Take the Lead From George Hearst on Investing in Precious Metals

A lot of us like shiny things like precious metals. They’re pretty. They have a nice weight to them. They’re tangible. We can hold them in our hands and see them. Precious metals make pretty jewelry that make our loved ones happy when we give them gifts made out of them. They aren’t so abstract as stocks or bonds. I get it.

There are a lot of people that want to sell us precious metals. We were told they’re great investments. Back in 2011-2012, we saw ads like this one:

Take the Lead From George Hearst on Investing in Precious Metals

 

And this one:

Take the Lead From George Hearst on Investing in Precious Metals

He seems to be conveniently standing in front of the right side of the graph. 

 

Gold

Gold. It’s the stuff that dreams are made of. At least it was for the thousands of people that risked life and limb to head for the California hills around 1848.

It’s the reason that Fort Alcatraz was built.

Take the Lead From George Hearst on Investing in Precious Metals

San Fransisco’s population exploded once gold was found and all those gold-hungry prospectors took up residence in what is now the United States’ most populous state. The government realized that San Fransisco Bay was vulnerable to attack and built a military installation to protect from foreign enemy invasion through California’s Golden Gate. That fortification later became a civil war prison and a maximum security prison on Alcatraz Island.

 

George Hearst

Some people say gold and silver led to the building of one of the most famous media empires in history.  George Hearst, the father of William Randolph Hearst traveled from his home state of Missouri in 1850 and became another one of the thousands out to strike it rich with gold. Or did he? We can take a lead from Mr. George Hearst in how he handled himself with regard to his investments in precious metals.

He was more intelligent, a harder worker and probably a little luckier than most and he did strike it rich. Mr. Hearst would buy up interests in mines around the central California Sacramento Valley area. He spent time mining the claims and after he proved there was precious metal ore in the mines, sell off the interests for a profit.

Taking a risk, he was also one of the first to cross over the Sierra Nevadas into eastern California and Nevada. He bought up shares of mines hoping to beat out other gold-hungry speculators before the share prices soared.

There was a big vein of some very interesting ore in one of these mines across the Sierra Nevadas. He loaded up a caravan of mules to make the trek back to San Francisco and see what he had. Fortunately for him, the ore contained a great deal of silver and he became even more wealthy.

So there you have it. George Hearst became a great and wealthy man on the back of precious metals. He built his fortune with those shiny little metals and you can too!

I hope you catch my sarcasm.

 

The rest of the story

If we take a closer look at what Mr. Hearst did, he took advantage of a bubble and used the wealth built during that bubble to build more substantial and historically profitable investments and businesses.

 

What did he buy with that gold money?

As stated before, Mr. George Hearst didn’t exploit every last ounce of gold or silver from his mines. Once he found the ore, he would sell them off at a higher value and find other mines (real estate) that he believed to be more valuable.

Take the Lead From George Hearst on Investing in Precious Metals

The View of the Pacific from Hearst Castle

He also bought ranch land. George used that ranch land to diversify into cattle production.

He was like a lot of miners and enjoyed his whiskey and card games. As payment for a gambling debt, he received the San Fransisco Examiner, a newspaper. He didn’t take much interest in the paper but kept it anyway for political reasons and to diversify his holdings.

He wanted his son, William Randolph to take interest in the mining and real estate development that was George Hearst’s passion but William took more interest in that little paper in San Fransisco.

Take the Lead From George Hearst on Investing in Precious Metals

Hearst Castle near San Simeon, California

George turned the paper over to his 24-year-old son, William Randolph, and he quickly turned the paper into an extremely profitable business worth over one million dollars in 1890. That is worth about $26 million today. You have to remember that newspapers were incredibly popular. It was the media pinnacle of the time. William then built a media empire controlling about one-quarter of the papers in circulation at that time. 

Both the father and son parlayed their fortunes into political careers that were somewhat successful.

 

What’s the point?

The point is that even though someone could point to these powerful and wealthy men as creating a fortune by investing in precious metals, that wasn’t the whole story. They actually made their fortunes in real estate, establishing businesses and growing those businesses.

George Hearst could have been pulling anything out of the ground as long as he could sell it for more than the cost it took him to dig it up and sell it. It didn’t have to be gold.

If he would have stored his gold and silver away and never sold his real estate or diversified his investments, we probably wouldn’t know his name. Many of the merchants that sold the prospectors clothing, supplies and goods became more wealthy than the prospectors.

Most investments (if you can call precious metals that) go through peaks and valleys. For gold, there was a big build up in price in the 1970s and then again in the early 2000s.

 

History of Gold

Here is a graph of gold prices since before the 1950s:

Take the Lead From George Hearst on Investing in Precious Metals

Now let’s look at it inflation adjusted:

Take the Lead From George Hearst on Investing in Precious Metals

 

When we factor in inflation, we’re currently sitting at the 1981 price.

 

History of Silver

Now let’s look at silver:

Take the Lead From George Hearst on Investing in Precious Metals

Oops. Don’t forget to adjust for inflation.

Take the Lead From George Hearst on Investing in Precious Metals

We’re sitting at the 1984 price.

