THIS IS MY 28TH 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.
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