"How to Profit From The New Boom in Silver and Gold"
For approximately 15 years now, except for short term blips, Gold and Silver have seen rather boring sideways market action. In fact, although the long term charts show sideways action in nominal dollar terms, in terms of true purchasing power, Gold and Silver have performed abysmally in the 80's and 90's. The author believes that, due to a confluence of many disparate factors and trends, this down cycle is about to, (if indeed it hasn't already), quite simply, END. Having peaked over 18 years ago and languished since then; observation of the fundamentals and recent world political and financial events, common sense, and 'gut' feeling tells one that; it must soon be Gold and Silver's turn to shine once again. Whether this change in the precious metals' fortune is accompanied by a torrid financial meltdown of fiat currencies (as some have predicted), or whether this rise takes the form of a general upward revision in Gold and Silver's value vis-à-vis those fiat currencies, will mean the difference between huge profits and astronomical ones.
It is not the purpose of this short article to discuss in detail these many factors which are at present converging to bring about the end of an 18 year bear market in Gold and Silver, but rather to point out various interesting investment strategies which now present themselves to the 'in tune' investor. For details of the numerous market forces which I have alluded to please take the time to read some of the many other pertinent articles on the Gold Eagle website pages http://www.gold-eagle.com and elsewhere on the WWW. The following are possible strategies for those individuals who have also formed the opinion that the tide is turning and that we are now at the beginning of a multi-year bull in Silver and Gold.
First of all, let us be aware that any rational investment plan will obviously keep in mind the old adage, 'Don't put all your eggs in one basket'. This truism has been lost on many of today's 'tulip bulb salesmen' who promote the mindless investment of every last penny into today's bloated stock and mutual fund market. These lackey's of the current Wall Street mania have gone to such lengths as to advise people to take out mortgages on the homes they live in (and thus to gamble with their future security) just to take another spin on the wheel. A prudent plan, in contrast to the above, will split one's assets into various categories and assign a rough percentile to each. 1
What are the various methods we can use to invest in Silver and Gold, to take advantage of the coming boom? Let's consider many of the possibilities by making a list of some of the possible ways to invest in these precious metals.
A) Physical Purchases
B) Silver and Gold Mining Shares
C) Futures Market Purchases
Each of the above categories has advantages and possible disadvantages, so, again, diversification is the way to go. Let's first review the advantages of each and later summarize the comparative risk of these vehicles in an investment strategy.
A) PHYSICAL PURCHASES
There is nothing like the absolute feeling of security bestowed on one by the actual possession of some physical Silver and Gold coin or bars.
Aside from the financial security aspect of holding physical quantities of Gold and Silver there is also the possibility of the substantial profit to be made in the next few years as this overlooked asset class again has its day in the sun. 2
Whatever the increase in Gold and Silver's market price in the coming years, the main advantage of physical possession is exactly that - Physical Possession. You can do with it whatever you will and there is very little that can stop you from acting Immediately should the need arise. Certainly one of THE most important reasons to have a store of physical Silver and Gold is the security that this strategy affords one in nearly every conceivable type of natural disaster or financial emergency. 3
As suggested above Immediate Access to your hard assets is a plus with physical possession. Bank run? Stock market meltdown? Job loss? Natural disaster? Each of these situations could very well be less of a problem if you've kept some physical at hand in case of emergency!
Portability is another great feature of physical coins and bars. You can take it all with you, or just a little, depending on the situation. When travelling I always carry a few gold coins as emergency back-up. (In case the traveller's cheque agency is inaccessible at short notice, or electronic communications are down, or, or, etc. It is hard to find a place on the face of the earth where someone does not recognize the value of Gold!
Of all the many reasons to own some physical coin and/or bars, the ultimate one is the Indestructibility of a portion of your Wealth when you hold precious metals in your hands - 100% bought and paid for. Certainly in the short run there can be fluctuations in which you see the value go down on a temporary basis, however, there is almost NIL chance that you can see your value deteriorate to nothing as sometimes happens with high-flying stocks or even the currencies of countries.
There is no set optimum amount of physical coin (bullion) that an individual should conceivably hold. This amount would vary greatly depending on each person's situation. One thing that should be kept foremost in mind is, however, the absolute financial (and in some cases bodily) safety and security that bullion coins and bars bestow to the holder. It is for this reason that many writers recommend possession of some substantial amounts of physical to act as a base for your financial assets. For, as a song writer once warned us, "Castles made out of Sand, Fall into the Sea, Eventually". (Of course his source was an ancient tome that some say has merit even unto modern times.) In this day and age of growing uncertainty, do we really want to build our financial home starting with a foundation of paper, or with a base of precious metals?
Let us now summarize just some of the many reasons for holding a portion of your net worth in physical Silver and Gold.
1) Base for Financial Security
2) Chance for Substantial Capital Gain in the next few years
3) Portability and Divisibility (into Small units if necessary)
4) Individual or Family Security in time of Natural/Financial Disaster
5) Immediate Accessibility
6) Indestructibility of a portion of one's Wealth
Conclusion - Physical Bullion (Coins and/or Bars) are a required part of every thinking person's portfolio.
B) SILVER and GOLD MINING SHARES
The purchase of shares in a Silver or Gold mining company gives the owner a direct stake in the future profitability of that company, (but not in any liabilities). In other words if the company makes oodles of money the shares should increase in value dramatically, however, if the company continually loses money, eventually the company will go bankrupt and the shares will lose all their value. Thus the price that gold fetches on the world's markets has a great effect on a company's future profitability and prospects.
