other problems include low volume and sometimes poor quality.  These are odds and ends that have been sold by individuals.  Some of them are found cleaning out their grandparent's house, some are reluctantly given by people scrapped for cash, and others are flip sold as spot prices increases.  There isn't going to be several rolls of brilliant, uncirculated, matching, rounds. Many have been sitting in a drawer or played with for years.

Also, if you are buying by the ounce, make sure the scale reads in troy ounces.  Troy ounces are slightly larger than regular ounces. Ridiculous, I know.  If you are reading in standard ounces without converting, you won't go home with as much weight as you think you are getting.

One more thing to remember is don't buy anything you don't recognize.  It is hard to know if something is solid or just plated.  I have a 1 oz gold-plated copper Bitcoin round that I bought for under $2.  It looks a lot like gold, weighs 1 Troy oz, but you would need to measure it and do some math to know it is too large to be solid gold.

Company Websites
This is where to get the bulk of your investment.  It is cheap, in abundant supply, and they clearly state the actual silver weight (ASW) or gold weight in troy ounces to avoid confusion.  Not all companies are created equal though.  You will want to look up a list of reputable companies and work from there.  Here are my recommendations and comments:
Silver Rounds:
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JM Bullion often has excellent specials and even some at
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spot price!
Junk Silver:
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APMEX is usually the cheapest
Silver Eagles: It used to be that
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BGASC was absolutely unbeatable in this category, especially when they have "any quantity" sales around holidays. Now, they no longer give free shipping so it depends on the order. Sometimes you get a better deal at
Text is SD Bullion and Link is
SD Bullion, but their checkout process is annoying.
Gold Eagles:
Text is SD Bullion and Link is
SD Bullion, usually has a price slightly lower than anyone's on everything, but with the shipping costs it isn't cheaper unless you are ordering several thousand dollars worth or you have a free shipping coupon.  In the case of Gold Eagles, they are usually cheapest here, even with the shipping.  
Text is SD Bullion and Link is
SD Bullion is a pain because you have to set up an account to check out *grumpy face*. Read the Ebay section below for another great gold buying option.
Anything else:
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BGASC is usually the winner.  You'll have to check on a piece by piece basis.
The disadvantage of buying from any of these companies is you have a bit of a run around with payment and slow delivery.  They will usually make you lock in the price with a credit card, but send a paper check in the mail.  You have to wait for your check to get to them, for the check to clear, then for your order to get to you.  It will take a couple weeks, but unless you plan on giving away or flip-selling the coins quickly, it really doesn't matter. Of course, you could just pay with credit card, but it will cost a much higher premium.

Note: If sales tax is added to your order, look up your state laws.  There may be a threshold you can buy that eliminates sales tax on precious metals.  In California buying from a California company (such as you'll have to purchase at least $1,500 in precious metals (not gift boxes or other products) to avoid the investment-crushing taxes.

I actually really like Ebay for precious metals.  It is faster than online stores, you don't have to send in a paper check, often competes in price when you shop with the wholesale dealers, and so far I haven't had to deal with the weird sales tax laws on precious metals.

One gem I've noticed is that APMEX actually lists some gold cheaper in
Text is their Ebay store and Link is
their Ebay store.  A few months ago, they were selling a 1 oz Gold Buffalo for $1,336.49 on Ebay, but at, it cost 1,359.49.  Even SD Bullion was selling Gold Buffalos at $1,343.79 (plus $7.77 shipping).  Before that, their special was on Gold Eagles.  Since I am fairly confident it is actually APMEX (based on high reviews, US location, an old store, and enormous volume of sales), I don't have to worry that I'll get some weird fake in the mail.  In this case, Ebay is, surprisingly, the way to go.

The thing to watch out for is Ebay is the perfect place for conning people.  Check reviews, how long they've been selling, etc.  Again, don't buy anything you don't recognize.  Also, be very careful to read the description of what you are buying.  Make sure your 1 oz coins aren't actually 1/2 oz coins with the same design, your 1 lb of junk silver doesn't have any war nickles or 40% silver coins, note any discrepancies between ounces and troy ounces, and that your rounds aren't just plated copper.  Actually, two of the sample entries in my spreadsheet came from the same suspicious Ebay listing.  They said 1 lb of 90% silver coins, but the coins they list don't add up to 1 lb!  If they list two different things, check with both methods on my free
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junk silver spreadsheet to make sure they are consistent.

If you are tempted by some weird mixed lot, PLEASE PLEASE PLEASE use
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my calculator to know what you are actually getting.  I've seen so many things that look like great deals, but when it adds up, it is $11 over spot per ounce of silver.  People love to list in standard ounces (not Troy ounces), throw 35% silver War Nickles or 40% silver half-dollars in with 90% silver coins in a "Junk Silver by Weight" listing.  Don't pay silver prices for copper or zinc!

When you are ready to buy, here are some calculators that can really help to compare apples and oranges so you can know if you are actually getting a good deal.

Text is Junk Silver Calculator (Excel spreadsheet) and Link is
Junk Silver Calculator (Excel spreadsheet)

...and if you want one for jewelry or nuggets or a simplified one for non-mixed purity by the weight listings...

Text is Gold/Silver Calculator (Excel spreadsheet) and Link is
Gold/Silver Calculator (Excel spreadsheet)

Seriously, get the money you can't afford to lose out of the stock market, out of dollars, and into precious metals.  Your grandchildren may thank you.

Good luck and enjoy your shiny wealth!

This is part 4 of Milly's "Precious Metals for Beginners" series. For part 1 see:
Text is Why you NEED Precious Metals in your Portfolio and Link is
Why you NEED Precious Metals in your Portfolio.

Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.

What Type of Precious Metal Investment is Right for You?

March 9th, 2018 at 12:58 am

This is part 3 of Milly's "Precious Metals for Beginners" series. For other parts see:
Part 1:

Text is Why you NEED Precious Metals in your Portfolio and Link is
Why you NEED Precious Metals in your Portfolio
Part 2:
Text is Silver vs. Gold and Link is
Silver vs. Gold
Part 3:
Text is Coins? Bars? ETFs? What form of Precious Metals are right for you? and Link is
Coins? Bars? ETFs? What form of Precious Metals are right fo...
Part 4:
Text is Where to buy Precious Metals and Link is
Where to buy Precious Metals

Which Form of Precious Metal to Buy? - Pros and Cons
Once you've decided to
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get some precious metals and have decided on
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what type of metal to get, there are a multitude of options what form to get the metal in. Each option comes with it's own advantages and disadvantages.

Buying Non-Physical Metal: Stocks, Futures Contracts, ETFs, etc.
Gold Stocks are just the stocks of companies within the gold sector, usually mining and exploration companies.

Futures Contracts/Options are basically leveraged bets made on price changes of the metal. Any change in the metal's price, whether up or down, is greatly magnified leading to large gains or losses.

ETFs and other investment assets can be set up to track the price movements of silver and gold. Some even offer delivery upon request.

All of these methods are very liquid. While sitting at home, you can click a few buttons, and sell or trade your assets. You can access your wealth rapidly. Buying and selling physical gold requires physical movement and can be much more cumbersome with large price vs. speed trade-offs.

