Is It Better to Invest in Precious Metals than to Store Cash Long-Term?

An interesting question...

Understanding the Real Value of Cash Over Time

First, let's take the reality that the face value of paper money remains constant. Imagine burying $50,000 in 1960, when a house cost roughly $10,000. If dug up today, that $50,000 would still be worth $50,000, but a house could now cost anywhere between $200,000 to $300,000. On the other hand, if you had used that money to purchase five houses, you could be sitting on a net worth of $1 million to $1.5 million. We also haven't considered the potential damage that moisture might have caused to that money during storage, turning it into slimy mush.

The Case for Gold and Silver

But what about gold and silver? If we could accurately predict the future values of anything, many more people would become wealthy. This brings us to the broader discussion of financial investments and the importance of understanding inflation.

The Impact of Inflation on Money and Investments

When I was a child in the mid-70s, a can of coke cost just 25 cents. Today, the same can costs around $1.25. The reason it costs more is not because the ingredients or packaging have become pricier, but because the value of money has diminished. Inflation is not the actual increase in the price of goods; it's the decrease in the value of your money.

Every item or service that we purchase changes in price due to inflation. For instance, while a TV might become cheaper to produce over time as manufacturing processes improve and better materials are used, a simple can of coke has experienced a price increase due to inflation. The value of that quarter you saved under your mattress 45 years ago would not be enough to buy the same soda today. If you had instead put that quarter in the bank and earned interest over the years, the value of that money would be equivalent to today's buying power.

Homeownership and Inflation

Let's look at a house instead. If you bought a house for $100,000 in the year 2000 and it appreciated by 3% annually, after three years, the house would be worth $109,000. Even though the house itself hasn't changed, the decrease in the value of money means that it now takes $109,000 to purchase the same house. If you had kept your original $100,000 under the mattress, it would only be able to buy 91% of the house's value, meaning you would need an additional $9,000 to buy it.

The Case for Precious Metals

If you had invested in gold or silver, which appreciate similarly to inflation, the metal would also be worth $109,000 after three years. Investing in gold or silver provides a hedge against inflation. Precious metals are valuable and remain stable in value, but they aren't without risk; their value can fluctuate based on various market conditions. Therefore, it's crucial to do thorough research and understand the market dynamics before making such an investment.

When to Hold Cash

So, when should you keep cash on hand? The only time I would recommend holding cash is during periods of deflation, a rare occurrence that would have the opposite effect of inflation. During deflation, the purchasing power of money increases, making it a safer choice to have cash on hand for immediate needs.

When you recognize that inflation is a hidden tax, a method for the government to get money, you can make better financial decisions. By understanding the impact of inflation on your purchasing power, you can make informed choices about where to invest your money, whether that's in real estate, stocks, bonds, or precious metals like gold and silver.