Buying precious metals?

[EasyMoney_in_NC]

Makes perfect sense to me. So now the question begs.....which one would you be? A derivatives trader or investor of the hard asset? I know part of the answer goes back to "make money now?" or "hold and hope for later?". I'm still curious as to opinions on the core question, to buy or not to buy hard assets (no other alternate forms)?

I am buying, irrespective of what goes on here. I think its going to be a good way to play with a little money.......and its shiny and I can hold it But seriously, it seems that people are regularly paying well past current spot for it, which can only mean people intend for it to go WAY up. If that turns out to be the case, I can see making 30% on my investments, something I couldn't do in the bank.

If the new President turns things around, it'll still take time for the dollar to rebound to any real value (I am making a WAG). In the mean time, as Silver for instance becomes expended, the price goes up. Even if it takes a couple years to get to my target price, its still better than what the bank would pay. I don't see the economy making a complete 180* turn around any time soon, so I think the odds are in my favor. Thats my story and I'm sticking to it

 

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[Edge]

Edge, you're absolutely right. The question maybe is more philosophical at this point, but isn't your investment strategy then "trading"? For example, if I bought/sold/sold calls, etc Centex Homes, am I real estate investor? I would consider that I was a trader.

By definition, the liquid market is trading, because metals aren't liquid. Well, unless they're really really hot and then I don't think anyone would be storing them. (Take that back - mercury is in liquid state at a normal range of temperature) Last part was supposed to be a joke, BTW.

But my serious point is that precious metals are just like any other commodity. You can buy the asset directly (real estate, gold, etc) or you can buy a derivative of it. Once you've moved into the derivative market, you're out of the direct investment market. Then it's a question of what sector I want to invest in (gold, real estate, business), but I'm doing it through a derivative.

Not sure if I'm making sense, or if I might be arguing a point no one but me cares about.

Here's the real life example: People tell me all the time they are real estate investors. But, as I understand their business more, they are really retailers or wholesalers or financiers. Their core business isn't always what they think it is. They are just using a product and the wrong label for themselves.

I do understand what you are saying and it does make perfect sense.

My understanding was that EasyMoney wanted to buy the physical asset because he thought it would go up in value and you were wanting him to consider the fact that he wouldn't be able to generate any cashflow until he sold it. I don't know if it is trading or investing, but I thought buying the liquid product and writing a covered call against it could be a solution. That's just the way I invest/trade. If I look to buy something, long term or short term, I also look at ways to buy and sell the risk by using derivatives of that product. Buying the physical asset isn't appealing to me because I don't know how to reduce or increase my risk throught the hold time to make me comfortable and enhance the returns.

 

[Exodia]

I started to invest in silver but i am saving for the long term.
I started with silver coins.

 

[Diane Kennedy]

I do understand what you are saying and it does make perfect sense.

My understanding was that EasyMoney wanted to buy the physical asset because he thought it would go up in value and you were wanting him to consider the fact that he wouldn't be able to generate any cashflow until he sold it. I don't know if it is trading or investing, but I thought buying the liquid product and writing a covered call against it could be a solution. That's just the way I invest/trade. If I look to buy something, long term or short term, I also look at ways to buy and sell the risk by using derivatives of that product. Buying the physical asset isn't appealing to me because I don't know how to reduce or increase my risk throught the hold time to make me comfortable and enhance the returns.

Here's the part that I'm stuck on - if, as I understand it, Easy wants to buy precious metals as a hedge against inflation, he would hold them in their physical state for long-term. On the other hand, you, as a trader, can make money if the value of the metal goes up or down. It's just a commodity and it creates short-term cash flow, but is not a hedge against inflation. Edge, you could make money using the same principal on pork bellies. Betcha Easy wouldn't want to take physical custody of those in the back closet for very long. So - although the underlying asset is the same, what you want to do with it and how you do it, is completely different.

Edge, Easy, did I get that part right?

 

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[EasyMoney_in_NC]

No ma'am, no bellies here! I have 2 young kids and 2 cats, I need nothing more in my life that create stink but I digress......