Gold Stocks and Contracts can offer leverage. If you are certain that gold will grow within a narrow enough time window, you can grow your wealth relative to gold, not just the dollar.

Gold Stocks are still just stocks. They may or may not make the anticipated changes in value based on gold price. Sometimes their values even head in the opposite direction as the metal they "should" be tracking.

A single bar of gold can have many contracts claiming it. Not all of the claims can be filled by a physical delivery, the rest will have to be settled in dollars. In the case of rapid inflation, you'll be very disappointed if a check is delivered instead of bullion.

Even if the precious metal is backed up one for one in your name and audited by third parties, there may come a time when people will do anything they can to keep it or seize it. Companies can change policy, governments can change regulations, and mailed packages with precious metal company names on them might be more likely to disappear.

I don't recommend any of these methods as your "precious metals" investment. That doesn't mean they can't be right for some people own, it just doesn't count as owning precious metals in my book. Instead, they belong as part of a well diversified stock portfolio. If you don't physically have it, you own someone else's liability and are at the mercy of their willingness and ability to pay.

Buying Gold and Silver Bars/Rounds
These are simply gold or silver bullion that has been refined and pressed into tokens (rounds) or bars by private mints.

Depending on where and when you are purchasing from, this is usually the most affordable way to buy any precious metal in both price per ounce and buy/sell spread.  You can even get a few ounces of silver at spot price from JM Bullion with
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this deal!  Without the deal, you can still usually find silver specials for $0.69/ounce premium or less over spot.

The potential drawback with this choice is that they are not recognized like government coined gold and silver.  If it didn't come from a well-known private mint, people might not trust it. If you are getting it second hand, maybe you shouldn't trust it either.

If you stick to well known brands such as Sunshine, Silvertowne, and APMEX you should be able to resell your rounds just fine. Expect less demand though.

Buying Junk Silver
Junk silver is a deceiving term for old coins that have silver content.  Most junk silver you'd buy are 90% silver, but pay attention because they can be as low as 35% in war nickles (we needed nickle for the war, so we used silver in 1942-1945) or even 10% in old Mexican Pesos (1957-1967).  Don't worry, all the coins and dates are listed under the "coin" tab in my free
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junk silver spreadsheet so you can just look up the silver content/ weight if you get confused.

In a time of crisis, survivalists have deemed junk silver the currency of a collapse.  I don't think it will become the standard because it is too uncommon, but it is a good idea to have some on hand just in case you need smaller amounts of silver in a barter scenario.  At today's price a 90% silver dime is worth just over $1, so you can easily price things in these lower denominations.

Another major advantage of junk silver is it's recognizability.  Everyone knows what a quarter looks like.  We've been using the same Washington obverse since 1932!  Also, it is very hard to counterfeit something that has been worn from years of circulation.  You will notice if something is amiss in a counterfeit.

We are also accustomed to doing transactions in these coins.  Sure a 90% silver dime is worth more than 10 cents, but you know that 5 dimes is the same as two quarters and that two quarters is the same as a half-dollar (so long as they are all 90% silver).  It is easy to make change with this system.  One exception to the "face value" math is the old silver dollar.  Despite being 90% silver just like the others, Morgan and Peace dollars are heavier than 4 quarters so they have more silver and are worth more.

You have to do more research when purchasing in this category.  If you limit yourself to large reputable dealers who sell quality coins in standardized batches, it simplifies things.  If you only invest in US 90% silver coins it gets even simpler.  Each face value dollar worth of 90% silver US coins contains 0.715 troy ounces of silver (unless they are silver dollars).

Seriously, if you haven't caught on yet, you need my
Text is junk silver spreadsheet and Link is
junk silver spreadsheet.

Junk silver doesn't follow the ups and downs of the silver market as much as 99.9% fine silver does.  In my observation, regardless of silver price, junk silver trades around $13-$14 per dollar of face value for US coins.  What that means is that if silver spot price is above $19, you might be better off buying junk silver, otherwise rounds would be cheaper.  Sometimes Junk silver even sells at spot price! It also means that these are a poor investment choice since they are likely not to increase in value as much over time.  I can't say this trend will always hold true though.

Because these coins are not "fine silver" you would have to pay a refiner to process them before you could use it in jewelry or industrially.  After adding that cost, the coins are probably more expensive than just buying bars or rounds.  40% silver coins are often not even accepted by refiners, but that could change in a large silver price jump.

Unless you are paying a hefty premium (additional price over spot price) for fancy coins, these are not showroom pieces and have been through may years of abuse.  Personally, that makes them fun. It is a little piece of history and I can sort through them and play with them without damaging their value. If the coins are extremely worn make sure to you get the price in weight, not face value as some silver has rubbed away.

Buying Fine Gold and Silver Coins
Fine Coins are generally 91% to 99.9% (or even 99.99% in the case of Canadian Maples and Australian Kangaroos) gold or silver and are minted by a government and has a monetary face value.

When you hold a silver eagle, it makes all the generic rounds feel like a toy version.  Silver eagles even feel heavier in my hand.  I know it is just an illusion by pressing them a little wider and thinner, but it still feels nice.

Another benefit of coins is their weight and purity is guaranteed by the sovereign government.  Of course, reputable private mints are defending their reputation too, so I wouldn't worry about fraud.

In general, government minted coins are easily recognized globally and have very liquid markets.  The American Silver Eagle is the most liquid silver coin in the world. The Canadian Maple is the most liquid gold coin. You could sell them at any pawn shop on any day they are open.

Because these are coins, they have years stamped in them.  This adds an additional collector value to the coin.  This is especially true of Chinese Pandas since each year has a different adorable picture of pandas.

More of a note than a disadvantage, but the face value usually doesn't mean anything because the value of the metal is worth so much more than the face value.  The most extreme example I know of is an America the Beautiful 5 oz silver "quarter".  With a silver spot price of $16.56/troy oz, this coin is worth 331 times it's face value!

The premiums are very high on Silver Eagles, currently about 13%, even on large volumes.  The generic rounds are only about 3% over spot.  For gold, however, this is not the case.  A Gold Eagle premium is only 2% and the cheapest bar is still about 1%.  I'd pay the extra $15ish and get the coin.  It will probably be much easier to sell in the future.

Buying Collectibles: Nuggets, Numismatic, Proof, Graded coins, etc.
Nuggets are chunks of precious metal in the raw, as pulled out of the earth.  Most of the gold and silver mined is in tiny particles encased in rock.  They get it out by grinding and chemically removing the rock.  Nuggets are rare and often found with metal detectors by hand.  The larger the nugget, the exponentially rarer the find.

Numismatic coins are rare coins such as extremely old coins, coins with low mintages, or errors.  The value is primarily determined by the quantity in circulation, not age.  Check the mintage on the years and mint marks carefully. One year might be rare while another year is common.

Proof coins are the normal coin design, but the blanks and dies are both carefully cleaned and polished for a superior finish.  They also struck at least twice to ensure a well defined design.  These coins are absolutely beautiful!

