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Benefits of precious metals for investors
You always need a good reason to do something, especially when you’re talk- ing about where to put your hard-earned, inflation-ravaged money. I think that precious metals in their various formats offer many benefits (see the following sections), and the sum total of these benefits makes them a com- pelling choice as a part of your portfolio.
Safe haven One point that you will hear on a regular basis from gold aficionados is that gold and silver are real money that are someone else’s liabilities. For new- comers to the world of precious metals that would be an intriguing statement. What does it mean? A currency such as the U.S. dollar is backed up by the “full faith and credit of the United States.” You can surmise that a dollar is not money in the truest sense of the word; it is a type of claim or liability backed up by the issuing authority which is in this case the federal government. There was a time when the U.S. dollar was redeemable in gold and silver. That dollar was backed up by something that was universally considered a “unit of exchange” and a “store of value,” which is what gold and silver were considered for literally thousands of years. This was the whole point behind the “gold standard.” As long as the dollar was backed by gold, it had strength and people had confi- dence in it. Starting in 1913 with the creation of the Federal Reserve (America’s “government central bank”), the dollar started to decouple from gold until the connection between gold and silver was totally severed during the Great Depression. At that point, the spigots on producing dollars opened up. The U.S. dollar started a long, slow-motion bear market where a dollar in 1913 is only worth two cents today. In all that time, the dollar lost 98% of its value! Precious metals such as gold were a different story. It has been said that a single ounce of gold could have bought you a decent suit during the 1800s. If you sold a single ounce of gold on December 24, 2006, you would have gotten $620 (not including transaction fees) and that would have been plenty of dol- lars to buy a nice suit for Christmas. In good times and bad, precious metals have retained their value and earned their title as a safe haven.
Privacy In the world of financial assets, reporting such as 1099s is common. With cer- tain types of precious metals vehicles, there is no reporting (for transactions under $10,000 value). This is especially true of gold and silver collectibles such as numismatic coins. Of course this does not relieve you of the obliga- tion of paying taxes in the case of capital gains transactions. Rules can change obviously especially in post-9/11 times so make sure that you discuss your purchases and sales with your tax advisor.
Inflation hedge In early 2006, Harry Browne died. I thought it was a great loss to the invest- ment and political world. (He ran for President on the Libertarian platform in 1996 and 2000.) His claim to fame is that he is a legendary investor who was right on the money during the 1960s and ’70s. One of the last books that he wrote was a short book that was a concise, true gem of financial wisdom called Fail-Safe Investing: Lifelong Financial Security in 30 Minutes(St. Martin’s Press).In it he detailed a model portfolio that was easily constructed by the average investor and it had performed very well in a variety of economic con- ditions. It consisted of 25% each of cash, stocks, bonds, and . . . gold. He sug- gested that you rebalance it each year to keep the 25% allocation. Mr. Browne was keenly aware of the dangers of inflation, recession, and other systemic problems that occur because of political and governmental misman- agement(such as through inflation, taxes, and regulation). He recognized that gold was not easily produced and manipulated by government. One question that may pop up is “Can’t gold be produced as well?” Gold is mined but the average annual addition of gold to our world gold supply is roughly 2%. That physical limitation keeps gold growing at a pace that helps it to retain its value yet plentiful enough to keep pace with population growth.
Dollar hedge A dollar hedge seems synonymous with an inflation hedge since you’re deal- ing with the same issue. But dollar hedgeis more related to those who see the dollar as an entity worth trading against. You can invest or speculate based on the direction of the U.S. dollar as its own investment vehicle. In the same way you can look at the relationship of a common stock to the company it is attached to, you can look at a currency as it is attached to a country. There are definite similarities. When a country’s currency is strong, it is to the rest of the world a representation of how strong or well-managed the country is. During the 1980s and 1990s, the dollar was considered a strong currency, but in this decade, due to factors including a ballooning national debt and a large trade deficit, the dollar started a long decline. Coupled with the fact that we keep printing more and more of it, that trend will probably continue. A hedge against the dollar can manifest itself in a variety of ways. For exam- ple, some will speculate in the currencies of other countries because if one currency declines in value then some other currency is probably rising. Of course, the other currencies could also decline as well. The bottom line is that gold and silver are solid choices as dollar hedges. 41 Chapter 3: The Beauty and Benefits of Metals
Confiscation protection In Chapter 4 I spend some time dealing with the risks of precious metals and in one segment the focus is on political risk. The issue was how government can affect your investment. In the 1930s, the FDR administration authorized government confiscation of gold and essentially banned ownership of gold. But they exempted gold coins, having a recognized special value to collectors of rare and unusual coins. Even in the extreme case of heavy-handed government intervention, gold can still be a store of value.
