More Resources on Biblical Financial Stewardship
Investing in Precious Metals such as Gold and Silver:
A Biblical View
In Bible times–and for the large majority of human history–precious metals, such as gold and silver, have constituted money, the medium of exchange for goods and services. Gold is used as money in Scripture (Exodus 38:24). The common Old Testament word for money, kesef, means “silver”; it is translated as “silver” 287 times in the King James Bible, and 112 times as “money” (see, e. g, Genesis 13:2; 20:16; 23:9, 13, 15, etc.). Likewise in the New Testament words such as argurion are translated as “money” (11 times) and “silver” (9 times), for silver was used as currency (Matthew 25:18, 26, 26:15, 27:3, 5, 6, 9, 28:12, 15; etc.). Gold was likewise used as money (Matthew 10:9; 23:16-17; Acts 3:6; 20:33). Gold will continue to be valuable until after Christ’s coming at the Rapture (Revelation 18:12, 16). While speaking in a spiritual sense to people who were trusting in themselves, a great danger to those who have wealth (Revelation 3:17), Christ stated: “I counsel thee to buy of me gold tried in the fire, that thou mayest be rich” (Revelation 3:18). The spiritual need to receive spiritual blessings from Him is clearly primary in the passage, but the verse would not make any sense were it wrong to think that those with a lot of gold are rich. In terms of Biblical politics, there is a very strong case for having a gold standard instead of paper money backed by nothing, the fiat currency that is the dollar and the other major currencies of the world. Gold and silver make a good currency; do they make a good investment? Precious metals are often viewed as a solid investment option that retains its value in times of crisis or high inflation. What are the positives and negatives of investing in precious metals? What options does one have who wishes to do so?
Arguments in Favor of Investing in Precious Metals such as Gold and Silver
There are a number of arguments made in favor of owning gold, silver, or other precious metals such as platinum or palladium. (The majority of the article below will focus on gold and silver; arguments both for and against the purchase of other precious metals are similar.) First, precious metals such as gold have universally recognized value. For thousands of years gold has been recognized as money. While the US dollar and other fiat currencies decrease in value over time and eventually become worthless, gold and silver will not totally lose their value before the return of Christ (Revelation 18:12, 16). Second, in times of economic hardship and crisis people turn to precious metals as a source of stability. In times of hyperinflation, war, or other disasters, paper money may not be worth more than a blank sheet of paper, but one is highly likely to have the ability to buy food or other necessities with gold or silver-at least if food and other necessities are available. (The only thing that is truly certain is not gold, silver, or anything else in this world, but the Triune God of Scripture and His infallible Word, the Bible.) Third, while governments can do a variety of things to attempt to manipulate gold and silver markets, the value of precious metals is not finally dependent upon how many dollars, euros, yen, pesos, etc. are printed by the government, and governments are not able to gradually destroy the value of gold and silver through inflation. Fourth, at least if one owns physical gold or silver, he may be able to avoid losing everything if the government decides to confiscate private property, seize private bank accounts, or otherwise steal from its citizens. Fifth, if governments return to a gold standard, one can expect that gold will rise in value. Finally, if one has a diversified protfolio of investments, overall investment risk is reduced; that is, a person who keeps a certain percentage of his assets in precious metals has a higher degree of protection from economic uncertainty than one who only owns, say, stocks or only owns bonds.
The main arguments for the purchase of silver are similar to those for purchasing gold. Silver is, of course, far cheaper than gold, so those who wish to purchase a precious metal but cannot afford gold can still get silver. Silver also is employed in industry and medicine to a far greater extent than gold. On the other hand, silver does not have quite the same power as an alternative to fiat currencies. While the price of both gold and silver can be highly volatile, silver tends to be even more volatile than gold.
