MONEY 28 - GOLD/SILVER

Money readers take note +

THIS IS MY 28^TH POST ON UNDERSTANDING MONEY TOOLS

Money, Money, Money. When we talk about money and investments many people today are bringing up the topic of investing in gold and silver.  Both of these metals have been around forever and both are commodities. The well thought of investments in precious minerals and precious stones are platinum, gold, silver and diamonds. Let’s address gold and silver briefly.

You and I can buy gold and silver directly from various sources or invest in them though specialty index funds on the stock market.

First, how is gold measured?  Gold is considered pure investment grade at 99.9% pure or 24 karat.  We also see “karat” spelled “carat” or just the abbreviation which most people understand, ct, after the amount of gold in an item.  Fashion jewelry is many times 18 ct, or 14 ct, or 10 ct.  This is a measurement of the amount of gold in the item.  Let’s use 14 ct, which is very common.  So, the item you have is 14 parts gold and 10 parts of another alloy.  14 ct is more durable and stronger than 24 ct and less costly because it is a fraction of pure gold. The weight and price are important. Gold is valued in “troy ounces”.

How do I buy gold?  The two most common ways for investing in gold is either buying gold coins or buying gold bullion. As with most gold coins the value is not in the coin, but in the gold, with very few exceptions. You may want to look at the US Eagle gold coin.

Let’s go off the track a bit here.  You see fashion gold jewelry and you want to buy it because gold has gone up and so has gold fashion jewelry.  Now, the jeweler presents you with white gold, rose gold and regular colored gold.  What is the difference? Gold is yellow color. As we noted, fashion jewelry is not pure gold and has something else mixed in.  To make white gold there is either silver or nickel added in.  Rose gold is attained by adding copper.

Now, back on track with gold.  Gold has for centuries been a medium for trade as well as a precious commodity to hedge currency loss as well as thought to hold value in case of economic emergency, inflation or catastrophe. Gold is a commodity and can move up and down rapidly in price  As we learned in a previous blog the United States Government used gold to back the US dollar until August, 1971.  At that time gold was priced about $40/ounce.  Then, the US went off the gold standard, and the US went to a “fiat” currency.  Gold continued to rise from that point, and kept up with inflation or better.  It went through a period of about 20 years without much movement in price. Nothing huge happened with the appreciation of gold until about 2003 and the price was approximately $365/ounce.  By 2005 gold was priced about $445/ounce. Then, what happened in the world?  Well, first the US was involved in two very expensive wars, Iraq and Afghanistan. We had gone from a balanced US budget to running up incredible deficits.  At that point the European Union looked financially strong.  The US started printing more money, diluting the US dollar. Now, we are doing even more devaluing of the dollar (QE1, QE2 and now QE3). Financial weakness was creeping into the European countries. China, India and Russia started buying a lot of gold. Where are we now?  As of this writing (12/18/2012) spot gold price is about $1,700/ounce.

China is the number one acquirer of investment grade gold, India buys more gold, but for jewelry.  In India a sign of wealth is gold worn.

Let’s talk silver.  The last US silver coin was minted in 1970. The US Mint began making gold and silver coins in 1986 for investors, the weight and purity of content guaranteed. Silver is actually a byproduct or other mining such as gold, copper and lead. Silver is also measured in ounces. With silver fashion jewelry there should be a stamp on the item showing purity such as 925, meaning over 90% pure silver.

The high price of silver over recent history happened in 1980 when the Hunt brothers from Texas attempted to control the market of the commodity and the price went up to about $50/ounce.  Then, the price plummeted to about $4.50/ounce and remained in the $5 range from 1993 until 2004-5, the same time gold started taking off. Silver hit another high in May,  2011 of about $48/ounce.  Today, it is steady at about $32.50/ounce.

Is gold going up?  Answer is who knows.  Is it a limited commodity or will more reserves be found?  The world had predicted we’d have run out of oil by now, but with new technology many more billions of oil have been proven.  Perhaps the same will happen with gold reserves, and then enters supply and demand.   With both silver and gold you have low production costs.  The actual cost of producing one ounce of gold, and adding in all corporate expenses like administration, marketing, shipping, etc. the total cost is only about $550-680/ounce, and yet it is selling in the market at $1,700.  Silver is even less. Silver runs about $1.25/ounce in mining, low as it is a byproduct, plus administration costs.  What other products do you find that can sell for 300% or more profit margin?