Graded coins aren't inherently anything special, but when people get a hold of a seemingly flawless coin, they may send it to a company, such as PCGS or NGC, to have a professional rate its perfection. If the coin is certified at a high standard, it increases it's collector value.  If not, the cost of grading it exceeds your gain in value.

These coins are collectible, interesting, and often stunning in appearance, a good choice for display or jewelry.  They hold their price even in market lows because much of their worth isn't just derived from the metal content.

When dealing with unique pieces, things become less standardized. Go figure. It is easy to get confused or tricked. Where do they come up with their market values? Are they telling you the weight of the piece or the weight of just the gold portion? Are you sure they are talking in troy ounces not standard ounces?

For a little extra help, see my free
Text is Gold Nugget Calculator and Link is
Gold Nugget Calculator. It can be used for gold or silver nuggets, jewelry, and even coins (if not using face value).

If you are looking to invest in precious metals, put your money into the metal, not baseball collections.

Very rare museum quality pieces (of any type) aren't a bad idea for a tiny portion of your investments, just don't get confused and include them in your "precious metals" allocation.  They belong in "fine art". (note: Jim Rickards recommends 5% of your investible assets in Fine Art)

The cost of these fancy coins far exceed the cost of the metal within them.  You'd get a lot more precious metal and exposure to market gains, if you just bought the everyday bullion.

The Bottom Line
All of these types of metal have their own role. It is nice to have non-physical metals for liquid and leveraged positions. It is nice to have bars/rounds because you can get the most metal for your dollar. It is nice to have junk silver because you can get small fractions of metal (and a little piece of history) cheaply. It is nice to have coins because they have the most confidence (and in the case of gold is still very close to spot!). It is nice to have collectibles because, well, they are fun.

The important thing is that you know what type of role you are trying to fill with your purchase and get the right form (or mix of forms) of metals to match your needs and definitely don't invest in anything you don't understand.


Compare deals and evaluate premiums with my precious metals spreadsheets:
Coins and Rounds:
Text is Junk Silver Spreadsheet and Link is
Junk Silver Spreadsheet
Nuggets and Jewelry:
Text is Gold Nugget Spreadsheet and Link is
Gold Nugget Spreadsheet

This is part 3 of Milly's "Precious Metals for Beginners" series.
For the next part see:
Text is Where to buy Precious Metals and Link is
Where to buy Precious Metals
For part 1 see:
Text is Why you NEED Precious Metals in your Portfolio and Link is
Why you NEED Precious Metals in your Portfolio.

Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.

What to Expect from the S&P 500

February 13th, 2018 at 07:39 pm

Many people are counting on an 8% compound interest to get them to retirement. Dave Ramsey’s book “Total Money Makeover” even claims a 12% return! Where on earth did these numbers come from? Are they at all a reasonable expectation?

What is the Long-Term Return on the S&P 500?
To start, I plotted the S&P daily opening values since 1871 (when they started tracking) and added a trendline. I choose to use a trendline to back out all of my expected returns so that all of the data within the range count towards the return. Because the odds of buying at the beginning and selling right at the end are astronomical, I think this trendline method gives a better idea of what people actually experience.

Looking at the equation of that trendline, I could conclude that the S&P 500’s annual return is 4.49%. That is a lot less than 8%.
As you can see though, we need to look a lot closer at the data to see if it actually matches in the trendline. With this zoomed out view, it is impossible to tell if the first 100 years are skewing the trendline down away from the 8% people expect. Because we are seeking the exponential return, a logarithmic graph should show us the data more clearly.

There! Now you can actually see the data. As suspected, the old data is very different from the new data. We are going to have to consider this data in pieces based on historical changes.

I’m going to walk you through several historical periods to get you adjusted to what is historically normal. If you want to just skip to the current period, be my guest and scroll down to 1995.

1871-1914: Industrializing World before the World Wars

During this exciting 38 year period where we experienced serious industrial expansion, urbanization, and erected the brand new Statue of Liberty, the annual S&P 500 return was only about 1.9% growth. Yup, definitely skewing the data down.

1914-1945: World Wars and The Great Depression

During this 31 year period the overall return was only about 1.32%: -1.1% during WW1, 2.14% between the two wars, and 4.83% during WW2. I find the cycle between the wars particularly important to look at as we are currently going through massive build ups followed by devastating crashes. The difference here is that we were still on a global gold standard so the recovery didn’t involve a boost from printed money (inflation).

1945-1971: Tense Global Cooperation

This 26 year period the US experienced several civil rights movements and the major world powers fought the cold war and indirect wars though Korea and Vietnam. This is our first period to yield high S&P 500 returns at 8.9%! Yay!

1971-1995: Goodbye Gold Standard

In my opinion, this is the most important dividing line in our financial history, the flight to

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fiat currency. In 1971 we got the "Nixon Shock" and the US Dollar decoupled from gold. Since 1971, the very essence of what money is has changed. All major currencies have abandoned any physical backing and floating exchange rates emerged. I don’t know that we can really count any data prior to 1971 towards identifying trends. (see
Text is fiat currency and Link is
fiat currency).
During this again profitable period of 24 years, the S&P 500 grew by 8.5%, but it lost some ground in the monetary policy switch and shifted to the right before resuming the growth.

1995-Present: Federal Reserve Induced Oscillation

In the piloting world, there is something called PIO, pilot induced oscillation. This is caused by a pilot pulling up, but the airplane delaying its response. The pilot’s instinct is to pull up harder, but when the plane finally starts responding, it is too hard of a pull, sending the plane towards a stall. To correct the error, he or she will quickly nose over and try to dive. Again, the delayed response of the plane intensifies the action as it convinces the pilot to keep pushing down. If the pilot doesn’t fight the instinct to recover, the rollercoster motions will increase in intensity until it suddenly stops and the plane lay in pieces on the ground.

I fear we are experiencing the same phenomenon in the financial world:

Since entering this increasing rollercoaster of crashes and bailouts and bubbles, we’ve dropped back down to, a 4.4% annual return on the S&P 500. That’s just under the all-time historic average of 4.5%, but this time we aren’t gold backed.

That 4.4% might actually be a little high. The graphed data includes 2.5 full cycles: three ups, but only two downs. The next bear market will push the trendline down.

Now I understand that I'm looking at much less data now making the numbers somewhat cherry picked. It is over 20 years though. 20 years is definitely significant in a 40 year career path. I don't really care if I can count on a 100 year return of 8%. I don't plan on working 100 years!

I can't use more data because things probably won't work out the way they did over 20 years ago. Can we really pull numbers to predict the future from before Bill Clinton and Greenspan (former Chairman of the Federal Reserve) started playing with money? I'm worried we can only really expect the 4-5% overall return until money game shifts again. When it does shift, who is to say it will be back to the 8% we got for only 50 years out of 147 or the 8% we got for only 24 of the 47 non-gold backed years?

Unfortunately, one of my hypothesis is that it will actually be a lot worse. If you recall the PIO example, it doesn’t just oscillate forever, expect a catastrophic collapse:

Dotcom boom and bust
With the excitement of the internet, new companies popped up all over and investors poured money into anything ending in “.com”. No one cared how much a company earned, only how many views they received. The Dotcom bubble had formed and the S&P 500 spent 5 years shooting up at a rate of 24.8% annualized.