Cautions about Investing in Precious Metals such as Gold and Silver
There are numerous reasons why those who are considering investing in precious metals should be wary. First, potential investors should make sure that they have accurately weighed the pros and cons of such an investment and not allowed their thinking to be influenced by improper causes. For example, you should place no weight whatsoever upon the information in the frequent advertisements for precious metals in media from newspapers to e-mail to radio to television. In the large majority of situations, a person who really believed he had the foolproof secret to getting rich would not be telling everyone else how to do it on television for free or for a token fee. He would cash in on his secret himself and make as much as he could before everyone else figured it out. He would seek to keep his special knowledge hidden for as long as possible. Ask yourself, “Are the people running the ads for gold doing it because they selflessly have my best interest in view, or are they doing it because they will profit if I buy precious metals from them?” The answer is obvious simply by asking the question. (Such a question is worth asking for any type of investment–be very wary if someone who is seeking to get you to purchase something gets a commission or has a financial interest other than whatever might be your own best interest.) Furthermore, financial markets tend to rapidly incorporate all available information into prices. Their ability to do this is one of the many reasons that free markets are superior to the government control of socialism and communism. Therefore, if a price for a product is too low, increased demand will regularly and rapidly lead to a higher price. If a price is too high, decreased demand will regularly lead to a lower price. Thus, if a particular precious metal were really vastly underpriced, other investors would very likely have already recognized this fact and, through increased purchasing and demand, bidden the price back to a reasonable level. How likely is it that you would be the first one to know that gold or silver was vastly underpriced? Of course, markets can be inaccurate at times, whether due to errors in processing information, crowd behavior, or other causes. But if gold and silver were really selling too inexpensively, would the people running the commercials let the world know this for free, or would they buy up all they could before everyone else figured it out? Whether or not you should invest in precious metals should be determined by a sober and careful analysis of their positives and negatives. Hype from metal retailers that always seem to make today just about the best time ever to buy their products should not factor into your decision in any degree. Similarly, a decision to purchase precious metals (or any other investment, such as a supposedly secret hot stock) should not be based on anecdotal recommendations from acquaintances. People tend to boast about their investment successes and refrain from mentioning their failures, and if a particular investment has already gained, say, 50% in the last month, the assumption that it will continue to rise like a rocket, rather than that it might have been a good buy a month earlier but is now overpriced, should at the least be the subject of sober examination. Do not view the purchase of precious metals as a “get rich quick” scheme. God tells us, “Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase. . . . He that tilleth his land shall have plenty of bread: but he that followeth after vain persons shall have poverty enough. A faithful man shall abound with blessings: but he that maketh haste to be rich shall not be innocent” (Proverbs 13:11; 28:19-20). If you conclude, after rational and careful consideration, that you believe it is probably wise for you to invest a certain percentage of your savings in precious metals, that is fine. It is not fine if you buy gold or silver because a flashy advertisement has convinced you that precious metal purchases are the ultimate secret to becoming fabulously wealthy in a few months or years.
Second, it is is certainly true that investing in gold or silver is better than hiding dollars in a mattress, but it is also true that investing in just about any standard investment with a rational basis is better than holding on to paper money. If you hid $1,000 in a mattress in 1969, you would still have $1,000 in 2015, but it would only have the buying power of $151.34; you would have lost 85% of the value of your money. On the other hand, if you bought $1,000 worth of gold at the average price in 1969 and sold it at the average price in 2014, you would have $30,600, which would be the same as $4,804.26 in inflation-adjusted dollars. Clearly, gold is a better deal than hiding money in a mattress. On the other hand, if you invested the $1,000 in the S & P 500, the $1,000 would have become $66,833, or $10,361 in inflation-adjusted dollars. If you had invested in the Dow Jones Industrial Average, your $1,000 would have become $83,409, or $12,930 in inflation-adjusted dollars. While gold is better than hiding money in the mattress, stocks are clearly better–much better–than gold. Gold netted an annualized and inflation-adjusted rate of return of 3.37%, while the S & P 500 netted an annualized and inflation-adjusted rate of return of 6.51% and the Dow Jones Industrial Average netted an annualized and inflation-adjusted rate of return of 10.33%. Silver was even worse than gold; the metal’s annualized and inflation-adjusted rate of return from 1969 to 2014 was only 0.98%. So precious metals are a better investment than holding paper money–but almost anything is better than holding paper money, and stocks have a historical rate of return that greatly outpaces that of gold and silver.
