How to Buy (& Sell) Gold

 How to Buy (& Sell) Gold

 

 

Buying gold as a store of value and protection against inflation seems like an easy thing to do, if you know how to do it correctly. Buying gold is only one side of the proverbial coin though, with selling proving to be the challenge many holders face. Thus, it is important to "begin with the end in mind," because it is far easier to buy gold close to spot price than it is to sell it near spot price.

First, it is important to understand some terms in the gold market. Chief amongst them is spot price. Spot price is the price paid for a certain weight of gold on the global exchanges with New York and London being the primary pricing markets. Gold is almost universally quoted in dollars.

Gold generally trades 24 hours a day, 7 days a week. The vast majority of this trading is via contracts for future delivery of gold. Spot pricing is for a certain moment in time. The spot price also refers to a certain fineness of gold, typically 24K. 

24K implies 99%+ pure gold. Other common measures of fineness include 22K, 18K, 14K, and 10K. An easy rule of thumb to mentally figure out what those different fineness benchmarks mean is to divide by 24K. So for example, 10K gold would be 10/24 or 41.67% gold.

There are many schemes to swindle the uneducated gold buyer out of their hard-earned cash involving spot price, weight, and purity. That is usually done on the selling side, but buyers need to be aware of what they are really buying.

Generally speaking, retail buyers should attempt to buy physical gold in liquid known instruments. That is a fancy way of saying gold coins and gold bars minted by either governments or the handful of private commercial mints.

To get the best pricing a buyer should shop around on several of the largest exchanges, eBay is a good starting point. There you can find hundreds of different sellers, many of whom have their own stores outside eBay. Companies with thousands of positive transactions with decades of experience are generally a safe bet.

Depending on what state you live in, there may or may not be sales tax on gold. In California for example, purchases UNDER $1500 are taxed, while those OVER are not. This is meaningful when you purchase say a 20 gram gold bar for $1450 and another $120 is tacked on for sales tax. Imagine if you were charged sales tax every time you bought a stock!

If you don't have $1500 or more to buy physical gold, or if you don't want to buy physical gold, there are other good options. Multiple companies have sponsored holdings called Exchange Traded Funds. These ETFs store gold in audited physical vaults with each share of this ETF representing a portion of that gold. 

The advantages of a gold ETF are significant. First they are very easy to buy and sell at close to spot prices. Second, you don't have to worry about storage or security for your gold. Third, the sales tax problem goes away. The downside is you don't physically have your gold in hand. There is an old saying in the gold buying world, "if you don't hold it, you don't own it."

Along with ETFs there are gold mining companies whose common stock can be readily bought and sold on most exchanges. This offers investors the upside of owning companies with gold mines. The downside is you have to be right twice; once on gold itself and second (perhaps more importantly) on management of these companies. In the Gold Rush era, it was extremely common for investors to own "feet," or literally the measured foot of a gold mine and be paid on that holding quantity every Sunday in dividend.

Buying coins, bars, and nuggets are all ways to physically buy gold. And generally the closer you get to the source, the closer you get to spot price. Dealers typically tack on a 2-5% premium ABOVE spot. If you contact a miner directly it is possible to get nuggets at up to 10% below spot. A lot depends on who you buy from and in what quantity.

One of the great conundrums of buying gold is that to get close to spot price on the buy you typically have to purchase larger quantities, unless you decide to go the ETF route. The real danger to an investor who has properly sourced a purchase of gold and perhaps needs to sell a portion down the road is SELLING it.

Of all the years I have been active in the gold market I have successfully only sold gold ONCE for above spot price, and that was for a gold bar still inside its protective plastic case. Barring that, you can expect to get a significant haircut SELLING gold; anything from 5-10% (or more!) depending on who you sell to. Seller beware!

Who you sell to is important. There are all types of schemes to lighten your load. They include trying to confuse you with different weights (pennyweights, grams, troy ounces, etc.) Then there is the old acid test where a piece of your gold is scraped against stone and different acids are applied to determine the fineness of the gold. Of course fineness is then called into question.

To help avoid these situations, physical gold like 1 Oz U.S. Gold Eagles, 100 Gram Gold Bars, and similar well-known instruments are best. For scrap gold or unknowns, it is almost always best to work with a smelter, but identify ahead of time what your estimated gold content is before a melt. Know the value before you sell!