Eventually, it became clear that many of these companies had failed business models and were going bust and there was a major sell off. The S&P 500 plummeted for two and a half years at a rate of -18.0%. The Federal Reserve slashed interest rates and encouraged investing.

Housing Crash
With the slashed interest rates and incentives, it became very easy to buy a home. With the extra buying of houses, the sticker prices of the houses increased. At first, the increased price simply offset the decreased interest rate, but then people started noticing trends and got greedy. With the house prices shooting up, people started buying houses and using them as banks. Some would buy as big of a house as they could with special interest only loans. The assumption was that they would sell it in a few years for much more than they were in debt for and turn a huge profit. Others took out home equity lines of credit on the appreciation they received on the home they already owned. With this buying frenzy, prices continued to shoot up, and paper wealth abounded. The S&P 500 again shot up for 5 years, this time at an annualized rate of 11.0%. People had thought they found the secret to unlimited wealth. That is, until some people started realizing they couldn’t actually afford the payments that the bank was so willing to sign them on.

Banks began to receive house keys as people walked away from their mortgages. As the buying frenzy reversed, house prices plummeted, destroying the crazy dream of living off home appreciation and putting many families “under water” owing more than their home was worth. The S&P 500 dropped at an annualized rate of a whopping -38.5% for one and a half years. Again the Federal Reserve slashed interest rates, but this time to unprecedented levels. In the dotcom aftermath the interest rates were slashed from around 5% to 1-2%, but this time they went all the way down to 0.1% for years. In addition, the Federal Reserve bought up securities, increasing the money supply.

Dollar Crash?
Again the Federal Reserve is fueling a crash by creating a “bailout bubble”. Each one getting larger than the one before. The interest rates stayed at experimentally low levels low for a full decade. For some reason, people are again thinking this can go on forever and the S&P 500 has grown at a rate of 12.1% for almost 9 years. Investors have become complacent knowing that the Fed refuses to let the market slide and will bail them out in the case of disaster. That’s what it did all through Obama’s administration, but who knows where the new Federal Reserve Chairman and Trump have their priorities: normalizing or market stability?

I worry the next crash will actually break confidence in the US Dollar. I don’t see any way the Federal Reserve can avert the oncoming crisis. I see two options:
1. They could continue to raise rates and shrink their balance sheet (sell the securities acquired after 2008). This would send the stock market into a crash and increase the price of servicing the debt to levels we can’t pay, causing countries to drop the dollar. The dollars would all find their way back home and become worthless.

2.They could reverse rhetoric and start easing to save their struggling economy, but sacrifice the dollar in inflation, also triggering countries to not want the dollar or dollar securities.

Luckily, I am not the one choosing the options. My hope is that there is a third option that those in power will come up with once they notice the cliff they are running towards.

It is hard to know what this will do to the S&P 500. The hundreds of years of data is somewhat useless since we have never had a market like the one we have today. My personal guess is it will crash, then grow but mostly due to inflation.

It all comes out in the inflation wash
If you read my explanation of
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what inflation really is, you understand that we are really hovering around a
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5% inflation! In other words, unless the stock market starts beating its 4% growth, your gains are just adjusting your money to inflation (or pent up inflation). If you have a mixed portfolio with bonds, you're losing to inflation. By all means, that is much better than losing the full 5% to inflation, but it does make retiring a challenge.
I re-ran my retirement numbers with the following grim assumptions:
1. Any money I gain in the stock market will be negated by inflation
2. Any pay increases you gain will be negated by a higher cost of living and taxes

In effect, it is as if we just kept replaying today over and over until retirement.

The good news is with these assumptions, we expect to be millionaires in today's money before I'm 50! The bad news is my husband will have to work till he's 69 before we can retire. Luckily, I should eventually be able to help him out, so I doubt it will really be that long. The numbers are still sobering though. Even maxing out our 401K ($18,000/year) isn't necessarily going to cut it.

If you want to run your own numbers with these depressingly conservative assumptions to see what could be ahead,
Text is here's a simple and free spreadsheet and Link is
here's a simple and free spreadsheet.

Bottom line:
If anyone is telling you long term rates (especially Dave Ramsey's crazy 12% expectation), ask how they derived those numbers. The data can be cropped, skewed, and made to tell anything you want. When it comes to something as important as retirement planning, you've got to do your own thinking and figure out what makes sense to you (and don't forget inflation!).
Good luck!

Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.

Bitcoin vs. Gold

February 7th, 2018 at 09:43 pm

The 2017 Bitcoin Frenzy has led to quite a debate on which is better, Gold or Bitcoin? Some are even calling Bitcoin Digital Gold. I see two ways of addressing this question: Which makes the better money and which makes the better investment. Let's start with the first question:

Which is the Better Money? Bitcoin or Gold?

For a currency to work, the quantity must both be fairly low and fairly stable.  If the currency is too abundant, then huge quantities would have to be used for everyday purchases.  If the quantity fluctuates too much, it becomes difficult and speculative to price goods or form contracts.

What makes Bitcoins usable is its elegant, indestructible self-regulation.  Bitcoins cannot be created at the whim of a computer developer.  Actually, no one even knows 

Text is who created it and Link is
who created it.  It isn't regulated by a single party, but by the entire system itself (decentralized) and the computer code is open source for all to inspect.  You can't hack your way to Bitcoin creation because the way to create Bitcoins is essentially using your computer to figure out numbers that fits an increasingly difficult sequence.  That number is part of the coin.  If you and your computer can figure out a usable number, then you have legitimately mined the coin.  You can't modify the structure, because it is continuously validating itself and checking for problems.  Because the release of bitcoins is asymptotic, there will never be more than 21 million coins released.  The supply is scheduled (by an adaptive level of mining difficulty) and limited.

Although Bitcoin itself is scarce, there is an infinite number of other cryptocurrencies that can be created and popularized.  Over a thousand types have been created already!  Litecoin, Bitdeal, Beatcoin, BipCoin, Bit20,  BitBTC, Bitcloud, Bitcoin 21, Bitcoin Cash, Bitcoin Planet, Bitcoin Plus, Bitcoin Unlimited, BitcoinDark, BitcoinFast, BitcoinTX, Bitcore, Bitcurrency, Bitdeal, bitEUR, Bitgem, bitGold, Bitland, Bitmark, BitSend, BitShares, bitSilver, BitTokens, bitUSD, BTCGold, BritCoin, Bytecent, and Bytecoin are all trading on the market.  Some are bringing in millions or even billions of dollars.  For this comparison, we will only consider Bitcoin itself and make the VERY poor assumption that if Bitcoin were to be used as a currency, it would be the only cryptocurrency to do so.

One of my friends humorously stated that gold is so rare that you can buy it at any pawnshop in any city.  It is true that there's a lot of gold out there, roughly 
Text is 165,000 metric tons and Link is
165,000 metric tons of it (
Text is what that looks like and Link is
what that looks like).  It is still scarce though because the available gold supply grows more slowly than the demand for it.  Unlike Bitcoin, there is no substitute for gold.  No other material in existence has the same useful material properties (nearly impossible to corrode, extremely malleable and ductile, efficient at transmitting heat and electricity, and very pretty).