One reason that precious metals, in the long term, tend to underperform stocks is that they do not produce anything. Let us say that you invested $1,000 in manufacturing companies. The demands of competition will require the companies to constantly be producing products customers value and constantly be striving to improve the value of their products. Over time, as technology improves, the companies will increase in value as they make better and better items in a more and more efficient way. In the long term, as useful products are created, the value of the companies, and consequently the value of your stock, will rise. Let us say that you used your money to purchase some farm land. Each year the land will produce a crop, and you can sell the crop to buy more land or other investments. If you buy gold or silver bars, will they have produced anything after a year, five years, ten years, or a hundred years? No. The number of dollars that the precious metals are valued at is likely to have increased because the dollars themselves will have declined in purchasing power, but the same thing would be true for the farm land–but with the farm, not only will that particular plot of land be assessed at a higher dollar value as the dollar declines, but you would also have the value of the years of their crop. Thus, it is reasonable that precious metals will underperform investments in stocks or other asset categories that produce real growth. Furthermore, if you invest in Christian mutual funds or Biblically-based peer-to-peer lending instead of precious metals, your money will be actively helping to do good. Instead of owning a shiny metal sitting in a vault somewhere waiting for the dollar to deflate, your money will be helping to fund companies that are doing things such as creating cures for various types of cancer. Not only do you get a better rate of return, but your money does good in the world instead of doing nothing. In one sense, investing in gold is taking a rare type of rock out of one hole in the ground (a mine) in order to put it into another one (a vault). It is noteworthy that in Christ’s parable the best thing to do with money was to actively trade with it as companies do (Luke 19:15), which earned the highest rate of return (Luke 19:16), the second best thing to do was to loan it out as one does when he invests in bonds, which at least earned interest (Luke 19:23; cf. Matthew 25:27), and the worst thing to do was to just hold the money (which actually was a precious metal in the first century) in a place such as the ground and refrain from investing it (Luke 19:20; Matthew 25:25). My point is not that everyone who owns or invests in precious metals is sinning–that is certainly not the case (cf. Revelation 3:18)–but one should definitely take into consideration the investment principles taught by Christ, and validated by the better performance of the stock market than the ownership of precious metals in the long term, when considering how to best honor God as a financial steward. There is a difference between the affirmation that gold and silver are real money in a way fiat currency is not and the affirmation that gold and silver are an investment that produces a positive return. There is also a difference between the affirmation that gold and silver are an investment that is likely to produce a positive return and the affirmation that they are a great investment or the best investment. One cannot logically leap to the second or the third conclusion from the first one.
Third, hard data seem to indicate that the price of gold does not correlate as well with inflationary pressure as is commonly thought, nor are many of the other standard reasons given for owning gold supported by actual analysis of data. (See the exhaustive article here.) The price of the precious metal does not always go up in times of high inflation, nor go down in times of low inflation, although, obviously, it still retains value better than fiat currency. Historical data, and some careful thinking, evidence that stocks are a better inflation hedge than precious metals in the long term. If a company is producing something useful, whatever a currency is valued, it should still be able to produce and sell its products. Stocks are claims on real assets, such as land, facilities, and equipment, which appreciate in value as overall prices increase. Thus, historical data indicate that the real rate of return in the stock market has generally been affected very little by the rate of inflation, in the long term; in the short term, however, elevated levels of inflation take a bite out of stock market returns. If an investor is concerned about short term effects of inflation on his investments, he may do better to diversify into foreign stocks that employ a different currency than the dollar instead of buying precious metals.
