Thursday, October 13, 2016

How Do Physical Assets Work? Briefly, kinda

What is a physical asset?
A physical asset is something such as gold or silver.  A physical asset has an intrinsic monetary value, a value which fluctuates according to the market of that item.

Why is gold or silver valuable?
They are both pure elements and rare earth metals that are extremely un-reactive and do not deteriorate.  In other words they do not depreciate in value over time.

How do physical assets work?
Physical assets, like stocks and real estate, are investments.  Since the US dollar and many other world currencies are not backed by any real value and economic problems are rampant, people over the last few decades have bought things like gold and silver as a way to secure their wealth.  You often hear phrases such as, "it's a hedge against inflation."  That means if the dollar was to go south, your wealth would not be lost.  In a collapse, such as the great depression, physical assets are not what you use to put bread on the table.  They are for when the market inevitably rebounds.  When the economy is back running smoothly and their is a valuable and secure currency in use, you can then sell some of the gold or silver and you will not have lost that much wealth.  At this point you can reinvest in industry and create new wealth for yourself and the market.

I know this is complicated stuff but not understanding it is why people poorly invest.  The key to understanding this stuff is knowing the prerequisite vocabulary and learning some basic economics.  I'm not going to explain things like inflation or how currency values work in this post. There are many resources out there to use.

I'll leave you with this:
George and Gary have $1000 each.  George uses his money to buy $1000 worth of silver.  Gary does not.  He keeps it in his bank account earning negligible interest.  After some time passes, the economy in their nation collapses.  Gary's money has been in a bank.  But, we know banks don't just keep the money in their vaults, they use it to invest and give out loans.  When the economy collapses, people could not repay the loans that were given to them with Gary's money.  Gary's bank goes bankrupt and Gary loses his $1000.  George, on the other hand, holds on to his silver, hoping in a few years everything will be rebuilt.  And so, the nation digs itself out of a terrible depression and the economy is thriving again.  George goes out and sells his silver for around $1000.  Gary has squat.

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