Thursday, May 11, 2006

SLV, GLD, CEF or Physical Possession

Ok, you have finally started paying attention to the rising price of gold and silver. You didn’t listen (or if you did, please leave me a comment) a year ago when I was gently suggesting that you might consider these archaic metals as investment opportunities. Now your TV is telling you that gold and silver are hot. You are wondering if you have missed the boat.

My answer: No, not yet. You missed the first boat, but more are leaving daily. There is still time. But what should you do?

Before I get to that, let me make my usual disclaimer: I am not a financial advisor. I have no special expertise. But I have spent the last two years reading what the experts were saying and researching investment opportunities they have suggested. You can search this site for references to gold and silver to review what I’ve reported. And, most importantly, I have followed my own advice and made money. You, of course, should do your own research and due diligence before you make any investment. I’m just reporting what I’ve found and what I’ve done. Perhaps you can benefit from reviewing this information.

I am not going to document everything I say in these articles. You know how to use Google.

First, understand the difference between money and currency. Gold and silver have served as real money for thousands of years. Currency is the paper we currently use. In the past, our currency has been based on gold and/or silver (as mandated in our Consitution). That is no longer true. Our paper is “fiat” currency, based on nothing more than belief. Its value is determined by 1) how many dollars are in existence, and 2) how much the world believes that the US of A is the best place to invest.

Currently, #1 is going way up, and #2 is going way down. The result is that the value of the dollar is decreasing, and we call this inflation.

Second, you should understand that all of the government data; CPI, inflation rate, employment rate, jobless claims, etc. is juiced data. All of the formulae from which these numbers are derived have been tinkered with by the government to the point that their relationship to reality is severely strained. We are currently being told that the inflation rate is around 3%. Real-world estimates are closer to 10%.

Sooo…the price of everything isn’t really going up as it seems, your dollars are just getting littler. Gold, silver, copper, platinum, palladium, and all other commodities seem to be going up in price because of these little dollars. To counter this effect, you must buy something that it not losing its value with your shrinking dollars. Real estate used to be a hedge against inflation, but it has been jacked too high at this point to be of use right now. (Unless you can sell it and convert the dollars.)

Another choice is to buy gold and/or silver. This is fairly easy to do these days. The popular choices are electronic trading funds (ETF), gold mining shares, CEF (a Canadian gold and silver holding company), or actual bullion (coins or bars).

Two ETFs are GLD (share price fixed at 1/10 an ounce of gold) and the newly-minted SLV (share price fixed at 10 ouces of silver). I've owned neither. I've heard it said that they are "not for the little investor". I don't see why.

I do not buy gold or silver mining company shares because there are too many confounding variables; are they hedged, do they have good management, are they located in dangerous countries, subject to dangerous environmental concerns, etc. You can make a lot of money here when junior companies are bought up by larger companies, but you have to be very knowledgeable, which I am not.

CEF is a Canadian company that baby-sits gold and silver. They seem tightly regulated. Sometimes you can see that the price of CEF lags the action in GLD and SLV.

Open yourself an online stock trading account (I use eTrade), transfer some money from your home bank account, and buy some shares. You’ll learn how to keep track of things, so you can buy and sell when it is advantageous to you. Or just leave it there, and don’t worry about it for a while.

Unfortunately you can't just forget about it, because if the dollar really crashes, as many predict it will, you will want to cash out of your stock account and convert to physical gold or silver. If you wait too long there may not be much available at a reasonable price.

Which brings us to the end game, physical gold or silver. There are many considerations but here are a few.

Gold coins (Eagles, Krugerrands, and Maple Leafs) are called bullion. The difference in price disappears when you sell as does the condition (mint or not), so buy the cheapest. Gold coins are a very compact medium for value, easily stored and protected. Today 14 one ounce coins are worth about $10,000.

In silver this would be about 577 coins, much bulkier and harder to store. But silver is up 61% this year compared to gold’s increase of 36%. Some of both?

There are other forms of physical to be considered: junk silver (1964 and older silver US coins), rounds (like coins but not stamped), and bars.

They are all really cool. The form they are in might become important if you were to actually use them as a medium of exchange.

Next article: How High Will They Go?

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