If there is a sudden breakthrough in lowering mining costs, especially if it allows us to mine deeper or in the ocean cheaply, then we could see a supply jump.  That would lower gold's credibility as currency, but I think the yellow metal will always be aggressively sought after.

Winner: a protected Bitcoin

I know, it's a funny word.  Fungible means non-unique.  If someone pays me a dollar, I am not worried that they gave me a 2016 dollar instead of a 2014 or a serial number ending in a lucky 7.  For something to work as currency, each piece must have a standardized value and not require a collector's evaluation.

Bitcoins are identical.  Sure the strings of numbers vary to identify the coin, but the users don't know what those strings are.  They are hidden within the code.  All the user sees is a quantity on the screen.  It could be any Bitcoin, or more likely, fractions of many Bitcoins.  By lacking a physical form, I don't think you can get any more fungible without also being easily counterfeited.

Gold is a little more collectible.  People are more willing to pay top dollar for rare or flawless coins, nuggets, and intricate jewelry.  When that happens though, it isn't being used as money.  Those coins and trinkets are effectively outside of the money supply and are a product of themselves.  When gold is melted down, refined, and made into uniform pieces, fungibility is not a problem.  Right now though, gold tends to be special and people care what form it is in.

Winner: Bitcoin

It us useful to have a currency with enough precision to represent the finest subtleties of worth.  This allows for transactions of tiny amounts, or slight differences in value.  Imagine if there were no subdivision to the US dollar.  Buying produce by the pound would be a game of "The Price is Right" as you try and get the most tomatoes without tipping it to the next dollar.  Sales taxes would be difficult for stores to directly pass on to the buyer.  Stock market values would be more stair stepped.  It is also important that the sum of the divisions equal the whole.  Four $0.25 pieces cannot be worth more or less than $1.

Bitcoins can be subdivided in to a hundredth of a millionth of a Bitcoin, also known as a
Text is satoshi and Link is
satoshi (0.00000001 BTC).  In other words, Bitcoins would have to reach a value of $1,000,000 USD per coin before it is less precise than pennies (1 satoshi = $0.01 USD).  My understanding is that it is also possible to open up more decimal places if needed.

Gold is also highly divisible.  It has been pounded to
Text is 0.000002 inches thick and Link is
0.000002 inches thick for coating astronaut visors.  That is so thin that it is actually translucent!  A single ounce of it can be stretched 50 miles (5 microns thick).  It can be divided into such small particles that you would get more gold scooping up a random cup of dirt.  At some point the divisions of gold will get too small to handle properly or see clearly and counterfeiting would abound.  Imagine trying to buy something small like a candy bar.  It would be hard to weigh out tiny flecks of gold.  It could become standard to use volumes of a standard gold solution or use "gold bills" with tiny flecks laminated inside.  At that point counterfeiting becomes much easier though.  Copper or other metals could be used for smaller quantities, but then your small coin to large coin rates would fluctuate with the relative metal prices.

Winner: Bitcoin

There have been societies that operated off food as currency.  It is a great system because what is more inherently valuable than food?  I guess water and air, but usually those are both available without cost in these situations.  One problem is almost all foods are poor long-term stores of value.  To invest your life energies into a currency, you need some assurance that it won't be destroyed or made worthless.

Bitcoins are difficult to destroy, but easy to lose.  Since the beginning of Bitcoin, there have been just over 10 coins destroyed on creation.  It turns out, it is possible to earn a block of coins, but not claim them all.  If you claim fewer than the reward, the remaining coins disappear forever.

It is much more common to lose them.  You could send coins (not very likely to happen by accident) to a bogus receiving address, never to be used again.  
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Thousands may have already been lost to this method. Another method is to put an OP_RETURN script on them (I don't know what that means either), which paralyzes them from future use.

Probably the biggest problem is if one loses access to an account via computer crash (with no backup or paper record), forgetfulness, or
Text is dies without passing it on and Link is
dies without passing it on.  There is no third-party you can call to open the account for you.  Likely the largest holder of Bitcoin is its creator with about a
Text is million and Link is
million coins.  There is also speculation that this mysterious person has died with those coins never to be circulated.

Gold, on the other hand, is here to stay.  It cannot be destroyed.  I guess you could chemically dissolve it and disperse it to the point where it is no longer economically practical to mine again, but that's about it.  It is also possible to lose gold, but unlike Bitcoins where there are more combinations than the
Text is entire energy of the sun and Link is
entire energy of the sun could go through with a perfectly efficient computer, I imagine gold usually eventually gets found.  In any case, you'd never accidentally lose it to shelf-life or damage.

Winner: Gold

You must be able to easily exchange the currency to properly use it in commerce.

Bitcoin has a great advantage in that it can be digitally transferred.  I can pay someone from across the globe with Bitcoin.  In person it is just as easy.  All you need is your smartphone with a specialized app.  

Of course Bitcoins are not widely accepted yet.  Sure you can use Bitcoin for, Newegg, Subway, Microsoft, Dish Network, and Virgin Galactic as well as anything from charities, to local shops, but I don't think anyone pays their rent in Bitcoin.  I believe most of the companies that do accept Bitcoin trade for their preferred currency as soon as possible.  They don't actually want the Bitcoin, they just want to tap into the paper assets the Bitcoin owners have.  If the Bitcoin volatility settles off, we could see a change here.  

Another problem Bitcoin is facing is it is expensive to transfer and very slow. Users are repeatedly suprised by extreme and varying
Text is transaction fees and Link is
transaction fees and sometimes loose access to their coins for days as they are stuck in transactions.

The other restriction to Bitcoin exchange is the requirement of hardware and internet.  If the power goes out or service is disrupted, you are stuck.

Gold, unfortunately, loses ground here.  The advantage to gold is that you could use it in a pinch even without electricity.  It has been used as money for thousands of years, so even if they are not set up to take gold, they might make a deal.  

I don't think physical gold could ever return to the normal currency status though.  Imagine if you had to mail out gold pieces before ordering anything online!  That would be even more expensive and slower than Bitcoin. Even in person it could be a pain.  As mentioned earlier small denominations could prove problematic.  In order to make tiny fractions usable, they will have to be packaged.  That could get bulky or counterfeitable.

There is a solution though!  
Text is GoldMoney and Link is
GoldMoney Mastercard lets you preload your card with a certain amount of gold you buy out of their vault.  You can then use your card just as any other prepaid card.  You simply are selling back your gold at whatever the current market price is and GoldMoney sends the dollars to the seller.  The physical gold is also available for your request at any time if you'd prefer to cash out in gold.  Of course, you are still limited to companies that take Mastercard and you'll have internet and hardware restrictions.

In theory this system is brilliant.  Just be careful because this is a major tax grey zone and the company is unproven.  Similar companies such as
Text is e-gold and Link is
e-gold and
Text is MtGox and Link is
MtGox have failed and the users lost. I think this company will do fine, but do your homework first.

Winner: Bitcoin

Overall, is Bitcoin or Gold best as a Currency?
Both mediums of exchange do very well on most categories and MUCH better than the US Dollar when it comes to scarcity.  I think the transfer of gold is just too crippled in the digital era and Bitcoin was designed as an attempt at a perfect currency. Bitcoin takes the overall best currency win.

