Is now the time to give up on PMs and look to the stock market?

Right now and likely over at least the short term, there simply isn’t anything to prop up gold prices. Inflation — using the measure employed by the Fed — is tame and the economy is strong.

Despite several rate hikes, the US 10-year is still below 3 percent and bond prices are stable. When you look at the overseas 10-year rates, you can quickly see why demand remains high: 2.85 percent is far and away the best deal being offered. Stocks take in money, Treasuries take in money and PMs prices suffer.

We are long overdue for a cyclical recession. And a soft to lousy economy does NOT guarantee higher gold prices. Several years back, gold and silver jumped because of a widespread EXPECTATION that higher deficits and the Fed’s near-zero interest rate policy would trigger hot inflation.

As we know, that didn’t happen (though quantitative easing may have staved off deflation). PMs prices fell back to earth.

In the previous economic crisis, in the early 1980s when PMs jumped sharply, we were dealing with double digit inflation — a totally different scenario.

My point: I think a lot of younger folks who are buying PMs are operating under the mistaken notion that a bad economy will automatically increase prices. I disagree.

The deciding factor will be inflation.

 

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I'm not following.

An ounce of gold can be $1225 today. It can be valued at $1250 this time next year. It has grown $25 in value, but it's still physically just that one ounce of gold.

A stock can be bought today for $100.00 and its perceived value tomorrow can be $105. It has grown $5, but it's still physically just a single share.

Both of those scenarios are growth. Please explain if you meant something else. Did you mean shares could be split, and now you have two instead of one? Besides that, the growth of a commodity versus the growth of a stock is really no different. It's just the perceived value of the thing that is the growth or decline of its value.

If you're arguing that stocks will grow more than gold, I completely agree. We can just look at average returns over the years to see that.

 

The key is knowing WHY. Corporations can THEMSELVES grow, gold cannot. Equities have a double source of increases in valuation. It's not ALL just the "greater fool" theory at work. But right now globally, look around. The "hot" thing right now is the United States Dollar, period. Hardly seems possible given all the drama, but there it is.

 

No, I am not talking about the price per unit, I am referring to true growth.

When Apple was founded, there were a handful of guys in a garage. Company had no real estate, no assets, no inventory, no revenue. Now it has Billions and Billions in assets plus huge revenue sources, the Company GREW and it turn the value of the "unit" stock share priced soared. It is much more than just someones perception, there is just a lot MORE backing each share of stock. For GOLD in 1000 years, the price may go up, but the actual asset will not have grown a lick. An ounce is an ounce is an ounce.

 

True
Companies can grow immensely thus having stock splits with continual stock upwards valuations.

And don’t forget about dividends if it exists.

A company can grow like wildfire. Or be bought, split up into multiple companies or shrivel up.

1 ounce of gold will still be one ounce of gold after 20 years.

 

Yes, that is correct. But our part of that as investors is nearly identical. We don't actually own any of that value. Our stock doesn't entitle us to any percentage of Apple physical or intellectual property or any percentage of a share of their products. We own a share of the perceived value of the company that entitles us, theoretically to have a sliver of a say in the company.

 

Like what?

 

But in a VERY real sense, it does. It doesn't give you CONTROL, but it does give you the financial benefits.

 

Have you ever read an actual balance sheet?

 

Well, this is a simplistic example but it makes the point. Lets say a small start up company has no assets, no income stream yet but a good idea and they float 5 million shares of stock at 1$ each and you like the company and buy 1,000 shares. Other folks buys thew share and they are no longer any available. The company now has 5 million in assets which they put to work. They buy raw materials and Manufacturer an item of value. The manufacturing process was a value add to the raw materials and the finished item has more value than the net sum of the raw materials. Bang, wealth has just been created. The company continues to create wealth and they buy more equipment, some buildings to expand manufacturing, stockpile some cash, invest in some of the created wealth and 5 years later instead of having 5 million in assets, they now have 50 million in net assets. Sooo, even if they even if the company did a total liquidation, each shareholder would receive $10.00 per share because the company grew. It is much more than perception that the share value went up. Now as I stated this is a very simplistic example as income stream (present and future) has a lot to to with the share price, but this is how the concept works.

