Physical or “Paper” Gold and Silver?

/0 Comments/in , /by

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

/0 Comments/in , /by

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?

/0 Comments/in , /by

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

/0 Comments/in , /by

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.

Graded Coins

/0 Comments/in , /by

GRADED COINS

Coins that have undergone a thorough inspection process by a major grading service are referred to as certified or graded coins. While coin grading may seem unnecessary to some, this process can allow one to buy with confidence in a coin’s authenticity, condition and market value. Graded coins carry higher premiums than non-graded coins, but for many this additional premium is worth the peace of mind that comes with a certified coin.

 

WHY HAVE A COIN GRADED?

There are several reasons to have a coin graded. The primary reasons include certifying the coin’s:

 

  • Authenticity
  • Bullion content
  • Condition
  • Market value

 

Counterfeit coins do exist and unfortunately may be sold to unknowing investors. Having a coin graded and certified by a recognized grading service virtually eliminates this risk allowing one to know exactly what they are getting. There are several established and respected grading services in business today, with NGC (Numismatic Guarantee Corporation) and PCGS (Professional Coin Grading Service) being two of the most well-known and used.

 

WHAT IS INVOLVED IN THE GRADING PROCESS?

Although different grading services may vary in their grading methods, the same basic principles always apply. These methods are quite stringent, and the process is thorough and extremely detailed. The basic process goes like this:

 

  • Coin or coins are received by grading company
  • Coin or coins undergo thorough, multi-stage inspection process
  • Coin or coins are encapsulated
  • Coin or coins are then returned to the customer

 

 

 

 

The first stage of the grading process is the receipt of coins by the grading company. Once the coins are received, the grading service will verify they have received the correct coins to be graded by checking the coin against the order. Once they have confirmed they have the correct coin or coins, they will barcode the coins and store them in a secure vault. If the coins include variety designations, they will also be examined by a numismatist specializing in variety attribution.

 

Every coin is examined by multiple numismatists. Professional coin graders may be prohibited from involvement in the purchase or sale of coins in order to maintain the highest level of objectivity and impartiality. As the coin is examined, each inspector will enter a grade for the coin into the company’s system. Additional information may have to be included on the coin’s report. These supplemental pieces of information may include such issues as whether or not a Franklin Half Dollar displays full lines on its Liberty Bell, or whether a coin contains specific types of alloys that may affect its color or appearance over time.

 

Surface conditions as well as any imperfections are closely examined and detailed in the coin report. Coins that have altered mint marks, dates or are not genuine are not eligible for encapsulation.

 

Once the grading and certification process is complete, the coins are ready to be encapsulated. The encapsulation process is designed to ensure that all pertinent information such as type, date, mint mark, metal and condition is accurately displayed.  Any special designations as well as the coin’s grade are also included. All information on the coin is transcribed onto a barcode that is inserted into coin’s label. Third party grading services such as NGC and PCGS utilize transparent plastic cores to keep the coin securely in the holder. After the labeling process has been completed, the coin and sleeve are cleaned one final time with compressed air to remove any dust or residue.

 

Following the grading and encapsulation processes, the coins will go back to the grading room for a final inspection. These grading services will do a final check to ensure complete accuracy and proper labeling. If the coins and sleeves look perfect, they are ready to be shipped out back to their owner.  A grading service will typically ship coins out in heavy duty cardboard boxes that contain dividers. The dividers prevent any coin from coming into contact with another coin while in transit. In addition, these parcels often contain tamper evident packaging and will be shipped using unmarked, discrete methods.

 

WHY BUY GRADED COINS?

While graded and certified coins carry higher premiums than non-graded coins, they can offer buyers some distinct benefits. Some of these potential benefits may include:

 

  • Confidence in what you are buying.
  • An accurate idea of the coin’s market value
  • Knowledge of any marks or imperfections on the coin
  • The encapsulation process will keep your coin in excellent condition for many years to come
  • The potential for an increase in premiums

 

Graded coins are certified for authenticity, condition and purity. By purchasing graded coins, one can nearly eliminate counterfeit risk and buy coins with peace of mind.  