Fourth, you should recognize that returns on investments in precious metals are taxed at a higher rate than returns on stocks. Long term capital gains on gold are taxed at 28%, almost double the 15% tax rate for similar gains in stocks and bonds. Unless your gold is in a tax-sheltered investment like a Roth IRA, you should expect the government to take a lot more of your money than if you invested in the stock market.
Fifth, one can argue that in an emergency, such as government-instituted persecution of Christians or other times of severe crisis, precious metals are something that can be taken along when it is time to flee, avoid starvation, or deal in some other way with a crisis. That is, one can keep a stash of gold by his canned food, bottled water, first-aid kit, and AR-15 (or perhaps something smaller and easier to conceal). However, Scripture states that all riches–even a stash of gold hidden somewhere–are “uncertain” (1 Timothy 6:17). Perhaps if a time comes when you need to flee money on VISA gift cards will be easier to conceal than gold, which is heavy and easily detectable in a metal detector. Perhaps a thief will break in your house and steal the gold and the AR-15. Perhaps the government will issue a tyrannical decree confiscating all gold, like FDR did on April 5, 1933 by executive order (see a copy of the decree here.) Or, on the other hand, perhaps a stash of gold will turn out to be a great thing to have around. Who knows? All the perishing riches of this world are uncertain, including gold and silver; only God and His Word and promises are certain (John 17:17). Scripture does say that “a prudent man forseeth the evil, and hideth himself; but the simple pass on, and are punished” (Proverbs 27:12), so if prudence dictates that you ought to buy some gold, that is just great. However, you should not think that your gold is some certain thing that you can always count on, or trust in it instead of in God.
A somewhat better reason to own precious metals than those discussed above is that they tend to change in price differently from other assets such as stocks or bonds, and so they provide an element of diversification to an investment portfolio. However, you should recognize that in the long term (if past historical data are reliable indicators) whatever percentage of your assets you invest in precious metals is very likely to underperform, and, indeed, underperform by a substantial margin, whatever percentage you invest in stocks. If one put $5,000 a year from the time he was eighteen until the time he was sixty-five into a Roth IRA invested in gold, and the precious metal earned its inflation-adjusted historical rate of return of 3.37%, he would have $556,134.27 when he retired, Lord willing. If, instead, in the same scenario he invested in stocks and earned the inflation-adjusted historical rate of return of 10.33%, he would have $4,865,988.63. Thus, the same amount of “pain” from saving $5,000 a year would result in a “gain” of half a million dollars if invested in gold, and in close to five million dollars if invested in the stock market. Simply investing in gold instead of stocks would cost the person over $4,500,000. Even if his stock portfolio earned less than 10.33%, it would still be highly probable to outperform gold.
Options for Investing in Precious Metals such as Gold and Silver
Reasonable Option #1: Buy Physical Metal
There are many dealers from whom you can buy precious metals if you choose to invest in them. The following are three dealers with whom I have affiliate links. You can purchase physical gold and silver from them, and I believe that they are reputable companies that have competitive prices. Of course, there are many other dealers you can choose from.
Note that while I believe these companies are reputable and offer competitive prices, they definitely push gold and silver in their materials. For example, a GoldCo composition states: “Financial professionals recommend diversifying your portfolio by placing a minimum of 5-10% in precious metals, and in some cases as much as 50-100%” (“Precious Metals IRA Guide, 6). While this statement is not simply false because there are at least two financial professionals in the world who probably give this advice, it is a radically, radically minority view among financial professionals that just about anyone should put 50-100% of his assets in gold, at least in a free country with a free market, and also false that anywhere close to a majority of financial professionals believe one should put 5-10% of his assets in gold. There are a lot more financial professionals that say you should own 0% in gold, or at maximum 3%, than those that say “a minimum of 5-10%,” and “as much as 50-100%” is something you will only find from people that sell gold. That does not mean that the dealers above are not a good bargain if you want to buy precious metals–it just means you should keep in mind that they have a very strong vested interest in their advice that you buy gold and silver.
