The fool’s gold in gold

The Thinker by Rodin

I was born upon the fathoms
Never harbor or port have I known
The wide universe is the ocean I travel
And the Earth is my blue boat home

Peter Mayer, Blue Boat Home

Are you paranoid? Good! I might not have swampland to sell you, but I am sure I could be unethical enough to try to sell you some gold, albeit at hugely inflated prices. Owning gold suggests you own something with eternal value. Our currency may get suddenly devalued by ninety percent tomorrow but the thinking goes that as long as you got your gold coins locked up somewhere you still have wealth. You can maintain that standard of living because you own something no one can take away, and whose value none can diminish. You own gold! You are a survivor, you shrewd investor you!

I will grant you that gold will probably maintain its value much better than, say, the Zimbabwean dollar. Gold is pretty to look at, quite malleable, won’t tarnish and it must be worth something or it would not make up the majority of wedding rings. Mine is made of gold too, albeit white gold. It seemed better at the time than a ring from a Cracker Jack box. And since I have gold on me at all times should a financial apocalypse arrive, my wedding ring might buy us some food, a tank or two of gas, and maybe a couple of days in a hotel in our post deflated dollar world. Beyond that my gold wedding ring has far more sentimental value than monetary value. It turns out that its real financial value would be if I sold it for, say, American dollars. Dollars are convenient in pre-apocalypse America in that I can use it for an even exchange of value. Gold: well, not so much. Exactly how do you get change for your gold coin or ring in something that will retain value? It might help if everyone else kept a stash of gold coins too, but of course most of us don’t own gold and if we do it probably won’t be gold coins.

How good will gold be in a post Apocalyptic world? Well, it will be better than nothing but in a post Apocalyptic world when push comes to shove you will gladly exchange a large value of gold for basic foodstuffs and medical supplies. See, it’s that stuff you really need to survive the Apocalypse. Gold has no caloric or nutritional value.

Most people who own gold coins don’t keep them at home because they are worried they will get stolen. Gold coins are worth quite a lot, obviously, with an ounce of gold worth roughly $1600 at the moment. A one ounce gold coin though is probably going to cost you more than $1600. Someone has to make the coin and distribute it, and that’s a profitable business. Curiously no one buys gold with gold, but they do buy it with money, which gold dealers are eager to accept. Money, unlike gold, is fully fungible. Which makes money in general far more valuable than gold, which is why people prefer money to gold.

Some people with enough means pay a banker or a company to store their gold in a vault somewhere. It’s nice to know it is somewhere safe, but it’s unclear if everything goes to hell whether you will actually be able to withdraw your gold. I’m pretty sure most vaults are not safe from nuclear weapons. Even if they are, it’s likely that your banker won’t be around to open the vault. How would you make a withdrawal even if you could get to the bank? Hopefully there would be enough infrastructure in place and you will have an armored car to make the trip safely, providing the bridges have not collapsed and the roads are serviceable. Of course, once you have your bullion you would then feel the need to protect it from theft, not an easy thing unless you own a Brinks truck.

So maybe you need a more fungible form of gold. You could invest in gold stocks. Get a piece of paper that says you own twenty pounds of gold instead. Maybe in a post apocalyptic world showing your gold certificate will let the local black market distributor advance you some credit. Or maybe not. Maybe there just won’t be anyone around to barter for goods with anyhow. In a real Apocalypse, gold will be the least of your problems, because you probably will be dead. We’re pretty sure you cannot take it with you.

Are there reasons to invest in gold? As a hedge against inflation its record is pretty spotty, and people often tend to buy it when it is overpriced, i.e. when they are feeling scared. Perhaps having some part of your total assets in gold makes a certain amount of sense for the same reason some part of your assets should be in cash. In the real world though it won’t be gold that you will use to buy goods and services. It will be good old-fashioned money. You will want to convert your gold into money and use that. And unless gold appreciates in value over time, it’s probably not going to be a great investment.