Precious Metals and Inflation

/0 Comments/in , /by

Precious Metals and Inflation

The term inflation refers to a sustained increase in the price of goods and services. In other words, things are getting more expensive. As goods and services get more expensive, a unit of currency will not buy as much of them. For example, as gasoline prices go up, every dollar buys less gas. As the price of a loaf of bread rises, every dollar buys less bread.

 

Inflation is always a concern for investors, and many seek out assets that may potentially provide a hedge to inflationary pressures. Gold, silver and other precious metals are commonly discussed with regards to hedging against inflation.

 

What Drives Inflation?

Although economists generally believe that inflationary pressures are caused by an increase in the money supply, an increase of the money supply does not always stoke inflation. Just look at the United States the past several years. The U.S. Federal Reserve has been increasing the money supply through quantitative easing, and thus far inflation remains benign. The same could be said for the Euro Zone.

 

Inflation can ebb and flow. Periods of low inflation do not necessarily indicate a new trend in inflationary pressures. These periods of low inflation may simply be caused by temporary events such as supply shortages. That being said, however, when there is an increase in the money supply that exceeds economic growth, a sustained period of inflation may result.

 

How Do We Gauge Inflation?

There are many different methods for gauging and calculating inflation. The consumer price index, or CPI, and the producer price index, or PPI, both give a good overview of inflationary pressures at both the consumer and producer levels.

 

The consumer price index gauges changes in a basket of goods and services. These changes are then reflected as a percentage. The consumer price index also consists of sub-indexes and even smaller sub-indexes that are combined and weighted to measure their portion of consumer expenditures. Generally speaking, the rate of change on an annualized basis is used to monitor inflationary pressures; using smaller time frames could lead to misleading information.  

 

The producer price index gauges changes in prices that producers receive for their products or services.  Like the CPI, the PPI is made up of a weighted basket. These figures show trends within the manufacturing, commodity and wholesale markets.

 

How Might Gold and Silver Hedge Against Inflation?

Gold often comes up during discussions on inflation. During the years 1946, 1974, 1975, 1979 and 1980, inflation was at its highest levels since the Second World War. During this time, the average return on the Dow was -12.33 percent while the average return on gold was over 130 percent. While this is impressive, it does not mean that similar results may be seen again. Gold may hedge against inflation, but it is also an imperfect hedge. While gold values could potentially rise or remain more stable during high inflation, there is no telling to what degree it may offer protection from higher prices.

 

It is also worth noting that the correlation between gold and the consumer price index has largely come apart in recent years. This could be due to many reasons, but the overall lack of inflation over the last decade is likely a large part of this uncoupling.

 

While inflation has not reared its ugly head in recent memory, there are many reasons to suspect that at some point prices will once again begin to climb. Some of the potential causes for future inflation may include:

 

  • Quantitative easing and money supply expansion
  • Sovereign debt issues such as those currently being seen in the European Union
  • Loose fiscal policies
  • The U.S. dollar resuming its long-term downtrend

 

Why might gold or other precious metals help? Well, one must understand that when inflation accelerates, one’s real returns become less. In other words, every dollar earned in return buys less goods or services, making the real or net return less. Gold and precious metals may potentially offset all or part of these losses in real return if they increase in value, or even just remain stable.

 

As stated earlier, there really is no perfect hedge when it comes to inflation. While there are no guarantees, gold and other precious metals may potentially offset inflation or soften the blow. Precious metals are one of the assets of choice when it comes to an inflation hedge due to their ease of acquiring, liquidity and global recognition as a medium of exchange. In addition, some of their past performance during inflationary periods is encouraging.

 

We do not have a crystal ball and cannot say with any certainty how effective gold or other precious metals may be should inflation come to roost. Because of gold’s long, reliable history as well as its general stability, we believe it is a good choice for investors looking to add some type of potential protection against inflation and a loss of purchasing power.

Precious Metals and Portfolio Diversification

/0 Comments/in , /by

Precious Metals and Portfolio Diversification

Diversification is a term many have heard, but few understand. Without getting into any fancy definitions, diversification is a way to try and improve returns for your level of risk. What does that mean? Well, it means that one can construct a portfolio based on numerous factors such as one’s age, time horizon and volatility tolerance. In order to try and maintain one’s level of risk, a mixed portfolio of various asset classes may be used.

