On my post about hyperinflation from yesterday, my advice was to move finances into assets like precious metals or real estate. An anonymous commenter had this to say:
I think precious metals are a fools errand. First, when the crisis strikes you will be making your target – meaning that you are going to risk your life for a thing. Second, it is not worth much for day-to-day transaction. I am aware of several who accumulate gold bars and coins. You cannot simply shave off parts of the bar for doughnut, and you are almost invariable going to get a lot less for the coins than it is worth.
I decided that this would be a good time to share my thoughts on this. My wife and I do have SOME savings in physical metals. Metals are not bought as a way to carry out day to day transactions. They are a hedge against inflation, and not meant to be used as currency to purchase things in some sort of a ‘Mad Max: SHTF’ scenario. Honestly, ammo and food would be worth far more in such a case.
No, I am talking about storing your wealth in a medium that will preserve your life savings during the high interest/high inflation economic troubles that will surely follow the idiotic policies that are being put in place by our new communist overlords.
I personally think that more than a few ounces of PMs are a bad idea. There is a loss buying in (a one ounce gold coin costs 5% over melt value), there is a loss selling (another 5 to 10%), and the coin is a nonperforming asset- meaning that it doesn’t make money for you, other than being an inflation hedge.
Real estate is different. If you own real estate, it can make money as rental property, as well as the fact that it gains value at a higher than inflation rate.
My wife and I discussed our options yesterday and have decided to close all of our accounts (other than IRAs and 401k accounts) and use the money to buy more real estate.
In an inflationary economy, you are better owing money than having money. A fixed rate loan for real estate is denominated in pre-inflation dollars, but paid with inflated dollars. If the loan is a fixed rate loan, the Fed increasing rates won’t affect your loan.
There are other pitfalls to owning real estate, but there are ways to reduce those risks. That is an entirely different and more complicated conversation.
Karl Ushanka · January 31, 2021 at 1:57 pm
Physical PMs can’t be hacked – by the Chinese government or ours…
There is always a buyer.
Plenty of other reasons to be in PMs. I wrote a book about it. TradeTheRatio.com.
Anonymous · January 31, 2021 at 2:06 pm
Instead of one ounce US gold coins, consider instead plain gold wedding rings. You can take a single one off your hand and spend it and the receiver won’t think you have a pile more to steal. Look to India for ideas about how to spend gold in small amounts. Beads or links off a necklace? Silver is the right size to buy groceries with, and you can buy old US silver coins by the pound. Gold is worth more and you might be buying a vehicle, medical care, or a bribe with it.
Divemedic · January 31, 2021 at 2:13 pm
While agree that physical PMs are a good idea, they are not a panacea, and should not be the main vehicle of your savings. I wouldn’t even say that they should be a major part. Remember that, at the end of the day, PMs are a nonperforming asset.
They will seldom perform any better than inflation.
billrla · January 31, 2021 at 4:33 pm
Real estate can mean a lot of different things. You could own land, but, where, and for what purpose? To build a residence? To develop commercial properties (retail, warehouses, etc.)? Rental (apartments, professional space, etc.) Recreation (hunting, boating, etc.)? Agriculture?
You could purchase shares of REITS (real estate investment trusts) that own all sorts of properties, including stuff you might not think of, such as timber (Weyerhauser, for example, owns millions of acres of forest land). There’s also tech REITs (own land for server farms, etc.). Office REITs. Cell phone tower REITS (a good business). You name it and there’s a REIT for it.
You must consider purchase costs, carrying costs, liability, regulations, taxes, upkeep, timeframes–many different things. So, what is is that you are really looking to achieve? If your primary goal is to hedge against inflation and economic uncertainty, there are many ways to go. Real estate is just dirt, until you do something productive with that dirt.
Divemedic · January 31, 2021 at 7:29 pm
That would be up to you and would depend on where the real estate is located, and on your own financial situation. I would avoid a REIT, because it is just another form of stock- you don’t own actual real estate, merely a part of an entity that owns real estate. A REIT is subject to all of the same problems as owning stock or even of owning a gold fund.
In my case, we own residential properties that we then rent out as long term rentals. I know people who own property that they rent out as short term rentals. I also know someone who buys property, builds or improves it, and then resells. (not flipping, more like developing)
In any case, you own something tangible, not merely a piece of paper.
raven · January 31, 2021 at 8:18 pm
A cautionary note about taking on debt in an inflationary environment with the idea that it will be paid back in inflated dollars- not only is there risk in simply not having a job to pay the loan, I have read there were hyperinflation periods in the past, where the debt was restructured to be in post inflationary terms- ie, you lost all your purchasing power, and the banks were allowed to reassess the loans adjusting for inflation. If they can screw you, they will.
Jonathan · January 31, 2021 at 9:21 pm
I agree with Raven that there I no guarantee that loans will stay in their original terms. The government changed bankruptcy laws to protect the unions in the GM restructuring in 2009; there is no reason they won’t change other contract law in the future.
As far as real estate, particularly renting it, in the past year rental income has become uncertain due to no-eviction laws – this is more than likely to continue under the new regime, and it is likely that landlords of all type will be vilified along with other businessman over the next few years.
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