Gold has been used as money for over 5,000 years and continues to be seen primarily as money. Silver has many more practical uses than gold, partly because it’s cheaper and partly because silver has many more industrial applications than gold. There are serious supply and demand issues with silver and new applications are being found even today. This could cause it to surpass gold in its gains over the next few years.
Platinum also has non-monetary uses and a supply and demand shortage. Expect it to rise as well in the next five to ten years. In fact there is a surge in the theft of catalytic converters to harvest the platinum as the price passed $2,000/ounce.
Gems are not in the same bull market as the precious metals. Although gems can be a hedge against inflation and economic bust times, they do not have the same monetary reputation as gold. “Real” diamonds, for example, do not have commercial value. Also, manufactured gems are getting closer and closer to the real thing and this will hurt the value of precious gems over time.
As long as the dollar is dropping in value and the economy is in deep financial trouble, precious metals, and especially gold, silver, and platinum will continue in a bull market. Some say that gold only goes up as the dollar goes down. This is true only to a certain extent. If you look at the dollar and gold over the past few years you will see that gold is decoupling from the dollar to a large extent and in fact gold rising against all currencies.
There are many ways to invest in precious metals and each carries its own risks and rewards. You can always buy the physical metal in the form of coins and bars. You have the option of keeping or storing the metal yourself or paying for storage somewhere else. Gold and platinum carry a high value per ounce whereas silver is worth less. You can hold over $9,000 in gold in just 10 one-ounce coins. That same amount in silver one-ounce coins would require about 570 coins. Storage can become a problem. Five hundred silver coins weigh about 35 lb.
You can buy gold certificates, from the Perth Mint in Australia. Again, the physical gold is held for you and you can take physical delivery at any time. Gold purists insist that you have physical gold, silver, and platinum in your hand in case things really fall apart but for the less paranoid there are many other options.
Investing in precious metals mining companies will often give you a better play than the physical metal but with attendant greater risk. With these stocks you can pay over $50/share for one of the big boys like Newmont Mining, or you can pay 25 cents/share for one of the junior mining companies. A successful junior mining company can pay incredible returns or you can lose it all. I have experienced both.
Safer ways to play the precious metals market include buying mutual funds focused on the mining industry. Mutual funds spread the risk and usually include the bigger mining companies as well as select juniors or mid-tier companies. With mutual funds you let someone else make the decision to buy and sell and you just watch your shares go up or down.
Similar to mutual funds but easier to buy and sell are exchange traded funds (ETFs). Like mutual funds, ETFs can also cover a specific segment of the market such as precious metals. There are ETFs for specific metals such as iShares (SLV) for silver and StreetTracks Gold (GLD). There are also ETFs for the industry as a whole. The benefit of ETFs is that you can trade them just like stocks.
For example, with SLV one share represents roughly 10 ounces of silver. Right now a share of SLV would cost you over $160. With GLD, one share would represent one-tenth of an ounce of gold or about $91 today. ETF shares can be bought and sold as easily as any other stock but you will pay for broker fees.
This is great theoretically, but what is actually possible through investing in precious metals? Some have suggested that the gains are less than the general stock market gains. This is not true if you look at the time from gold’s low in 2001 to its current price. Without giving away any of my personal financial information, I will tell you what I have done to date with precious metals.
In October 2002 I purchased Fidelity’s precious metals fund (FSAGX). The net asset value (NAV) at that time was a little over $19. A little over five years later, the FSAGX NAV is over $43. That’s a gain of over 126%, more than 25%/year.
In January of 2003 I bought my first gold coins. They cost me $330/oz with a $13 premium per coin. I could sell those coins today for $923 each, a gain of almost 180% or 36% a year. In April 2004 I bought my first silver coins. I paid $7.78 per one-ounce coin. Again, this included a premium per coin. I could sell those coins today for $17.37 a gain of 123%. I expect both to go up a lot higher before this bull has run its course.
I have purchased mining stocks and ETFs. I have a commodities CD that will mature in 2009. If commodities go down over that period, I will still get my principle back (see Everbank.com).
How have my stocks done? I have had at least three companies go belly up. I have lost and gained. Right now, I have 29 stocks in the red and only 17 in the green. These include energy stocks and other non-commodities plays. Including all of my stocks that are in the red, my portfolio is up almost 184%. At its best it was over 200%.
I have sold stocks at a loss just to get rid of them and get some cash back. I think my best individual stock gain thus far was 800%. What is important about this is that I am not an economist or a professional investor. I did this on advice from people I trust. What you need to know is that this precious metals bull has a lot more room to run. Even though gold’s high of $850 in the 80s has been breached, in inflation adjusted dollars gold would have to reach over $2,000 to match that high.
Gold is still a bargain under $1,000 and silver is a bargain under $20. It is not for the faint of heart but unless you believe there is going to be some kind of miraculous turnaround in this crumbling economy, consider going for the metal of kings.