 

It should be clear that diversification is not intended to boost portfolio performance, and that it is no guarantee against losses. A well diversified portfolio may, however, potentially keep portfolio volatility to acceptable levels.

 

How Do Precious Metals Add Diversification?

Gold, silver and other precious metals are often used as diversification tools. Some may buy physical precious metals to accomplish this end while others may use paper assets such as gold or silver based ETFs.

 

It is important to keep in mind that many investors feel they are properly diversified when they are actually not. For example, many believe that if they own stocks and bonds they are diversified. Others believe that if they own a mix of mutual funds they are diversified. Some have stocks, bonds and cash and believe they are adequately diversified.

 

The reality is that there are several other asset classes that can be utilized for diversification purposes. Precious metals are one of them, along with real estate, collectables, and commodities. That being said, most investors are only using one to three of several asset classes available.

 

Let’s now discuss a few ways that physical gold, silver and other precious metals may help achieve portfolio diversification:

 

Low correlation to stocks: Precious metals generally have little correlation to equities. While at times precious metals may have an inverse correlation to stocks, on larger time frames this correlation does not hold. The precious metals markets may move with stocks or inversely, and many of the forces that drive the price of gold, for example, differ from and in many cases counter the forces that drive other asset classes.

 

Purchasing power: Gold and other precious metals often exhibit an inverse correlation to the U.S. dollar. As a dollar denominated asset, gold prices may rise when the dollar is falling and may fall when the dollar is rising. As the dollar falls, one’s purchasing power is reduced. Every dollar now buys less goods or services. In order to try and protect against a loss of purchasing power, physical gold or silver ownership may potentially be beneficial. If the dollar weakens, then the net returns of other investments actually weaken too-because those returns now buy less. Should gold, silver or other precious metals rise in light of a weaker dollar, those gains may potentially help offset the purchasing power being lost.

 

Geopolitical risks: Gold and other precious metals may potentially rise during periods of economic or geopolitical risk. Gold is often viewed as a “safe-haven” and as such may see buying interest when investors get nervous. If a war were to break out, for example, stocks and other risk assets may be sold off as investors look to try and protect capital. Gold, having little correlation to stocks, may potentially rise in price during these times.

 

The same can be said for any significant economic crises. If stocks are sold off, gold and other precious metals have the potential to move higher as investors seek their perceived safety. It is no secret that sovereign debt issues are a major problem in today’s world, and could cause a large scale financial meltdown. If this issue or any other large scale economic issue started to cause ripples in global financial markets, precious metals could potentially benefit as investors look for alternative asset classes to put capital to work in.

 

While this list could go on and on, we think it will give you the bigger picture.

 

Should I Buy Physical Metals or Paper Products?

We believe that owning physical, tangible precious metals is the way to go. Paper metals products such as ETFs and gold mining stocks carry significant counterparty risks. In addition, they will be of little to no help in case of a real global emergency.  Shares of an ETF, for example, will not buy food or a gallon of gas. Physical precious metals, on the other hand, carry zero counterparty risk and can be used for exchange anywhere in the world.

 

How Much of My Portfolio Should Consist of Precious Metals?

This is a difficult question to answer, and there is no ‘one size fits all.”  Some experts recommend a 10-12 percent allocation to precious metals while others recommend a much higher amount. How much you decide to allocate to precious metals will depend on many factors including age, risk tolerance, economic outlook and others. We recommend discussing the issue with your financial professional as well as examining your own thoughts on the economy, your existing portfolio make up, your volatility tolerance and your objectives.

 

This material is for informational purposes only. No investment advice is being given or implied. Please consult your financial professional for questions related to portfolio diversification and the use of precious metals. 

The Gold Dollar

/0 Comments/in , /by

The Gold/Dollar Relationship

The relationship between gold and the U.S. dollar is an important one. Understanding this relationship can be advantageous when it comes to making investment decisions.

