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.
Gold has a higher tax rate than most other assets because it is considered a collectible. That itself puts it at a disadvantage compared to more conventional investments.
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.
HappyinHowell: 
Mr Misno: 
Marsha: 
Brian Wilson: 
Steve: 
Larry Crouse: 
Brian Wilson: 
Monty Pelerin: 
Bob Snyder: 
Syrin: 
Dear Monty,
Until this gold blog post, I thought I had, through your excellent advice and counsel, come to understand the place and importance of gold (or other hard assets) in a wealth preservation portfolio. However, the warning in that post and in Daniel Amerman’s cited article, seems to throw the inflation protection benefit of gold accumulation and holding into a cocked hat.
As I understand these two articles, the government tracks my gold purchase over time, and, in the event I sell, taxes the difference between the acquisition cost and sales price at a 35% (“collectible”) rate. I cannot imagine a scenario in which that process would provide any inflation protection. Purchases made with “real” dollars, later sold for cheaper dollars, the difference then taxed as if the gain were all in the original “real” dollars, strikes me as just one more example of government’s intrusive, confiscatory hand. My sense is that gold may be a reliably appreciating commodity during periods of high inflation, thereby “protecting” gold owners from the worst day-to-day punishment associated with loss in value of the dollar as long as the gold is simply stored in a safe place. As long as I don’t sell the appreciated gold for inflated dollars, I remain essentially whole; but my hard asset is useless to me until such time as the value of the dollar is restored–unlikely during my lifetime.
If that is true, when do I sell? Is such gold (or other hard assets) useful in a barter economy? What are the estate tax consequences of bullion assets?
Perhaps, hopefully, my understanding is flawed. When I buy gold, is that purchase reported to the government? Gold brokerage websites say no, but given the recent requirement for small businesses to report transactions with one trading partner of more than $600, is that “FAQ” answer out of date? When I sell gold, am I required to report the sale to federal or state governments? Seems to me that only if there is no reporting requirement would such an investment provide both inflation protection and liquidity.
Sorry if these questions reveal brain failure on my part, but since the IRS is getting bigger, DHS is being armed with hollow points, and the Fed insists on destroying the dollar, I’d simply like to know the risks and guidelines for making an investment in hard assets work. The two articles suggest that it’s harder than buying, burying, then selling when the gold’s value appreciates.
I think Gold is good. I would argue the statement “it has been the best answer in a losing game.”. I put a substantial portion of my retirement fund in AAPL over the past 8 years. I believe it has outperformed Gold. And much of this is in an IRA so the tax is deferred, which helps some. Still, I get your point, and my biggest concern is what happens when Obama and Reid, and some compliant weak Republicans succeed in destroying the economy and the spending on iPhones and iPads naturally declines. Then my other investment GLD, should help. But the hard version would be better if I could figure out that market. Thanks for all your sage advice Monty.