Liquidity Liquidity is an important benefit for investors. All liquidityreally means is how quickly you convert an asset to cash. Securities such as stocks and bonds are very liquid assets. Assets such as real estate are not. Precious metals and their related investments tend to be very liquid. Mining stocks, like other stocks, can easily be sold in seconds either with a call to the broker or a visit to a Web site. You can do likewise with options and futures (you get them and get rid of them through your brokerage account). In terms of physical metals, the most liquid precious metals are gold and silver. If you have gold and/or silver coins, they are very liquid as you can go to virtually any coin dealer store or Web site and quickly convert bullion or numismatic coins to cash. Numismatic coins carry a high markup so if you were to liquidate them you may get only 70 cents on the dollar (or less). Most people sell their coins to coin dealers but these dealers will basically offer you wholesale prices since they will end up trying to resell the coins at retail. Consider selling coins to other investors or collectors as they are easier to find now through the Internet.
Liquidity Liquidity is an important benefit for investors. All liquidityreally means is how quickly you convert an asset to cash. Securities such as stocks and bonds are very liquid assets. Assets such as real estate are not. Precious metals and their related investments tend to be very liquid. Mining stocks, like other stocks, can easily be sold in seconds either with a call to the broker or a visit to a Web site. You can do likewise with options and futures (you get them and get rid of them through your brokerage account). In terms of physical metals, the most liquid precious metals are gold and silver. If you have gold and/or silver coins, they are very liquid as you can go to virtually any coin dealer store or Web site and quickly convert bullion or numismatic coins to cash. Numismatic coins carry a high markup so if you were to liquidate them you may get only 70 cents on the dollar (or less). Most people sell their coins to coin dealers but these dealers will basically offer you wholesale prices since they will end up trying to resell the coins at retail. Consider selling coins to other investors or collectors as they are easier to find now through the Internet.
Portfolio diversification In the book Stock Investing for Dummies, 2nd Edition (John Wiley & Sons), I wrote extensively on portfolio diversification. It was important to have stocks in different sectors so that the overall portfolio could be safer yet still grow without you having to reach for the antacid on those volatile days. In this book, I get to tell you what I think is a good part of the diversification. Metals mining stocks (and uranium) have been among the top-performing stocks in the country in this decade. Yet, I am sure that many in the public haven’t real- ized it. You already know about physical metals and their performance along with their advantages. Their “disadvantages” are covered in Chapter 4. How about the stocks? Take Agnico-Eagle Mines Ltd. (symbol: AEM) for example. AEM is a Canadian gold-mining stock listed on the New York Stock Exchange. You could have purchased it at the beginning of the decade for around $5 a share. It hit $45 in 2006 for a total long-term gain of 800% (not including dividends). If that’s diversification, I want more of it. Other selective mining stocks in gold as well as other metals (and uranium) had similar results. I realize that the key word is “selective,” but you can find more details on choosing mining stocks in Chapter 12. Yes, I spill my stock-picking guts there! Your retort to me after that paragraph might be, “Gee, Paul, I’m sure that if I look hard enough that I will certainly find stocks that did just as well and probably a heck of a lot better in totally different sectors. Why choose stocks in the metals sector if there are also healthcare, biotech, and so on?” I’m glad you asked. Or I’m glad that I wrote down that you asked what I’m glad you asked. In the realm of investing and speculating, the past is something you learn from so that you can prepare for the future. In that prior example, AEM went up 800% in the same time frame that the asset it mined (primarily gold) went from under $300 to over $650 an ounce (gold more than doubled). I, along with an army of gold experts, see economic conditions that are very fertile for gold to shoot past $1,000 and much higher in the coming years (more exciting details on gold in Chapter 5). In the event that gold does go into four figures, what happens to gold-mining companies that are profitably sitting on millions of ounces of the stuff? Can you say “jackpot”? It doesn’t stop there. Consider the rest of the metals that are covered inside the pages of this book. Gold is great but there are also silver, uranium, and so much more. Cool profits in hot markets; I like the sound of that.