What I'm doing is nothing more than burying money in coffee cans in the back yard, except for the fact that instead of paper cash, its hard asset specimen, and if all goes as planned, its worth quite a bit more than what it is when I bury it, unlike the cash that pays for it today, which for the near future seems to be on a downward trend.....where as the specimen are moving northward.
I have thought about the derivatives end of it too, it'd be nice to make a little now money off of the upward movement, but..................

may still happen. One step at a time for me.

 

[ocean]

Here's the part that I'm stuck on - if, as I understand it, Easy wants to buy precious metals as a hedge against inflation, he would hold them in their physical state for long-term. On the other hand, you, as a trader, can make money if the value of the metal goes up or down. It's just a commodity and it creates short-term cash flow, but is not a hedge against inflation.

Why not do both?

They're different strategies. Just like wholesaling and renting are.

1. Holding the physical asset is a temporary hedge, and only part of an overall strategy against falling currencies/inflation/disasters. You want to go into a hard asset as currency begins to drop, and then get out and move into something else, so you're investment is always riding on an upward trending wave.

2. Trading part of your investment on the liquid product to make shorter-term profits, realizing a gain early, is a business.

#2 is a business (trading), a way to make money.

#1 is a technique to keep your savings in an upward trend. But it's not a position to stay in no matter what. You move it where it will grow.


(As for holding the physical asset or not? That depends on what happens... If it gets really bad, and we start to see civilization crumble, I'd much rather have the hard asset somewhere. Think of WW2 Europe... When Germany invaded a country, people who had their savings in dollars were instantly penniless. But if you had a commodity in your possession, such as livestock, produce, or... precious metal, you had a chance of getting out alive. There was a great documentary on the History Channel about that. Hitler didn't invade and lay waste to cities for the fun of it... He did it to get the gold in their banks. It disappeared by the way... all the gold he took... much of it was never recovered. IIRC)

 

[Edge]

Here's the part that I'm stuck on - if, as I understand it, Easy wants to buy precious metals as a hedge against inflation, he would hold them in their physical state for long-term. On the other hand, you, as a trader, can make money if the value of the metal goes up or down. It's just a commodity and it creates short-term cash flow, but is not a hedge against inflation. Edge, you could make money using the same principal on pork bellies. Betcha Easy wouldn't want to take physical custody of those in the back closet for very long. So - although the underlying asset is the same, what you want to do with it and how you do it, is completely different.

Edge, Easy, did I get that part right?

I think you got it right for the most part. The only thing I would add is that if I was going bury bars of gold in my back yard I would probably still trade derivatives around that pile of gold to manage that risk that is buried in my backyard.

Derivative investments don't need to be defined only as a "short term" cash flow trade. I think it makes sense to trade derivatives to manage the risk of long term investments also. In fact I think that is why folks started structuring derivative products. It wasn't necessarily the speculator that created the demand, it was the long term holder that wanted to hedge and manage their risk.

 

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[Diane Kennedy]

Thanks for the distinctions Easy & Edge.

Rep++

 

[John]

Very interesting discussion! I see two separate issues here, each with its own unique answer:

1. How can I hedge against the declining US dollar?
For protecting against a dollar decline I'd prefer investing in a foreign currency over investing in gold or silver. This way you're also collecting interest while your money's just sitting around. I like the "Currency Shares" ETF's. You can buy and sell them as easily as a stock, and they pay interest on your balance. You can see the symbols, current prices, and current interest rates for each here: http://www.currencyshares.com/ . I think the Euro (ticker symbol FXE) is a good place to stash some cash while the dollar's going down. If you're dead set on gold or silver check out the GLD and SLV etf's. They offer an easier way to buy and sell gold and silver if you don't mind not actually possessing the physical bars.

2. How can I protect myself if the poop hits the fan, banks close, dollars and paper assets become worthless?
For this you'll probably want to be in physical possession of gold or silver. In the unlikely event that everything goes really bad then pieces of paper saying that you own some gold in another state or some Euros in London are going to be next to worthless. To prepare for an event like this, you should get some gold and/or silver coins (not bars) and keep them somewhere safe, but close and available (home safe, safety deposit box...) I recommend coins and not bars because if currency becomes worthless it will be pretty hard to get change when bartering for food or gas with a $10,000+ gold bar. Go for well-known and easily recognizable gold coins with the weight stamped on them, such as American Eagles or South African Krugerrands. This will make it easier to convince people of their authenticity and value when you try to use them.