There are advantages of owning physical metal, such as the fact that you can be sure to have it with you if there is a serious crisis. There are also disadvantages, though, such as the need to either pay for storage fees in a safe-deposit box or other secure location or risk having the metal stolen in your home.
Reasonable Option #2: Buy Shares in an ETF
Exchange Traded Funds or ETFs are a reasonable way to invest in precious metals. One who invests in a gold ETF such as ETFS Physical Swiss Gold Shares (SGOL), iShares Gold Trust (IAU), or SPDR Gold Shares (GLD) will have his investment track the price of gold minus a small management fee. There are no worries about thieves stealing gold that is hidden in your house. Of course, since the gold is not physically in your possession, in the extreme horror-story scenario funds in the ETF may not be able to help you out.
Reasonable Option #3: Buy Stocks or Mutual Funds in Companies that Produce Precious Metals
A third option for receiving exposure to precious metals is to purchase stocks of companies that mine gold or silver, or mutual funds or ETFs of such companies. (If you are considering investing in precious metals in this way, be sure that your stocks or mutual funds are clean.) If precious metal prices go up, the value of such stocks tend to increase; if precious metal prices fall, so do mining companies. Advantages of purchasing mining stocks instead of buying gold directly include the fact that many mining companies offer dividends, mining companies are quite likely to appreciate in value to a greater extent in the long term than gold bought directly, and those who own mining stocks are assessed the lower tax rate of 15% applicable to stocks instead of the higher rate of 28% applicable to gold. Furthermore, the problem of storage fees and the threat of theft is greatly minimized in comparison to storing physical gold in one’s residence. Disadvantages include the more limited ability to immediately have value in one’s hands in times of extreme crisis and the potential for governments to nationalize mines in such times of crisis.
Reasonable Option #4: Leveraged Metals Trading
With leveraged metals trading, you can hold the value of a much larger amount of a precious metal than the amount of money you invest. For example, with 100:1 leverage you can hold the value of $100,000 of gold with just $1,000. How does it work? Let us say that you have $2,000 in your account and you hold $100,000 worth of gold with the $2,000 at 100:1 leverage. If the value of $100,000 of gold goes up 1.1%, you have just made $1,100. However, if it goes down just 1%, you would lose $1,000 and then your investment would automatically sell because you would only have $1,000 left in your account and as soon as you lost $1,001 you would have less money than the required 100:1 leverage. As a long-term investment strategy, utilizing leverage of somewhere between 3:1 to 10:1 is possible to allow an investor to maximize the long-term increase in the value of gold in comparison to deflating fiat currency. That is, in comparison to owning physical gold and making the (historical average) of 3.37% yearly, at 5:1 leverage you would make a (historical average) of 3.37 x 5 = 16.85% instead. Furthermore, companies that allow customers to do leveraged metals trading typically have low to no fees, so in this manner you can invest in precious metals and avoid storage costs. Leverage higher than 10:1 (and very possibly lower) is not really feasible as a long-term investment strategy because the price of gold and silver fluctuate too much to be able to avoid having your investment dip below the required cash-to-metal ratio and having your investment sell out. At 10:1, you can only sustain a 10% dip in the price of your gold or silver to lose all your money. I believe that leveraged metals trading can be a great way to invest in precious metals. However, there are a few extremely important cautions. First, gold and silver are already extremely volatile and leverage makes them far, far more volatile. 