What is Qualitative Easing and How does it affect Markets?

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What is Quantitative Easing and How Does it Affect Markets?

Quantitative easing, affectionately referred to as “QE”, is a term that has been widely used in recent years. In fact, more people are likely familiar with this phrase than ever before. Given its coverage in the media, and its widespread use, we felt it prudent to provide a simple explanation of what QE is and how it can affect financial markets.

 

What exactly is Quantitative Easing?

Quantitative easing is a tool used by central banks in order to try and boost economic activity. The way QE works may seem difficult to comprehend, but is relatively simple. To perform quantitative easing, banks purchase securities from banks (such as government bonds) and pay for these securities with electronic funds that did not previously exist. In other words, with the click of a button, the central bank is able to print money out of thin air. This newly created money is designed to boost the amount of bank reserves. The bank, in turn, is then supposed to make more loans because it has more capital in reserve. The bank may also purchase new assets to replace those sold to the central bank. It is thought that these bank purchases, as well as higher loan activity, will cause stock prices to rise and interest rates to fall.

 

QE may be used more as a method of last resort. Under normal economic conditions, central banks may be able to control the money supply through interest rates. As the economic crises began to take hold in 2008, central banks slashed interest rates to zero or near-zero levels. That, however, did not prove to be enough. QE then began being used as a tool to get banks to lend more and spur economic activity.

 

It is not yet known whether quantitative easing was truly effective or not…

 

Some would argue that QE did, in fact, boost output and lending while other analysts believe that is was largely ineffective.

 

Perhaps even more important now is how central banks begin to step back from such measures. If the additional cash that has flooded markets began to circulate more rapidly, it could spur inflation. In addition, once central banks begin to unwind their balance sheets (selling the assets they have accumulated) interest rates could potentially soar and cause any economic recovery to falter.

 

It remains to be seen just how central banks will accomplish the unwinding of balance sheets, and it is a cause for concern.

 

Some analysts believe that the multi-year rally seen in equities has been a result of QE and low interest rates. QE may boost demand for stocks and other assets, especially in the face of low interest rates.

 

While that may very well be true, and QE may drive risk-taking and investment, it has not been proven. Just look at Japan, or the fact that several rounds of QE in the U.S. have thus far not been able to ignite inflation.

 

QE is ongoing in some nations, with the European Central Bank recently announcing another, larger round of bond purchases.

 

Time will tell just how effective, if at all, QE is. In addition, stepping back from QE may prove challenging for central banks, and could potentially cause higher interest rates, lower stock prices and risk-aversion while dampening economic activity.

What the End of the Stock Market Rally might mean for Precious Metals

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What Might the End of the Stock Market Rally Mean for Precious Metals?

Global equity markets have been on a tear in recent years, with the benchmark U.S. SP 500 index having made solid triple digit returns over the span of the last several years. Markets have been climbing since the 2009 lows, and continue to make new all-time highs.

 

This run higher in the equity markets as well as current valuation levels obviously begs a few questions:

 

-Will the rally continue?

-Are stocks overpriced at current levels?

-Is this a set up for a nasty correction?

-What has driven such significant upside?

 

We feel it is important to address some of these questions, as we believe the day will come when equity investors once again run for the exits. In turn, we believe that gold and precious metals could stand to benefit handsomely if and when this does in fact occur.

 

The stock rally is now in its seventh year. To put this into perspective, the average bull market lasts five years. Stocks have seemingly risen non-stop over the last half-decade, and new all time highs have been discussed widely in financial media circles.

 

We believe, however, that what goes up often comes down. Given the extent of the rally, many of the economic problems that still exist and the underlying factors driving the rally, we believe it is only a matter of time before this rally has run its course.

 

With regards to stocks being overvalued at current levels, once could certainly make the argument that equities have become expensive. To shed some light on this subject, let’s look at current price-to-earnings ratios, both trailing and forward.

 

The current 12 month trailing P/E ratio for the SP 500 is a tad over 19. The historical average for this number is 15.5. The forward P/E ratio for the SP is currently at 17, while the average over the last decade has been 13.5.

 

While simply looking at this data can be deceiving and may not give one the true lay of the land, it does indicate that perhaps stocks have become rich. Adding some credibility to this notion is the fact that stocks have not undergone a true correction in some time. In fact, stocks have not entered “correction” territory (defined as a 10 percent drop) since 2011.

While we cannot see the future, we do believe that stocks will not continue higher indefinitely. We believe it is only a matter of time before stocks reverse course.