 

The relationship between gold and the dollar began a long time ago. This relationship began as gold was used to set the value of currency. Under the gold standard monetary system, the value of a country’s currency was directly tied to the value of a specific amount of gold. The United States went on the gold standard in the early 1900s, and remained on this monetary system until 1971.

 

Following the end of the gold standard in the United States, the U.S. dollar and gold were free to fluctuate on open markets. At this time, the U.S. dollar became a true fiat currency that was traded on open markets with no risk to the country’s gold reserves.

 

The price of gold was also now free for trade, as it was no longer tied to monetary policy and financial policies that were designed to keep currencies in order.

 

Over time, the price of gold has seen more relative stability than currencies. This is one of the reasons that gold is considered by many to be a “safe-haven” asset. Another way of looking at this relationship is that the price of gold is indicative of overall confidence in the dollar. After all, when the dollar goes up, gold often goes down. When the dollar falls, gold often goes up.

 

The U.S. dollar is the reserve currency of the world, and as such its value is very important to the global economy and financial engine. This reinforces the idea that as the dollar weakens, reserves may be shifted to currency, and as currency weakens, reserves may be shifted to gold.

 

Because gold is a dollar denominated asset, there are other factors involved as well. When the dollar weakens, gold becomes relatively less expensive for foreign investors. On the other hand, when the dollar is rising, gold becomes relatively more expensive for foreign investors. This fluctuation between relative cheapness and expensiveness can drive the price of gold as supply and demand forces take hold.

 

Does the dollar/gold inverse correlation always hold true? No, it does not. For example, if there is an economic crisis in another country, that country’s currency may fall against gold while the dollar may rise with gold. In other words, there are times when both assets may be seen as safety instruments and draw buying interest.

 

Understanding the gold/dollar relationship may help one make better investment decisions. It is important to understand how a weaker dollar eats into purchasing power, and how owning gold may potentially offset this loss of purchasing power.

 

While the dollar remains the reserve currency of the world, there could be challenges to its status in the not too distant future. Should the dollar begin to lose its status as the reserve currency of choice, not only could the price of gold potentially move significantly higher, but many other new financial dynamics would be set in motion. 

What Determines the Spot Price?

/0 Comments/in , /by

What Determines the Spot Gold Price?

The spot gold price is in a constant state of flux. The price of gold may experience quiet periods as well as volatile periods in which large swings in price may be seen. That being said, there are a number of factors that may potentially influence gold prices.

 

Current Supply and Demand

As with any other commodity, the current price of gold is driven by supply and demand. Supply and demand may fluctuate wildly based on many different factors, and the spot gold price is a reflection of these forces at work. While there is a limited supply of gold, there are no limits on potential demand for gold. Because of this, gold has the potential to experience rapid and significant rises in price. On the other hand, should demand for gold drop significantly, then the gold price may also potentially see significant drops in price.

 

Risk Aversion

Gold is commonly referred to as a safe haven asset. This means that investors may elect to buy gold in times of uncertainty. Gold typically has little to no correlation to stocks, for example, and when stocks begin to falter some investors may choose to take capital out of equities and put it to work in gold and other precious metals markets. In addition, investors may elect to add gold to their portfolios for diversification purposes.

 

Geopolitical Risks and Uncertainty

Because gold is viewed as a safe haven by many, it is often bought during times of geopolitical turmoil.  These issues can take many different forms, and current headlines give some prime examples. The ongoing conflict between Ukraine and Russia, for example, could potentially have a dramatic impact on global financial markets. The continuing debt issues in Greece and the possibility of a Greek exit from the EU could also have a large impact on world markets. In both cases, should equity markets begin to slide, gold and other perceived safe haven assets could potentially benefit.

 

Gold has been considered a store of value for thousands of years, and has no counterparty risk. In uncertain times, investors may seek out the comfort of gold ownership and potentially drive prices higher in the process.

 

Outside Markets

Outside markets that may affect the spot gold price include but are not limited to stocks, the dollar index and crude oil. When stocks are moving higher, investors may chase returns in equities. When stocks are moving lower, investors may want to diversify or put capital to work in alternative asset classes such as gold.

