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How best to invest in gold and silver in 2010

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ArabianMoney has done a great deal of due diligence in gold and silver investment over the past couple of years. You do need to be careful. It is only too easy for somebody to take your money and claim to have invested it in gold and silver – perhaps pointing you to a few bars in a vault as yours – while actually running off with the money.

Gold and silver trading is actually a very low margin business, so you can see why even the most honest operators could get lured into something decidedly dodgy. But the good side of a low-margin business is it means that you can afford to shop around.

Perth Mint

What about finding a gold depository which is triple-A rated, government owned and operated, and located in a very stable country outside the USA? That is why we like the Perth Mint, and if you choose to trust its unallocated precious metal scheme there are no storage charges above $250,000 invested, and for a fee this bullion can be converted into allocated bars at any time.

ArabianMoney dislikes the idea of buying bullion and burying it in the garden or hiding it up a drainpipe. Gardeners and plumbers might become rich this way. It is just not safe. You could use a safe deposit box of course. But where would it be located and how will you transport your gold to the box securely? The Perth Mint is cheaper and safer.

Other major investors, including big hedge funds, seem happier with the gold and silver exchange traded funds, GLD and SLV, for example. This can be done through a simple online brokerage account and the charges are very reasonable.

ETFs

Purists argue that the small print of the ETF means that your money might not be immediately invested in gold but for funds now equivalent to sovereign reserves in size this is frankly pedantry. If Mars attacks you might have a problem, otherwise your gold is far safer than buried in your garden.

There is also a good argument to hold some precious metal stocks. These equities have actually lagged well behind the gold price, and are priced to reflect the gold price in 2003. Clearly they ought to catch-up at some stage but equities will also be subject to the ups and downs of the stock market, although again they can outperform other stocks.

Juniors ETF

Last year saw the launch of the first ETF covering junior mining stocks (GDXJ) and for a longer term play on the gold price with maximum leverage to the upside this looks a good choice. The ETF is highly diversified, avoiding the risk of picking a dud among the many junior firms, while still exposed to the precious metals sub-class with the highest upside in a boom, and is also very liquid unlike the small stocks themselves.

A diversified gold and silver portfolio for 2010 should therefore include the physical metals, selected major stocks and some exposure to the smaller companies. This will put investors in a position to capitalize on the big upswing in precious metal prices which is coming this year (see this article).

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Written by Peter Cooper

January 6, 2010 at 9:41 am

One Response

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  1. It’s funny, but last week I was looking at alternative ways to protect the value of savings for when the economy recovers (we hope) and the Great Inflation probably starts. Double digit inflation can wipe out the value of your savings very fast. (And the US Government plans a 5% yearly inflatation rate to cut the real value of the National Debt in half over the next 15 years.) I narrowed my options down to the Perth Mint, Canadian Maple Leaf gold coins (Sad to say, people might not trust any coins from the US Government during a dollar collapse.), and those supermajor oil company stocks that pay a good dividend. (Without oil, most people in the West will starve, so not having any money won’t be your big problem.) Since it cost to both buy and sell physical gold, and since I don’t know if all that paper gold really exists if a bunch of folks all start selling at once, this year I like a few of the big multi-national oils on any pullback.
    The major US telecoms pay a nice dividend too. With new Internet gadgets coming out monthly, use of telecom is exploding. People are wasting amazing amounts of money on all this expensive, usually unnecessary junk, myself included. The service providers can’t build facilities fast enough to keep up with the demand. That is a nice problem for a business to have, especially when there are so few of them, and barriers to entry are very great. But their stock price can’t explode like oil stocks can, and will, after the peak oil crisis hits during the second half of this decade.
    Should a complete global financial meltdown happen, Perth is a lot farther away than a bank safe deposit box full of gold coins. Now if you lived in Australia, the Perth Mint would be the way to go, since the Australian government is trustworthy. Eventually, depending on domestic political developments, Chinese military power might become a threat to Australia. Think after 2025 for that.
    You need to remember that the price of gold can drop and stay there for years. It IS possible, though not likely. Governments will make owning gold illegal, long before they make owning stocks that pay dividends illegal. Gold that you can’t legally sell is effectively valueless, unless you like to risk jail, or worse. And even if you can sell it on the black market (bring friends), you will get a fraction of what you paid for it. Waiting for the law to change could take a while. Cash is everywhere, is totally liquid and can buy anything, anytime. (You can watch the movie ‘Blow’ if you want to see the only cash problem that I know of.) Governments can sell massive amounts of gold, drive the price down, and then buy it back. So be careful how much you invest in gold. It’s a lot less stressful to just watch the gold price, and cash the dividend checks. And please try to keep from freezing during this period of global warming.

    Bill Simpson in Slidell

    January 6, 2010 at 3:34 pm


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