 

Stock markets could, in fact, be setting up for a large reversal-a reversal that may catch many off-guard-that could begin to take shape anytime now…

 

We feel it is important to understand what has driven the rally to put this into context. The U.S. and many other countries have taken significant measures in order to try to boost economic activity. Quantitative easing as well as extremely low interest rates have been used in an attempt to fuel economic output. While some would argue that these measures have proven effective, others would say that significant problems still exist, and that the rally has been “artificial.”

 

Perhaps we are close to finding out…

 

The U.S. is nearing its first interest rate hike in years. The Federal Reserve appears to be on track for an initial hike of 25 basis points in the coming months-perhaps as soon as July or September.

 

Once the Fed does act, stocks may begin to falter. As the era of free money comes to a close, it may send investors looking elsewhere. Many who have ridden large portions of the multi-year rally may be the first to cash out.

 

Once capital begins to flow out of the equity markets, investors will likely be looking for alternative places to put cash to work. Alternative assets like gold and silver could potentially see a massive influx of investment capital.

 

While gold has been trending lower during this period of higher stocks, we expect the inverse correlation of gold to stocks to hold true.

 

The gold market does appear to be in the basing process when looking at recent price action, and investors have been buying the yellow metal on dips. The market does not appear to be headed lower, and we suspect that once capital starts flowing out of stocks, the gold market may once again turn higher.

 

In fact, we believe that gold will resume its long-term uptrend, and that now could represent one of the most opportune times to buy gold.

 

As the stock market approaches its eventual top, now is the time to be considering alternative asset classes for diversification. Gold has stood the test of time as a reliable store of value in good times and in bad, and we believe may provide an excellent investment opportunity at current levels for the long-term investor.

Why Use a Depository?

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Why use a Depository?

When purchasing precious metals, buyers must take into consideration where they intend to store their gold, silver or other metals.

 

While many may elect to store their metals at home or in a safe deposit box, this can become more challenging if larger quantities are being purchased. While the accessibility of home storage can be quite appealing, it does also represent a security concern. A safe deposit box, on the other hand, may offer superior security but comes with more limited access.

 

While using a depository to store your precious metals does not provide immediate access to your metals, it does offer a cost-effective and secure solution to your precious metals storage needs.

 

What Exactly is a Depository?

A depository is a third party facility that stores and secures precious metals for a fee. A depository can store both large and small amounts of gold, silver and other precious metals in various forms.

 

A depository may offer storage in either segregated or non-segregated accounts. A segregated account is an account in which your precious metals are stored by themselves, completely separate from the metals of other customers or any depository holdings. A non-segregated account, on the other hand, will store your precious metals in communal areas along with precious metals belonging to other account holders.

 

The decision on whether to use a segregated or non-segregated account may depend on personal preference, types of bullion being stored and fees associated with such accounts.

 

There are many depositories available for storage of your precious metals. Your choice of depository may depend on your location and a comparison of fees. Some of the more popular depositories include:

 

–          The Delaware Depository

–          Brinks

–           HSBC

–          JP Morgan Chase Bank

–          ScotiaMocatta Depository

 

What are some Advantages offered by a Depository?

Storing your gold, silver or other precious metals in a depository can have numerous advantages. Here we will outline some of these potential advantages:

 

Security: A precious metals depository is in the business of holding and safeguarding your precious metals. These depositories utilize state-of-the-art security technology to keep your metals secure. Measures such as constant, 24 hour surveillance, entry and exit records as well as security personnel may be used. The risk of loss or theft when using such a facility is extremely remote.

 

Insurance: Many depositories offer insurance coverage to further protect your gold, silver or other precious metals. Insurance coverage is an added layer of protection that can cover losses in the unlikely event of loss, damage or theft. Different depositories may offer different forms and levels of coverage, and one should become familiar with insurance policies and coverage when choosing a depository.

 

Auditing and Record Keeping: A precious metals depository goes to extensive lengths to properly store, maintain and account for all the metals it holds. Periodic inventory checks can alert the depository to any potential missing inventory quickly.

 

Ability to store large amounts of Bullion: For larger holdings of precious metals, a depository may be preferable to other storage methods. When storing precious metals at home, space can be a serious limitation as well as the security issues that come with it. In addition, home storage is more likely to lead to loss or theft. A depository can handle even the largest amounts of gold, silver or other metals safely and securely.

 

Peace of Mind: Due to their security, accounting and insurance measures, a depository can provide the owner of precious metals with peace of mind. One can sleep well at night knowing their precious metals are secure and accounted for.

 

Some types of precious metals purchases such as purchases made within an IRA account must be stored within an approved depository. If you are purchasing gold, silver or other metals outside of an IRA account, precious metals depositories represent a secure storage solution that should be considered along with other storage options.

The Top 10 Reasons to Own Gold

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The Top 10 Reasons to Own Gold

While different investors may have different reasons for owning gold, there are several reasons that are very common among gold buyers. Here we will outline the top ten reasons to own physical gold.