 

Crude oil prices can also affect the price of gold. As crude oil rises, inflation risks become more of a concern. As crude oil prices fall, inflation becomes less of a concern-and in fact deflation may become more of a worry. This is being seen currently with the recent slide in oil prices from $100 per barrel to less than $50 per barrel.

 

Because gold is denominated in dollars, any movement in the dollar index can drive spot gold prices. As the dollar weakens, gold becomes relatively less expensive for foreign investors and thus prices may potentially rise. On the other hand, as the dollar strengthens, gold becomes relatively more expensive for foreign investors and thus the spot gold price may potentially fall.

 

Government or Central Bank Buying

Governments and central banks have more purchasing power than other market participants. If one of these entities decides to make a gold purchase or sale, it can affect the spot gold price. When central banks are buying gold, demand is higher and thus prices may potentially rise. When central banks are selling gold, supply is greater and thus prices may potentially fall.

The spot gold price is always moving, and is affected by numerous factors. As with any market, however, the laws of supply and demand drive the spot gold price. Simply put, when gold prices are falling there is more supply and less demand. When gold prices are rising, there is more demand and less supply

Which Precious Metals Should I Buy?

/0 Comments/in , /by

What Physical Precious Metals Should I Buy?

What should I buy is a common question among those new to investing in precious metals. The reality is that there is no one size fits all when it comes to buying physical gold, silver or other precious metals. Here we will provide a quick guide, however, to help you decide what products may be best for your needs. Please keep in mind that no investment advice is being given or implied.

 

What are your goals?

Why are you buying precious metals? Is it simply for the bullion content, collectability or other reasons? Knowing the why can help you buy the most suitable products. For example, someone looking to own physical silver may be best off sticking to the basics such as silver bullion bars and bullion coins or rounds. Someone interested in the collectability of numismatic gold coins, however, would look at entirely different products. Those looking to buy coins for their precious metal content will likely stick with bullion coins, and those looking to buy coins for their scarcity or collectability may buy numismatics. Knowing why you are buying precious metals will help steer you in the right direction.

 

What is my budget?

Different precious metals products carry differing dealer premiums. As an example, a basic one ounce silver round may carry a premium of less than $1.00 over the spot silver price, while a one ounce Canadian silver maple leaf bullion coin may carry a dealer premium of $2.25 to $5.00 or more over the spot silver price. For those looking to acquire as much gold, silver or other precious metals as possible, sticking with lower premium rounds and bars may help you get more bang for the buck.

 

Where will I store my metals?

Storage is another important consideration to take into account. If you will be storing your precious metals at home, coins, rounds and small bars may be a good choice. If you are looking to buy larger quantities of precious metals and are thinking of buying larger bars such as the 100 ounce or 400 ounce, you may want to consider a safe deposit box or depository. These can be sources of additional cost, and should be considered when making a purchase.

 

Is liquidity important to me?

Liquidity refers to the relative ease or difficulty of buying and selling a product. For example, one ounce Canadian silver maple leaf coins are very liquid-one can buy them or sell them to dealers easily. On the other hand, very large bullion bars or numismatic coins may be less liquid-or less easy to buy and sell. If liquidity is important to you, you may want to stick with smaller, more popular bullion products such as bullion coins, rounds and smaller bullion bars. Some examples of these products include:

 

  • One ounce Canadian gold or silver maple leafs
  • One ounce American gold or silver eagles
  • One ounce silver rounds
  • One ounce gold or silver bars
  • 10 ounce silver bars

 

Do I want to diversify my precious metals holdings?

Diversification is usually a good thing, and precious metals holdings are no different. Different precious metals products will have differing premiums attached to them, and may experience periods of relative scarcity. Premiums can and do fluctuate, just like the values of the precious metals themselves. As with other areas of investment, one may want to consider diversifying their precious metals portfolio. For example, one could build a portfolio on the most popular and liquid bullion products and then add some additional larger or more collectable products. One could buy bullion coins issued by different countries or by different mints. One could also buy varying sizes of bullion bars. There are many ways to diversify a precious metals portfolio, and this may be another thing to consider.

 

Of course there are additional issues to think about. This simple guide, however, should help you lay the groundwork for your precious metals purchases and help you narrow your product search.