Written by Olivier Garret     May 21, 2018

A while ago, I wrote a couple of stories about how gold had come into my life at an early age.

The first story was about my Swiss grandfather during WWII. The other one was an account of refugees from Cambodia that became friends of my family when I was in my teens in France.

The stories triggered an unexpectedly high volume of responses from my customers who shared their own experience with precious metals.

This article is a compilation of three true stories about precious metals. The first two are proof that precious metals are an excellent store of value. The last one reminds us to be cautious of market cycles and to time our gold purchases accordingly.

Let’s dive in.

Today Silver Buys More Gas Than in 1958

Bob D. recalls:

When I was a young man in college in the mid-sixties, a gallon of gasoline to power my 1958 Ford cost a silver quarter. Yes, only 25 cents! 

In 2017, I was talking to a gas station owner who understood the value of precious metals. For fun, the man allowed me to purchase my gas for one silver quarter per gallon. Contemporary, yes, but relevant to the wealth-preserving power of the precious metal.

As of April 30, 2018, silver traded at $16.32/oz. The gas station owner who accepted silver quarters from Bob could sell them at melt value for approximately $2.95, which is more than the price of a gallon of regular unleaded gasoline in most states.

How the Dollar Lost Its Purchasing Power

Roth L. writes about what a dollar could buy back in 1964:

Last year, I visited a friend in Medicine Hat. Carol (not her name) showed me a couple of 1954 hundred-dollar notes as we talked about the picture on them showing a view of Okanagan Lake, where we live.

I was flabbergasted to see that she saved these bills her mother gave her, thinking that they might have antique value. I explained to her that up to 1964, one could convert the paper note to gold or silver at the bank—it said on the note: Pay the bearer on demand. At the time, $100 would have bought just about three ounces of gold.

Sadly, those $100 bills have lost most of the purchasing power they had in 1954. The example demonstrates how one could buy 1,000 cups of coffee for $100, and the same $100 today would only yield 50 cups.

On the other hand, three ounces of gold are worth about $4,800 today.

In 1954, one ounce of gold was worth approximately C$36 while today it is trading at C$1,695. Over the last 64 years, the Canadian dollar lost almost 98% of its value against gold. The US dollar did not fare much better.

The Lesson of Buying Gold at the Peak

Greg T. shares his valuable experience of buying gold at the wrong time:

In January 1980, while talking to my brother, I learned that he owned several gold Krugerrand coins. My mind immediately went to what I had been hearing, and not paying much attention to, every day on the news recently. The price of gold was jumping higher and higher—$20 to $50 virtually every day!

I was envious of my brother’s gains and immediately decided that I needed to be a part of the action. My brother told me if I wanted to purchase some gold, he would be happy to unload part of his cache.

Contemplating this new idea, I asked my other older and wiser brother for advice. Did he think I should be purchasing gold at this time? He laughed and told me that he was ready to unload some of his.

Undeterred, I told him I wanted to purchase four of his gold coins. It took all the money I had in my savings account. So, the deal was agreed to.

The very next day, the price of gold hit what was at the time, and for several decades later, to become an all-time high.

The lesson: when the last person (i.e., the person who had never even considered buying) buys, the party is over.

The gold party was definitely over for me! The lesson, painful as it was for me at the time, has served me well.

I will never forget!

While gold has been a great investment and store of value in the long run, it’s not exempt from cycles like any other asset class. The problem is that record-high valuations at the peak usually create a mania in the market, pushing asset prices even higher.

The story above is a good example of this phenomenon.

In 1979–1980, gold was in a late-stage bubble. It took over 25 years for those who bought gold at that time to recover their losses (in nominal terms).

From 2003 until 2011, precious metals were in a big uptrend. But once again, the rise was too fast, too soon, and the end of QE drove silver and gold prices back down.

The lesson for investors is: invest in asset classes that are out of favor and reduce exposure to overvalued assets. While there is no way to predict the exact date of the next market correction, it is clear that stocks, bonds, real estate, art, and speculative investments like cryptocurrencies are selling high.

In contrast, precious metals are relatively cheap.

It makes sense to diversify out of asset classes that sit at record-high valuations and buy cheaper assets like gold and silver.

When your taxi driver or elementary school child starts talking about investing in precious metals (like in late 1979 or late 2010), you will want to reduce your exposure to gold and silver.

Over the years, my allocation to precious metals varied between 5% and 15% depending on their value relative to other asset classes. However, I always keep a minimum of 5% as disaster insurance.

As for today, I’m close to my maximum allocation.