 

  1. Gold is a recognized store of value: Gold has been recognized as a reliable store of value and medium of exchange for thousands of years. It is unlikely that gold’s status as such will be changing anytime soon. Gold is exchanged all over the world, and an ounce of gold in Canada is the same as an ounce of gold in China. Unlike “paper” investments, gold could be exchanged for goods or services in times of crises anywhere in the world.

 

  1. Gold has no counterparty risk: Gold carries no counterparty risk and as such cannot go broke, declare bankruptcy or default on any obligation. Investors can buy gold with confidence in its reliability and value. This is in direct contrast to paper investments such as stock shares or bank certificates. Companies can go out of business or declare bankruptcy and banks can and do fail. Any type of paper investment unfortunately involves these risks whereas gold stands alone.

 

 

  1. Gold can be purchased and owned anonymously: The purchase of physical gold can be completed privately and anonymously. In fact, physical precious metals transactions are some of the most private financial transactions today. In a world with more and more scrutiny and more invasions into personal space, gold ownership can be maintained without the invasion of personal privacy.

 

  1. Gold may increase in value during economic or geopolitical crises: Gold has the potential for rapid and significant increases in value during times of geopolitical or economic uncertainty. Because of its long history as a store of value, investors may flock to gold during these times for its perceived safety. Needless to say, the world is currently facing many issues that have powder keg potential such as a potential Greek exit from the EU or escalating conflict between Russia and the West.

 

  1. Gold is not issues by governments: Gold’s value is not dependent upon governments or monetary and fiscal policies. Gold is, in fact, the polar opposite of fiat currency that is issued by modern governments. Fiat currencies have been shown to lose value over time while gold’s value has remained relatively stable.

 

  1. Gold investments are liquid and easy to store: Gold can be bought in fractions of an ounce and in various forms. The liquidity of the gold market as well as the ease of storing gold, even in your own home, make gold a very appealing investment vehicle.

 

  1. Currency war potential: In today’s modern economic world, countries and governments manipulate their currencies in order to boost exports or make it easier to service their debt. This can lead to dramatic declines in the value of fiat currencies and a significant erosion of purchasing power.

 

  1. Central banks and governments are buying gold: Governments and central banks are the biggest buyers and holders of gold in the world. These entities have been buying gold and keeping gold for some time now. If the largest financial powerhouses in existence are buying gold, shouldn’t you be?

 

  1. The possibility of a return to the gold standard: There seems to be more and more discussion today about a potential return to the gold standard. A return to a monetary system in which a country’s currency is directly tied to a specified amount of gold could stabilize the global currency market and level the playing field. Should such a monetary system be put into place once again, the value of gold could potentially rise dramatically.

 

  1. Gold may potentially offer protection from hyper-inflation: The modern global financial picture is one filled with sovereign debt, currency battles and quantitative easing. The slowing of the global economy has caused many central banks to increase the money supply by printing more money. This expansion of the money supply has the potential to cause a significant and sustained rise in inflation levels. Gold may potentially offset some of the losses in real returns and purchasing power that may be seen during periods of high inflation.

 

While this list could go on and on, these are 10 of the top reasons to own physical gold. Physical, tangible precious metals like gold can provide peace of mind that comes with no other investment.

Industrial Use and Demand for Silver

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Industrial Use and Demand for Silver

When comparing the various uses of gold, silver, platinum and palladium, silver may have the most industrial uses and possibilities. Silver can be used in various industrial applications across a very wide range of industries. This puts silver in a somewhat unique position among the precious metals complex. When one thinks of gold, for example, two words normally come to mind: jewelry and investment. Silver, on the other hand, is widely considered to be an investment vehicle and an industrial metal. Silver, therefore, has the potential to see growing demand and potentially higher prices based on investment demand as well as industrial demand. During times of strong economic conditions, silver may see investment demand falling while industrial demand is rising. Demand for silver is well-diversified among many different sources, making the metal attractive for investment purposes as it can potentially flourish in both good and not good economic times.

 

Demand for silver comes from three distinct sources: Investment demand, industrial demand and jewelry demand. While silver may have hundreds or even thousands of potential applications, here we will highlight just a few to give you an idea of just how useful the white metal really is.

 

Silver Jewelry

Silver has been widely used in jewelry for hundreds of years now. The most widely used silver for jewelry today is sterling silver. Sterling silver is combined with additional alloys to make the metal harder. Jewelry accounts for a nice piece of overall silver demand, and is forecast to be in the 235-265 million ounce range this year.

