Five Sophisticated Gold and Silver Investment Strategies for 2009 21 comments
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Buying a few gold coins or the odd mini-ingot and hiding them away has been a successful investment strategy over the past five years. Even in the annus horribilus of 2008 investors who chose gold over other asset classes have been well protected while others have seen their wealth decimated. US dollar gold prices have been maintained while gold in Australian dollars, for example, was one of the best performing global asset classes in 2008.
For 2009 the resumption of a strong bull market in gold is one of the few positive predictions that look reliable. The sell-offs by hedge funds which kept gold future prices down in 2008 are coming to an end, and that should unleash a powerful new up leg in the gold market.
Chartists can already see this happening in their technical analysis. The spot price of gold has moved above the futures price, something known as ‘backwardisation’. This is almost always a signal that a huge price shift is about to occur. The same ‘backwardisation’ is also present in the silver price chart.
Soaring demand
You can also see this in the demand for physical gold that has been soaring. Last month a group of Saudi investors bought a $3.5 billion hoard of gold, one of the largest single deals ever, and smaller investors have been snapping up precious metals all over the world, leading to shortages of many popular bullion coins and delivery delays.
What is gradually happening is that physical demand for gold is overpowering the paper or futures market in determining the spot price for the yellow metal, that is what ‘backwardisation’ means down on the ground, and once the futures market is sunk the gold price will leap back above the high of $1,030 set last March.
Aside from sensing this change, why is it that smarter investors are so keen to invest in gold now? It is really down to the condition of the global economy and the massive amounts of money being injected by governments to counter the slump in bank lending. Investors reason that not too long down the road, this action is going to be inflationary, like in the 1970s.
Gold has a relatively fixed supply and so will retain its value as price levels soar, and in fact this phenomenon will attract new investors to the yellow metal and send prices very much higher. In the late 1970s the gold price rose eight-fold, and history has a habit of repeating itself, whatever governments try to do to keep prices down.
But the smarter investor is going to want to find a way to leverage the rising gold price in 2009 and to achieve the greatest returns without necessarily putting capital at risk through debt-funded instruments. There are a number of well-proven methods of achieving this kind of zero-debt leverage to the gold price.
Gold stocks
First, you can buy gold stocks, the shares of large gold producers. Conveniently the recent stock market crash has taken these share prices down to low levels, marking an attractive entry point for investors.
Buying gold stocks levers the gold price because as the gold price rises it has an even larger impact on the profits of gold producers. Clearly any rise in the gold price above the cost of production flows straight through to the bottom line.
Secondly, junior gold stocks or gold exploration stocks offer a riskier investment class – as smaller companies with less certain assets and management – but a proportionately higher return. Gold exploration companies own the claims to land on which future gold mines might be located, and in a gold boom the value of these assets rises exponentially.
Legendary investment adviser Dr. Marc Faber recommends gold explorers in his latest newsletter, pointing out that these stocks have become ‘incredibly cheap’ because of the stock market crash. In the late 1970s investors who bought the right gold juniors at the right time made one hundred times their original investment.
Thirdly, instead of buying gold you could buy silver. These two precious metals are close cousins and it is not for nothing that silver is often referred to as ‘poor man’s gold’.
In previous gold price booms, silver has always tended to outperform gold in terms of its price rise. People who cannot afford gold tend to buy silver and it is a fact of life that the available stock of silver is much smaller than gold, and so the price rises are more dramatic as demand lifts off.
Silver
Silver price movements can be very volatile as investors have seen in 2008, but the reward for patience is higher returns than gold. Chartists note that silver price movements tend to lag gold in the early months of a major price advance and then suddenly sprint ahead, bringing down the important gold-to-silver price ratio.
The gold-to-silver price ratio stands at around 66 today compared with its long-run average of 15. This leaves considerable room for a closing of the gap between the gold and silver price, and that will come on top of an increase in the gold price. Owning silver therefore gives a strong leverage over the gold price.
Fourth, the sophisticated investor can look to gear-up on the silver price by buying stock in the major silver producers. This is how investors like Warren Buffett, Bill Gates and George Soros have played a rising silver market in the past. The same argument applies as with the gold producers, as profits will be geared to the rising price of the underlying metal.
