What is Your Exposure?

October 29, 2009

A well-known truism is that every investor needs to start with savings. But what if that "savings" gave the investor too much exposure to risk? What investors or people in general need in this financial environment is savings that don't deteriorate. We are in an environment now where the idea of making money, which is kind of the preamble to being American, is going away. In other words, today's environment is, he who loses the least, wins, and the way that you do that is to hold a currency that doesn't devalue over time.

There really are only two currencies, and they are gold and silver.

I remember starting my quest in this silver journey that has been ongoing for several decades, beginning in the mid 1960s. Silver was the coin of the realm here in America, through 1964. In 1965, coins were minted but they did not contain silver. (Just to be accurate about this, there were some exceptions with the 50-cent piece.)

The futures market back in the late '60s and early '70s had two silver markets, actually. There was the bullion market that we still have, and there was also a coin bag market. The bag market consisted of "junk silver" as it was referred to, which is U.S. coinage that is 90 percent silver. I remember people asking questions such as, how can you make money by buying money?

In other words, the link between the dollar and silver had been cut but people didn't even understand it, because it hadn't drifted that far-they didn't get it. Paper money, silver money, what the heck is the difference?

In fact, in years hence, many people my age or older tell me it never dawned on them to obtain the silver coinage that was available for the taking and hold on to it. Of course some people saw right away what was happening, and silver coinage in general circulation disappeared very quickly.

What you need now is real money and that means silver and gold. I advocate silver "junk bags"-quarters or dimes or even half dollars that are 90 percent silver and placed in bags of $1,000 face value or some fraction thereof, such as a ½ bag, which is $500 face, etc.

Today that full bag of junk silver $1,000 face value is going to cost you probably 12,000 in Federal Reserve Notes. So they both say a dollar on them but one's a little different than the other-one is real, and the other is a promise, but not much of one.

Once an investor has accomplished a physical metal holding in both silver and gold, he or she might want to speculate. Personally, I favor top-tier, cash-rich, unhedged mining companies for serious money.

The next level of risk to reward is a very high-risk sector but very high reward at times, and that is the junior mining sector. Let me be clear: I don't sell bullion but do advocate that everyone buy coins and bars of both gold and silver. I think that's your best savior in this kind of an environment.

Often the question arises, what percentage of someone's assets do you recommend in the precious metals sector? Let us understand that we're talking in a very generic sense here without any kind of suitability or special circumstances or things like that. But what range or percentage is recommended that people allocate through real money?

In The Ten Rules of Silver Investing, I was asked that question. At that time I said 10 percent; however, after that was published, my inclination was to move it up to 20 percent, because the financial system was becoming much more unstable.

The best investment you could ever make is in yourself. If you have a going business, put money in your business, make it stronger, make it better, and market it better, whatever. Or get an education for yourself so you can get a better job or a promotion and so forth. Having said that, you do need some exposure to the metals, and 10 percent as a minimum is a good place to start.

The next question of course is how much gold or silver? This is subject to the individual. The older you are, the less time you have to recover from a mistake. Thus, the older you are, the more gold you should have-so you should probably favor the gold market. The younger or more aggressive you are and the more risk you can take, the more you might consider the silver market. Then there are those who watch the market carefully (such as I do) and trade the gold/silver ratio when it seems favorable. If this is done properly, an investor can actually end up with more metal, with very little effort.

You could look at it this way: if you're 50 years old, you're 50 percent gold, 50 percent silver; if you're 60 years old, you're 60 percent gold, 40 percent silver, that type of thing. Several people I know who are in their fifties, sixties, and seventies believe silver will outperform gold, but it's a rougher ride.

I think you definitely should have both, a metals portfolio; it's not a metal portfolio. And while there aren't very many silver-only bugs out there, there are more gold-centric people who really don't want any silver exposure. And I'm not against them; I think that they're going to really see something that's going to take their breath away in a couple years. I think once silver rises above the $25 level, there will be an acceleration up in price that will absolutely astound people. But we're not there yet. That's sort of the end of the story, and we've still got several innings left in this ballgame.

A couple of weeks ago in my weekly posting I stated,

"I would be much more comfortable saying this is the final blast-off if silver were hitting $21 right now as gold is trading over $1,000-that would be confirmation in my book, and I'd be very, very bullish. Unfortunately, silver isn't leading the charge at this time and that is acceptable. It's certainly shown some good strength this whole year, but not quite the amount of strength I would expect if we were to see all this inflation pouring into the financial markets. Again, I still suspect that there's probably some more recessionary, deflationary, depression type of news coming."

Looks like the markets are responding to the downside-how far and how long is tough to state at this time.


It is an honor to be.

David Morgan

Mr. Morgan has followed the silver market for more than 30 years. He wrote the book Get the Skinny on Silver Investing. Much of his Web site, Silver-Investor.com, is devoted to education about the precious metals; it is both a free site and does have a members-only section. Mr. Morgan has just written a free report titled, Silver Fundamentals, Fundamentally Flawed, which can be accessed here: Free Silver Report. To receive full access to The Morgan Report, click the hyperlink.

Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.

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