So, in summary, here's what I'm personally doing: I have some cash in FXE (Euro ETF). This cash is gaining in value as the Euro gains against the dollar, and is earning a small amount of interest as an added bonus.

Also, I have a safe stocked with gold and silver coins just in case. I understand that I'll most likely never need to use them, but I figure it's better to be safe than sorry. Call me crazy if you want. The safe also contains a gun and plenty of ammo, again, just in case.

 

[hakrjak]

As with most boom markets (Real Estate, the Tech Boom, and now Metals) -- By the time the average Joe investor recognizes what is going on, and decides to jump in -- it's time for you to get your money and move somewhere else.

I have bought metals over the past 5 years, but I'm not buying today because there are too many people jumping in, and it reminds me of the RE and Tech booms all over again. When Joe Sixpack gets in, you get out -- simple rule.

Cheers,

- Hakrjak

 

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[EasyMoney_in_NC]

Very interesting discussion! I see two separate issues here, each with its own unique answer:

1. How can I hedge against the declining US dollar?
For protecting against a dollar decline I'd prefer investing in a foreign currency over investing in gold or silver. This way you're also collecting interest while your money's just sitting around. I like the "Currency Shares" ETF's. You can buy and sell them as easily as a stock, and they pay interest on your balance. You can see the symbols, current prices, and current interest rates for each here: http://www.currencyshares.com/ . I think the Euro (ticker symbol FXE) is a good place to stash some cash while the dollar's going down. If you're dead set on gold or silver check out the GLD and SLV etf's. They offer an easier way to buy and sell gold and silver if you don't mind not actually possessing the physical bars.

2. How can I protect myself if the poop hits the fan, banks close, dollars and paper assets become worthless?
For this you'll probably want to be in physical possession of gold or silver. In the unlikely event that everything goes really bad then pieces of paper saying that you own some gold in another state or some Euros in London are going to be next to worthless. To prepare for an event like this, you should get some gold and/or silver coins (not bars) and keep them somewhere safe, but close and available (home safe, safety deposit box...) I recommend coins and not bars because if currency becomes worthless it will be pretty hard to get change when bartering for food or gas with a $10,000+ gold bar. Go for well-known and easily recognizable gold coins with the weight stamped on them, such as American Eagles or South African Krugerrands. This will make it easier to convince people of their authenticity and value when you try to use them.

So, in summary, here's what I'm personally doing: I have some cash in FXE (Euro ETF). This cash is gaining in value as the Euro gains against the dollar, and is earning a small amount of interest as an added bonus.

Also, I have a safe stocked with gold and silver coins just in case. I understand that I'll most likely never need to use them, but I figure it's better to be safe than sorry. Call me crazy if you want. The safe also contains a gun and plenty of ammo, again, just in case.

This is exactly what I was looking for in this post, people sharing ideas on what, when, where and why. Nice post John :smx9: REP +++ to you!

 

[hakrjak]

One of the questions I have is...

If Metals go up because of the declining dollar and inflation, and say $100 worth of gold today is worth $300 of gold in 5 years... Then if you invest in gold, you are lucky to keep pace with inflation.

What about those of us that want to beat the hell out of inflation and increase our net worth wildly? It doesn't sound like metals is the place to be, or is it?

- Hakrjak

 

[EasyMoney_in_NC]

Got to say I'm a bit confused by that comment. Aren't you the one doing a fix and flip for what you said was no money just fun? How in a down economy is that beating the hell out of inflation and increasing your net worth wildly?
I'm not flaming you, I just don't understand, what have I missed? I don't think your $100 gold will be $300, that would require $1000 gold to go to $3000 an ounce.....no?

Lets keep in mind (for instance) Silver, to come close to its 1980 bull run high would have to be at $140 an ounce to match. I would say that since the BRAC countries weren't part of the $50 equation back in 1980, and are now, there should be HUGE upside for Silver, copper etc. Gold I think will grow slower that the more widely use metals, but still has its own upside. Plus the ratio of gold to silver needs to work closer to the 15:1 to be tapped. Its at 50:1 +/- right now.