What are drawbacks to these investments? 

1)    Volatile price

2)    Many scam artists in the business, and loose controls

3)    Lack of liquidity unless you purchase gold/silver stocks

4)    Storage expense. If you buy out of Switzerland storage may cost you a half of one percent annually or more. Buy out of Hong Kong about one third of one percent annually. Yes, you could put it in a bank safety deposit box, if large enough.

5)    Gold and silver do not earn any return until sold, and you hope for a higher price than what you bought it for.

How do I buy? In tons of places.  Go with a reputable source.  Reputable sources typically do not charge a commission, but work on a “spread”.  This means when they sell to you they sell at a higher price than if they were buying from you.  This is similar to buying foreign currencies when you travel.

How about gold or silver stock?

1)    The stock may not run parallel to the price of the commodity because of corporate failings.

2)    A benefit is that you have liquidity.  Call your stockbroker or investment advisor and you can buy or sell immediately.

3)    With an index mutual fund you are spreading your risk amongst several companies.

4)    When buying a gold/silver mining stock the stock may be priced significantly higher than the resources and assets of the company.

How much gold should I hold as an investment in my portfolio?  Again, gold is a hedge against disaster.  Many advisors recommend in the range of 10% of your total investment assets.

When should I buy?  As gold and silver are very price fluctuating I would recommend buying on dips in price and on a varying schedule, either quarterly or monthly when you have extra money to invest.

To end here, I hope you learned a bit about gold and silver. Another precious metal is platinum, and the price of that has historically been higher than gold, however with the run up in gold platinum is priced at $1,610/ounce. With gold and silver there is little utility today except for investments and fashion jewelry.  Substitute materials have taken over in commercial products and dentistry.

MONEY 27 - ANNUITIES

THIS IS MY 27^TH POST ON UNDERSTANDING MONEY TOOLS

Money, Money, Money.  In the last blog we talked about insurance.  Let’s talk about investing in an insurance product, annuities.

Annuities have been around for years. These vehicles are managed by insurance companies and sold by bankers and insurance companies.  There are two main types: deferred and immediate.  The names describe the plans, you can defer payments to a certain future date or start payments immediately. 

A deferred payment, sometimes called a regular payment annuity, has a plan set up for periodic payment into the plan until a certain time or age you reach and then you get payments on a defined schedule, usually monthly to supplement social security, a pension plan or other retirement money.

An immediate payment plan, or single payment plan, involves you placing a certain amount of money into the plan. You may start taking out payments immediately, usually based upon a schedule.

Annuities can be either “fixed” (guaranteed) or “variable”. A fixed pay annuity is exactly that.  A fixed plan distributes money from the plan for a fixed period of years or until you die, or perhaps it is set up for payments to continue until your death and the beneficiary death.  This is many times used in a husband and wife relationship; a joint annuity.  If the plan has payments until both you and your beneficiary die, the payments will be less than if just established until your death. As with all insurance products this is worked out with actuarial studies.  A variable policy is associated to the investments made with the money such as bonds and stocks.  These markets fluctuate.

Annuities are set up to your estimated financial wants and needs, normally when a person retires.  These payments are paid to you from your original principal plus the money that has accumulated from being invested.

When there are payments made from the plan to you your original principal paid out from the annuity is tax free, however the amount of money that has grown in your plan from being invested will be taxable income.

The nice things about annuities are: 1) your principal grows tax deferred and 2) you can place any amount of money into an annuity unlike your IRA and other retirement plans where there are limits to the amount you can invest each year.

Just like other investments there are good points and weak points.  Let’s talk about the downside of annuities.

1)    Annuities are insurance products and many times have fairly high commissions paid to sales people, even up to 10%.

2)    There may be policy surrender charges the same as with life insurance if you need to alter the policy and take more money out than scheduled or withdraw all your money.  This could be anywhere from 5% to 20%.

3)    Administration and management fees can be substantial such as 1% to 1.75% of the money annually.

