As stated by most financial gurus, one of the most important aspects of investing is to know the difference between assets and liabilities. Not knowing the difference, or simply ignore that an investment is a liability, can result in it being very hard for you to generate solid returns and a good cash flow on you invested capital.
Investors like Robert Kiyosaki continually bombards us with the message that your house is not an asset, it’s a liability, and in most cases he’s totally right in saying so. Because if we uses his wife, Kim Kiyosaki's definition of what’s an assets and what’s a liabilities we can see that, "An asset is something that puts money in your pocket, whether you work or not". So, with that clear, what is precious metals, assets or liabilities?
Even though there are exemptions to the rule, like gold lending and such between major financial institutions, physical silver and gold is not to consider as assets. I’m not saying you shouldn’t hedge your investment portfolio with precious metals and other commodities, I’m just saying that precious metals in its physical form, and most other forms as well, take money out of your pocket. Precious metals rarely generates a cash-flow for the owner. On the contrary, it usually generates an expense flow. First you have the up-front expenses, like the premium above spot, delivery, and money transfer cost, second you have the storage cost, and if you don’t have any storage cost (because you store it at home, etc.) your precious metal cash-flow will in best case be zero.
It think it was Albert Einstein who once said that, “Compound interest is the 8 wonder of the world”, and I very much agree with him. Take Warren Buffet, one of the worlds richest investors, he has amassed his wealth by acquiring income generating assets throughout his career. So what we want is to have as little capital tied up in precious metals since they are liabilities.
But if silver and gold are so bad for our cash-flow, why do we want them at all?
That is because they are very good hedging instruments against stocks, which is for most investors their largest asset group.
The hedging mechanism of precious metals is simply explained as follows:
When the market experiences financial uncertainty, people get more cautious with their investments. The market picks up this as “the public has lost thrust in the market” and prices on stocks and houses starts to drop. People start looking for hedges and safe storage instruments for their currency and the proven hedge throughout time (if we are to believe the experts) are precious metals and commodities. And the earlier you shift you money from stocks, during a crash in the stock market, and into hedges like precious metals, the more currency you can save, or even better, make on the whole situation.
The problem here is of course timing. It is very hard to predict a market crash.
That is why the best strategy for most investors is to diversify their investment over several investment instruments, such as bonds, stocks, real-estate, cash, and commodities like gold and sliver. The price we pay to keep our investment safer, is to put some of our hard earned cash into liabilities, that hopefully will act as a hedge in the event of market collapses and crashes. But diversifying and rebalancing our portfolio continuously we dont’t have to worry about timing and market crashes since the loss in one category will be counterbalanced by another category.
