How to invest in gold or silver

What is the best way to invest in gold or silver? I have a definite view on gold vs. silver and how to invest.  I do not think you will like it, but read on. Before buying gold or silver first ask yourself why do you want to invest. If this is a small part of a diversified portfolio or for the novelty of owning coins, this is OK. But if you are looking to get a good ROI with precious metals, know that you are competing against the rest of the world and it is at best a zero sum game, unless you use my alternative idea. Yes that is right, your probability of making a profit is like flipping a coin.

Your choices of investment vehicles are:

  • Gold and silver physical assets
  • Precious metal stocks
  • Futures

Precious metals are not investments but speculation

You would thing there is almost nothing safer than gold or silver right? Think again, if the price is $1,500 dollars an oz and it goes down to $500, and it could, you lost most of your money. I do not invest in metals. Why? They are not productive assets. Let me explain, if you buy a share of stock you are participating in a dynamic company’s growth. This company can expand and create. If you buy gold or silver you own a non productive asset.

If you could invest in a farm that is producing something or raw land in a forest in upstate New York what would you invest in? The only way you can make money on a non producing asset is if demand increases and the price go up. This to be is price speculation not an investment of capital with expected return.

It is zero sum investing because for every winner there is a loser. Actually worse because of transaction costs. Precious metals have no dividends or growth. It is simply supply and demand and price, a mathematical equation, a coin toss.

My alternative to buying bars of gold or silver coins

This is an example of a gold stock. It is something that is rich in valuation data and I might not have a problem investing in. I prefer shares of stocks to raw physical commodities, or futures.

In the stock market in the long-run there are always more winners than losers. I prefer that game to zero sum investing. If you want to buy silver or gold it is better to buy shares in a mining and mineral company. Natural resource companies are often somewhere in politically stable Canada are better than South Africa. If the demand for precious metals increase, the stock price will increase in tandem. Mining companies actively manage risk and hedge price changes. It is a more conservative way to apply your equity capital. They take the nuggets out of the ground, but also explore new sources.

With a gold and silver mining company you can use traditional valuation methods, like any stock. I wrote an article on how to invest in the stocks.  I owned  Canadian resource companies in the past and made a profit, with low stress.

Gold vs. silver – a comparison of natural value and price

Both metals have ornamental or jewelry value, this is their real worth. I buy gold and silver for my wife in small quantities in the form of earnings for example. So they both have subjective value, but for whatever reason I think people put too big of a premium in their minds. It is not necessary for survival. Here is a basic review:

  • The demand for gold is based on the amount of uncertainty in the market and gold has some prestige value.
  • The demand for silver is not only based on uncertainty and prestige but it has intrinsic value because it has industrial applications. You can use it for medical, water purification, mirrors and coatings and solar panels etc.
  • Gold silver ratio – That is, the spot price of gold vs the price of silver per oz. The price per oz is historically 16 to 1. That means the price of gold is 16 times the price of silver. The ratio is a natural value argument for investing. Silver is mined seven times more than gold. If you are trying to make sense out of this golden mean, don’t. Better spend your time with quantitative valuations of stocks.
  • Silver appreciates more than gold in times of uncertainty – Historically when there has been times of inflation or uncertainty actually silver and not gold appreciates more in value. So if you’re buying it on the rational that these are the times that try men’s souls, silver is your answer.
  • Silver is lower priced and more volatile – Although an asset that is low-priced does not necessarily have greater volatility, it seems to be the case with silver. Greater risk, but also return.

The conclusion is if the price has not already been run up, buy silver and not gold.

Trading precious metals futures

If you still want to invest in just gold or silver and not some company that mines these metals, another alternative to holding coins or physical assets is trading futures. That is paper asset that derive price from the underlying real asset value, factoring in time decay and exceptions. Companies buy these en masse to hedge risks, speculators try to beat the system.

Trading commodities needs trend analysis not natural value

Pick up a book on trend analysis. People try to trade commodities and precious metals on some abstract valuation. This will not work, except in the long run, but ‘in the long-run we are all dead’ (John Maynard Keynes). Better is find a moving average trend and trade futures with exits and spots, even if hey are just mental stops. Stan Weinstein‘s stage analysis is a good investment book on this.

I do not speculate in this way as it is a different type of investing than equities. I am not saying that you cannot make money trading gold and silver, but you need a different system. It is also zero sum.

If you still want to hold physical silver or gold bullion for other reason, such as if you believe that is a good hedge against inflation as you feel the currency is not stable and you need a store of value, then the question is which is better. Some people believe it will be a medium of exchange if the US collapses and the dollar is not longer accepted as legal tender. Under this doomsday scenario gold bullion will be valued many fold what it is today. I am do not believed America is doomed. But I have no problem with having a few gold or better silver coins under my mattress, but to not expect this story to have a silver lining. Better is to buy a good mining and mineral stock that supply us with these precious metals.