 

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[hakrjak]

Got to say I'm a bit confused by that comment. Aren't you the one doing a fix and flip for what you said was no money just fun? How in a down economy is that beating the hell out of inflation and increasing your net worth wildly?

ROFL -- No, you misread that message. The blog was for fun -- I don't make any money off of that. Of course I'm making money off my flips... I stand to profit $50k off this next one.

Cheers,

- Hakrjak

 

[randallg99]

One of the questions I have is...

If Metals go up because of the declining dollar and inflation, and say $100 worth of gold today is worth $300 of gold in 5 years... Then if you invest in gold, you are lucky to keep pace with inflation.

What about those of us that want to beat the hell out of inflation and increase our net worth wildly? It doesn't sound like metals is the place to be, or is it?

- Hakrjak

Very simply: gold and silver are a much better investment when they either remain stable or increase in price while the currency deflates.... it takes more units to buy the same ounce than it did prior in an inflationary period.

and in a stagflation environment, we must go back to our investment basics and realize that investing is a zero sum game: we must invest in the highest potential return relative to all investment vehicles available to us and at this time in my opinion, there aren't nearly as many good opportunities as previously. In bull markets, it's easy to make money.... but now, we all have to be more selective.

to me, gold is probably positioned better to increase than any other time in the past couple of years now that so many elements of our economic scenario are so much clearer and that the "doom and gloomers" predictions are coming to reality.

keep in mind everytime Fed drops interest rates, that is another convincing point for owning gold (and/or silver) for the obvious reason that there is an attempt to fight the deflating dollar... and at this very moment in such a period of nervousness and uncertainty, and if we are really in a stagflation mode deep enough that requires the Fed to prop up interest rates to ward off inflation, then that makes it all the more compelling to own gold.

what can make gold go down? if the US$ suddenly increases dramatically... this happens when US deficit dramatically drops, tax revenues dramatically increase, bond auctions are not as frequent, hard assets ie real estate stop depleting value, oil/gas come back to sustainable levels, prices of food drop back to year 2006 levels. I personally do not see any of these things happening but this is just my opinion and it's probably not worth the 2 cents but my money is where my mouth is with junior miners having the most compelling potential return at this juncture.

we are in a long term volatile secular bull market and it's my belief that we are only in the 3rd inning...

good luck.

 

[EasyMoney_in_NC]

keep in mind everytime Fed drops interest rates, that is another convincing point for owning gold (and/or silver) for the obvious reason that there is an attempt to fight the deflating dollar... and at this very moment in such a period of nervousness and uncertainty, and if we are really in a stagflation mode deep enough that requires the Fed to prop up interest rates to ward off inflation, then that makes it all the more compelling to own gold.

what can make gold go down? if the US$ suddenly increases dramatically... this happens when US deficit dramatically drops, tax revenues dramatically increase, bond auctions are not as frequent, hard assets ie real estate stop depleting value, oil/gas come back to sustainable levels, prices of food drop back to year 2006 levels. I personally do not see any of these things happening but this is just my opinion and it's probably not worth the 2 cents but my money is where my mouth is with junior miners having the most compelling potential return at this juncture.

we are in a long term volatile secular bull market and it's my belief that we are only in the 3rd inning...

good luck.

well the Fed's expected to drop another 1/2 point for the March meeting so we should hopefully see a nice bump if you're correct (hoping you are).

I am no economist, but from what I know, hear and my gut feeling, I agree with your last comments. I believe we'll have another year or two of this personally. There's still the remainder of the RE and credit fallout, the settling down of the political scene just for few things to keep the roller coaster rolling. Not sure about the baseball analogy but we're not even close to seeing an end to this. Oil at $125, gas at $4 + a gallon, we're in for a fun ride kiddies!

 

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[kidgas]

I think this might be pertinent to the discussion on precious metals.

There was a Russian economist, Nickolai Kondratieff (1892-1938), who felt that capitalist economies underwent boom and bust cycles ranging from 50-60 years in length. This cycle is referred to as the Kondratieff Wave and is conveniently divided into "seasons". Each season, theoretically, has certain investments that should prosper.

