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Many investment counsultants are telling their clients to move some or all of their portfolio away from traditional stock or bond investments and into precious metals like gold or silver. The motivations behind this are relatively simple, namely that traditional investments have been extremely volatile as of late, while metals have performed very well from 2006 through 2011.
In 2011, around the September time frame, the commodities market began to turn south and began a four year slide, losing some 45% of the gold value per ounce, and 80% of the silver value, Platinum faired much worse than gold and lost 60% of it value.
The equity markets began to do extreamly well from mid 2011 until 2016 and appear to be continuing the growth during this world wide recession / depression.
That being said, there are a growing number of very wise individuals that seem to believe that the markets for gold and silver have bottomed out.
This article will discuss some of the more common precious metals and collectable coins and currency as investments, as well as their advantages and disadvantages.
Physical Metal (Gold, Silver, Platinum and Numismatics)
The investment that we advocate most is a purchase of physical metal bullion that you yourself hold. This is different from purchasing metal and storing it in a depository, or purchasing metal “on account”, as we believe the only way to truly own these metals is to hold it in your possession.
If a true economic crisis came about, investors with these metals in hand would be much more comfortable than those who were trying to extract it from a depository or account. Although we advocate holding physical metals, there are a few other investments one can utilize.
Exchange-traded funds, such as SLV, are funds that can be traded online through brokerage services like Fidelity or Morgan Stanley. ETFs are investments into a trust which holds physical metals, but it is important to note that you are not actually purchasing physical metal. ETFs can never be redeemed for physical metal, so in a crisis situation you are likely left with nothing but paper.
Futures contracts are agreements to purchase or sell a fixed amount of metal at a fixed price at a specified future date. So, for example a futures contract could be to purchase 5,000 ounces of physical metal at $XXX/ounce on January 1st, 2016. Futures contracts tend to correlate very closely with physical spot prices, so as the metal moves up and down, the value of your contract changes accordingly.
Although futures contracts can actually be redeemed for actual physical bullion, the vast majority of these contracts are “canceled” out before expiration by buying or selling an offsetting contract, thus settling the balance in cash.
One unique aspect of futures are that they are highly leveraged, meaning that you can take on a rather large position with only a portion of the cash you would need to buy that much physical metal. This allows you to leverage your capital, but also means potential gains, as well as losses, are magnified from even small market movements.
For example: lets say you purchased a contract for 100,000 ounces of metal at $10.00 per ounce, with a capatilization of only 20%. This would mean you control $1,000,000 worth of metal, with only $200,000.
If the metal went up $1.00, you would have increased your net worth by $100,000.
If however the underlying material droped $1.00, you would lose half your investment, and you would have to come up with another $100,000. to answer a cash call to get your investment back to PAR or even.
A very risky investment if the market is vacillating up and down with wide swings of 3% to 4% a Day.
Silver on Account
Another way of gaining exposure is to purchase the metals on account, meaning that you receive a certificate detailing your position, while the seller keeps and protects the actual physical metal for you.
There are a few methods for doing this, namely allocated and unallocated accounts.
Allocated accounts means that you own specific bars and/or coins at the holder’s facilities. If you wish to redeem your physical material, there are specific products in the vault that you can lay claim to. This is the safest form of account. (it is also the most costly)
Unallocated accounts means that you own a specified amount of material within a pool of other customer’s metals. The holder does not actually have to keep all of the material on hand at any given time, as the likelihood of a run on their pool is very low. However, if there was a run, you could end up out of luck if the seller did not have enough metal on hand to meet their obligations. Back to the "Empty Sack" syndrome.