Category Archives: Precious Metals

Gold and silver, the classic money for thousands of years

Investing in Precious Metals

Gold and silver have been used for business transactions and as store of value and for a very long time. Nowadays you can invest in a number of ways in precious metals. But it is easy to lose money, you need to have a strategy in place before you start investing. Here is an introduction to precious metal investing.

First, let’s define what metals are called precious metals. In chemistry, base metals are metals which oxidize or corrode relatively easily, such as iron, copper and nickel. Precious metals on the other hand, don’t oxidize or corrode easily. In the investment world, precious metals include gold, silver, platinum and palladium. Sometimes also uranium is counted as a precious metal.

In the good old days, if you wanted to invest in precious metals, you had to buy physical gold or silver. But nowadays, it is possible to invest in precious metals in a number of ways. Obviously, you can still buy physical gold or silver. But in most cases, you probably prefer to buy paper assets rather than the physical metal itself.

If you buy physical precious metals, you can choose between bullions, ingots, numismatic coins, jewelry and collectibles (containing precious metals). Unless you really know what you are doing, you should not buy numismatic coins as investments. They typically have a much higher price than the pure metal value. The same can be true for jewelry collectibles so make sure that you know what you are really paying for. It is very common that commemoratives are very overpriced, the price is often at least ten times higher than the metal value.

By buying shares in mining companies you get an investment with a potential growth component. Other ways of investing in precious metals without buying physical metal are mutual funds, ETFs, futures and options.

If you are buying precious metals as protection against hyperinflation or financial meltdowns, then the only the real thing will be good enough, paper assets could turn out to be virtually worthless if the financial markets crash. The main drawback with owning physical metals is the problem of secure storage. Owning precious metals in paper form does not involve such problems

If you are not worried about financial meltdowns, buying precious metals in paper format is much more convenient. The classic solution has been to buy shares in mining companies. The advantage of investing in shares in mining companies is that you may get paid dividends and enjoy capital gains. The main disadvantage of buying shares in mining companies is that you can’t be sure that the share price will follow the price of precious metals.

Mutual funds and ETFs (Exchange Traded Funds) are both convenient ways of investing in precious metals. The number of mutual funds and ETFs which focus precious metals has increased a lot lately but it can still be difficult to find a suitable fund or ETF. Mutual funds can have high fees, make sure to check the fees before you invest. ETFs typically have low management costs but many ETFs have low liquidity. Note that just because an ETF specialize in a specific metal, like gold, does not guarantee that the ETF actually owns any metal. This could be a potential problem in case of extreme price movements.

Futures and options are derivatives. This means that you can make big money even with small investments. Unfortunately the opposite is also true, you can lose a lot of money. Unless you really know what you are doing, it is best to avoid futures and options.

The Case for Silver

It has become popular to buy gold and silver. But does it make sense to invest in silver? The price has gone up a lot during several years. Has not silver become too expensive? And does not gold offer better protection than silver?

Most so-called financial gurus don’t like neither gold nor silver. They don’t pay any dividend and in most cases you have to pay for storage as well. Of course, you don’t need to buy physical silver, there are a number of ways you can invest in silver without buying physical silver. The easiest option, which may also pay dividend, is to invest in shares in companies that are silver producers. You can also buy silver certificates or ETFs, Exchange Traded Funds.

But if you are buying silver as an insurance against financial meltdowns, then the only safe solution is to buy physical silver. Gold is the traditional solution for such scenarios but silver has some advantages as well. One reason to own some silver and not just gold is that gold is far too expensive for daily transactions. Silver on the other hand is much more useful for smaller transactions. Note that in a case of a financial meltdown, both silver and gold prices are likely to skyrocket but silver will still be a better choice than gold for daily business. Although silver has performed better than gold lately, the gold/silver ration is still far higher than it is long-term average. Some people argue that the gold/silver ratio should, sooner or later, get closer to the long-term average. This means that silver has to perform much better than gold in the future. At the moment, the gold/silver ratio is above 50, it long-term average on the other hand is below 30.

Another reason for investing in silver is that silver is a much more useful metal than gold. Compared with gold, silver has a lot of commercial and industrial uses. This is also the main reason why the price of silver is much more volatile than the price of gold. The price swings of silver are a mixed blessing. It gives you the chance to buy silver cheap once in a while. But on the other hand, you may also see the price of your silver holdings drop significantly from time to time.