This obviously is where ETFs have a significant advantage over physical gold. Liquidity is as easy as hitting "Sell" on the computer screen. The ETF shares are sold and funds deposited into your account immediately. Another advantage is that since ETFs trade as stocks rather than actual commodities any taxable implications are also treated favorably. 

As Johnny Cash said, "This world is rough, and if a man's gonna make it he's gotta be tough." The same can be said of the gold market. There still is tremendous friction in buying (and especially selling) gold. Scams and cheats abound, a little of the Wild West remains in every gold transaction. But if you know what you want to buy, can identify it precisely, and "buy smart" adding gold to your portfolio can be a smart move.

 

Taxflation

Taxflation

 

 

It is hard to believe there was a time in the United States, nay the world, where there as NO income tax! Indeed, for the first glorious 137 years of our Republic there was no income tax. Save for a brief period of fundraising for the Civil War, 3% for incomes over $800 from 1861 to 1872, there was no Federal Income tax. 

 

In 1913, however, the Democrat Party along with Progressive Republicans helped usher in the age of taxation with passage of The 16th Amendment which provided that "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

The initial 1913 shakedown was minimal; less than 1% of the population paid income taxes at the then 1% rate. Oh how things have changed. The passage of the 16th Amendment quickly led to nearly every State then implementing an income tax. Not to be outdone, many local municipalities jumped on the bandwagon and passed legislation implementing THEIR own taxes.

Over time the RATE of income taxation has gone up in percentage terms considerably, where for many high earners the net take-home pay is less than half the amount earned. For some 110 years the trend has been for the Governments (yes plural; Federal, State, Local) to take MORE.

This is obviously a serious concern for an investor, and especially a financial farmer because we know how much effort and labor it takes to create capital, grow it, and even harvest it. That entire process is now steeped in taxation. But it gets worse.

America has long been involved in many conflicts, obviously the Civil War, World War I and World War II immediately come to mind. There have been numerous other large scale conflicts such the Korean War, Vietnam War, Cold War, Iraq Wars, Afghanistan, and also day-to-day funding of parawars in Central America, South America, Africa, Ukraine, and Israel to name but a few. Wars are expensive, very expensive.

In nearly every single one of the example illustrated above, this country needed to raise funds. This was accomplished by either increasing (starting) taxation or printing more money. Productivity gains, winning wars, and general population growth developing Western States generally took care of the Civil War, World War I, and World War II. We saw taxation rates stabilize and fall. Inflation spiked, but then cooled. The straw that broke the proverbial camel's back, however, was Vietnam.

To pay for Vietnam a combination of increased taxation and more spending wasn't enough. Ultimately Nixon needed to take the United States off of the Gold Standard in 1971. This allowed the government to print virtually unlimited money to pay for the war and inflate our way out of the financial situation. At least for a time, because we never went back on the gold standard. And the results have been disastrous.

 

So what is a financial farmer to do regarding taxflation? The most important thing to do first is realize the danger taxflation poses to your economic well-being. It is in your best interest to make the best tax-advantaged moves you can make. A lot of that has to do with WHERE physically you generate income. Another concern is HOW MUCH income your generate, and it there are ways to reduce that number. Finally, if we are all using the fiat dollar, the one must put serious thought in how to squeeze immediate value from the currency.

 

Not everyone can move to Florida or Texas, control their income generation, and buy gold, real estate or stocks with whatever dollars they do generate. But for many of us, there are other salient options available such as reducing "friction," ie triggering gains unnecessarily, frequent moves, consuming rather than saving more resources than needed, or wasteful behavior. Those all have meaningful long-term impacts.

 

Ultimately, growth in real terms springs from increase in productivity. Stores of value, like gold and real estate, help protect against inflation because gold talks toil to obtain while real estate is a need universal good. But growth in a function of productivity...doing something in a new way; faster, cheaper, smarter than we are currently doing it. And that is what we are looking for as financial farmers.

 

Escape Velocity

Escape Velocity

 

 

"Escape velocity is the speed that an object needs to be traveling to break free of a planet or moon's gravity well and leave it without further propulsion." - Northwestern University

 

As financial farmers striving to build, grow, and ultimately subsist off of our portfolio it behooves us to understand this aerodynamic concept.

