15.1: Precious Metals, Art, and Collectibles

Precious Metals: Gold, Silver, Platinum, Palladium, and Rhodium

Okay, ‘fess up! Your first thoughts when you decided to take this class included gold. Gold! Gold is so beautiful! It’s the only real asset that holds value, right? Everything else is just paper. In fact, stocks, bonds, mutual funds, short-term investments, etc. are not even paper anymore. All these other investments are just bits of electronic data stored away in some computer system somewhere across the world. Over a hundred years ago, none other than J. P. Morgan famously testified before the United States Congress that, “Gold is money, and nothing else.” The Gloomsters and Doomsters claim that when, not if, technologically based civilization collapses, gold will be the only way for you to survive.

It turns out, they all are wrong. Gold has been a very disappointing long-term investment. Sure, you can buy gold bullion bars and wafers and gold bullion coins but where will you store them? Hide them in your home and hope they are hidden away well enough that some thief doesn’t find them but not well enough that you can’t remember when you put them? Don’t bother storing your gold in a safety deposit box in a bank because if the economy collapses, you won’t be able to get into the bank. There will be an armed guard at the door. I know. Why not use an Exchange-Traded Fund (EFTs) dedicated to gold or buy the stocks of gold mining companies. Oh, but wait. Those are just the same bits of electronic data that you were worried about with the other “paper” investments.

Tom Petruno, who retired from the Los Angeles Times many years ago, said it best, in my humble opinion, “…if your reason for owning gold has something to do with the end of the world as we know it, shotguns and canned food probably would be more practical investments.” Sure, if you believe that the world economy is going to fall apart anytime soon, put your money here! But at the same time, you better get out of the Northern Hemisphere, make your way down to Tierra del Fuego or Tasmania and learn to grow sorghum and raise goats! There is an old saying: “Don’t bet on the end of the world because you can’t collect.”

Also, what is gold, anyway? What is it good for? Who uses it? Who needs it? Gold is a commodity similar to the other commodities that we discussed when we covered futures contracts. Can you think of any uses of gold other than jewelry? Probably not. Gold is one of the best conductors of electricity and some very important electrical components still use tiny amounts of the precious metal. However, electrical engineers have found much better and more plentiful substitutes. The dentists will tell you that it is still the best material for dental work but again, there are much cheaper and suitable materials that work almost as well.

So what is gold good for, then? It turns out, not much. Warren Buffett quipped that, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Plus there just isn’t that much of it. According to some estimates, all of the gold discovered thus far would fit in a cube that is 28 meters wide on every side. That is much smaller than would fit in a modern sports stadium.

The gold bugs, as they are called, will say that the scarcity of gold is what actually makes it so valuable. This argument falls flat on its face. Just because something is scarce does not necessarily make it useful or desirable. We will see the same argument in our next chapter on kleptocurrencies, ah, my apologies, cryptocurrencies.

Finally, the long-term returns of gold as an investment have been pitiful. Gold has barely kept up with inflation. Do you remember the following graphic from chapter 1?

However, even when you explain all the disadvantages of gold, even when you show them this very illuminating graphic, many people still want to own gold. Because, of course, it’s gold! Fine. You want to buy gold, buy gold. We will come back in 30 years and compare your return versus a portfolio of high-quality growth and income stocks via individual stock selections or a high-quality mutual fund. Can you guess who will have done better?

On the other hand, silver is a much more useful precious metal commodity. Silver is actually the best conductor of electricity and because it is much more plentiful, it is very useful and essential to industry. Unfortunately for silver producers, the largest usage of silver is long gone. Does anyone remember those ubiquitous yellow boxes available in every grocery store, drug store, and convenience store. You know, the ones with the brand name Kodak on the box. Silver was essential in the production of film. Ah, many of you have never even seen a camera in your lifetime except maybe in a museum or your grandparents’ attic.

There are three other precious metals that might actually be a useful instrument for those more speculatively inclined, platinum, palladium, and rhodium. These precious metals are becoming more and more essential to the economy. They are used in catalytic converters in cars and other high-tech industrial products including medical devices, electronics, and waste treatment and purification. Recently, their prices have spiked so high that criminals, including organized crime syndicates, have begun stealing the catalytic converters from cars, most notably those of the Toyota Prius and other hybrids, as the precious metals are consumed much more slowly in hybrid vehicles.

Precious Stones: Diamonds, Sapphires, Rubies, and Emeralds

Precious stones may be beautiful to behold but as an investment, they are horrible. Diamonds, sapphires, rubies, and emeralds, are not an investor’s best friends. Only a small number of the most elite stones will ever increase in value. And to make matters worse, precious stones are highly illiquid investments. It will be difficult and maybe impossible to find someone who will want your precious stones, even if they are of elite value. Unlike precious metals that have industry standards for quality and quantity, the valuation of precious stones is highly subjective and an uninformed investor will be at the mercy of informed brokers and dealers.

However, the worst is yet to come. It turns out, diamonds and other precious stones are really not that rare. For decades, De Beers was a cartel that controlled the diamond trade and artificially restricted supply to keep prices high. They were also masters of marketing and were able to convince a majority of the population that diamonds were actually a good investment. But as The Atlantic so penetratingly asked, “Have you ever tried to sell a diamond?” To make matters worse, the world has been creating artificial diamonds since the 1950’s. Currently, companies can make artificial diamonds that are indistinguishable from natural diamonds. In fact, some enterprising companies will sell you a diamond made from the ashes of your beloved pet or loved one. That’s right. Diamonds are made of carbon and so are we. Your beloved Abuelita Juana can be displayed prominently on a ring on your finger or on earrings dangling from your ear.

Art and Collectibles

Collectibles include rare coins, works of art, antiques, stamps, rare books, sports memorabilia, rugs, Chinese ceramics, cars, paintings and other items that appeal to collectors and investors. They can be both a good investment and a hobby, or a financial disaster. One example of the latter was a gentleman from San Diego who had a collection of Barbie Dolls that supposedly were worth a million dollars at the time back in 1992. His entire collection disappeared. Fortunately for him, the story had a happy ending as his collection was returned within two weeks.

If you do decide to dabble in collectibles, be careful of investment scams, know the dealer’s reputation, and comparison shop. Better yet, take the advice of Christopher Burge of Christie’s Auctions, “Don’t buy art as an investment.” Whatever collectible you decide upon ‒ art, baseball cards, cars, Beanie Babies, whatever! ‒ do it because of the joy and fulfillment it gives you, not because you want it to make you rich. Who knows? You might just find that $10 painting at someone’s garage sale that you know is selling for $98,000 on the art market. But don’t rely on this for your retirement savings, okay?

Tax Considerations of Hard Assets

The maximum capital gains tax rate on most all investments for the vast majority of individuals is currently 15% and could be as low as 5% or even zero in some unusual cases. The capital gains tax rate on precious metals, art, and collectibles is 28%. By the way, none of these investments are eligible for tax-qualified accounts such as retirement accounts. Do you think the Congress is trying to tell you something? (Disclaimer: There are ways to hold gold and other precious metals in an IRA. But it ain't easy and it ain't cheap. Plus, if you do not handle the gold according to IRS rules, you could be liable for outrageous taxes and penalties.)