Precious Metals for 1st property

16 Replies


I am in college and going to graduate soon with my accounting degree. I have always worked and saved money. I had a landscaping business (mainly mowed lawns, lots of lawns) and worked retail jobs making the bare minimum. Fortunately, my father is very supportive in my efforts to become a real estate investor. He says my goal should be to get my hands on the first unit. I invested heavily in the stock market, but have not contributed to my brokerage account due to stocks (MO, MCK) being overvalued in my opinion. 

Recently, with precious metals at 5 year lows i have embarked on a buying spree of silver and even a couple ounces of gold. I was thinking that gold, silver have an inverse relationship with real estate. I would be able to take advantage of my investments in  precious metals appreciating, while my ultimate goal/investment would be depreciating. What do you wise people think? Is it a decent plan or should I just save cash? To be honest I have a hard time just saving money because its literally eroding in value. 

While precious metals are at a multi-year low, they do not pay for themselves like real estate does with income. I think there is a place for metals, but not really to build wealth and income.   

Coincidently, my first business was a lawn care service, and my first investment was 100 ounces of silver.  

Originally posted by @Daniel Connolly:


... To be honest I have a hard time just saving money because its literally eroding in value. 

A lot like Gold lately!

I don't personally thing you timed the bottom right.

Where is the last three and one half years on your chart?

Mark: I'd say that I have about 15% of my net worth in PM's. Thanks for the input. 

Jon: That is the main dilemma I have with investing in PM's. Especially since my equity portfolio is made up of solid dividend firms such as Altria and I have a P2P lending account that averages around 11% interest. Great coincidence though and I appreciate your input. 

Richard: I think my timing has been pretty decent, hopefully I do not eat my own words. I have contemplated buying into PM;s since 2012 when that market started its decline. I do not believe that I need to another 3.5 years on that chart. My intention was to show the inverse relationship between real estate and PM's. And my theory was to have a great exit point in one asset class and an even better entry point into another. 

I like to trade a percentage of my paper for shiny rocks, especially when the rocks are at 5 yr lows. The whole reason I got into RE was knowing that the property would never be worthless. Same with PMs.

I invested  fairly substantial amounts  into  gold, platinum and palladium  in 2008 .  I've sold some of that  in the past couple of years. I am mostly neutral  about gold.  Since 2001  it has had a large run up .  Platium and Palladium mirror overall economic activity and I think we are topping on that front.

 I do think gold is a good place for savings as opposed to all cash. Silver is more volatile but trades in similar fashion. If you do invest in physical precious metals I would recommend you buy well-known pieces such as commonly traded coins, and PAMP bars. I would recommend you get them from a large dealer such as APMEX so that you can sell quickly if an opportunity arises. These same dealers often do not buy back oddball coins and bars. In my opinion however, the very best way to invest in the metals themselves without taking possession is through a Goldmoney account. I would never have more than $50,000 of metal on hand, too risky.

I am not as big a fan of the miners. If you compare long-term gold miner indexes to the price of gold (GLD vs GDX) you will see that they only loosely correlate. Their costs increase as energy costs increased so they negatively respond to inflation. Additionally, ore concentrations are at historic lows meaning it costs more to get an ounce than it used to.

There isn't a set answer that will fit every case. In general I agree that in the past 5 years the housing market has been going up and the PM market has been on a huge decline so getting in now it could make sense to get into the PM market and hope in a couple years you'll have bought enough at the low's and then see an increase in PM value while at the same time seeing a possible decline in the housing market. But I'm able to buy a lot of real estate with little or no money down that gives me a positive cash flow. I do invest my own money in PM at times but it's more of an emergency fund (with some extra if they do take off and the housing market declines). With any investment keep learning about it and look for good deals and you may be able to invest some in PM while also finding some great, no to low money down, real estate investments in the mean time.

Yea, the problem is that in my location (SF Bay Area) I'll need a significant sum to put down on a house to be cash flow positive. I've asked my dad for help but he said he bought his rentals on his own and I should do the same. Even if I liquidated everything in my portfolio today I'd be short a down payment. And I do not like the idea of hard money lending since I'd rather be the lender. Maybe just way  a few more years saving plus Ill be graduated too. And hopefully housing goes into a little cyclical downturn for my sake. 

There isn't an inverse relationship between precious metals and real estate.  You need to look at a chart that goes back in time to the early 70's, not just the past 5 years.  The last bear market in gold took 18 years to unwind and real estate had almost 2 full cycles over that time (1981-1999).  

From the year 2000 to 2007, both gold and real estate absolutely killed it.  No inverse relationship there.

From 2008 to 2011, gold went into parabolic bubble territory while real estate crashed hard.

From 2012 to present, real estate has recovered from the crash, while gold has crashed hard from its bubble.

If you study all of these time frames, RE and gold are not positively or negatively correlated. In truth, real estate is driven by completely separate fundamentals than precious metals.  Real estate is a play on housing supply & demand, as well as population & job growth, whereas precious metals are a play on rising inflation and lack of confidence, as well as global commodity demand. 

Right now inflation is going nowhere and global demand is tanking with a capital 'T'.  If the US raises interest rates it's going to start another leg down for gold.  A lot of the excesses of the prior gold bubble have not been worked out yet.  The price of gold outpaced the rate of inflation for many years, basically on the expectations of inflation that never materialized.

If I were you, I would avoid precious metals for many years until this mess has completely worked itself out.  In the meantime, look for a rental in a market with good cash flow prospects.  Perhaps Stockton or another inland market in California.

Thanks for your input. I think I'll continue averaging down on precious metals though. We could be set to repeat 2008 when commodities were bashed, then appreciated greatly. In reality looking at a 5 year chart is probably more reliable then a chart from the 1970's. The world has changed rapidly and there's way more demand out there. Plus, in emerging markets like China where there currency is devaluing , people aren't staying in cash, they are buying precious metals (or US real estate). The Great Depression was a deflationary environment and gold went up. Then again the past is no map for the future. 

But your advice in a deflationary environment is to buy a property in depreciating market. Debtors get crushed in deflationary times. Factoring in the high unemployment rate of Stockton and similar cities, I'd rather stay far away from Stockton for investment and safety purposes. The skids of Oakland provide price appreciation through gentrification. 

I think there's a strong lack of confidence, job growth (full time, well paid employment), and real corporate earnings in the world. 

Daniel C.:

But your advice in a deflationary environment is to buy a property in depreciating market. Debtors get crushed in deflationary times.

Well, I doubt much of what I have to say will change your mind, but in the 1930's the value of dollars was pegged to gold.  So the "increase" in the price of gold was FDR's artificial devaluation of the dollar against gold.  You're right times have changed, as the dollar is no longer pegged to gold, which happened starting in.... drum roll please... the early 1970's. That's why I advised looking at charts starting then.  

Nonetheless, any long term chart you look at disproves the inverse relationship between housing and gold, so at least admit to yourself that buying gold is not grounded in any historical performance data.  It's a gut feeling on your part, nothing more.

If deflation takes hold, it won't matter which market a debt holder is located in, they will get crushed.  The advantage a cash flow investor will have is that the value of the rent dollars will appreciate at the same rate as the debt payments.  Investors speculating on appreciation in a deflationary environment will be in for a rude awakening as the value of their investments plummet and they don't have cash flow to cover expenses.  Cash flow investors should still be able to cover expenses, which will lessen their chances of getting wiped out.