7 Replies to “How to invest in gold or silver”

  1. Very well researched and well understood. One would think that during difficult times, that Gold would lose value based on its commercial use such as jewelry. However, during great recessions like we are having now, gold is of great intrigue. There is a mystique about those whose raked in fortunes during the worst of times while inflation has strip away small fortunes of those who thought they were old money.
    I agree with Mark. Gold is merely a speculative position. There are not many uses for gold in industry. I know of an arthritis drug that uses gold. I’ve seen gold plating on electrical components while in the aerospace industry. And I’m sure I could google the other uses if I had time, energy and interest.
    Now I have heard it once said that gold can be used as a way for a country to relieve its debt. Simply create speculation for gold and use the gold reserves as a way to trade the country out of debt. I have no idea if such a scheme is possible or legal.
    As for gold, I remember the last gold rush starting in the late 70’s. In Philadelphia, Pa where I had live, commercial radio was playing paid advertising for gold investment. My recollection is that these ads were fear based. A hedge against the falling value of the U.S. dollar due to inflation. Gold averaged around $130/oz in the mid to late 1970’s then in 1980 it was selling $820/ oz. Never to see that price until 2007! Within a short period of time, the commercial advertisements ended. And apparently the gold rush ended. Until now. As “There’s a sucker born every minute” , a phrase often credited to P. T. Barnum. So be careful with your hard earned money. Someone else may be ready to show you how to spend it.

    1. Mark Biernat says:

      Greg, great point. If you bought gold in 1980, it would take almost 20 years for you to make a profit. For me that is too long to wait. I mean I am sure someday gold will break new highs again. But it might not be in this lifetime. I think it is at dizzying highs already, maybe it could go up another 30% or more, but I think the downside risk is high. There are better investments with a better risk/return relationship than a raw exposure to a commodity.

    2. Pick your date, but from 1970 to present, Gold has returned 4200%, The DOW has returned 1600%. That is a good track record. From 1900 to present, Gold has returned 7600%. The stock market has returned 17,600%. Stocks win in the long run, but the major difference is that we went off of the gold standard 2/3 of the way through that longer period. The continuous printing of money has had a massive influence on the price of gold since we removed ourselves from the gold standard. As Ron Paul has put it, “I remember the day very clearly,” he says. “Nixon closed the gold window, which meant admitting that we could no longer meet our commitments and that there would be no more backing of the dollar. After that day, all money would be political money rather than money of real value. I was astounded.” There will be a day of reckoning for the inflated money. It is history repeating itself. Gold will continue it’s upward trend, up to and through that time of reckoning. Ask a German about inflation and what gold would have done for them in the Weimar Republic. Here is a number for you: 139,000. That’s what each person in our country owes on our national debt. Double that if you have a wife. Triple it for 1 kid. A family of 5 owes $700,000 as their share of the national debt. The rest of the world could bail out Greece, but who is bailing out the United States when we start defaulting? Keep buying your paper and you won’t even be able to burn like the germans did because it’s all electronic now. We are on an unsustainable path. There are very few people on this earth who could actually pay their portion of the debt in their lifetime. And we aren’t done spending. It is becoming exponentially worse on a daily basis. Our grandfathers and great grandfathers would be stuffing gold and silver anywhere they could put it if they were alive today.

      1. Mark Biernat says:

        Well, you know I am in favor of a gold standard or free money alternative to the Federal Reserve bank of the USA. There is no way anyone can argue that the value of our money has not declined. That in itself is not bad per say, but it is the monetary shocks that go along with unstable currencies cause economics problems in the real sector.

        I personally like the idea of gold company stocks when that sector starts to trend up. But I am an equity guy because they are so liquid and can be traded on my computer.

  2. Yes Mark, make no 2nd guess. Gold is hardly investment grade material as you already stated in your post. Probably more likely spare change speculation for those who have it to flaunt. There is too much fear speculation also associated with Gold. Right now the Gold run is showing every aspect of being a technical performer. I say watch it, don’t play it. Check out this chart posted today available at KimbleCharting solution.
    blog.kimblechartingsolutions.com/wp-content/uploads/2010/12/goldstuckinarangedec15.gif

    This says it all.

    1. Mark Biernat says:

      Interesting, but beyond even the charts I think gold can be a medium of exchange in a gold based economy, but to speculate is a negative sum game, and I do not like those odds.

  3. In an economic recession in india within the last five years property prices have increased 3 times and the rate of gold according my experience has increased by an average of 30%.

    In an economy where people are really wondering where to invest. It is a safe investment.

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