 

No, we actually do own the physical and intellectual property. You are correct on the control though, we only have a minute sliver which does not amount to much say on how those assets are utilized, but we do own them, and they represent value. The stock price reflects that value so when it is time to sell, the potential purchaser will pay a price based on that value and income potential.

 

A company can own many things such as Patents. Patents can be used to protect intellectual property, and also used to gain additional revenue by allowing a company to use their patents.

Other companies would buy out other companies just for their patents and potential revenue stream from them. ==> https://www.nytimes.com/2012/12/20/business/kodak-to-sell-patents-for-525-million.html

here's a list of top patent companies ==> https://www.networkworld.com/articl...atents-in-2016-apple-doesnt-crack-top-10.html

Intellectual property is big business all on it's own. There are companies out there that all they do is buy and protect patents in order to create revenue.

Some just use those patents to create revenue ==> https://www.theverge.com/2016/7/18/...quisition-intellectual-property-patents-value

Who cares about making things. With the right intellectual portfolio one can make hundreds of millions of dollars doing nothing. You just need a building full of lawyers to protect them all.

 

Only if the company is liquidated can we say we "own" any of the IPs or physical assets of the company. We have no ability to "cash in" that ownership unless we sell our share to someone else. We don't have ownership of a thing unless we can control that thing. Wouldn't you agree?

One has ownership of gold, no matter how big or small.
One has ownership of a patent because they can sell the rights to make that thing to someone else.
One has ownership of their home, even if they are still paying for it, because they have the right to do with the physical thing as they please.

One does not "own" any of the physical or intellectual properties of a business BECAUSE you have no ability yourself to liquidate that asset. You may only transfer your minute sliver of control to someone else.

 

Dividends got a mention here, but no traction. Most stocks provide dividends, which you could of course cash out and keep the money, or you can roll that into additional shares. So 100 shares bought last year could well be 105 shares this year and 111 shares next year. So in a very possible scenario, even if the price per share has remained flat, you've gained.

Commodity investments do not do that.

 

Dividends may be one of the strongest arguments for stocks over PMs.

 

Let's see now, in order for a $100 stock to grow 10% in the first year it has to go to a $110. In the second year it has to go to 133. In the third year has to go to 146. In the fourth-year... uh-oh, all the Uber drivers and gig economy drones are gushy goo-goo about this "equity" (sounds soooo official). Still they' re expecting 25% return because, you know, it's going to the moon dawg. So now it has to hit 183.

Am I being sick and twisted by asking what happens when all this compounding becomes un-sustainable?

 

Not true, you can "cash-in" at any time by selling your shares and with that goes the property that you own. While the company is not liquidating the assets, the shareholder certainly is as they are sell the property "THEY" own.

 

I certainly agree, I was just using manufacturing as a simple example as it is easier to visualize the creation of wealth. Service companies do not create any NEW Wealth at all, they merely transfer it from one person to another, but you can still get rich from a service company

 

I would like to mention REITs ( Real Estate Investment), I have owned the same one for 8 years and the average dividend has been close to 10.8% per year. Currently the quarter coming is 11.46%/quarter. If the company owns/lease property in a desirable area, it won't crash like a stock or bullion will;, because most of the properties are longer term, but you do have to pay attention ( but much less than stock or bullion) to its activity. So ask ...How are the rental values where the REIT participates.
IMO. Jim

edited to add: The companies can be readily bought and sold as easy as stocks or much easier than bullion.

 

Hey Longnine, I don't think you are being twisted by questioning when the compounding becomes un-sustainable. I think we all remember the dotcom bubble.

While I am sure some folks expect 25% returns forever, I assure you the rational folks do not. What I can say though, since the beginning of the modern stock market in 1923 when the S&P 500 index was created (then called the composite index). That index has averaged around 9% per year (95 years) and that is good "chowda" in any state of the Union.