Note: This is still taking into consideration the HUGE assumption that Bitcoin has a monopoly on cryptocurrency and other variations are barred from the market or fail for other reasons.

Unfortunately, just because Bitcoin is a more useful currency than gold doesn't necessarily make it a good idea to buy.

Which is the Better Investment? Bitcoin or Gold?

Inherent Value
Bitcoins don't exist!  They are just a blip on the screen and are as real as Pokeballs.  Just because they don't exist, doesn't mean they aren't valuable.  A Picasso painting is only useful for looking at, yet they can be worth
Text is millions and Link is,28804,1917097_1917096_1917100,00.html
millions.  The same can go for other unique and rare virtual items.  Americans spend billions of dollars every year purchasing pixels.  Some even 
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flip-sell in virtual markets.  When all is said and done though, there is nothing of value in the Bitcoin except its clever novelty.

Gold actually is fairly similar in this aspect.  Most gold isn't productive either.  
Text is 52% and Link is
52% is used in jewelry,
Text is 34% and Link is
34% is reserved as money (government holdings, individual retirement, etc), and only
Text is 12% and Link is
12% is used industrially.  The remaining 2% is unaccounted for.  In the extreme case where all "pretty" or "hope to resell" gold was dumped on the market as people need money, the industrial demand should still command a fair price in the growing technological world.  This isn't a very great way to look at it, but I'm not going to devote more time to the study:  12% of $1,330 (Feb 2018 price) is $160 per ounce, so you could probably expect that much as a bare minimum.

Winner: Gold

Market Cap
First off, Bitcoin's price passing gold's price (and even trading in 5 figures) means nothing.  If twice as many Bitcoins were released in each block, then the price per Bitcoin would be roughly half the current amount.  If we wanted to look at gold in pennyweight, Bitcoin would have passed its price in 2013.

What does matter is market cap, or how much money are people willing to collectively dump into that investment vehicle.  Most experts agree that in all of history roughly 
Text is 165,000 metric tons and Link is
165,000 metric tons of gold has been mined.  That is 5.4 billion troy ounces.  With the current market price of gold of about $1,330 USD (Feb 2018), that is a market cap of about $7 trillion US dollars.  As of 5 Feb 2018, there are a total of 16,845,938 Bitcoins mined.  With a Bitcoin price of $8,271 USD, the market cap is about $139 billion USD (over 50 times smaller than gold).

That is actually quite impressive considering cryptocurrency has only been around for a few years.  It is amazing that something so new could capture that much market.  There are three problems with this picture though.
1. The Bitcoin market cap changes pretty dramatically day to day.  Since Jan 2017, the weekly Bitcoin price spread has averaged at 22%, whereas the weekly gold price spread has averaged at 2.3% in the same time period. Bitcoin's record weekly change since 2017 could be as high as 80%, but gold only had one instance over 10% in many years (when President Trump was elected) and quickly resumed it's normal pace. Bitcoin is extremely volitile.

2. Bitcoin isn't the only cryptocurrency out there.  Ethereum, the second largest cryptocurrency as of writing, was only released in July 2015.  At initiation, its market cap was about 3% of the size of Bitcoin's.  A year later it was 10% the size of Bitcoin, 11 months later (June 2017) it peaked at 83% the size of Bitcoin.  If there were no other cryptocurrenies, Bitcoin would have lost almost half of its market to Ethereum.  Of course there are
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over a thousand other cyrptocurrencies that are also trying to eat Bitcoin's market.  Although Bitcoin has gained some of that market share back (Ethereum's market cap is about 60% the size of Bitcoin's), it is easy to imagine another currency disrupting it's position in the future.

3. Bubbles always grow... until they don't.

(here's my
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Cryptocurrency Excel Spreadsheet, dated 5Feb2018 ,if you want to play with the data yourself)

I love the idea of cryptocurrency, but I just don't know that Bitcoin is going to be the winner.  Something I learned from Peter Lynch's
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Beating the Street is a company gaining market share in a depressed industry is generally a great buy.  Bitcoin was losing share in a booming industry.  In other words, we might be paying top prices during the hype for something that won't last.

Another Lynch rule Bitcoin breaks is that if your shoe shiner is telling you to buy a particular stock, it is time to get out of that market.  We are to the point that people who have never bought precious metals, foreign currency, or even an individual stock in their life have heard about the millions some have made in Bitcoin and are advising on the matter. Even as Jannet Yellen gave a testimony to congress in July of 2017, a man held up a "Buy Bitcoin" sign in the background.

Here's a place where you can listen to up to date podcasts about the financial markets, he almost always does a few minutes at the end on Bitcoin:
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Peter Schiff Show

Winner: not Bitcoin

Bitcoin's position is precarious when it comes to government.  Bitcoin is
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legal in most countries, but rules and restrictions vary by country and are still evolving.  In the swish of a pen, Bitcoin could become illegal, deemed a "security" and have massive regulation, or be heavily taxed.  The anonymous nature of the coin would make it difficult to enforce, but companies would not be able to offer Bitcoin as a payment option, restoring it to its original limited peer to peer nature.

Gold could also come under condemnation.  Particularly since WWI, governments have been manipulating gold away from the people.  The good news is that, as a physical commodity that has been around for longer than human law, things change less frequently and there is a long list of precedent cases to draw from.

Winner: Gold

Definition of a Bubble

If people are buying an item solely for the purpose of reselling due to a climbing market, you can bet you're in a bubble.  If you buy whatever is going up in stocks instead of researching the actual company or at least the dividend history, you need to rethink your strategies.  I think most people who buy Bitcoin buy it because they see huge gain numbers that previous holders have seen and get dollar signs in their eyes.  They don't actually want the Bitcoin, they want profits.

In contrast, I think many people who hold gold don't do it because they think gold's value will skyrocket, but because they think the dollar will tank.  They aren't looking to flip-sell.  They are looking to protect.

Winner: Gold

Overall, is Bitcoin or Gold the better Investment?
Although the argument for Bitcoin as a currency is extremely compelling, I don't recommend it as an investment choice.  If you are dead set on Bitcoin, don't just buy it because it is gong up, but because you believe it is the future of money. Or even better, invest in a company that facilitates the transactions and benefits from Bitcoin volatility, whether up or down.

Gold does provide a decent hedge against the dollar and is a sound investment.  Of course, in a future post, I will show you something even more powerful.  Subscribe to my newsletter in the left sidebar so you don't miss it!

Good luck!

Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast.  Anything I recommend should be personally analyzed and discussed with your financial adviser.

Should I buy Gold or Silver?

February 5th, 2018 at 05:52 pm

This is part 2 of Milly's "Precious Metals for Beginners" series. For other parts see:
Part 1:

Text is Why you NEED Precious Metals in your Portfolio and Link is
Why you NEED Precious Metals in your Portfolio
Part 2:
Text is Silver vs. Gold and Link is
Silver vs. Gold
Part 3:
Text is Coins? Bars? ETFs? What form of Precious Metals are right for you? and Link is
Coins? Bars? ETFs? What form of Precious Metals are right fo...
Part 4:
Text is Where to buy Precious Metals and Link is
Where to buy Precious Metals

One of the first things to consider is what type of metal to buy.  I'm only going to consider silver and gold in this analysis for 3 reasons.

