Most readers know that I favor hard assets as opposed to paper assets. By hard assets I mean precious metals, land and things that will hurt you if you drop them on your foot. Paper assets are stocks and bonds.
My position regarding hard versus soft assets is a recent one. Up until probably 2001, I had never owned gold or gold stocks. Until then I had only invested in stocks and bonds. Since then, I gradually left financial assets until now a very small portion of my portfolio (less than 10%) is represented by financial assets. So far, this strategy has worked well, although there are periodic painful adjustments just as in any asset class.
Past success is no indication of future success. While I still believe that is the place to be, it may very well turn out differently. One never knows; one only guesses.
Daniel R. Amerman discusses gold and the difficulties of staying ahead of inflation. His focus, correctly, is on the real after-tax returns that one has been able to achieve. By “real,” the deterioration in the purchasing power of the currency is taken into consideration. He looks at three recent historical periods. Although his article is directed at gold, it applies to the difficulty of generating true real after-tax returns in an inflationary and confiscatory tax environment:
The government’s “game” is more sophisticated than most investors realize, and it is deeply ironic that many unsuspecting precious metals investors trying to protect themselves from government-created inflation are playing right into the government’s hands when it comes to wealth confiscation under existing law.
The above notwithstanding, there is a strong case to be made that this is one of the best times in history to be buying gold or silver. But to realize those gains in practice, investors first need a thorough understanding of how the game has been rigged, before they can find ways of overcoming the problems.
I encourage you to read the article to understand how the ravages of inflation and our current tax code make it nearly impossible to maintain your real net worth, regardless of what you invest in or how well you do. During the last eleven years when gold increased every year, after taxes you did not keep pace with inflation. Of course you did worse in financial assets over this same period.
The reason is that inflation creates nominal gains, but not necessarily real ones. You are taxed on these fictitious gains rather than an inflation-adjusted measure. In short, all other things equal, the higher the inflation the more taxes government collects. You are being taxed on gains generated by a devaluing dollar.
It is ironic that those who invested in the highest returning asset of the last decade, one which produced phenomenal nominal gains, likely lost money in terms of purchasing power. Gold is not the problem. In fact it has been the best answer in a losing game.
We have entered a period where profligate government spending drives rapid inflation and confiscatory taxes. As a result, even the successful are becoming poorer. Wealth is surreptitiously being transferred from your real net worth to the government. Government is “stealing” wealth from its citizens.