Gold simply offers the illusion that your worth can maintain value regardless of the uncertainties in life. Rest assured this is an illusion, but perhaps it has some value because you won’t need to regularly pop Valium. Real worth is predicated on people thinking something has value. Moreover, real worth is the consequence of the way society is ordered and your place within in. Worth rests on a complex web of relationships, which must be there for your worth to have value. Worth depends not just on your job and your assets, but in the investment that society makes in civilization. It depends on the networks that make ATM machines possible and people’s willingness to work for a living wage, yes even at Walmart. It depends on roads being there so you can get to where you want to go. It depends on a justice system so the criminals aren’t preying on you and your neighbors. Without these and much more gold is worthless. Which means that chasing gold in the hope that it will keep you safe from calamity is foolish. It is fool’s gold.

As Peter Mayer put it, we are born upon the fathoms. Our home and our standard of living is an illusion. In reality we are living on a boat adrift in the sea, a giant Noah’s ark that we all share. There is no permanence; we are just around for the ride, but it’s a ride that we are all in together, so it behooves us to play nice and share our toys. So if you want to maintain your wealth and standard of living, stop looking at gold and try investing in society instead. Let’s make our world a place where we all have the likelihood to achieve our potential. Let’s keep investing in roads, good schools, new drugs and technological inventions. All these things though depend on a healthy and sustainable natural environment. Which means that our real treasure is not our personal wealth, but our shared natural world.

Now there’s a solid investment.

Looking out for Number 1

The Thinker by Rodin

I hope I am wrong, but I am predicting a mean decade ahead, particularly here in the United States. Americans may be voting their bum out of office on November 2nd, hoping for real change or genuine bipartisanship, but at least through 2012 they will not get it. Political paralysis over the next couple of years is easy to predict, with a high probability that a Republican House of Representatives will try a reprieve of its 1995 government shutdown. The results of the 2010 census will encourage governors to draw congressional districts even more tightly to ensure even higher partisanship in Congress.

In addition, there are structural problems with our economy that are going to linger, particularly high unemployment. The “government is spending too much” mantra combined with businesses sitting on huge piles of cash but unwilling to use it to actually hire people simply means a prolonged period of high unemployment. And since Republicans in general will block spending on infrastructure and high tech investments, those jobs that will be created are mostly going to pay less. Add to this mess our massive foreclosure problem, wars in Afghanistan that will linger, massive climate change and the natural disasters that they will cause and it is hard for me to be optimistic about anything.

The Glenn Beck’s of the world would have me running to buy gold at inflated prices as a hedge against all this uncertainty and potential turmoil. The problem with gold is that it is not fungible. In any event, the world now runs on electronic currency. I am not worried about a currency collapse, but it’s clear that government is not going to look out for me, the little guy. And due to the Supreme Court’s incredibly bad Citizens United decision, we can expect even more extreme government by and for the corporation. Unless you are very agile and smart, you are going to be screwed.

Since I like prefer to live in the real world, I have been running “what if” scenarios with my financial future. I happen to be a federal employee who can retire in less than two years. Until recently, I assumed that I would never have to worry about my pension. It is as solid as the United States government and its sterling ability to print money, right? However, using Greece as an example, at some point if in the opinion of its creditors a state is insufficiently well managed, the creditors will show who is really in charge. In Greece, the effect has been a sudden reduction in the wealth of its citizens in general and government pensioners in particular.

While the social security system is fully solvent for at least twenty years, Medicare is not and Congress seems unwilling to do much more to make it more solvent. Larger structural issues remain to be solved but of course, there is nothing close to consensus on how to do this, and the situation will only get worse. It’s easy to see that even for a vested civil servant like myself, my pension may be on someone’s chopping block.

While I don’t see my pension going away altogether, I can see the federal government devolving into something like California. I can see mandatory cuts in pensions as well as many other programs in order to make creditors and Wall Street happy. How do you survive this new reality when the assumptions you made for your life plan change fundamentally?