We have recently seen multi-year lows for Silver and Gold prices on world markets (although Silver has just recently 'broken out') and, in consequence, we have also seen mining shares plummet to bargain basement levels. Due to the inherent leverage that the market price of these precious metals has on the profitability of the mining companies, we will often see a much higher percentage move in share prices (up or down) than the actual percentage increase or decrease in the metal price itself. This, then, is one of the main advantages of owning mining shares in a rising market; your share value may increase by a much higher percentage than the actual physical metal prices. The downside, of course, is that the opposite applies. However, this is one of the main reasons that the author believes that NOW is the time to take advantage of the mining shares, at recent rock bottom prices, as certainly the share prices have been ravaged due to the recent multi-year lows that the precious metals themselves have recorded. As mentioned above Silver has just broken out VERY convincingly to the upside and the author believes that Gold's turn is next!
When deciding upon which individual companies' shares to purchase, there is a myriad of data available and the investor would be well advised to do quite a bit of reading and comparison shopping before making the actual purchases. Some pay meager or no dividends at present, (preferring to plow profits back into upgrades at the mine site or into further acquisitions), while others pay healthy dividends which may actually increase by many fold should profitability increase. It should be noted here that there are basically three types of mining shares to be considered. A hypothetical range of percentage ownership in each class is shown.
1) Large producers. 30-60%
2) Small and Medium producers. 30-60%
3) Exploratory mining firms. 10-25%
Research is required in each case to determine which stocks should make up your portfolio, and again a little diversification in each category is the best way to go. It should also be noted here that perhaps mining share ownership should also be diversified by the inclusion of shares from various companies from around the world and not just from your own local region. For example, one might take into consideration North American, South American, Australian, and South African companies as distinct regions for the purposes of diversification.
Now let's summarize just a few of the reasons that Silver and Gold Mining shares should be a part of your balanced portfolio of assets.
1) Direct ownership in the mining companies future wealth.
2) Risk is limited to share purchase price.
3) Leverage (Chance of Huge Capital Gains in next few years)
4) Dividend Income
5) Diversification of Assets
C) FUTURES MARKET PURCHASES
The futures market is where speculators (large and small), large funds (as both buyers and sellers), and producers and manufacturers, all place their orders to buy or sell contracts representing future purchases, (at many various set time periods in the FUTURE), or sales, of the physical commodities. Sometimes these buy and sell orders are offsetting and therefore no actual delivery takes place.
Another part of the futures market involves the purchase or sale of options on the contracts themselves but with various 'strike' prices AND months of delivery. With options, one's risk is limited to the initial purchase price.
The futures market contracts in Silver and Gold represent 5,000 and 100 ounces respectively. To make a purchase one need not place 100% of the money on deposit, but rather something in the order of 7-10%. Due to this arrangement the speculating purchaser or seller of these types of contracts is subject to an enormous amount of leverage. A one dollar increase in the price of Silver, for instance can gain the investor a quick $5,000 on only one contract. Likewise, a one dollar drop will lose $5,000. The maximum daily limit on Silver, however, is $1.50. Thus one's profits or losses in ONE day on ONE contract are conceivably $7,500. However, this does not preclude the possibility of being locked into the contract ('locked limit') for a number of days in a row.
Taking into consideration all of the above, it is quite obvious that futures markets are not for the novice. Rather, it is recommended that anyone who is not thoroughly versed in the complexities of these markets, yet has a sincere interest, avail themselves of study materials and subsequently 'paper trade' before taking the plunge. True, fortunes can be won or lost in these markets, but you may as well have as much knowledge on your side as possible before plunking down your hard-earned cash blindly.
The many complexities of the futures market are beyond the scope of this short paper and are deserving of a complete study of their own. It has been said that 80-90% of small speculators in this investment arena lose money, yet, at the same time, there have been huge fortunes made by parlaying a small initial stake into a fortune, as this market lends itself to pyramiding as none other can.
Summarizing just some of the many advantages of playing the futures market, we come up with the following list:
1) HUGE LEVERAGE (a two-sided sword)
2) Chance of enormous Capital Gains in a very short time period
3) Large purchases/minimal down-payment. (See 1 and 2 above)
4) Opportunity for huge capital gains but with pre-determined loss limits. (Options)
Timing - It is obvious that after a market has had a huge jump in value, (such as the stock market in the last five years or the Silver market in the last six months), that one must exercise caution upon entry into volatile markets. One proven method of minimizing risk in the arena of physical and stock purchases is, however, purchases made on a regular, dollar-cost averaging plan. When buying commodity futures contracts, puts or calls, timing AND time erosion is always a major consideration. Further study is recommended in this area.
Comparison of Relative Risk in Silver and Gold Investment Categories
A) Physical Cash Purchases - Very Minimal Risk - Possible High Return
B) Diversified Portfolio of Silver and Gold Mining Shares - (At today's prices) - Minimal Risk - Probable High Return in Near Future
C) Futures Contracts - High Risk - Possible High Percentage Return
D) Futures Options - High Risk (yet risk is limited to initial Premium) - Possible VERY High Return (Ask recent holders of far out-of-the- money Silver call options)
It is the writer's opinion that in the present investment climate, Silver and Gold investments deserve to have a high priority in the prudent person's investment portfolio. Diversification is the wise course of action. First study, and THEN - action - is the way to go. Good Luck to all in 1998!
A fellow investor, valued friend and reader of these pages wrote the Editor with the following comment: Investor's Caveat - For Investors in Canada and the U.S.A. it should be noted that of A,B,C, and D above, only B, (stock purchases), are allowed within the confines of R.R.S.P.'s or 401's. The purchase of hard assets (the Physical purchases), and Future and Option Investing must take place "outside of an RRSP or 401K".