As we have discussed many times, the greatest threats to the investor are taxation and inflation. Generally speaking, a financial metric like the S&P 500 will continue to increase in value over time because it is composed of survivors; ie only companies who remain prosperous remain in the index, while losers are dropped or go bankrupt. But even the S&P 500 fights a tough battle against inflation. 

The question investors need to ask themselves is whether real growth is occurring are we simply seeing an increase in prices? Inflation often disguises itself as growth. A superb example is M2, or money supply. Does increasing the supply of money increase its true value? Not if it isn't backed by productivity gains.

Knowing that every dollar is worth less tomorrow than today due to inflation, an investor should seek to capture the value of that dollar sooner rather than later. Over the past 5 years the 3 assets classes which have been able to do that are gold, real estate, and stocks (S&P 500 as the preferred benchmark.)

For the worker who has been saving cash the past 5 years it has been brutal. And for those who have been steadily socking it away for decades even worse. The traditional saver has been inflated out of a good portion of their buying power, some 50% in the past 3 years alone!

In the example above, a spaceship needs enough velocity to escape a planet's gravity well. Velocity in our situation are resources, whether gold, real estate, or stocks. Assets that not only hold their value, but perhaps offer growth potential as well. The "gravity well" can be considered that suffocating burden of taxation and inflation which erodes true value and stifles growth.

The reason we Invest Like A Farmer is to achieve sustained growth over time. That rarely happens by chance. An investor needs to understand the value of their paper money and how best to deploy it quickly as fiat currency apparently has a half life in the current environment of about 3 years.

 

Why You Can't Buy a House

 Why You Can't Buy a House

 

 

You can't afford to buy a house because the Home Price to Median Household Income Ratio is at the highest level ever at 7.56. Historically that ratio has been around 4. Things are even worse, much worse, if you are in California.

 

Many of the small, medium and large cities in California are into the double digits. Are you a young family considering moving to Santa Barbara, CA? Good luck. With a median household income of $89,000 relocating to this beautiful city with a median home price of $2.4M results in a HP2MHIR of 27!

 

California is so bad because of the effects of Proposition 13 which has allowed a singular generation to capitalize on the real estate market by essentially capping their taxes while simultaneously allowing for unlimited upside potential. This law has kneecapped future generations. 

Historically real estate has been an IDEAL investment (Income, DEpreciation, Appreciation, Leverage), but with a HP2MHIR at 7.56 (or worse) what is a young, ambitious gainfully employed American family to do?

Well, first it helps to have 2 incomes. Ever since more women have entered the workforce rather than raise families the HP2MHIR has steadily risen. This makes sense. Money will chase good housing, and only those who have more money can get into better housing.

This brings up the next point; it is far better (from a housing standpoint) to have no children. Children are expensive, and the cost of childcare, either directly or indirectly, is tantamount to LOSING one income. Good housing incentivizes childless couples, while penalizing families with children.

 

All of these factors has lead many young families to be "trapped" in a never-ending renting loop that shows zero signs of abating. These families can afford to rent in a area that has good schools perhaps, but there is little to zero chance of them ever being able to purchase in these very areas.

 

As the population grows there hasn't necessarily been in a growth of good places to live, or housing for that matter; demand is increasing, but supply is not. By definition, prices will continue to march higher as demand outstrips supply. Naturally the demographics will also change. Santa Barbara is a good example.

 

What has historically been a sleepy surf town just two hours from Los Angeles, Santa Barbara has now become a large open air retirement enclave with many East Coast urban transplants along with many from the Chicago area whose politics fit neatly in their new home. The result of this migration has been the establishment of the owner class and the servant class. This scenario is playing out daily throughout coastal California.

 

What is a young family that wants to have children to do? Immediately, probably the best course of action is to prioritize the best schools for your kid(s) even if that means renting. Alternatively, you could also look to a 2nd or 3rd tier area to live which may not have everything you want, but it may have everything you NEED.

 

The United States is vast, so there really should be no housing shortage. Over the longer term, the best way to absorb the excess demand is to create more housing. There is plenty of room for multiple entire cities to spring up across the country. Creating more housing will lower the HP2MIHR.

The most obvious, and impactful, solution would be to increase productivity in the United States with a combination of monetary and fiscal policy that is pro-growth; the impact of this would be to significantly REDUCE inflation.