 

Formaldehyde and Ethylene Oxide

Silver is a necessary component in the production of other products. Both formaldehyde and ethylene oxide requite silver to be produced, as a matter of fact more than 700 tons of silver are used annually in the production of these critical compounds. These compounds are used in a large number of products. Flexible plastics, molded plastics and solid plastics all require these compounds. Modern day plastics have thousands of uses, and are a big part of life on this planet. A few of the products that silver makes possible are:

 

  • plastic toys
  • electrical connector housings
  • clothing
  • plywood and particle board
  • various appliance components

 

Solar Cells

Silver paste is used in the manufacturing of crystalline silicone photovoltaic cells. These cells are the most common type of solar cell and are used to power homes and even businesses. Use of these solar cells continues to spread around the globe, and various countries are looking to employ more of this type of power generation as it is relatively simple and pollution-free.

 

Silver in Automobiles

Over 36 million ounces of silver are put into cars each year. Silver is a key component in anti-freeze production, which keeps our cars running in the winter. Today’s auto electronics utilize silver coated contacts for ease of electronic signal transmission. These silver contacts facilitate everything in your car from closing the moon roof to pressing a button to open the trunk. Silver-ceramic wires contained in the glass on the rear windshield allow us to melt snow and ice. Without silver, many features of the modern automobile would not be possible.

 

 Silver in Healing

Silver also has many uses in medicine. The metal has very strong anti-bacterial properties that help heal wounds faster. Because of this, silver compounds are often found in burn creams and contained in bandages. The healing properties of silver have been known for hundreds and perhaps even thousands of years. Modern medical device companies are finding more and more uses for this fascinating metal. Some of the largest medical equipment and supply companies are now producing their own brands of bandages and other products containing silver.  

 

In addition to its healing properties, silver also hates germs. The white metal can help prevent the spread of germs making it useful in hospitals and doctors’ offices. Medical tools and devices can be embedded with silver to help stop the spread of germs in their tracks. Hospitals are now even embedding silver in their furniture to assist with germ prevention.

 

Photography

Even in the digital age, silver still plays a vital role in photography. Many professional photographers, for example, still prefer to take pictures the old school way. Silver is a key component in the production of photo negatives. A large amount of some of the best photography ever taken would not be possible without silver. Professional photographers as well as motion picture producers still make use of this type of photography today, and their preference for it will not likely dissipate even as digital imaging becomes more advanced.

 

In addition to photography, x-rays make use of silver as well. Like the photography industry, many providers of x-ray services have gone digital. Silver in x-ray technology has, however, proven to be extremely reliable over many years and is still widely used today in many parts of the world. Silver x-ray technology has a very successful track record and is significantly less expensive than other methods.

 

 

Batteries

With a higher power-to-weight ratio than comparable batteries, the silver oxide battery is slowly but surely replacing the lithium ion battery.  In addition to its superior power, the silver oxide battery has less of an impact on the environment. The battery in your watch or in your cell phone is likely a silver-oxide battery. As environmental concerns grow, and as more and more everyday devices require batteries with longer life and more power, silver oxide batteries will be found in more and more products from watches to toys to laptop computers.

 

Electronics

Silver is known for its ability to conduct electricity. Because electrical transmissions are able to travel through silver quickly and with ease, silver is used in many types of electronic circuitry and components. Some current uses include:

 

  • computer keyboards
  • DVDs
  • Toys
  • Plasma screens
  • Light switches
  • Printed circuit boards

 

Because of its conductivity, silver is the metal of choice for all types of electronic switches and can be put through millions of on/off cycles.

 

Current Overall Demand

The U.S. Geological Survey recently calculated the amount of silver demand in the U.S based on use.  Here is what they came up with:

 

  • 35 percent of silver is used for electronics
  • 25 percent is used for coin and medal production
  • 24 percent is used in hundreds of other applications such as medicine, soldering and chemical  production
  • 10 percent is used in photography
  • 6 percent is used in jewelry and silverware

 

Silver has very far-reaching potential applications, and those applications grow by the day. As such, demand for silver will likely continue to increase as developing markets grow and become more modernized.

 

According to The Silver Institute, total demand for physical silver reached 1081 million ounces last year. The Silver Institute has also forecast a 27 percent growth rate for silver through 2018, and has attributed this anticipated growth in demand to the electronics sector.

 

As a precious metal with limited supply and very valuable investment and industrial uses, the upside potential of the white metal is considerable. The uses outlined here barely scratch the surface.

 

Government Mints and Private Mints

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Government Mints and Private Mints

When buying precious metals, whether it is coins, bars or rounds, it is important to understand the differences between government mints and private mints.

 

Government Mints

A government mint is a mint that has the ability to produce legal tender coinage. While government mints are often charged with minting a country’s coinage, many also produce other forms of bullion as well such as bars or rounds.