Answer: not very well, as many unemployed and overleveraged Americans have discovered over the last few years. While I have escaped it through the virtue of steady employment, watching what has happened during the Great Recession to those caught in its vice is instructive. It has had me sending emails to my financial adviser, who all along has warned me that the solvency of some of my retirement benefits was questionable.

To some extent, I may worry too much. My wife and I are fortunate because we have mostly lived within our means. We do not carry a credit card balance. Our homeowner’s equity line of credit is now paid off as well. All our cars are paid off too, although we are dealing with the major expense of shepherding a daughter through college. It’s not today I am worried about. It’s my standard of living ten years or more from now when I am living on a fixed income that causes me concern. It’s when Uncle Sam’s creditors are forcing austerity and all that austerity means they are raiding my pension fund and scaling back my benefits. I think it is unlikely that my pension will disappear altogether. However, I do think it is prudent to assume a worst case of a 25% reduction in my pension, 10% reductions to my social security income and a lot higher premiums for health insurance. I am having my financial adviser run the numbers. What would my retired life look like? How can I mitigate now some of these potential serious financial consequences to my future?

Here’s the gist of what I am learning. You may want to take notes. I need to save as much as I can and pay off debt as fast as I can as well. For me, saving more is actually difficult to do. The federal Thrift Savings Plan is essentially a 401-K and I have maxed out my contributions into it. The one thing I can do is put money into an IRA as well, but that is limited to $5000 a year. I could save more as a financial cushion, but there are no tax benefits for doing so, and I must report interest as income.

The second thing I am learning is that I need to get out of debt. We are doing very well there, but we still have $85,000 for so left on the mortgage. This seems the wisest place for me to park any extra income. I have been chipping away at it the seventeen years we have been in the house, but need to be more aggressive. I am looking at strategies like applying all leftover income to paying off the principle on our mortgage.

So basically, to reduce our impact to any financial shocks, we need to be debt free as soon as possible, and save and invest as much money as possible. There are also other strategies that may seem not particularly patriotic. My financial adviser has had me move most of our funds into international stocks, where economies that are growing and the legislatures have more common sense. While Wall Street remains one of the few bright spots in our economy, investing too much money with Wall Street may be unwise, at least over the course of the next decade or so, because it will be buffeted by shocks to federal and state governments that seem likely to continue and exacerbate.

With luck, at some point, Democrats and Republicans will agree on a common path forward. It’s not hard to see what that future will be because it is likely to be laid out for us by events. Eventually we will all find that our lives will become more austere and we will be paying more in taxes. There is no way to escape this reality indefinitely, and no amount of vitriolic partisan clamoring otherwise can change it.

However, if our mortgage is paid off, we have a new real asset: our house. Washington Post financial columnist Michele Singletary made an excellent point recently: those of us who think having equity in our house means we are homeowners are fooling ourselves. We are homeowers, and our home as a permanent as our ability to keep sending mortgage payments every month. You are only a homeowner when the mortgage is paid off. Only then can you truly count your house as an asset and as part of your net worth.

We do own our investments free and clear. Properly managing that so it grows but does not lose value when we retire, that matters and is something we can control. Unfortunately, there are so many other variables that I cannot control. I can change those variables within my control and lessen my overall financial risks, and I can do that by saving like the Japanese, investing wisely and getting out of debt.

You are welcome to follow these strategies as well, which are sound and should be much more viable than buying gold from Goldline. I suspect many of you are younger, start with many more liabilities and have less in the way of income. In general, we all need to acquire the painful habit of living beneath our means to the extent we can and save or invest the difference. In addition, we need to become educated if we are not and continually keep our education relevant to the job market. The unemployment rate for college graduates even during these tough times is about five percent. It’s those with less education who are bearing the brunt of these times. Education in a decently paying field is the key, as well as mastering the social skills to get and retain these jobs.

It’s clear that no one is willing to look out for you anymore. Our safety net is collapsing. So much about the future is uncertain, but following these principles should greatly increase the odds that you will emerge with most of your standard of living intact.