Inflation has bee the true scourge on the economy, causing prices to rise over 50% in the past 3 years alone. Couple that with dilution in the value of American Citizenship and we have some serious problems. The road ahead for potential home buyers is a slog. Unless there is a meaningful drop in prices, an increase in income, or both we have a polarized future of owners and renters who can never own.

Wage Collapse

 Wage Collapse

 

 

One of the greatest challenges Americans have faced over the past 3 years is the collapse in real wages caused by poor fiscal and monetary policy. 

As an investor, one of the primary goals is to increase the value of your portfolio over time. Value is typically associated with a dollar sign, ie the more your portfolio is worth in dollars over time, then logically one would assume that it is more valuable as well. That assumption would be a serious mistake.

M2, or money supply, generally increases over time for a variety of reasons. Ideally that increase is stable, predictable, and backed by productivity gains. Since the US Dollar is a fiat currency (ie not backed by anything but "the full faith and credit" of the United States government), an investor should keep a close eye on the M2. Why?

As M2 increases without a corresponding increase in productivity or physical commodity backing, it DILUTES the value of every other dollar. So say you're a guy named Dollar Bill just minding your own business looking to make a purchase of a good or service. And out of nowhere a hundred, perhaps thousands of NEW Dollar Bills appear out of nowhere and want the SAME good or service that you do!

The net effect of too many Dollar Bills is dilution in purchasing power. Value has decreased. The illusion created by flooding the country with dollars is one of prosperity and wealth, the reality is just the opposite. Wage earners feel the bite of this con worse than anyone else because wages are typically fixed, whereas the monetary supply, stock market, and gold market react immediately and exactly to the con.

Consider the charts below representing 5-year snapshots. The M2 increased by some $7,000,000,000,000 ($7 Trillion) over the past five years in nominal terms or roughly 50% MORE U.S. Dollars were created out of thin air. Not surprisingly, the stock market, as measured by the Dow Jones Industrial Average, also "gained" some 50%. As did the price of gold. Did your wage increase by 50%? Probably not.

As a proactive investor, it behooves you to understand the greatest challenge you face is probably inflation, especially if you are a wage earner. And broadly speaking, probably 80%+ of all Americans are wage earners; whether you are a blue collar worker on an assembly line with an hourly salary or a white collar worker behind a desk or in an office with a fixed salary or even a "no collar" worker on the gig economy with a hybrid salary, the vast majority of us are all subject to a recurring price paid for labor. Typically the wage lags, or never catches up, the price charged by the manufacturer or service lead.

What does this all mean? Vigilance coupled without action is useless. So the prudent financial farmer needs to have what I call an "Argentine Mindset." Americans can learn a lot from socialist countries that are corrupt and face raging inflation. Namely, what do their citizens do with cash when they get it from their jobs?

 

Answer: They dump local currency ASAP and turn it into (pick one or more): a more stable currency, gold, real estate, stocks and/or physical goods or tools. They literally cannot spend it fast enough because it depreciates so rapidly. Indeed, it has been recounted frequently that inflation was so bad in the Weimar Republic (pre-WW2 Germany) that a cart full of banknotes was left outside a bakery. When the owner returned, the cart was stolen.

If the goal is to increase the value of a portfolio over time, one should understand the true value of their country's money and deploy it accordingly.

Corruptflation

 Corruptflation

 

 

"Where there is smoke, there is fire," the old adage goes. So too is the relationship between corruption and inflation; where one finds raging inflation, inevitably one will find corruption pushing those prices up via any number of nefarious schemes.

 

As per the Bureau of Labor Statistics, consider the following facts since January 2021: Overall Inflation UP 17.2%, with Food UP 33.7%, Housing UP 18.7%, and Energy UP 32.8%. If you are a small business owner or someone working in the private sector paying full boat for your mandated healthcare insurance, that number is approaching UP 50% depending in which state your reside. It is no wonder that inflation is often referred to as "the silent killer."

When too many dollars chase to few goods or services, inflation is the natural result. Too few goods or services are often a victim of government regulation which often seeks to control outcomes by restricting free market choice. Stifling private competition is a classic tactic of big government.

