There are several reasons to be bullish on gold, but I think most of these reasons apply more to the long run.  The short run is too hard to predict.  If it was easy, then I would be extremely wealthy.

I am an advocate of owning gold and other investments that correlate with the price of gold. I always caution against gold mining stocks.  It’s not that I don’t ever recommend mining stocks or buy them myself, but I warn people that they are a very risky investment.

The main reason for owning gold (or gold equivalents such as GLD) is for insurance.  It is a hedge against massive currency depreciation.  It is a hedge against disaster.  It is a hedge against long-term fiscal insanity from governments.

I recommend having 25% in gold and gold-related investments as part of a permanent portfolio.  It is there to pull up your portfolio during times of higher price inflation.

It is ok to add more gold to your portfolio, but then it should be viewed as a speculation, just as owning any mining stocks would be speculative.  Gold obviously has periods where it goes down in terms of U.S. dollars (or whatever currency you are dealing with).  If you live in Venezuela and own some gold, then you probably aren’t going to exchange it for the local currency, which has undergone hyperinflation.  But in most places, if you want to actually spend your gold, you would likely first convert it back in to the currency that is widely used.

In terms of U.S. dollars, gold has done really well since about the turn of the century.  If you bought an ounce of gold for under $300 in 2000, then you have done well.  It has been a rougher ride since about 2011.

If we go through a recession in the near future – which is looking more likely with a yield curve that is almost inverted – then I don’t expect gold to perform well in the near future.  When the financial crisis struck in 2008 and early 2009, gold went down with stocks, although not nearly as much as stocks.  When there is recession that is not accompanied by high price inflation, people seek safety in cash and bonds.  This is particularly true in the U.S., where U.S. Treasury bonds are seen as the safest investment.  As people seek safety and liquidity, gold tends to not be in high demand.

But longer term, things are more bullish for gold.  If we do hit a recession, it is likely that the Fed will stop deflating and start inflating its balance sheet again.  It is likely to lower its target interest rate.  An easy money policy from the Fed tends to be bullish for gold.

On top of this, the national debt is about $22 trillion, with unfunded liabilities estimated to be as high as over $200 trillion.  During our current so-called prosperous time, the federal government is still running annual deficits in the ballpark of $1 trillion.  Those massive deficits are projected to continue even without accounting for a major recession.

In the long run, this is all bullish for gold.

Public Opinion and State Laws

The Mises Institute recently published an article about how some states are changing their laws to exempt gold from capital gains taxes.  This is not a concern for residents who live in a state with no taxes on income and investments (at a state level).

Some libertarians preach for a gold standard.  The proper libertarian position is that the free market should determine what should be used for money.  It’s just that gold (and, to a lesser extent, silver) has historically been chosen by the marketplace as money.  A government-run gold standard would, however, likely be much better than the pure fiat standard we deal with today.

In order to get closer to a free market in money, I believe it is important to repeal legal tender laws.  When Ron Paul was in Congress, he would regularly sponsor legislation to repeal legal tender laws.

But perhaps the most important aspect of this is to repeal any taxes associated with gold and silver.  As it currently stands, you are supposed to pay capital gains taxes on gold and silver.  If you bought a one-ounce gold coin for $300 and later sold it for $1,300, then you would owe taxes on the $1,000 gain. This seems rather unjust considering that the gold price increases over the long run largely due to inflation. Yet, you have to pay taxes because of the “gains”, which is really mostly currency depreciation.  On top of that, the government considers it a collectible, which can mean a higher tax rate.

Most individuals probably don’t pay taxes on small transactions of physical gold, or at least that is my guess.  But a major business is not going to disobey the law and make transactions in gold if it could ruin the business.  If a business were to say that people could transact in gold (or electronic equivalents representing gold), then it would present a problem of calculating taxes owed.  Every purchase would have to be translated into dollars in order to track any capital gains on the gold.  It would just be a total mess for all parties involved.

Therefore, I believe that getting rid of the federal tax on gold and silver would be a major step forward in allowing money competition.  It is a great sign that many states are eliminating these taxes, or at least considering it.

This can be compared to marijuana laws.  In the case of gold taxes, states are not defying the federal government as they have with marijuana laws, but I still see a close resemblance. When public opinion is shifting, it is more likely to show up at the state and local levels.  The federal government may just be lagging behind in gold taxation, just as it is lagging behind in marijuana legalization.

I believe it is just a matter of time before the federal government legalizes marijuana, or just leaves the matter up to the states (which would be the proper Constitutional position).  This could easily happen within the next few years.  Hopefully the same can be said for eliminating taxation on gold and silver. I am not saying it will happen in the next few years, but it is a possibility.  It is more likely now than it has been for a long time.

If the federal government were to eliminate taxation on gold and silver, I would expect the demand for gold and silver to go up.  I would expect the price of gold and silver to shoot higher.  Just the announcement that such legislation was likely to pass would probably drive the dollar price of gold higher.

