There’s been a hot buying frenzy and hoarding of precious metals, notably since late last year. Early this year, investors that bought Gold and Silver were happy to see the charts as prices for these precious metals shot through the roof.

Also, many financial experts are encouraging the masses to buy them in face of the dropping US Dollar. However, I do not consider buying Gold and Silver as really ‘investments’.

Now you’re probably asking, “Huh? Why not?”

NOTE: For the record, I keep precious metals like Silver and Copper. I had been asked many times if it’s a smart decision to buy any precious metal and whether it’s a good time to buy now. To give a short answer, I would say “buy for the right reasons”.

So if you are considering to buy any precious metals – the most popular choices being Gold and Silver – I hope you find my insights helpful in making more informed decisions.

How Gold Prices Work In A Nutshell

Gold has been around since the dawn of mankind, both as a measure of a person’s wealth and display of status. That said, Gold will be here to stay for a very, very, very long time to come, even when paper money is being devalued.

Now I’m not going to give you a “nerd’s lecture” on how Gold prices work (you can Google that yourself) but you just need to know this:

Print More Paper Money = Currency Weakens = Gold Price Goes Up

The same holds true for Silver.

So unless you’ve been living a secluded life from the rest of civilization, the US government is in a titanic of debt – last I checked the US is $14.7 trillion in the red.

And in an effort to cover their already humongous debt, they are printing more dollars. Thus this leads to the weakening purchasing power of the US Dollar.

This is why many experts and people alike are positive that the Gold and Silver trends will remain bullish as long as the US government keeps printing paper money.

Why Buy Precious Metals?

Precious metals make an excellent hedge against inflation (I prefer to call it ‘devaluation’ actually), more so in today’s global financial turmoil.

This is precisely why I bought precious metals. I don’t want to see my hard earned savings get devalued over time, not when governments are printing money by the trillions and devaluing them in the process. An ounce of Gold will always be an ounce of Gold. Unfortunately, a dollar will not be a dollar.

To get a better perspective: what costs $1 million in 2004 costs $1.245 million in 2011. On an extreme example, $1 million in 1912 is equivalent to $68 million in today’s dollars!

So if you’re buying precious metals to hedge your savings against inflation/devaluation, it’s one of the wise things you can do to respond to the global economic crisis.

(Showing off your prestigious collection is an added bonus, and rich people throughout history own some form of precious metals, most notably Gold).

But that’s all buying precious metals really is about, as far as protecting your hard earned wealth is concerned.

If you want to get in on the modern gold rush for other reasons – especially profit via capital gains – this is not the right vehicle, contrary to what many people have been misled to believe.

Here’s why:

Case Example: Silver

As I am looking at the Forex charts right now, Silver is at $38.14 / oz. For simplicity sake, let’s make it $40 an ounce.

So you bought ounces of physical Silver at $40 an ounce and you keep them in a safe box somewhere in your house, or some undisclosed location. Okay, cool.

Fast forward a year later – let’s say Silver is now $70 an ounce. While I have reason to believe figures like that are very possible, you must be thinking you made a profit of $30 for every ounce you bought the year before!

By definition of ‘investment’: see POSITIVE RETURNS for the money you put in.

But here’s the thing: you didn’t really profit or should I say “get positive returns”. In fact, nothing’s really changed when you analyze it closely.

If it’s true that it’s $70/oz, this means that the dollar has weakened so much that it now takes more dollars to buy the same ounce of Silver!

So if you’re investing with the mindset or goal of profiting from its so-called ‘appreciation’, in reality you’re not getting ahead with it. Because if you decide to sell them away, you’re getting back perpetually the same value of dollars when you bought them last year.

It’s palpably clear why this is not a game of capital gains, and why I don’t consider it an ‘investment’ in terms of profiting.

Other Reasons Why I Don’t Favor Precious Metals (too much)

• It does not give you cash flow. I categorize buying precious metals as a DEFENSIVE wealth strategy. It helps preserve the value of your hard earned savings in the form of precious metals. But if you want to buy that sleek sports car, go on a luxury vacation or live beyond your current means, then my friend, you need to go OFFENSIVE and do/buy/create things that produce positive cash flow.
• If and when you sell it away, it’s gone. A bar will not magically spawn another bar. Once you decide to sell it away, you don’t have it in your posession anymore. And depending on where you are from, tax laws vary in different countries but one thing is for sure: you will almost never be able to sell it back at its full market price, not without paying the spread or tax bracket. Alternatively, you have to find a buyer who is willing to pay a higher price than when you purchased.
• Any Tom, Dick and Harry with money can buy it too. To me, if an opportunity is too available I can’t help but get skeptical. And more so when buying precious metals entered public conscience just not that long ago, which triggered a mass buying frenzy with so many people jumping the bandwagon. It’s the modern day Gold Rush.

It’s easy to see why it’s a favorite investment for many because it requires no intelligence or skill to buy and keep them. You have money, you can buy ‘em.

But like I said, to really get ahead in the game of wealth it’s in playing OFFENSIVE. I haven’t seen or known of any competitive sports that players win just by defending. This is precisely why I place heavier emphasis and efforts on business building over my commodities portfolio.

In Conclusion: Should You Buy Or Not?

I hope my insights have helped you make more informed decisions. Quite simply, if you don’t have much money right now you should focus your efforts on building your cash flow.

But if you have large reserves then sure, you can purchase precious metals to fill up your commodities portfolio and protect your existing wealth against devaluation of paper currency.