Joe Biden's "Inflation Reduction Act," culpably passed by Congress, is as laughable as a Netflix comedy special. It may have done more damage to America than anything since Obamacare was forced upon us. The destruction to the economy is in the trillions, as freedom of choice has been destroyed and replaced with mandatory purchases at government mandated prices.

 

Consider how crazy things have become: If you do not purchase healthcare insurance as a legal California resident, you can be thrown in jail. Yet, if you are an illegal resident in California, you are provided with free healthcare insurance. Think about that one.

How did we get here? Tremendous power begets tremendous lobbying. And the taxpayer citizen really has no representation at an individual level anymore. The best a taxpayer citizen can hope for is perhaps membership in a labor union to shake down other taxpayers or such wealth that they cannot be ignored by their "representatives."

 

Barring those two scenarios, a taxpayer citizen is left at the whim of chance. The net result of fiscal corruption results in inflation which reduces your purchasing power. Your "fair share" has silently become whether you can afford to buy a house, start a family, or even retire in dignity.

 

 

 

A Compelling Future

 A Compelling Future

We all need a compelling future to motivate us to do our best in life. The opportunity for a compelling future has traditionally been the greatest gift offered by these United States to its citizens. It is a belief that with strong motivation and diligent work one's goals could be achieved because we live in a society built on a bedrock of freedom and justice.

Visualization is a big component of achieving one's future. Many articles and studies have been written about the importance of seeing your future self. Indeed, it has often been said that one "should start with the end in mind." Meaning imagine yourself at a later date and contemplate how you got there. Just about this time of year though, New Year's Resolutions begin to fade and often drop by the wayside as we fall back into old comfortable patterns.

For most people investing and securing that compelling future are the same thing, or at least should be. Additive steps in the right direction over time begin to compound. And like most things, over time greater and greater experience leads to greater resources and success. Chance definitely plays as part. As does your starting block. But time is a great equalizer in those regards.

So for the young that compelling future is at first a fight for survival, honing one's skills, and becoming useful. As time passes that utility can be transformed into further growth and creation, from starting businesses to mastering valuable skills and building meaningful relationships. Utility becomes relevance.

Once relevance is achieved in the United States, the stars are the limit. Relevance can lead companies, raise capital, create new industry, unleash productivity, and a host of other meaningful results. Relevance by its very nature has a certain sanctity about it because others trust and believe in the potential of that individual. The flip side of the relevance coin is a higher standard to which that individual must be held.

It is this author's opinion that the most compelling future leads to relevance, regardless of industry or profession or even net worth in the traditional sense of dollar signs. As individuals, we can tell by the fruits of our labor the good accomplished. Steve Jobs considered his relevance most importantly as a toolmaker, not a tech titan or a visionary or a billionaire. But he ended up being all those things too.

 

Systemic Inflation

 Systemic Inflation

 

Systemic Inflation is one of the greatest risks to the survival of America. The debasement of the U.S. Dollar has resulted in wholesale destruction of value. And the rate of inflation is only increasing as poor monetary and fiscal policy has resulted in surging costs for diminishing values.

What is inflation? Inflation in practical terms is too much money chasing too few goods or services. "Money" can be considered the Federal Reserve's supply of funds to facilitate the functioning of the economy. Per Trading Economics: "Money Supply M2 in the United States averaged 5163.74 USD Billion from 1959 until 2023, reaching an all time high of 21703.20 USD Billion in July of 2022 and a record low of 286.60 USD Billion in January of 1959." -Source, Federal Reserve.

Visually that data looks like this:

 

 

From a pragmatic perspective, what this means is that every dollar you have in your pocket today is worth less tomorrow, and increasingly so.

 

The problem with fiat currency (money not linked to a physical commodity, like gold) is that is has unlimited notional "value." The Federal Reserve, at the direction of the U.S. Treasury and Congress can literally create as much money as they need to fund whatever they want. Hence, as there is no "check & balance' on the U.S. government. There is no limit to the money that can be created.

 

It wasn't always this way. In fact, looking at the data it is clearly obvious when things started to change. The moment the United States went off the Gold Standard, then under FDR made it illegal for Americans to actually own gold, then finally to create money to fund Vietnam Nixon took us fully off the Gold Standard. 

