Investing in Gold and Silver

April 10, 2011

Unfortunately my writing and reading computer has broken and has been in the shop for over a week now. I'm a bit out of the regular news loop as I'm working from my trading computer only and I am none too keen on opening sites other than what I need to trade with.

It's nice to keep this PC as "clean" and virus and malware free as possible. But I am still keeping up to date and most importantly keeping my eye on markets and making some nice trades as well as taking care of our subscribers.

It looks as if the computer won't be fixed until later this coming week which boggles my mind. I love Macs for reading and writing but the repair time and cost is not so good.

Life does go on though as it's only an item, albeit one I rely on anywhere between 60 to 80 hours a week normally. It's my first major computer issue and now that I know how it feels I need a backup system. How many computers does a fella need anyhow?

There will be no charts or pretty graphics of any kind today. My apologies. We should be relatively up to speed and running normally by next weekend...hopefully.

This past week we saw gold and silver break higher to the upside. It's a nice move so far with gold having risen by 3.23% and silver by a much better 8.28% with $1.31 or 3.31% of that coming on Friday.

There is no doubt my two favourite metals are stars again this year, especially my long-time favourite, silver. I've preached for years on the validity of owning the physical metals and hope you've done so. I've certainly put my money where my mouth is in a large way and it's really paying off in spades.

It's been a long and sometimes frustrating road so far in this precious metals secular bull market, but we are only warming up. The Johnny come lately types you see on TV or read on your favourite financial sites will disappear as quickly as they recently appeared with any sniff of a correction. There are more and more investors and talking heads talking about the metals these days, but one question I rarely hear asked of them or answered voluntarily by them, is do they personally own any physical gold or silver.

My bet would be 90% or more of them do not own one single ounce. They may own an ETF and think they own gold or silver, but they don't. The ETF's are fantastic to trade, but not to own as an investment in my opinion. There are premiums on the physical metal when you either buy or sell. As the secular bull market continues these premiums will both increase and decrease as they always do, dictated by supply and demand. There will be a day though, likely near the end of this run higher, where we will see premiums to sell your coins in the 50% or more range. The facts are there just isn't a heck of a lot of metals around. Supply is managing demand for now, but only 0.07% of the world's assets are invested in gold.

Mine supply has been relatively constant, around 2,500 tonnes for years, and that is unlikely to increase markedly. Demand has been rising, especially in the investment realm. That is the world famous recipe for higher prices.

Owning the ETF's is great and will appreciate and make you a great deal of money, but wouldn't you rather get the quoted value of the physical metal PLUS a premium that could be much higher. If things get really crazy, and they are beginning to, then gold can easily move to $5,000 or $10,000.

Name a number within reason and it's a valid suggestion.

With the continuing systemic currency debasements the sky is the limit for physical precious metals.

There have been many tales, although I can't vouch for them 100%, that already investors have been offered well over $50 an ounce for silver to take cash rather than stand for the delivery of silver in the futures market.

Just wait until silver is over $100 and closer to $200 and it's a more widespread or acceptable investment. The disconnect between the prices you see on TV and what a buyer will give you for your metals will be huge.

Even a quick look on eBay shows me a one ounce silver 2011 Maple Leaf coin going for $48.76 under the "buy it now" offer. A silver American Eagle is about to sell for $53.55! That's already a huge premium of over 20%. I don't want to sound like perma-bull or fantasising writer but I think we will easily see 50% premiums and more likely greater than 100% as supply gets tighter.

Yes, I realize that may sound a little out there, but so did $1,000 gold in 2004, even in 2007 people still shook their heads at that statement generally. Now, the vast majority of them still own no physical metal!

One day though, I'll gladly sell them mine!

One topic I've been asked about on many an occasion is the capital gains taxes.

First of all the US mint produces these coins with a face value and they represent them as legal tender although they really aren't. Perhaps the US mint should be prosecuted for counterfeiting as Bernard von HotHaus was recently.

If gold and silver coins are supposed to have a face value and are in fact legal tender then why should an investor be punished with capital gains taxes if their coins appreciate in value due to the depreciation of their paper counterparty?

It's plain wrong.

The good news is that the move in Utah to make gold and silver legal tender once again will also eliminate the taxes when you do sell. The movement is sure to spread throughout the nation and likely to other countries as well.

I'm hearing talk that Utah will only honour the face value on coins and not the market value and that this is a voluntary form of gold confiscation. Quite frankly, this is one of the most ridiculous things I've ever heard. I don't know if the writer simply made this up or if he has actual information. Either way there is no other point in writing about this topic than to scare investors away from buying physical gold. It will not happen. Even if a law were passed with this face value stipulation it would be pointless as nobody in their right mind would ever turn over a single ounce.

The point of today's letter is don't sweat the details too much, just get some physical metals. The little details will work themselves out eventually, but if you don't have your metals then you'll be up the creak without a paddle.

Any way I can spin it in my mind, it's far better to deal with the "hassles" of owning the physical metal than the ETF unless it's for a short to mid-term trade.

As for where I think gold and silver are going in the short-term gold should make a run to $1,500 now before we see much of a setback. As for silver I think we are seeing a little overshoot of the $40 level here to lure in some more speculators before we see a correction below the round number resistance of $40. You'll likely get a chance to get more metal closer to the $38 area.

My moto throughout this secular precious metals bull market has been to buy weakness and sell strength. This is strength, but I wouldn't and won't be selling a single ounce for a while yet.

I suppose I should change my moto then to, buy weakness and enjoy strength!

Economies are literally crumbling around us these days and that includes the US who just passed a bill to avert a government shutdown for a week while they posture and fill the airwaves with garbage bickering over $10 or $20 billion dollars which is nothing today. The real test will come when they must increase the debt ceiling.

On the other hand, a US government shutdown taking headlines daily averts attention away from real issues like the nuclear disaster that is still uncertain in Japan along with new large earthquakes and what about Portugal, Spain Ireland and the other cash strapped countries?

Finally let's not forget about the situation in Libya which is dragging on and is likely to drag on for longer than I care to ponder. The whole Middle East is truly a tinderbox and matches are being thrown at it constantly.

If I were a politician in the US I'd suck this budget issue dry to make Americans lose focus on the real issues in this world such as rising oil and food prices.

The world remains a perilous place in so many regards. I still feel strongly that it's far from to late to begin investing in the real physical gold and silver if you haven't yet.

It's been my view that these metals must be the basis of a strong portfolio. Then you can look for other investments such as dividends, miners and even the high-beta stocks for swings trades. That's been our strategy and we couldn't really imagine doing much better than we are.

US silver mining began on a large scale with the discovery of the Comstock Lode in Nevada in 1858.