Now is the time to own gold and silver. Investors from across the United States are flocking to gold and silver investments as their ultimate wealth preservation tools to combat one of the worst financial crises our nation has ever witnessed. Historically, gold and silver increase in value during times of economic distress because investors rapidly purchase the metals to protect their hard-earned wealth from massive contractions that are commonly experienced with dollar-backed assets like stocks and bonds.
In the year 2000, the gold spot price was sitting around $280 per ounce while the silver spot price was sitting around $5 per ounce. Today the gold spot price is just above $1,317 per ounce while the silver spot price is at $19 per ounce. With the US economies falling deeper into the pit every day it is no surprise that more wise investors are turning to gold and silver investments as their “secret weapon” diversifications.
Factor affecting Gold and Silver prices
Precious metal commodity price depends upon demand and supply. Investing in in these commodities is certainly a wise decision but it comes with the heavy risk. The gold & silver prices swings daily due to the heavy volume. The prices of both metals depend upon war, bulging country deficits and geo-political unrest. The inflation and deflation also gets affected by the gold & silver prices. Often, people turn to the hard assets like gold and silver when supply of money is increased in market. The increase in money supply reduces the value of money. However, gold and silver never lose their worth over time.
Moreover, during deflation people again invest in gold & silver to secure their money. The gold & silver prices also affect the value of U.S. dollar. Since, in the international market the price of the precious metals is determined by the value of U.S. dollar. This is why whenever the value of U.S. dollar goes down metal prices goes up. When the value of U.S. currency goes down then metal commodities become cheaper for the investors, which induce the buying and raises the price of gold and silver. The gold and silver are global reserved currency of the world. Therefore, if anything occurs around the globe then it certainly affects the price of gold and silver.
How to Invest In Gold and Silver
There are several ways to invest in gold and silver, yet the safest and most effective methods are with physical possession bars and coins that you can hold in your hands. Other ways of gaining exposure to these precious metals include; Exchange traded funds (ETFs), Mining stocks, jewellery and Commodity futures.
Common bullion coins are easily sold, often to dealers or even via local classifieds or Craigslist. But, where you buy matters as prices can vary from dealer to dealer by as much as 5% or even more. You will generally have to pay in cash (if local) or wire transfer. Storage can become an issue if you are buying large quantities. But in the case of gold, 100 coins (or five rolls of 20) is a small little package (maybe 8×1.5×2 inches) and has a value of $135,000 or so- easy enough to hide in a sock drawer. A case of silver Eagles (500, or 25×20 coins) is bigger (10x10x2 inches) and only stores $15,000 of wealth. Even 10 cases (5000) of silver coins is not that big, but is noticeable. You could put them in a safe deposit box, and that is the traditional suggestion. But you may be running some additional risk of confiscation.
Coins are pretty. They are fun to look at and to collect. The biggest issues I have against them as an investment are price and liquidity. Prices can vary way more than bullion coins. The same coin might be listed in a coin price list as valued at $100, but be available for $50 or $125. They always trade a significant premium to melt value, yet the sellers mention “melt” quite often when trying to convince you they are good investments. It’s true that a collectible coin will always be worth at least melting (well almost always). But the value may have to double just to break even. In addition, when you want to sell a collectible, you have to go to a dealer or find another collector in order to get some part of your premium. Dealers typically work on a 25-50% markup, so that $100 coin that a dealer is selling at $50 might only be worth $30 when you are ready to sell it.
Exchange traded funds (ETFs)
ETF’s are liquid. You can buy and sell them in seconds inside any stock brokerage account. But they have some drawbacks. Biggest is taxes. Unlike a regular ETF, precious metals ETFs are treated differently by the IRS, and you will have to pay income taxes each year whether you sell them or not. Additionally, they are treated as regular income, not capital gains, so you pay a much higher rate. Before you buy any ETF’s, speak with a tax advisor to determine which rules affect you.
Owning some mining stocks may be a good idea. They provide some protection against outright confiscation, since you know that they will be exempted. But the companies themselves can be nationalized, or individual mines can be taken. So you have to look at where the company has its mines and be aware of political risk. In addition, you are buying a company, so have all the risks and challenges that entails- Lower earnings, Fraud, Rising costs, Bad management etc. Hedging programs can make companies insensitive to the price of gold, so buying a gold miner may not give you the appreciation you expect. And watch out for leverage – mining stocks tend to move faster than the metal, up and down. They are not bad investments, but you have to do your homework and you have to understand exactly what you are buying.
Not for the timid. This is the “market”, where price discovery happens and where all other gold pricing is based. To trade in it, you just need to open a commodities account. The big risk is leverage. You can buy a single gold futures contract with about $3800, and you control 100 ounces of gold. That means you have about 3% of the contact value amount. If gold goes up by $38 an ounce, you have doubled your money. If it goes down by $38 you are wiped out. And believe me; gold can move a lot more than $38 in a single hour during a selloff or panic. It is a good market, and reasonably fair, but you really need to have some sophistication to play here. Not for the neophyte.
Jewelry is the traditional way for lower-income people to own a little bit of gold. The dual-use nature of jewelry lets them buy a gift and make an investment at the same time. This is very true in third-world countries, and a big part of the culture in India and China. It is a way to have an asset in a country that generally discourages that or periodically confiscates it all. But you can only wear so much at a time. So it’s good in small amounts, but not larger. And you have a big difference between prices and melt value, so as an investment it doesn’t really work. If you disagree, go buy some jewelry and take it immediate to a “cash for gold” place to see what they will pay you.