1. Other precious metals such as platinum and palladium are foreign to the average person.  Yes, they are valuable.  Yes large dealers know what their worth and you could probably sell them when ready.  You'd have a much harder time selling them to your neighbor though.  They look a lot like silver and most people have no clue what their worth is.

2. Copper and other industrial metals have little value when compared to other things you could put in storage.  At today's prices, a pound of copper is less than $3.  The upside to copper is it is fun.  For less than $2 extra on your gold coin order, you can get an
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extra replica (made out of copper, larger, and with a different reverse) just to play with.  Or you can get
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other designs just for fun.

3. I've only studied gold and silver, so anything I say about other metals is unfounded.

In some ways asking if you should buy gold or silver is akin to asking if is it better to put your cash savings in $1 bills or $100 bills.  Both operate by the nearly the same means, but have different liquidity and portability.

Silver is a great choice because it is more divisible.  Although gold can be pounded to
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0.000002 inches thick and easily broken down to less than a cent's worth in value, the smallest bars major dealers circulate is 1/2 gram and rarely under 1 gram (
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that's tiny and very thin!).  At today's $1,330ish spot price, 1 gram is worth about $43 USD.  Silver, however, is at about $16.70/toz (at the time of writing) and also can sell in 1 gram bars that's $0.54 a bar!  Smaller denominations make it much easier to actually use for things like groceries.

The problem is, if you try and put some of your life savings into precious metals, that could amount to quite a bit of silver.  You can carry enough gold just on your person to start a new life.  It is also easier to hide since gold is much smaller than it's silver equivalent.  If gold were $1,330/toz and silver were $16.70/toz, the gold would be about 80
times lighter and about 147 times smaller than the same value of silver!

I guess, it comes down to how you imagine needing the metals. Will they be used for day to day life? or bulk wealth preservation? Probably a mixture of both.

Another consideration is the two have separate markets and their relative prices vary.  Right now, Gold is about 80 times the price of silver.  Since 1995 (just before the dotcom boom), that ratio has averaged around 62.  In other words an ounce of gold will buy more silver today than it has for most of the last couple of decades.  Silver is "on sale" in terms of gold.  Of course, there is always the possibility that this is the new norm.

Another thing to note is that silver might be more volatile than gold.  If you normalize the two metals in 1995 like I did in the graph below, you see that silver jumps to a higher percent gain than gold does in both the dot com and housing crises, then comes back together at the resolution.  If you are trying to play the market, buying low and selling high, silver might be the more useful vehicle.

One final market consideration is found in monetary policy.  
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Fiat currency is starting to fail on a global scale.  No country is willing to admit this because they are desperately trying to keep confidence in their paper money, but the complex systems of national debt, supposed assets, and inflation have reached unsustainable levels.

In the background, India, Russia, and China are buying up immense amounts of gold.  A while ago I heard some whispers about a backing of the dollar by gold and other assets. A few months ago I heard one about indirectly backing the Chinese yuan with gold.  Both of these seem like very far fetches, but what choice do we really have?  With Donald Trump's nominating
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5 of the 7 Federal Reserve Governors recently and in the near future and Trump's history of "stirring the pot", who knows?  Maybe he could actually pull something off.

Regardless, I think it is clear that countries know that gold is their best chance for a favorable end game, but it is a very delicate game. There is a lot more money than gold (at the current prices) and no one wants to loose the confidence of their currency.

If any country does make the jump, it will likely put a huge upward move on the gold price and not have the same amount of force on silver.

Of course, that also means a higher confiscation risk, especially with the historical precedent. I don't think silver will be cost effective for the government to confiscate, at least not at the individual level.

Silver is better for day to day bartering.
Gold is more efficient in terms of size/weight.
Silver may be a better deal right now.
Silver may be better for playing the market.
Gold may be better for long term moves.

How you should invest is based on your personal needs and philosophies.

Good luck and enjoy your shiny wealth!

This is part 2 of Milly's "Precious Metals for Beginners" series.
For the next part, see:
Text is Coins? Bars? ETFs? What form of Precious Metals are right for you? and Link is
Coins? Bars? ETFs? What form of Precious Metals are right fo...
For part 1 see:
Text is Why you NEED Precious Metals in your Portfolio and Link is
Why you NEED Precious Metals in your Portfolio.

Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.

Why you NEED Precious Metals in your Investment Portfolio (especially in 2018)

January 19th, 2018 at 07:40 pm

This is part 1 of Milly's "Precious Metals for Beginners" series. For other parts see:
Part 2:

Text is Silver vs. Gold and Link is
Silver vs. Gold
Part 3:
Text is Coins? Bars? ETFs? What form of Precious Metals are right for you? and Link is
Coins? Bars? ETFs? What form of Precious Metals are right fo...
Part 4:
Text is Where to buy Precious Metals and Link is
Where to buy Precious Metals

Gold and Silver should be a part of anyone’s savings and investing. My personal goal is to have it represent 10% of my retirement portfolio and up to a quarter of my emergency savings.

I didn’t start out believing in gold. It gets a lot of hype in sensational language, which always makes me skeptical.

My biggest obstacle to adding precious metals to my portfolio was is it is hard for me to imagine going back to using gold and silver as currency. It is just too out of place in today’s modern society and impractical in the digital world. If there were a dollar crisis, my tools would probably be worth more than useless metals and I can use them now.

I knew their are some inherent physical properties to the metals that make them valuable in industrial and medical applications, but I still don’t think it would cost nearly as much if those were the only competitors for the metals. Only 10-12% of the gold out there is used industrially. It is mostly people just liking precious metals and speculating in the metals that keeps the prices so high. I didn’t want to invest in other people’s fancies.

Let me Change your Mind
Now I see gold and silver in a new light. A lot of the people who don’t like precious metals point to the
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S&P 500 and show that gold isn’t going anywhere, but the stock market is. Well, it may be true that US stocks have matched or out performed gold, but not by nearly as much as we are led to believe.

Gold as an Investment
From 1971 (when the US abandoned the international gold standard) through 2016, gold has actually tied the return of the MSCI US (large and mid cap US market) at a return of 10.6% annualized. That wasn’t all in the huge gold jump that happened at the beginning either. The last 10 years has returned an average of 7.7%, lagging the US stock market by only 0.5% (
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source with pretty pictures).

I did my own math and graphing with an exponential trenline (to avoid cherry picking dates) and came up with both the S&P 500 and the Perth Mint gold prices returning 7.3% annually.

That is not a lot of missed gains compared to the risk of a major market correction any day. You might pay the 0.5% in fees to your brokerage anyways. If you agree with Lewitinn in
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Yahoo Finance that 93% of the stock growth since November 2008 is resultant of Federal Reserve moves, then that is a lot of risk. You could see 93% of those gains come crashing down any day, especially if the Federal Reserve isn't able to do the tightening and normalization they planned (rate hikes and unloading the balance sheet).