Today, everyone is trying to figure out what best to do with money and investments.  Managed money in annuities goes to the same trough, mainly bonds and stocks so returns have come down over the past 3-4 years. What are we looking at for returns, mainly on bonds where the money managers for insurance companies invest money?  We are down to about 1.6% for a 10 year US bond. An  A-AA mix of bonds reinvested may yield 2.5% now.

Bottom line, with annuities holding mostly bonds in their portfolios and high fees for purchase, management of money and very high penalties for yearly changes and withdrawals, you might be better off with other investments for the majority of your money.  Don’t forget that if and when interest rates go up the market value of bonds goes down. If you, or the money manager, sell bonds before maturity in a rising interest rate environment, you will most likely lose more money than you have made at today’s 1.65% to 2.5% yield rates.

When you look into investments you might run into the term “basis points”.  It may come across as “this” or “that” investment has changed 25 basis points.  What is this?  One hundred basis points equals one percent. Therefore, in the above illustration of 25 basis points, it means the investment has changed 1/4 of one percent.

As you most likely know, inflation (exclusive of food, oil and gas) is expected to remain low and interest rates are also predicted to remain quite low through mid-2013 and longer, so your returns on annuities will be similar.

Another positive point is that US debt is still very desirable in the world markets, and the US dollar should remain strong in relation to other currencies

MONEY 26 - INSURANCE

THIS IS MY 26^TH POST ON UNDERSTANDING MONEY TOOLS

Money, Money, Money.  Let’s talk about insurance.  Several years ago the trust company I worked for wanted me to have several national and state licenses more for knowledge, and not to necessarily sell products.  The reason for this being that I assisted the company in joining lawyers and other professionals on a regional lecturing platform.  Some of these licenses included  Life, Health and Disability licenses. That knowledge remains with me today as a useful tool for myself, and hopefully others who ask for advice.

As with all financial matters, please seek out professional advice from experts who are respected, full time people in the business.  Below is a personal example and perhaps can help you.

Let’s start with life insurance.  There are several types.  A friend recently told me he didn’t think he needed life insurance, and asked for my suggestions.  He is a divorced single man, with one child and has a successful business. Let’s look at this from different angles.  First, and foremost, he has a child to protect.  He can buy life insurance for himself at a relatively low cost as he is in his mid-thirties and hopefully insurable as he appears to be in good health.  Depending on the insurance company and amount of insurance he may need to have a complete physical exam for insurance underwriting.  If he buys insurance it is best not to name his estate as beneficiary because when he passes away the amount of insurance will increase his estate worth.  Name other beneficiaries, in this case perhaps his daughter. Today, inheritance tax exempts the first $5,120,000 million, however my friend’s business is worth more than that amount on an estimated value. Federal inheritance tax on an estate greater than $5,120,000 million starts at 35% and goes up from there.  Then, there could be state taxes involved.  Why waste money?

A second idea here may be to take a whole life or variable life policy out for his daughter and let the cash amount build for her financial security later in life, or to help pay for college education.

A third idea may be to protect his company’s assets, and the possible forced sale of the company to satisfy inheritance tax obligations when he dies.  A “key man” policy might be used, and paid for by the company and that would be a company expensed item.

There are three main types of life insurance, whole life, term and variable although in actuality there are many variations.  For instance, there are non-participating, participating, limited pay, single premium, interest rate changing policies and more.  With younger people insurance is inexpensive and whole life or variable life might make the most sense.  Your insurance professional will advise you and go over specifics.

Variable life insurance places the premiums into separate markets such as mutual funds or bond funds so that over time you may have a faster build up of money than with a set rate with whole life insurance.  With this insurance you, as owner, select where the policy money is to be invested.

If a person is older and trying to protect an individual, family or company assets a term insurance policy might be best. Term has no cash build up and is strictly a specific amount of insurance for a specified period of time with a set payment schedule.  After the time period expires there is no cash build up and no further insurance.  Term is the least expensive form of life insurance.

Because of life expectancies and insurance costs figured with actuarial tables, insurance of any type can be very expensive to buy later in life, even if health permits coverage.

Bottom line here is that I recommended that my friend see an insurance agent and most likely purchase insurance.  Almost everyone can use some life insurance if nothing more than to pay for burial costs, or legal costs to settle or administrate an estate until assets can be liquidated, which can take a long time.