 

The Royal Canadian Mint, for example, produces not only Canada’s coinage but also produces bullion bars, rounds, collectables and more. Many government mints have been operating for hundreds of years, and the quality of coin and bullion produced by these mints is at the highest level.

 

Coins, bars and rounds produced by government mints are some of the most well-recognized and sought after bullion products in the world. Government mints, like the Royal Canadian Mint, take great pride in their coins and other products and look to make coinage that is symbolic of their sovereignty.

 

The Canadian gold maple leaf coin is an excellent example. These gold coins are known throughout the world, and symbolize Canada through their design and detail. These stunning coins are good, legal tender in Canada, and are some of the purest bullion coins available today.

 

In addition to legal tender bullion coins, the RCM also produces many other coin and round products that are symbolic to Canada. These products may include detailed designs of wildlife, the Canadian flag, historical events and more.

 

Due to the quality of coin and bullion produced by government mints, these products may carry higher premiums than private mint coin and bullion.

 

Private Mints

A private mint does not have the authority to produce legal tender coins. Private mints produce many types of bullion bars and rounds.

 

It is important to note that bullion rounds are similar in shape and size to bullion coins, but carry no face value. These products are valued solely on their precious metals content and any degree of collectability that may exist.

 

The Sunshine Mint, based in Idaho, U.S.A. is a good example of a private mint. The Sunshine Mint has many well-known products such as one ounce silver bars and one ounce silver rounds.

 

The Sunshine Mint produces some basic bullion products of high quality, but is a private, for-profit company.

 

Unlike government mints, private mints often offer additional products or services. The Sunshine Mint, for example, also offers bullion blanks and custom minting. Some private mints feature their own assay labs and services as well. Others may be part of a parent company with operations in other areas of industry such as diamonds or metallurgy.

 

Private mints produce some of the most beautiful designs and also some of the most simple. When you purchase bars or rounds from a private mint, you may pay a lower premium than purchasing from a government mint.

 

Should I Buy Government Mint or Private Mint Products?

We feel that both are appropriate. Gold and silver bullion coins are an important component to any precious metals portfolio and must be produced by a government mint. Bullion bars are more comparable when looking at government versus private mint, and in this case it may simply be a preference of product and comparison of premiums. Rounds, like bars, are also more comparable. Choosing gold, silver or other precious metals rounds is more a matter of personal taste and premiums.

 

Government mints are regarded for their history and their place in a country’s monetary system. These factors, along with the fact that they produce legal tender coinage, make government mint products highly sought after. At the same time, many private mints are very well regarded and have excellent reputations of quality and craftsmanship. Private mint products may potentially be more cost-effective as well.

 

Overall, diversification of products within a precious metals portfolio will call for both types of bullion to be incorporated.

Physical or “Paper” Gold and Silver?

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Physical Gold and Silver or “Paper” Gold and Silver?

Investors today have a lot of choices when it comes to investing in precious metals. Gold or silver backed ETFs, gold or silver mining stocks and certificates are just a few of the choices available. We believe that owning physical, tangible precious metals is the best way to go. This guide will outline some of the key differences between these investment choices, and why physical ownership may be beneficial.

 

Here we will briefly discuss some of the potential precious metals products available today. We will discuss both the pros and cons of these investment vehicles. We will also highlight differences between actually owning physical precious metals as opposed to owning “paper” precious metals products.

 

Owning physical gold or silver: This is our method of choice. Physical gold, silver or other precious metal ownership has some distinct advantages to the investor in our opinion. When compared to various “paper” investments, we feel the pros of owning tangible metals vastly outweigh the cons. Judge for yourself. Some of these distinct advantages include:

 

  • Gold, silver and other physical precious metals have zero counterparty risk. An ounce of silver, for example, cannot default on its obligations or declare bankruptcy.
  • When you own physical gold or silver, it can provide peace of mind. In the unlikely event of an economic or geopolitical catastrophe, one could use these precious metals to buy basic goods or services such as food or gasoline.
  • There are several storage options available. Many precious metals buyers will store gold, silver and other metals at home in case they are ever needed. One can also store their precious metals in a bank safe deposit box or in a highly secure precious metals depository.
  • Many gold, silver and other forms of precious metals are highly liquid. Silver rounds, for example, could be easily exchanged for goods or services should the need ever arise. These metals are recognized and exchanged all over the world, and an ounce of silver carries the same value anywhere you might be.
  • Purchasing precious metals can be done safely and anonymously. Precious metals purchases are a very private transaction. One can buy gold, silver or other metals at any time from the comfort of their own home or office.  