If one believes in this, here is a link to a great graphic that will say more than I could (picture is worth 1000 words):

http://www.dinl.net/latest_letters_0...023_ll_2bg.jpg

 

[MJ DeMarco]

Just curious to know if anyone is buying precious metals, not trading Forex or anything but actually buying hard pieces of gold, silver etc....as a hedge against an ever declining dollar.

If so or not, why or why not?

I haven't bought actual physical pieces of silver, but have been day trading the SLV silver ETF with great results. In fact, its been my cash register for the past few days.

Everytime I get a bill from my General Contractor, I go daytrade the ETF and make a quick $1K. Today I held a trade for 8 minutes, 11 seconds and made $1,024.

I think the metals are great investments for the next 18 months which make them great buy and hold candidates as well as day trades.

 

[EasyMoney_in_NC]

kid that link isn't working

 

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[kidgas]

Try it now:

http://www.dinl.net/latest_letters_05/20051023_ll_2bg.jpg

 

[kidgas]

Bear,
My thoughts are that the Dow:gold ratio will bottom somewhere between 7-10:1.

If the Fed starts tightening, it should be because of inflation, in which case gold may hold its value relative to the dollar. I have a hard time seeing recession and Fed tightening in the same sentence, but would love to hear some scenarios.

 

[PEERless]

When Joe Sixpack gets in, you get out -- simple rule.

So true!

I work at a jewelery store, and gold prices are already cutting into demand.

 

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[randallg99]

So true!

I work at a jewelery store, and gold prices are already cutting into demand.

methinks it will be a while before Joe6pack realizes what knocked the economy on its a$$.

 

[PEERless]

Mm... I'm referring less to Joe and more to consumers of fine jewelery. It is hard to sell a tiny 14k charm for $700.

 

[randallg99]

If the Fed starts tightening, it should be because of inflation, in which case gold may hold its value relative to the dollar. I have a hard time seeing recession and Fed tightening in the same sentence, but would love to hear some scenarios.

here's the can of worms you've opened: I have a feeling the vast majority of us on this forum weren't around to understand what happened in the early 70's when inflation coupled with high interest rates created the demand for commodities... but looking back on stats you can't help but see a similar scenario brewing right now... gold was not holding its value relative to the dollar, but rather the relationship for the several year+/- span of stagflation created a phenomenon that held a converse relationship between the dollar and gold, thus creating a commodities bubble. remember - the markets move in abberations and there really is no true justification for gold to hit 2000/ounce no matter how bullish one may be... even me.

you know, there is no talk of debt instruments on this forum and probably rightfully so because it's boring but they have really become the backbone of our financial system and one of the key factors in determining rate levels... Debt instruments in the markets come in all forms, ie bonds along with derivatives (think mortgage bundles, CDS's, SIV's, etc...) and even stocks have become unconventionally in some ways become a debt instrument. Much like us trading bonds/debt instruments, banks themselves make money on the spreads the borrow vs what they lend out. Plain and simple: banks have been scraping pennies off the consumers living room floors the past several years because of low loan spreads while all servicing fees have skyrocketed... the BS ATM fees, checking fees, etc have all been focus of consumer advocacy complaint groups yet the banks have had no choice- the spread on the money between overnight/fed to Libor to loans/mtg have been only 100-200 basis points on a good day... that's like you borrowing against your home equity using a line of credit at 8% and lending to your neighbor at 9%... that 1% spread doesn't get too much profit and there is absolutely no compensation for risk, really.. (this by the way is the premise of my pessemistic thread because this is what ultimately killed the mortgage companies but not the banks, but we are starting to see some bad things happen to the banks as a result of spillover from mortgage mkts.)

and everytime big Ben reduces the rates, he is actually making it harder for the institutional bank to make more money. and frankly, buying subprime mortgage bundles were really the best thing decision makers in the banks had available because everything else was depleted of rate of return... so the irony is this: the fed's perfect world and scenario is that higher interest rates will compel the banks to more freely lend money again because there is more room in the spreads and in a recessionary period, banks liquidity is one of the most important things to spur economic activity.

baby is sick and cranky so with the interruptions, I didnt proof this...