2:1 leverage doubles volatility, 3:1 triples it, 10:1 is ten times more volatile than 1:1. Thus, LEVERAGED METALS TRADING IS AN EXTREMELY VOLATILE INVESTMENT IN WHICH YOU COULD EASILY LOSE VERY LARGE AMOUNTS OF MONEY IN A VERY SHORT TIME. THIS IS ABSOLUTELY, ABSOLUTELY NOT AN INVESTMENT FOR EVERYONE. I do not recommend trading currency or metals simply as a speculative financial vehicle in the hope of making short-term gains, because THE OVERWHELMING MAJORITY–95% IS A COMMON ESTIMATE–OF PEOPLE WHO DO THIS LOSE MONEY. God’s Word says: “He that hasteth to be rich hath an evil eye, and considereth not that poverty shall come upon him” (Proverbs 28:22). If you are trying to “get rich quick,” expect to be in poverty quickly. I would only suggest leveraged metals trading to anyone as a long-term, rarely-traded, limited-leverage investment where you try to beat the historically average appreciation of metals to currency by holding metals at limited leverage for the long term. Before getting into it, you also ought to seriously consider opening a practice account and making sure that you know what you are doing. Remember to keep enough money in your account to overcome short-term dips in price; if, say, the metals you hold decline in value $3,000 in the morning but are up $4,000 by the end of the day, but you only had enough money in your account to “cushion” your investment with a $3,000 loss, you would automatically sell out at the $3,000 low and find yourself out thousands of dollars instead of being up several thousand. Furthermore, in light of the extreme volatility of leveraged metals trading, do not put into such an account more than you are willing to lose, and possibly lose quickly. Finally, the Dodd-Frank Act has prohibited US-based forex dealers from offering leveraged metals trading since July 15, 2011. I am thankful that this unconstitutional limitation on freedom was not enacted before that time, because, in the mercy and blessing of God, provision from leveraged metals trading is why we are living in a house today instead of an apartment. If you live in the USA, it is probably just about impossible for you to invest in gold and silver with leverage unless you have a family member or very trusted friend who lives outside of the country and who is willing to open an account for you. However, there are non-U. S. based companies that offer leveraged metals trading, such as one in the United Kingdom, another in the UK, this one in Australia, and this one in Switzerland. (Since I live in the USA, I have not investigated any of these companies in great depth, since I cannot engage in leveraged metals trading with them. Thus, while I have provided you with their websites, I make no representation about their quality, reliability, or anything else. INVESTIGATE THEM YOURSELF AND INVEST AT YOUR OWN RISK.)
Questionable Option #1: Leveraged ETFs
Leveraged metals trading, as described above, is a manner in which one can successfully magnify, indeed, greatly magnify, the price swings of precious metals owned directly. Another way one can attempt to do this is by purchasing leveraged metals ETFs such as ProShares Ultra Gold (UGL), which is designed to mimic the increase or decrease of the price of gold (before fees and expenses), except doubled, or VelocityShares 3x Long Gold ETN (EGLD), which has the same gold, except tripled. Similar funds, such as VelocityShares 3x Long Silver ETN (ESLV), exist for silver. That is, if the price of gold goes up $10 in one day, shares of UGL would increase (close to) $20 and shares of EGLD would increase (close to) $30. At first glance, buying shares of EGLD would seem like an easy way to triple the long-term price appreciation of gold. However, such is not the case. Such ETFs are “are not designed for investors who seek to track an index over a long period of time” since they are almost always a losing proposition in the long term because of their expenses. That is, long-term investors should absolutely not buy and hold leveraged ETFs in the hope of beating inflation; they are almost certain to decline in value over time. For example, UGLD, has a -35% yearly rate of return since its founding in 2011. In summary, you should definitely not invest in leveraged ETFs as a long-term investment strategy. You are going to lose money–lots of it.
Questionable Option #2: Rare, Collectable, Historical or Numismatic Coins
Some precious metal dealers will also sell gold coins with alleged special collectable, historical, or numismatic value. These coins are priced higher than the value of the gold would be were it melted down and sold because they are supposed to be of special value to collectors. Unless you are an expert in such matters, you are very likely to simply be paying a high price for a coin that is not worth more than it weight. Numismatic coins should be avoided by the normal investor.