 

Owning physical gold, silver or other metals is our vehicle of choice. That being said, there are some issues one must consider when buying precious metals. Some of these issues include:

 

  • Precious metals do not provide dividend income. When one buys precious metals, they may make money if prices go up and they may lose money if prices go down. The lack of investment income may present an opportunity cost to hold physical precious metals.
  • Buying physical precious metals can cost more than buying shares of an ETF, for example. When buying precious metals, one will pay dealer premiums and shipping and insurance costs on most purchases. In addition, if you are storing your metals in a safe deposit box or depository, you will incur storage costs as well.
  • Storing precious metals at home or on your property may present the risk of loss or theft.

 

Buying mining company stocks: People often consider owning stock in gold or silver mining companies a proxy for precious metals ownership. While it is not the same by any means, some investors may elect to go this route. Some of the potential benefits may include:

 

  • The potential for a rise in the stock or share price. Stock or ETF investors may potentially profit if the share or stock price rises.
  • The chance to earn investment income. Some mining companies, for example, may pay dividends to stock holders.
  • Stocks and ETFs today are transacted cheaply and easily. With electronic trading really taking hold in the last decade, one can move in or out of these vehicles with minimal cost.
  • When someone owns a “paper” precious metals investment, they do have to worry about storing the precious metals themselves.

 

Investing in ‘paper” precious metals products comes with some serious problems as well. Some of the issues that must be considered are:

 

  • Counterparty risk. Any type of paper investment carries with it counterparty risk. If you own shares of a mining company, for example, what is to say that the company won’t go bankrupt?
  • The potential for a significant drop in the share or stock price.
  • In the unlikely event of an economic, geopolitical or currency crises, paper investments will not do much good. You cannot, for example, exchange your shares of a gold mining company for a gallon of gas or groceries.
  • Ownership of paper investments is not the same as owning physical, tangible precious metals.
  • Buying precious metals backed ETFs: An ETF, or exchange traded fund, is another “paper” vehicle that investors may use to get exposure to gold or silver. When an investor purchases shares of an ETF, they are buying an interest in a fund that holds gold or silver as its primary asset. Precious metals backed ETFs buy gold or silver and handle the storage and management of the physical metals. These ETFs were designed to mimic the price of gold or silver. Precious metals backed ETFs also have their own pros and cons. Some of the potential benefits of precious metals ETFs may include:
    • A simple way to gain exposure to gold, silver or other precious metals prices
    • Low transaction costs and good liquidity
    • May pay dividend income
    • Individual investors do not have to deal with storage or management of precious metals
    • Small amounts of capital may be used

 

Precious metals backed ETFs also have some serious problems as well. These problems may include:

 

  • Investors are not entitled to any physical precious metals
  • Investors have no control over metal storage, security or expenses of the fund
  • ETFs cannot be exchanged for goods or services
  • ETFs, like other paper investments, carry counterparty risk
  • Investors have no way of verifying the fund’s actual holdings or inspecting the metals held

 

 Gold or silver futures: A futures contract is simply an agreement between parties for the purchase or sale of an asset at a certain price at a certain date in the future. Futures contracts are highly leveraged, allowing investors to control a large amount of gold, silver, corn, crude oil or other contract for a small amount of the total contract value. This leverage gives investors a way to magnify their gains, while also and equally providing a way to magnify their losses. Certain futures contracts are physically deliverable, while many are settled with cash. Some of the potential benefits of using futures contracts may be:

  • Ability to potentially magnify gains
  • Liquidity
  • Very low transaction costs
  • Extended trading hours

 

Futures contracts have some significant drawbacks that must be considered. These drawbacks may include:

 

  • Magnification of losses-serious risk of loss
  • Possible margin calls
  • Process for taking delivery of precious metals may be costly and cumbersome
  • Does not equate to owning physical precious metals unless delivery is taken
  • Contract sizes are standardized, one cannot take delivery of a small amount of gold or silver

 

Gold or silver certificates: Certificates are another form of paper investment issued by banks or financial institutions that indicate ownership of a specific amount of gold or silver. There are different types of gold or silver certificates available including allocated certificates and unallocated certificates. We do not see a lot of positives to certificates. The only pluses in our opinion are:

 

  • Storage of precious metals is handled by institution
  • Fees may be competitive

 

As with other forms of paper investments, we see some potential issues with gold or silver certificates. In our opinion, some of these issues include:

 

  • Precious metals are not accessible
  • Certificates may require a high initial investment
  • Storage costs can be significant
  • Counterparty risk

 

There is a common theme seen in all paper precious metals investments. They are not the same as owning physical precious metals yourself!