 

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[randallg99]

Mm... I'm referring less to Joe and more to consumers of fine jewelery. It is hard to sell a tiny 14k charm for $700.

ah, now I understand your point. I think the original post by Harjak referenced commodities in their trading form....


do we know what percentage of gold is sold in the form of jewelry vs. how much is supposedly held by banks and nations?

 

[randallg99]

Tsk, you should check up the fundamentals before you invest!
2/3rds of world gold demand is jewelry. That's why the drop in Indian demand is so significant... High prices are cutting into demand, at some point we will short gold and make money.(not yet.)

yes, one day we will short gold. That could be tomorrow or in 10 years, but the driving factor for gold is it's relationship with the US$ and until macro dynamics change in our economic scenario, there is no alternative but to stay long gold. The metal markets can change on a dime and it's a volatile ride (as with all markets) but I have stayed this course for 2 years now with ownership of junior mining companies. Short term trading outside of core positions is a part of my strategy but my long term holdings have not been touched.

and I don't think there really is a correct answer: the rhetorical question I posed was how much is held by banks vs. other uses and it's entirely hypothetical since I was asking a jeweler... but how do you define "demand"... how do you know that 2/3 of world "demand" for gold at this time is for jewelry? Also, the article did not mention how much is held by large institutions around the world. There is so much speculation about some of the rogue countries and how much they have bought and sold that we don't really know. China has the resources to own half of the worlds gold but only disclosed owning 600ktonnes...

http://en.wikipedia.org/wiki/Gold_standard

take it with a grain of salt since it is wikipedia, but wikipedia has info that disagrees with your statement:

>>> (Gold) is also held by central banks as a way of hedging against loans to their own governments as an "internal reserve". Approximately 25% of all above-ground gold is held in reserves by central banks.<<<

http://en.wikipedia.org/wiki/Official_gold_reserves

then above link states (without credence for lack of source) India has 13k tonnes of gold among the "public" but that's not only in the form of jewelry... think religious connotation... but India's cultural leanings has accumulated the gold over generations and didn't buy all that gold in the last several years thus had little effect for the huge appreciation in price of gold which convinces me even further that the consumer demand for gold is not the driving force but instead the flight to safety from currency risk is the culprit in rapid rise of gold.

then I started thinking that India is not that significant of an economy to impact the value of the US$ and pricing of gold as much as people realize and bingo... (India's impact on world economy was surprisingly very powerful in the 1700's) - by the way, very cool website. Their demand conclusively has little impact to overall price fluctuations of gold because the driving force is not cosmetic demand but rather stability and appreciation to offset currency declines.

http://www.visualizingeconomics.com/2008/01/20/share-of-world-gdp/

 

[MJ DeMarco]

Silver was trounced today and I peeked in for a day trade ... $1,900 realized profit in 2 hours! This ETF has become my little ATM machine! If I continue at this pace, Ill have to start selling seminars on how to day trade metal ETF's.

Act now! Only $1,999 for this exclusive workshop! Don't be a loser, run to the back of the room!! Hurry!!:smxF:

 

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[imirza]

Gold, Silver, Oil, Agriculture and commodities in general fell apart today. Word is that Hedge Funds are being forced to reduce leverage by their prime brokers.

Commodities in general is a very crowded trade with a lot of hedge funds long the metal , oil and ag. Thus the losses today in GLD, SLV, DBA, USO etc due to the unwinding of leverage. This trend is likely to continue. Might be a good time to give the new short gold and double short gold ETFs a try - DGZ DZZ. DCR gets you short oil.

Another ETF to try might be SMN which is an inverse leveraged bet against basic materials. Gets you short MON FCX DD AA NEM DOW and other basic material companies. DUG gets you short the oil companies - XOM CVX COP etc. As the world goes into recession oil prices will fall and oil companies are going to get hit. Of late a lot of investors have been waiting out this market down turn by hiding in oil and commodity related stocks. All this appears to be changing as of today.


Long term I would continue to be bullish on commodities. Short term it appears they may have topped. Could be a rough ride for those long gold, silver, oil , agriculture etc.