 

Today, gold ads look more like this:

You get a sweet 30-day price guarantee. Are they admitting it’s likely to go down in value but you don’t have to worry about losing money for a whole 30 days?

 

I think Warren Buffet summed up investing in gold very nicely with this quote:

I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.

How to Approach Precious Metals

I’m not a fan of gold and silver as an investment. At best it holds pace with inflation. If you want some gold as a hedge against political upheaval and war then I see the benefit. Even then you should approach holding gold/precious metals with a strategy.

Holding “gold” in the form of paper where a company gives you a certificate of ownership is no better than owning stock in a poorly performing company. If you are using that as a hedge against national or global unrest, chances are that certificate will be worthless if that time comes.

If you buy the metal from a company that promises to hold the gold in a secure place, can you assure that you will have access to that secure place when you most need the gold? I think it’s likely to be quite difficult to gain access to some secure vault if we are in a period of unrest or post-apocalyptic world.

If you’ve access to the gold by storing it in your home that carries its own risks. You’re at risk of robbery or loss. I will concede, this is probably the most intelligent way to hold the metal if you plan to use it as you’re skipping town and airplanes are dropping bombs on the city where you live.

My advice is to limit your exposure to gold. If you want it as a safe haven for global/national emergency then there could be value, although guns, bullets, and nonperishable foods will probably get you further. 

Don’t be captivated by the shiny little gold bars or coins. Sure they look nice but they won’t make you rich.


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So what’s your take on precious metals? Do you think gold rings and necklaces could work just as well as coins and bars? Do you think we should keep it in our portfolios?

Tom
Tom is a doctor, husband and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

7 Responses to “Take the Lead From George Hearst on Investing in Precious Metals

  • TheGipper
    2 months ago

    I have also never been a fan of precious metals in the accumulation phase, due to its inability to produce an inflation adjusted return.

    However, when I retire I will take a long, hard look at owning precious metals, pethaps up to 20% of my portfolio. Multiple academic studies and back testing calculators reinforce that gold increases the safe and sustainable withdrawal rates of a portfolio by its very low correlation with equities. Smoothing volatility and reducing sequence of return risk makes up for low expected real returns.

    I’d likely go with a precious metals ETF, but who knows what vehicles will be available in 10 yrs.

    • I understand the need to reduce sequence of return risk. It is one of my biggest concerns too for early retirement, but why choose precious metals to accomplish that when there are other options. I would probably be happier with rental property income, flexibility in withdrawal rate, passive online business income or continued part time employment.
      I know none of these things are guaranteed but neither is the stability of gold.
      I’ve never been able to find studies associated with all the factors I listed above for sequence of return risk.
      One advantage is gold investing has no work involved so if that is your goal, gold would probably be the best bet for limiting risk although a low return.
      Personally I like the idea of diversifying income in other ways besides precious metals investing.

      Tom @ HIP

      • TheGipper
        2 months ago

        All strong points. I hope to sell my rental properties and anything else that requires effort before retirement.

        I once thought like you and had no use for gold. Surely there were better diversifyers.

        For kicks try playing around with portfoliocharts.com withdrawal rate calculator. You’ll be surprised (as I was) that adding a bit of gold will significantly increase withdrawal rates, more than anything else because it almost akways moves in the opposite direction as equities.

        Now in order for me to actually use gold, I’d have to be 100% sold, enough to stick with it during the many volatile lows. I may never get there.

        Commodities can be used similarly in withdrawal phase but have a little less positive effect on SWR.

        • Your right. I need to spend more time investigating retirement withdrawal strategy but I’m not quite there so it is a week point in my financial knowledge.
          Right now I like the idea of part time employment, passive online businesses and real estate but in 10-15 years I might just be tired and precious metals might be the safest play for sequence of return risk.
          Thanks for the portfoliocharts.com tip. I’ll play around with it and get back to you. If I could set up some scenarios with potential returns of my other option versus gold I’ll be better informed for the future but for right now in the accumulation phase I’m pretty comfortable with my asset allocation.

          Tom @ HIP

  • I wouldn’t buy precious metals with my worst enemies money. If it doesn’t deliver production of some sort it has no intrinsic value only perceptional value. That’s the definition of speculation. They tie poorly even to inflation when analyzed from 81 onward. If you must do commodities then choose one used in production.

    • When doing research for this article I saw an article that proclaimed the permanent portfolio dead. That portfolio consists of 25% gold. It was talked about quite heavily after the 2008-2009 crash but it hasn’t had much traction since and the returns show why.
      Intuitively it seems more intelligent if your objective is increasing your portfolio value while working to invest in productive assets. I’m right there with you.

      Tom @ HIP

  • TheGipper
    2 months ago

    Interestingly, one of the best performing portfolios on all metrics on portfoliocharts is the “golden butterfly”, which combines the returns of US Total Stock Market and low volatility of the permanent portfolio. It is:

    20% US Total Stock Market
    20% Small Cap Value
    20% Long Term Bond
    20% Short Term Bond
    20% Gold

    Seems far too conservative for me on the surface buts it’s hard to argue with its results, particularly its long term SWR rate (over 5%) while maintaining long term real CAGR (over 6%) to match total US Stock.

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