Should you buy silver coins or silver bars? You want to pay as little extra premium as possible. This means that numismatic coins are not a good idea, you often pay far more than the silver value for such coins. Rare coins are difficult to value and unless you really know what you are doing, you can end up losing money. Silver bars are the safe option, unless you buy small bars, the premium is small, at least as you find a good seller. Generic silver coins such as the Silver Eagle sell with a small premium as well. You should never pay anything for numismatic value for such coins. But note that for small coins such as 1-ounce Silver Eagles, you have to pay a significant premium, generally more than 10% above the spot price. You have to pay a relatively large premium also for small silver bars, so it is best to buy at least 10-ounce silver bars. On the other hand, you can generally get a slight premium also when you sell Silver Eagles, although significantly smaller than when you buy the coins.

If you only want some silver in order to have some basic protect against hyperinflation and financial meltdowns, silver coins can be a good solution. If you are more serious about getting into silver, buying larger silver bars is a better solution. Just remember that investing a lot in silver requires much storage space. In such cases, ETFs or silver certificates may be a better option. As long as you also remember that in a doomsday scenario, paper and electronic assets may become worthless.

Note that in some countries, for example members of the EU, buying physical silver has the drawback that you have to pay VAT. If you back gold instead, you don’t need to pay any VAT. This makes it less interesting to buy silver in such countries.

Should I Buy Gold

A lot of investment gurus tell you that gold is not worth buying. You should invest in shares and real estate. If you want less risk, bonds is the solution. Gold is seldom recommended. But the last couple of years, gold has outperformed both stocks and real estate. More and more people are asking the question, should I buy gold?

First of all, it is worth pointing out that the so-called investment experts are not completely wrong. Gold is not really an investment, at least if you want investments to pay dividend and have growth potential. Many shares, but far from all, pay dividend and if the business is successful, the value of the shares will grow. The same goes for real estate investments. Tenants pay rent which the owner gets and if the property is in a good location, the value of the property tend to increase over time.

Gold, like all other commodities, doesn’t pay any dividend, instead you will most likely have to pay for safe storage. And gold does not have any growth component. So if you buy gold, you are rather speculating than investing.

Gold has often been a poor choice, in the 1980s and 1990s, stocks and real estate rallied while gold went downhill. But in the 1970s and so far in the 21st century, the gold price has rallied. But if you ask most financial advisers, you are likely to be told that gold is not worth buying. After all, the gold price has rallied and if it drops back to the levels around year 2000, you would lose a lot of money.

The people who recommend that you buy gold generally look at gold as an insurance against inflation. As you probably know, money nowadays is not backed by gold any more. Governments can print as much money as they want. And some governments are printing a lot of money. Although the expression printing money is not used, instead the fancy term quantitative easing (QE) is used.

The Federal Reserve in the US has now started an open-ended QE. The Fed will keep on printing money until the economy has recovered. But the US is not the only country to drastically increase the money supply. And it looks like things are only getting worse. An increase of the money supply generally leads to higher prices, also known as inflation.

Inflation can be seen as a stealth tax. It is not a tax that is paid to the government but it makes you poorer. A low and predictable inflation is not a big problem but high inflation makes a lot of people poorer. The hyper inflation in the Weimar Republic crushed the German middle class and paved the way for Hitler.

But the Fed is more worried about deflation than inflation and is also confident that it can withdraw the surplus money when the time is right. Far from everyone is convinced about the later statement. After all, Alan Greenspan managed to get most things wrong and Ben Bernanke did not think that the subprime loans were a source of concern.

It is impossible to know if inflation will increase or not. But quite clearly, with the huge increases of the money supply, high inflation is a possibility. It is also quite clear that virtually all governments prefer inflation rather than deflation. So the risk of high inflation in the future has increased and the classic insurance against inflation is gold.

This should not be taken as any kind of guarantee that the inflation will skyrocket but if you haven’t protected yourself against such an outcome, you are either very optimistic or very gullible. Protecting yourself against inflation is not easy, especially since you don’t want to paint yourself into a corner where you need high inflation in order to avoid getting poorer.

As mentioned, gold is one way of protecting yourself against high inflation. But there are also other ways, well located real estate works well in most scenarios. Also shares can be good during times of high inflation but it is much more difficult to pick the right shares than finding good properties.

How much of your fortune should be in gold? If you ask most investment experts, they will say zero percent. But we would recommend about 10% as long as the QE operations are running. Given that it looks like QE is becoming popular worldwide, it may be prudent to increase the share of gold to 15% or more. But remember that as a long term investment gold has the disadvantage of not paying any dividend.

Here you can learn more about investing in precious metals.