 

Ownership of physical gold, silver or other precious metals ties all of the potential benefits together like no other vehicle. Owning physical metals allows one to:

 

  • Participate in potential price appreciation
  • Diversify their investment portfolio
  • Enjoy the peace of mind that comes with physical ownership

 

Unlike paper investment vehicles, gold and silver have been considered a reliable medium of exchange and store of value for thousands of years. Governments may fall, companies may go bankrupt, and banks may fail. Physical gold and silver have zero counterparty risk and zero risk of default. These metals will continue to be reliable and valued in an ever-changing world.

The Gold to Silver Ratio

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The Gold/Silver Ratio

The gold/silver ratio has been used for a long time. This ratio tells one how much silver it takes to buy one ounce of gold. For example, if the gold/silver ration is 50:1, then takes 50 ounces of silver to buy one ounce of gold.

 

One can easily find this ratio published at numerous websites online, or one can simply calculate it themselves. The ratio is easy to figure out-simply take the price of gold, divide it by the price of silver and there you have it-the gold/silver ratio.

 

What is the Gold/Silver Ratio Used For?

The gold/silver ratio may be a useful tool for determining relative value. For example, when the ratio is very high, then silver may be considered undervalued in comparison to gold. On the other hand, when the ratio is very low, silver may be considered overvalued compared to gold.

 

This ratio may be used by some short-term traders as well as long-term investors. Long-term investors will use the gold/silver ratio in order to try and acquire more total ounces of gold and silver over time. In other words, by using the relative undervaluation or overvaluation, the precious metals buyer may have a better idea of opportune times to buy silver as opposed to gold, and vice-versa.

 

Historical Average

Over the last several hundred years, the gold/silver ratio has oscillated between 14 and 100. Today, that ratio sits at about 74. The pre-1900 average for this ratio was 16. Some experts are looking for a return of this ratio to those levels. In order for that to happen, silver prices would have to rise dramatically, gold prices would have to fall dramatically, or there could be a combination of both rising silver and falling gold. Since these markets often tend to move together-at least to a degree-the most likely scenario is a combination of both.

 

Looking at the last ten years of price information, the gold/silver ratio has fluctuated from the high 30s to over 80. Although the average appears to be on the high side currently, it has been trending higher. Some may consider this an indication that silver is severely undervalued when compared to gold.

 

It is important to note that ratios can and do change. Although one can certainly make a good case as to why this ratio could potentially return to pre-1900 levels, no one can see the future. Gold is primarily used as an investment vehicle, whereas silver is not only used for investment purposes but also has many industrial applications as well. Therefore, a stronger economy could potentially work in silver’s favor whereas a weaker economy might work in gold’s favor.

 

The gold/silver ratio can be a useful tool to the long-term precious metals investor. By monitoring trends within this average, and looking for opportunities when the average may be stretched, a long-term investor may be able to stretch his or her investment dollars further. That being said, the gold/silver ratio is constantly changing, and should not be the sole basis for buying decisions.

Do Other Markets Affect Gold?

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Do Other Markets Affect Gold?

Gold prices are a result of current supply and demand. The gold market is in a constant state of flux as price discovery takes place. That being said, there are a number of outside markets that can affect the price of gold. Here we will discuss some of these key outside markets:

 

The U.S. Dollar Index: The dollar index can have a significant impact on the price of gold. One must remember that gold is a dollar denominated commodity. As such, when the dollar is stronger, gold becomes relatively more expensive for foreign buyers. On the other side of the coin, when the dollar index is weaker, gold becomes relatively cheaper for foreign buyers.

 

The dollar is often discussed in gold market commentary because it has such an impact on prices. While the correlation does not always hold true, if you watch the dollar index against the gold price, you will see that more often than thought these two markets will move opposite of one another.

 

The dollar has a very far-reaching affect on the gold market. For people in the United States, when the value of the dollar falls so does their purchasing power. In other words, every dollar now buys less goods or services. On the contrary, if the value of the dollar rises, every dollar now buys more goods or services. This is an important factor for the gold market. Gold is often purchased as a hedge against inflation or a reduction in purchasing power. That being said, when the dollar is falling gold may be more attractive not only to foreign buyers but U.S. buyers as well. This will often cause the price of gold to rise.

 

To see this correlation in action, look at recent charts of the dollar index and gold. You will see that the dollar has been rising while gold prices have been falling.

 

Crude Oil: Gold prices will at times also move with the price of crude oil. Oil prices have a far-reaching effect on the global economy. Higher crude oil prices can put a dent into disposable income. Higher crude oil prices can translate into higher prices paid at the gas pump. This, in turn, can stoke inflationary fears. Investors may elect to buy gold in order to try and hedge that inflation risk. On the other hand, when crude oil prices are falling, inflation may become less of a concern. In addition, discretionary spending may increase as people have more money left in their pockets due to lower energy costs. The price of gold can potentially fall during periods of lower oil.

