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Silver, in the meanwhile, has been the real story - with a five year rise from a little over $2/oz to over $10/oz today - an amazing rise of 400%! In fact, as you may notice in the chart below, the rise in silver began around mid-2003, and a prescient call was made by the writers at http://www.silver-investor.com/ about the timing of this rise.
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Clearly, silver has been the place to be the last five years while the Dow and S&P 500 and the NASDAQ are still struggling below the highs they hit back in 2000-01.
Different Ways to Invest in Precious Metals
Book Recommendation
From the Financial Glossary
Quote from the Wise
What is fueling this Bull Run in the Precious Metals?
- US Dollar is depreciating in value. There is fear that the US dollar is dropping against all the major currencies, and so the value of Gold & Silver is rising in terms of dollar.
The above reasoning seemed to be true until recently when the US Dollar began appreciating against foreign currencies (as the interest rates in the US rose). But gold and silver are continuing their bull run and are now appreciating in all currencies!
- Higher buying demand from countries like India.
This reasoning does not seem to be strongly supported by data as the buying demand fluctuates, but the bull-run has been rather steady.
- The money-printing presses are working overtime! In other words, governments around the world are over-printing paper currency (i.e. not keeping money supply in line with expansion of economy) - resulting in severe devaluation of all paper currency and the rise in precious metal value.
There could be truth in this as availability of easy money does cause devaluation of existing currency (recall that banks can loan amounts up to ten times or more than the amount of deposits they have. Thus loans become a form of "money-printing" - and cheap loans accelerate that process).
- Fear. Fear of terrorism or other calamities is pushing people into gold and silver as a currency of exchange of last resort.
There is a touch of sensationalism to this theory. If this rise in gold was being accompanied by a crash in the stock markets, there might be more truth to it.
The above storylines are what are heard to explain the rise of gold. The rise of silver is somewhat simpler: Supply & Demand.
Silver is an industrial metal, used in photography, televisions and many other appliances. For years, the depressed prices in silvers made mining of the metal uneconomical - resulting in less mining and more consumption. Over a period of time, the amount of above-ground silver has become depleted, resulting in a steady rise in the price of silver. Eventually, miners will start producing enough silver to bring the price into a more steady state.
Different Ways to Invest in Precious Metals
Of course what began as a matter of making the life of suppliers and users of a commodity simpler, slowly ended up attracting those who had no interest in the underlying commodity but only an interest in making a profit by buying and selling futures contracts. And since playing in the futures markets may often involve large sums of money, the Options market stepped in which gives the trader an option to buy or sell contracts at a certain pre-defined price within a certain amount of time. This has allowed more individuals to participate in the gold and silver markets over the years - helping create more efficiency in the market.
Physical Gold
Perhaps you are interested in holding actual physical gold (as some commentators recommend). You can actually purchase the physical metal from brokers such as at
http://www.investmentrarities.com or from other similar concerns. There is a small spread that you have to pay - but if you are going to purchase the physical metal, that implies you don't intend to sell it anytime soon - so the quality of the purchase rather than the spread should be your concern. Most gold coins have a purity level of 0.96oz/1oz of coin to 1oz/1oz of coin. US Gold Eagle, Canadian Maple Leaf, Austrian Philharmonic and Krugerrand are all easy ways to hold onto the physical metal.
Make sure you put away physical gold in a safe deposit box or other safe place.
The story is similar for silver except that silver does not carry the same value per ounce, and hence is not as good a storage unit of value as gold (though with more upside potential than gold).
Physical Gold in a Safe
To solve the problem of protecting gold that you physically own, entrepreneur and goldbug James Turk founded the GoldMoney company. This firm allows you to buy parts of actual gold that they already own and safeguard at a safe in London, England. You will essentially own certificates that indicates your claim to a certain part of the total gold that the company has made available for purchase.
This allows you to buy gold at any fractional part (say "buy gold worth $50") and see the total added to your account. Your account can build up slowly and you do not have to worry about its safekeeping etc.. The company also has relations with firms like http://kitco.com who will allow you to purchase goods and services from them in exchange for your gold kept at GoldMoney safes. In other words, this is an attempt by GoldMoney to make their certificates which are fully backed by gold as another form of currency (a more "real" currency if you will).
The same applies for Silver purchases as well.
Gold ETFs
GLD is a new ETF introduced in November of 2004 which is traded like shares of a company on the New York stock exchange. Each share represents one-tenth of an ounce of gold. The ETF has finally popularized the buying and selling of gold and made it extremely simple to trade in it for the average investor. An article on the dawn of this age can be found here.
Gold Mutual Funds
You can always participate in the Precious Metals run through a mutual fund. As usual, pay attention to the manager of the fund and his or her understanding and philosophy behind purchasing gold or shares in gold mining companies. Also look for fund diversification into other metals like Silver and Platinum.
Mining Shares
Another way that has been popular in playing the Gold & Silver bull market has been to purchase mining shares.
The markets then value not only the current earnings of the company and the value of the gold that will be extracted in the coming year - but they value the entire property that the company owns at a higher level. The more promising the property, more the overall value of the firm (in expectation of years of terrific future earnings and profits). This is the leverage effect of mining shares.
All the solid investment newsletters that recommend gold and silver often do so through mining shares. When you are sure of a good thing - why not go all the way!
Is the Bull Run Over?
While we do not make investment calls in this letter, it is worth checking a few reasons why many believe the bull-run is not over yet.
- Commodities have just come out of a long bear market and now have finally entered a multi-year bull market. Treating gold and silver as commodities, these metals are likely to participate in this bull market. For example, take a look at the 30 years charts of most metals (base and precious) here: http://www.mrci.com/pdf/metals.pdf . As you may notice, Copper and Platinum both are at all time highs.
- Gold is considered as an inflation hedge, and even as the US and world economy continue to fight off deflationary forces such as cheap labor from China & India by printing more money, and all the while the prices of commodities like oil and copper rise - it is useful to have an inflation hedge such as gold. (One could argue in favor of TIPS and I-Bonds as well).
- Silver specifically continues to be in a supply/demand imbalance. At $10+/oz, it is profitable once more to mine for silver so this imbalance should end soon - but it takes 3-5 years for new mines to become production ready. So the bull market is likely to continue for some more time.
Having said that, it is better to leave the world of commodities to the experts and follow the advice contained in the great investment newsletters mentioned in our e-book! There are enough minefields (no pun intended) in the world of gold and silver investing that it is better to follow the experts who have been watching and investing in these markets for decades.
Book Recommendation
"The Coming Collapse of the Dollar and How to Profit from It
" by James Turk and John Rubino will be of interest to you. Read this book with the understanding that James Turk is also the owner of GoldMoney.com, but what he says in the book is accurate. It is well worth understanding some of the forces beating down on the dollar (or for that matter, most paper currencies) though you don't have to buy into the complete collapse of the dollar.
From the Financial Glossary
Gold bond: Bonds issued by gold-mining companies and backed by gold. The bonds make interest payments based on price of gold.
Simplified Meaning: Essentially like regular bonds, but with the variable interest payments giving the investor exposure to variability in the actual price of gold. Today, many investment banks and other institutions offer Gold-linked bonds that provide better yields, principal protection and some exposure to price of underlying gold.
Quote from the Wise
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The fate of the nation and the fate of the currency are one and the same.
At all times, we appreciate your feedback on improving this journal, any experiences you wish to share, or any disagreements you may have! Mail us at: shri_ajay@characterandwealth.com or post on the forums!