Two ideas about ownership of physical gold have been on my mind lately, and the time has come for me to address these. They both fall into the general rubric of "how much gold should we own?", maybe I should start a separate blog for that...
It always amazes me when I think that only some 1% - 3% of Americans own any meaningful (ie, non-jewelry) amount of gold. Most of the numbers I have seen actually lean more to just 1%. Only ONE in 100 people own investment gold?
Yet we see that it is perfectly OK with many money managers to own up to 5% of your wealth in gold. And this is a mainstream view. Yet, if only 1% of people own gold, how few of Americans have 5% or more in gold? I would have to guess perhaps 0.5% - 0.75% (say, half to 3/4ths of ONE PERCENT of Americans actually do)... I do believe that those who do own gold are likely to own a reasonable amount, but I wonder how frequent gold owners actually have 5% in gold...
On the other hand, I know of two people who claim to be "All Inn", that is, most of their assets are in gold! Even a Happy Follower of the Mighty FOFOA like myself want to share a huge gain if/when gold hits its "$55,000", has to wonder where to place his bets in a safer manner...
Being All Inn has its risks as well, unless you are so fabulously wealthy (with no debt or other liabilities) that it does not matter what happens... All Inn implies not much else is held other than gold.
A Thought Experiment here: "Let's say" a member (not fabulously wealthy) of the All Inn Club loses his job. No income, or meaningful income. What happens of that were today, with gold hanging in there at some $1320? Having an income stream allows you to "Defend the Precious" (that is, get along OK without having to sell any of your gold that presumably would be worth a LOT MORE after reset). Let's run through a couple of scenarios. Please note that I am just "MSU" (as is typical of my "Thought Experiments"), but I am trying the best I can to model two American Middle-Class scenarios with what seem to be reasonable numbers.
Nico is a middle-aged guy who, until just now, had an decent job making $65,000 with a wife and young child. Nico has been prudent in his affairs and is able to save (invest) $5000 per year, his family's living costs would then be some $60,000. Let's also say that Nico has two children, and has, in toto, saved up some $40,000 for his retirement as well as $30,000 for his children's future college expenses. He also is the owner of 10 oz of gold (worth some $13,200 today), and we will pick a number like $200,000 for Nico's total net worth (gold then would be some 6% of his net worth). BUT, Nico has $40,000 + $20,000 + $13,000 for a total SAVINGS of $83,000 (I will refer back to this number). Nico, as far as I can tell from my little scenario-painting here, is doing pretty well by American standards.
OK, his job is out-sourced to China, or he loses it to Obamacare, let's go with the latter. Nico has no other job lined up, and now must start downsize. He and his wife talk it over, and they find that they can reasonably easily forego $15,000 in non-essential spending, good, they are now down to $45,000 (mortgage, cars, food, etc.). What if he is out of work for a year? He loses some combination of his retirement savings, college-for-the-kids-fund and/or his gold.
Hmm. Tough spot! One way he could keep his family's lifestyle (reduced to $45,000 remember) is to cut his retirement in half (netting $20,000), cutting the college money for his kids in half ($15,000 more) and sell EIGHT of his twelve ounces of gold... Ouch, because look at what Nico "will eventually" miss when a reset in gold happens:
Two ounces (left of gold) at $55,000 each: $110,000 (nice!)
$-value of eight ounces lost due to job loss: $440,000 (ouch!)
But, assuming his misfortune has ended after that bad year, he survives it all OK... In fact, the value of his investments (as listed above) is worth more than before! ($110,000 vs. $83,000)
Of course, Nico's timing could be off:
Two ounces of gold, no reset, or reset way into the future: $2640. Plus half of the college fund and retirement savings: $2600 + $20,000 + $15,000 = $37,600 left after his bad year (down from $83,000).
Fred ,observant guy that he is, trustful of no one, has a similar financial situation as Nico, but we will posit that he has a very understanding wife who allows him to save as he chooses. Fred decided to save only in gold, with very little into other investments. OK, so let's say his holdings are $0 (in cash) for retirement, $0 for college for the kids and $73,200 worth of shiny gold (55 ounces). But, alas, Fred loses his job too, and they decide to forego various expenses, like Nico and his family. So, Fred has no choice but to sell gold, at $1320 along the way:
$45,000 (spending) / $1320 = 34 ounces
Fred is left with 21 ounces:
21 ounces left: $1,155,000 (with reset, very nice!!)
34 ounces sold: $1,870,000 (well, ouch, but he still has his $1 million)
Unless no reset or reset far into the future:
21 ounces at $1320: $27,700 (from $83,000). And, with NO other savings, he has just $27,700 vs. Nico's $37,600 (no reset). Fred has just $27,700 left after his bad year...
My point here is that Diversification (Nico: $37,600) wins over All Inn (Fred: $27,700) if the reset does not happen AND the chips are down.
All Inn wins by a lot if the reset DOES happen.
1) Staying at the All Inn vs. a broad diversification has widely varying results for a middle class family with a tough year (loss of a job for a year). Reset happens? Gold wins big! Reset does not happen (during that year anyway)? All Inn not so good...
2) And who can tell me when the gold price reset will happen? Members of the All Inn Lodge better have a decent income or lots of other assets as well if they wish to reap the great fortune of a Gold Reset.
The above Thought Experiment was so much fun that I would like to explore another! We can lump the below into "What happens to me if gold DOES go to $55,000?". This one is more fun! And we will NOT inflict that losing their job misfortunes upon them...
Alice has 5% of her wealth in physical gold (at $1320 today), let's call it 10 ounces saved up (so $13,200). That works out to her having a Net Worth of $264,000. What happens, assuming no misfortunes like the guys above had?
10 ounces at $55,000 @ = $550,000 (in gold) plus her OTHER wealth ($251,000), total:
Alice, post-reset: $801,000
Betty does not trust people, our government nor the financial system (single guys: get her number!). By coincidence, Betty has the same $-value net worth, but she owns 50 ounces of gold ($66,000)! So, Betty (while not completely All Inn) is a true believer. Gold then resets:
50 ounces of gold at $55,000 each:
Betty, post reset: $2,940,000 !! (($55,000 * 50) + $198,000 (non-gold savings))
Camille, is even harder than Betty! Everything she has is in gold! $264,000 (net worth / $1320) = 200 ounces of gold, I think you can see where this is going (smile):
Camille, post-reset: $11,000,000 !!! (it is rare for me to issue three exclamation points)
The above three ladies all experienced the joy of a gold reset.
And if gold does NOT reset? Assuming no misfortunes, they still have their initial stakes of $264,000.
There are three big factors at work in the above Thought Experiments:
1) How likely and how big a reset would be?
2) Diversification vs. Concentration (All Inn)
3) Probability of downside risks to income stream and/or losing other assets.
For me, if I fit into a middle-class scenario, even with the allure of a huge gold windfall, lil ol me would be prudent and very careful to maintain diversification! I have mentioned before that I cannot predict the future (and have a long list of financial positions to back up my assertion), so for me, diversification is smart.
But, diversification includes gold ownership...