The level of political corruption *might* have been as bad in the past as it is now, but at least there was some "check & balance" on the currency because it was linked to a physical commodity. Now there is no tether supporting the value of the dollar, which as we have well seen has spiked to whatever sellers are willing to charge. $10 for a gallon of milk? Sure. $100,000 for a new truck? OK. $2,000,0000 for a starter home? What a deal!

Systemic Inflation has ravished our country and there is no end in sight. Here at Invest Like A Farmer we like to provide readers with some actionable solutions. First, as a society we need to take back control over our currency. Please support The Gold Money Act, which is a first step to restoring some semblance of sanity to our monetary policy.

 

The GMA will be a tough act to pass, as politicians are afraid of gold; it transfers power away from them and returns it to the citizens. If you live in an area of the country where your voice is ignored and your vote doesn't count, then there are a couple other options besides seeking representational relief.

Knowing that Systemic Inflation is only getting worse, the antidote(s) can be found in several areas. Since the definition of inflation is too much money chasing too few goods or services, it would behoove the inflation weary to own those goods and services which are being pursued by ever-increasing dollars. Who doesn't like to be wooed?

Land seems to make sense as there is a finite supply and you can also live on it. And for some, you can also sustain some level of farming. Obviously gold itself makes sense as it is both finite and extremely portable, liquid, and valuable. Ownership of select companies that are increasing their profitability in real dollar terms while also decreasing the number of outstanding shares.

 

A couple more esoteric plays: Locking into long-term contracts with either insurance companies or city, state, federal governments in which you pay a fixed cost indefinitely and they bear the burden of Systemic Inflation. Buying tools that increase your business productivity on favorable long-term fixed debt terms.

Systemic Inflation is like gravity; it is inevitable due to the human condition (that's a nice way of me saying corruption, malfeasance, and downright stupidity.) The best we can do as financial farmers is protect our farms by taking concerted, concrete actions to stymie Systemic Inflation.

Obsolete Cut

Obsolete Cut

 

 

In the future, the price of every diamond, regardless of cut, color, clarity or carat, will approach $0. How could this be possible? Aren't diamonds some of the most valuable objects on Earth? Haven't diamonds become almost mythical in love? Don't thousands of people each year die mining diamonds because they are so valuable? How can Invest Like a Farmer make such a bold prediction? Read on dear readers.

For those not in the diamond industry, you have never had it better to purchase a special diamond for your true love. Prices over the past 20 years first stagnated, then started falling, and have now completely collapsed. Mind you, for the diamonds considered "natural" they have gone down at a slower rate. But the writing is on the wall.

Using technology developed in the 1950s for producing diamonds for commercial use, think saws, grinders, lasers, etc., retail diamond creation has advanced at a pace akin to the size of PCs. What was once the size of a garage, now line rows upon rows of desk-sized pressure & heat kilns in multiple diamond farms around the world. These machines are "seeded" with small diamond specs and churn our diamonds with similar or better characteristics of natural diamonds. Color, clarity, and carat can all be custom-grown. The final "c," cut, is still finished with some of the old techniques.

Natural diamonds are considered those stones mined from the the earth which were created by the heat and pressure of the Earth over thousands of years. Chemically they are identical to man made diamonds; both are a form of the element carbon.

The implications of this science are monumental, but as usual mainstream media has completely ignored it. The wealth destruction to nearly every married household is significant, especially for those large-diamonded second & third wives. Kidding, aside from a national perspective we're talkling ~100M+ diamond rings being reduced in value to the gold or platinum in their settings plus some notional value of the stone. Cumulatively this is the in $500B-$1T+ range.

De Beers and the diamond monopoly is in a tough position now. They will need the mother of all marketing campaigns to convince the public that a natural diamond, a stone typically mined in Africa by poorly paid laborers under miserable conditions run by dictatorships bent on turning these diamonds into cash...yes the proverbial "blood diamond"...and then shipped for additional low cost labor to India for polishing typically by children, then a final polish in Antwerp then off to New York and beyond is BETTER than a man made stone which can be had for a fraction of the price and minimal social or environmental impact.

The only marketing campaign powerful enough to do this would be to pay the world's most powerful influencer to let her boyfriend know she prefers a natural diamond. I'm thinking De Beers could give the diamond industry one last gasp if it launched a "Love is Natural" diamond campaign. And yes, this would almost certainly involve Travis Kelce proposing to Taylor Swift with a large natural diamond.