 

Like the dollar index, the correlation between gold and crude oil is evident in recent months. Oil prices have dropped significantly from the $100 per barrel mark to less than $50 per barrel in just a few months. The price of gold has also dropped during this period, and may potentially see further downside as lower oil and a lack of inflation lessen investor worries. One should keep in mind, however, that this correlation will not always hold. Gold may be bought in times of deflation as well as inflation.

 

Stock Market: The stock market can also have a dramatic impact on the gold market. Stocks have been moving higher for several years now, and gold has not accomplished much on the upside. Coincidence? Not likely….When stocks are moving higher many investors may elect to chase potentially higher returns in the equity market. That being said, gold and other perceived safe-haven assets may not garner much buying interest during stock bull markets. On the other hand, when stocks are moving lower, or in the event of a market crash, gold may see a significant increase in buying interest as investors take money out of equities and look to put that capital to work elsewhere.

 

This begs the question: Will gold prices find a meaningful bottom when the global stock market begins to reverse course? While no one can see the future, this would make sense. In a world with low interest rates, investors will still seek out returns, and with rates as low as they are, those investors may potentially look to gold and other asset classes.

 

Like other outside markets, the correlation between gold and equities will at times hold true and at other times diverge.

 

No correlation is set in stone. Correlations can and do come apart at times. Knowing and understanding gold’s relationship with other outside markets can, however, potentially give gold investors a better handle on the gold market, and may potentially aid in identifying turning points in the market.

Getting the Most Metal for Your Dollar

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Getting the Most Metal For Your Dollar

For many precious metals investors, the goal is simple: Acquire as many ounces of gold, silver, platinum or palladium as possible. Needless to say, buying numismatic or collector’s coins is not going to help one accomplish this goal. Here are some simple tips to help you acquire more ounces of gold or silver and to make your precious metals investment dollars work harder for you.

 

  • Stick to the basics:  When looking to acquire as much bullion as possible, it is imperative that one stick to the basics. The basics include silver rounds, silver bars, silver bullion coins, gold bars and gold bullion coins. Rounds tend to carry the lowest premiums of all bullion products followed by bars and then coins. That being said, if you are looking to get as many ounces of silver as possible, you may consider sticking with silver rounds as you will be able to get more silver for your money. If you are looking to get as many ounces of gold as possible, then you may consider sticking with gold bars.
  • Pay attention to shipping and insurance costs: Shipping and insurance can potentially add a significant amount to a gold or silver purchase. Different dealers will offer different shipping methods as well as costs. Some dealers may even offer free shipping for certain purchases. Make sure to factor these costs into the total per-ounce cost of your purchase.
  • Compare bullion dealers: With many bullion dealers operating online, it has never been easier to compare bullion dealer pricing than it is today. You can shop different dealers from the comfort of your own home or office, and choose the dealer you believe has the best combination of price, selection and reputation. For easy price comparisons, simply choose a few products such as the one ounce Canadian silver maple leaf coin and a Royal Canadian Mint one ounce gold bar. Compare prices for these bullion products at various dealers, and also factor in other costs such as shipping and insurance. Like anything else, the lowest price is not necessarily the best. Also take into consideration the dealer’s reviews and time in business.
  • Buy in Bulk: A very simple trick to saving money on your next gold or silver purchase is to buy in bulk. Most precious metals dealers will offer product pricing that is tiered based on the amount being purchased. For example, a dealer may offer the Royal Canadian Mint one ounce gold maple leaf coin at a price of $1275 for one to nine, a price of $1268 for 10-25 and a price of $1265 for quantities of 26-50. 50 and above may offer even further discounts. Not only does buying in bulk give you the opportunity to pay less per-ounce in premiums, but it also gives you a way to save money on shipping and insurance. Some dealers may offer free shipping on bulk purchases reducing the total per-ounce cost even further. Either way, buying more metal per transaction will save on shipping and insurance costs.
  • Forget numismatics and graded coins: Numismatic coins as well as graded coins will carry significantly higher per-ounce premiums than bullion coins, rounds or bars. If your goal is to get as much metal as possible, stick to the bullion products with the lowest premiums.
  • Look for dealer specials: Precious metals dealers will often offer specials on certain bullion products. By keeping your eye out for these specials, one may be able to take advantage of sale prices. One easy way to stay abreast of dealer sales is by signing up for a dealer’s email list or newsletter.

 

Following these simple guidelines can potentially save one vast sums of money not only on individual purchases but over time as well. With a little research and smart product choices, one can stretch their precious metals dollars further and acquire more ounces over time.