A question that most frequently arises from holders of gold and silver coins/jewelry is when they should sell their metals. The question is often followed by “are gold and silver prices up now?”, “is the price high at the moment?”, “should I wait for prices to go higher?” or “do you think the price will fall from here?”
The Question Behind the Question
The main question is one of importance, while the second is just noise. In the author’s view, gold and silver should not be viewed as speculative assets (such as stocks) to cash in on for more dollars; rather they are investment vehicles to retain the purchasing power of dollars already earned.
Precious metals have an extraordinary track record for wealth preservation. Understanding the mechanism behind the preservation is an important aspect in answering the original question. Gold does not rise in price per se. The value of the currency it was purchased in depreciates over time. i.e., U.S. dollars for most of us. Someone who bought an ounce of gold for $400 in 2000 could sell that coin today for roughly $4,000. It is easy to believe that the holder has made 10x their money. However, the truth is that the U.S. dollar has fallen by 90% over that same timeframe.
It is for this reason that putting your savings into gold is much better for one’s financial future than leaving it in a bank account. At the same time, it is wise to sell the stored gold for specific reasons and not to fill everyday desires, such as purchasing the newest phone on the market.
In the author’s view, there are several practical reasons to convert gold back to dollars. Here is a short list, along with the thought process behind each:
Starting a Business
Starting a business is generally a costly endeavor and carries risk. At the same time, an established and properly run business provides a continuous stream of income to the owner(s). If the proprietor(s) has savings in gold, it could provide them with the funds required to start and grow their business without the need to borrow. Since a new business will most assuredly struggle in the beginning, having additional interest payments to make on borrowed money will certainly slow the progress of the business’ growth. Once the revenue stream begins to flow, the income would allow the owner to repurchase the gold that was originally sold to fund the business, yet have a stream of income that follows for the life of the business.
Purchasing a Home
A home purchase is one of, if not the biggest financial decision most families must make. Whether it is a couple’s first home or upgrading to a larger home to accommodate a growing family, the decision shall impact them financially for many years to come.
Had the individual or couple been saving toward a down payment for an extended period, how they stored it over that time is pertinent. If they had purchased gold with their savings, the value of their original savings would have remained steady. Whereas, if they had consistently added to a bank account or put it in a safe, the actual value of their savings will have depleted.
Selling stored gold would be a wise decision in this case, especially if the amount of the down payment exceeds 20% of the home’s price. This immediately removes the need for mortgage insurance and saves the buyer several hundred dollars a month on all future payments.
Exchanging Metals
There are times where one doesn’t want to rid themselves of their metals, but a rare opportunity presents itself. There is a centuries-old ratio that can easily tell you whether gold is expensive compared to silver or vice versa. You simply divide the gold price by the silver price and get the ratio. If gold is $4,000/oz and silver is $100/oz, your ratio is 40:1.
For most of recorded history, that ratio was 15:1. This means that it would take 15 ounces of silver to exchange for 1 ounce of gold—or 1 ounce of gold could be converted to 15 ounces of silver. The ratio that has set a precedent has been vastly skewed since the de-linking of the dollar to gold in 1971 but could easily revert.
The reason for this ratio’s significance is that it tells you when gold is cheap compared to silver and when silver is cheap compared to gold, without including nominal dollar amounts. The average ratio over the past 25 years is roughly 68:1. In 2011, the ratio fell to 31:1 making gold very inexpensive. Then in 2020 the ratio hit 125:1, making silver extremely affordable.
The premise behind the conversion is simple. If you convert some gold into silver when the ratio is high (above 68:1) and convert silver to gold when the ratio is low (under 68:1), you essentially earn more metal (savings) with little to no effort. Although gold and silver do not pay interest like a bank account does, these moves generate significantly higher returns than interest being compounded at bank rates and are not devoured by inflation.
Unexpected Life Events
As fate would have it, sometimes things just wear out or go wrong. For example, a roof may need to be replaced, or an unexpected medical expense occurs. Having had savings set aside that were not being eaten away by currency devaluation, the expense can be more easily absorbed.
While we all hope that such unfortunate events do not occur, they just do. With a lack of savings, many people would be forced to pay for these circumstances with a credit card, home refinance, or borrowing of another sort. Resorting to credit instead of savings most certainly means that another bill has been created, along with interest payments. The problem was bad enough and now it just got worse.
Major Purchases
There are times where a major purchase, aside from a home, must be considered. This could be for a reliable means of transportation or possibly an RV for retirees. The author is not advocating that gold and silver be sold for these purposes, but there are times where it is feasible.
You don’t necessarily have control over when a vehicle has reached its end of life. During COVID, selling some metals to make such a purchase would have been more rational than during normal times. New cars came with interest payments in the double-digit percentages. Having the ability to convert savings into cash would have allowed the buyer to obtain either a reliable used vehicle or reduce the amount subjected to high interest on a new vehicle.
Another scenario for converting precious metals for a vehicle is if the savings themselves were set aside specifically for the purpose of requiring a vehicle in the future. Meaning that someone is not spending all of their savings on a depreciating asset. They are spending only the portion of their savings that were designated for the purchase.
Summary
Understanding that every dollar you earn today is absolutely going to depreciate in the future (if not spent today) provides a compelling reason to convert savings to gold. The amount of savings one should convert depends vastly on their level of income and spending habits. Periodically reviewing your own budget is an excellent way to find unnecessary expenses and provide further cushioning for yourself in the future, should the need arise.
Of equal importance, the time to sell gold is dependent upon one’s own situation. The author recommends that it be done to improve one’s financial future and not to sell any type of assets to boost their perceived social status or fulfill empty desires.
Every item is different. The most reliable way to understand what you have is through an in-person evaluation.