Precious Metals as Protection
Even with all of those investment benefits, I still see precious metals as the way to preserve wealth, not to invest. I suspect much of the gold rise is actually dollar weakening. No matter what any politicians or leaders do to the US dollar (and you know what they are going to do), precious metals will hold value. Jim Rickards once asked someone how their family preserved their wealth for 800 years. The response was a third in land, a third in art, and a third in gold. These are the things that last.

As the value of the US dollar and future dollar (treasury bonds) continues to drop, I believe one (or both) of the following two things will happen in the near future, possibly even before the 2018 mid-term elections, probably before the 2022 mid-term elections. I'm not sure how to present these without sounding like I'm using a scare tactic. If you think these are too extreme, just move on and remember all of the other great reasons to invest in precious metals.

1. QE4, or rather the fourth round of "Quantitative Easing", a disguised term for explosive money creation (eventually leading to inflation). At the end of 2008, 2010, and 2012 the Federal Reserve bought up massive amounts of mortgage-backed securities and Treasury securities through a program called Quantitative Easing or "QE". Those three rounds of easing brought the Federal Reserve balance sheet (assets purchased with money created out of thin air) from $700-800 billion to $4,500 billion, effectively adding those trillions of dollars to the money pool. One glance at this
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M1 money supply graph (ready to spend money) can show you how dramatic the effects were. By the time they were done at the end of 2014, the Feds had bought nearly 3 times more in assets than there was M1 money when they started QE1!

Why is this bad? Each round takes more and more money "printing" and lessens the share of each dollar on the dollar market. This lessening of dollar share hasn't led to price increases yet because the crisis also lead to a greater demand of dollars. Dollars were crucial to all of the liquidation and exchanging going on in the crisis. The problem is we are short changing all of the countries holding treasury securities who thought they were buying a larger share of future dollars. I think QE4 will cause countries to throw in the towel when it comes to buying securities. The treasury auctions are already falling and we are beginning a trade war with China. Why on earth would they keep buying our debt?!

I know I've kind of left the primary topic. I will probably move this section to a future post once it is ready, but the bottom line is this: Buy precious metals because the US Dollar and treasury securities are going down and the plummet will only increase in speed as the problems unravel.

2. Jim Rickards’ “Ice-9” prediction (
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Road to Ruin) will be realized. There could come a day when the government will be forced to freeze all digital money except for a small amount for gas and groceries, much the same way as they have done in
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Greece. Even if the money never is seen again, or
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inflation happens to an extent that it isn’t worth anything when we get it back. Precious metals are individually and physically owned. They are a safety net when financial weapons are deployed. Precious metals will preserve.

Why 10%?
One question you might be asking: If you believe that much in gold and silver, why only 10%? One answer is I’ve seen a
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compelling prediction of a $10.000/oz price of gold. That's in today's dollars, so if there is major inflation, the number will be higher. This isn't some fudged Wall Street chart pattern prediction either. This is a mathematical analysis done by a world expert on currency wars and is based on the required non-deflationary price of gold. If we reach $10,000, your 10% would become about 100% and even if you loose everything else, you’re insured.

Why not more than 10%? Right now we are in a very difficult time for investing. According to John Keynes, we are in a depression which is highly deflationary. Companies are laying off workers (who in turn find part-time jobs, "creating" jobs on federal reports), individuals are deep in debt, and savings are at a record low. In times like this, short term opportunities are the way to go.

At the same time, countries around the globe are cheapening their currencies with monetary easing. The US government simply cannot afford the real value of their dollar denominated debt to increase. Eventually, they will have to change course and switch back to monetary easing "money printing".
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Inflation will win at some point.

In his book,
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The Big Drop, and in
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this article, Jim Rickards explains the thoughts and methods behind a "barbell" strategy that is loaded up on the ends as a protection against inflation AND deflation, with cash in the middle ready to pivot positions as needed. So if you put 35% of your investments in hedge funds, private ventures, angel funds, and the like for your deflation hedge, and leave 30% cash (and treasury bills) in the middle, you only have 35% to diversify into a inflation hedge. As stated earlier, those should include precious metals, undeveloped land, and fine art (try 10%, 20%, 5%). If you want to tweak those numbers you are always welcome to.

I know that was a lot of external thoughts and analysis in a beginner's precious metals post. The bottom line is you don't want to put it all into gold.

In any case, Jim Rickards recommends 10% and most precious metal companies recommend 10%. If people who do more research than me and are an even bigger believers in precious metals than me recommend 10% in gold, I should say the same.

What about confiscation?
When looking into gold as an investment, fingers are often pointed to
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Executive Order 6102 signed by President Roosevelt in 1933, which required gold to be traded in to the Federal Reserve for the official gold price of $20.67 per troy oz. The criminalization of “hording gold” in the US lasted all the way until 1974, after we left the gold standard. Other gold controls have occurred in Australia and much more recently in India. I’m not going to let fear of confiscation prevent me from buying for 5 reasons:

1. There was a good reason for gold confiscation at the time. It is one thing for the government to confiscate items that cause destruction such as illegal weapons and drugs, but the confiscation of gold comes down to one thing: they needed it, so they took it. As terrible as it is to have the “land of the free” to secure themselves a discount on your savings, it was this confiscation that allowed us to keep on the gold standard for about 40 more years. Without this questionable move, we would have had a run on the gold reserves and it is impossible to say what that would have done to the American future we live in today. Was it the right thing to do? I doubt it, but I may be reaping the rewards today. (or maybe it just means it is going to be that more painful when the ungrounded financial system fails)

2. Gold owners were compensated. It is against the constitution for gold to be sized without just compensation. Sure, the government might do something sneaky like dump a bunch of gold supplies into the market to suppress the price just before they close the market so that they can buy at discounted prices. Even if they don't, you’ll still miss out on some massive gold hikes in the event of a gold crisis. Either way, you’ll probably still be better off buying gold today and selling it to the government in a few years than just holding onto dollars. The shakier things get, the more gold will go up.

3. Not all gold was confiscated. There were exceptions for industrial uses and some personal exceptions as well. Rare coins were exempt and individuals were even permitted the equivalent of 5 troy ounces of coins.

4. Owning gold is the patriotic thing to do. If there is going to be a future gold confiscation, wouldn’t it be much better for the United States to get a bunch of gold from it’s citizens than to have that gold sitting in India, China, and Russia? I don’t want to give away real money for fiat currency, especially when it is in a crisis, but at least it is going to someone who wants the United States to be strong. We want as much of the world’s supply of gold in our own borders. Owning gold is the patriotic thing to do.

5. The risk of confiscation is smaller today. In 1933, the dollar was backed by gold (
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what it is backed by today). They had to stop a run on the gold reserves when the gold peg was strained.
Today, we live in the world of floating exchange rates.
If the US really gets into a bind, instead of confiscating gold, they can just print whatever money they want to cover their debts. Yes, creditors will be upset about taking a "haircut" when paid in a debased currency, but they took an inflation risk when they bought the government securities.

Good luck!

This is part 1 of Milly's "Precious Metals for Beginners" series
For Part 2, click here:
Text is Should I buy Silver or Gold? and Link is
Should I buy Silver or Gold?

Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.