I have not been a big fan of Bitcoin, but it has surprised me how much it took off.  If I had known there would be so much fanfare around Bitcoin, I would have bought some bitcoins early on and made a bunch of money.  I think the Bitcoin bubble will collapse (if it hasn’t already), but it is promising that there is so much interest out there for competing forms of money.

With the popularity of cryptocurrencies, and with state legislatures taking action to eliminate taxation on gold, this could ultimately be a bonanza for those who own gold. Silver is a little less clear, but silver investors would likely benefit too.

As people seek alternatives to the U.S. dollar and fiat currencies in general, we will hear more about this subject other than from predominantly libertarian and gold bug websites. This is bullish for gold over the long run.  If you are going to buy and hold an asset, gold seems the most promising, but you’ll have to be patient.

Happy New Year!

For some reason, the new year is seen as an opportunity to start fresh.  You can’t necessarily make all of your past mistakes vanish, but it is an opportunity to at least get on the right path going forward.  Whether it is losing weight or saving money or spending more time with family, you can make corrections to improve your situation going forward.  Hopefully your past mistakes aren’t so bad that they are impossible to correct.

It is not entirely clear why the new year brings a sense of starting over.  January 1 is just another day in your life, although often a holiday from work for most people.  You could just as easily make corrections to your life on July 1, or really any other day of the year.  So if you are reading this on a day other than January 1, you can still make corrections to your life for the better.  This sounds obvious, but sometimes we need to be reminded of the obvious.

One of the marks of the new year is the New Year’s resolution, at least for Americans. This often means just trying to get into good habits.  It means doing something that you should have been doing all along.

While I think goals are good, I also think it is important to set controllable goals.  If you want to lose weight, don’t make your goal to lose 20 pounds.  Or if that is your goal, it should only be your broad goal.  You have to be more specific to make sure you are taking the correct actions.  Your goal could be to consume no more than a certain amount of sugars and carbs per day.  Your goal could be to walk around your block at least twice per day.  You control these specific outcomes.  You don’t fully control how many pounds your body loses each week.

If you are trying to make more money, don’t make it a goal to get a 20% raise this year.  You are not fully in control of this goal. Maybe the economy will turn down. Maybe your boss won’t recognize your hard work, or maybe it just isn’t in the company’s budget.  Instead, set goals that could possibly lead to getting that 20% raise.  Set a goal of producing more at work, or showing up 15 minutes earlier every day.

This is not just true of New Year’s resolutions but for any goals.  You want to be in control of your action steps, and you don’t want to feel like a failure if your goals aren’t met.  You can’t control if your boss is a jerk and doesn’t want to give you a raise even though you are producing more than your peers. You can control what you can control.  And if you take specific action steps, then they are likely to eventually lead to something good, assuming you set up the right action steps.

A Financial Review

I think the new year is also a good time to do a review of your finances.  This is what I have done in the past.  And I know I could do it on July 1 or any other day, but it just makes sense to do it on January 1.  This is when I get year-end statements, and it is a time that is easy to remember.

If you are doing tax planning, you may have to do that before January 1, but that is one small piece of the puzzle.

The new year is a good time to reflect on your budget (if you have one).  It is a good time to assess where your money is going and what you are getting value from.  If you have a monthly subscription for something, are you getting your money’s worth from it?

With your year-end statements, it is a good idea to calculate your approximate net worth. If you own a primary residence, you can calculate your net worth with and without the equity.  I wouldn’t count most of your tangible things in your net worth.  Even with a car, I generally wouldn’t count it.  You certainly shouldn’t count things such as furniture and electronics, as they are consumption items that you probably aren’t going to sell.  And if you do sell anything, it probably isn’t worth much, and you are probably just replacing it with something more expensive.  There are exceptions with certain collectibles or things you could easily sell and not replace.

Since you are looking at your finances, it is also a good time to make any adjustments that you have been meaning to do or that should be done.  If you have to reallocate your portfolio, go ahead and take care of it.  If you have been meaning to open up a higher yield savings account, don’t keep procrastinating.

Important, But Not Urgent

Personal finance is one of those areas that people tend to neglect far too much.  It is one of those items that is not urgent, yet important.  We take care of the things in our life that are urgent and important.  We also take care of things that are urgent but not that important.  But we forget, or tend to neglect, the things that have no urgency, yet are highly important.

Imagine if Tom Clancy had not started writing because it wasn’t urgent at the time.  Imagine if Steve Jobs had waited to start Apple because he had some other seemingly important things to take care of at the time.

When it comes to your personal finances, or really anything else, don’t let non-urgency be your enemy.  Don’t look back 30 years from now and say, “Gee, I really probably should have set up that Roth IRA and put some money away.  I could be a lot richer now if I had taken a few minutes and done that.”

Stephen Covey wrote about the urgent vs. the important.  If you are going to make one resolution this year (and forever), I think it is a good idea to remind yourself to focus on things that are important but not urgent.  You typically don’t need to remind yourself of the things that are urgent.  This is true of personal finance and most other areas of your life.