And here is a fifth and final option for smarter investors in precious metals: you could buy shares in the smaller silver producers, or silver explorers, whose share price advances in a bull market will eventually be bigger than the larger integrated producers. Again in a real bull market the value of the assets of smaller companies will leap, and these shares are presently very cheap after the stock market crash.
However, one big warning to smarter investors who want to leverage the gold price in 2009: leverage, even without debt, will act in reverse if the gold price falls. So a diversified portfolio of precious metal assets is preferable to limit downside risk.
Also you should note that this article has not even considered ways of levering the gold price by borrowing cash for investment. Gold is not for market timers whose leverage depends on precisely timing options, and silver is even more volatile.
No debt
The trick is to keep the price movements working for you by holding the right type of investment instrument and not borrowing up to the eyeballs or using options to try to lever a small price change that might not happen exactly when you want it.
Think of precious metal exploration stocks as an option that never expires, or at least one that does so very slowly, but do not buy precious metal options unless you happen to be in the jewelry trade.
However, the sophisticated investor is paying more and more attention to precious metals and trying to exact the best performance from this asset class is something that is taxing the best brains in the business right now. It may be that top managers come up with some better ideas than those presented in this article, but these are all the approaches that have worked in past precious metal booms.
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This article has 21 comments:
Happy New Year!
Like SW says, beware of the locations of the Gold Miners. The hardest hit Countries are more likely than not to Nationalize those Mines. IMO
The curtain has fallen on the stage play called "Where's Your Money?".
The answer is "Gone" !
The answer is buy gold. You know what it is and where it is.Your broker could never answer those questions for the hedge fund in which you lost almost all of your money. Investing is not like betting at the horse track unless you like loosing all your money.
Don't look to politicians for salvation. Berny has them in his pocket. They will not blow the whistle or retrieve your losses.
Could these be the reasons gold goes up when the economy dies from an overdose of incredibly over leveraged assets like homes, commercial real estate, stocks, and bonds?
Good luck.
l
Gold will go up for the following reasons.
#1 Deflation of inflation won't matter. When you print too much fiat currency it loses value. Gold is always measured against the amount of fiat currency in circulation. It has been this way for decades. The deflation pundits are missing this point.
#2 Gold will become a momentum play. In other words Gold is up 80% when all other plays including energy and commodities have continued to decline. The money sitting on the sidelines that is developing a little more risk appetite is increasingly becoming convinced that Gold might be that safe play that in the least will preserve its value and at viewed conservatively will provide handsome returns. Most money managers are asking clients now to allocate 10% of their portofolio to Gold stocks. Most clients have all their portfolio in cash! When 10% of this huge cash pile moves into Gold there will be the first big spike in price of Gold. When this happens the monetum crowd which is looking for the next big asset class toe xplode will pile their money into Gold which will cause a massive runup in price of Gold. I believe the first part of this rush has already begun.
#3 Gold as a "safe haven" play. People forget how tinderbox of a situation exists in certain parts of the world. There are three global flash points -- first is India/Pakistan. People think that tensions are under control but they are wrong. The Indian newspapers are asking the question if Israel could "bravely" go bomp the ?UCK out of Hamas for shooting rockets at them why can't India go obliterate the terrorist camps in Pakistan whose locations India knows all too well. This and the often repeated comparions that the Mumbai terror incident is analogous to 9/11 might trigger India's hand into a strike on Pakistan. This would be mayhem in the making. Second, is the Israel/Iran situation. I don't believe for a moment that Israel will let Iran acquire nuclear capabilities. Israel must take out the Iran nuclear facilities and do so now before Obama comes to power in the U.S. Third, Russia is desperate looking for answers to its ills and the population is restless. What better than war to divert their attention? Watch out former Soviet republics! Irrespective of whether the tinderboxes named here will ignire just the fact that these are simmering and may explode will add luster to Gold's reputation for safe haven.
If you want to invest in the real thing (backed by actual silver and gold, not paper), get into Central Fund Of Canada. Central is listed on the NYSE Alternext - Symbol CEF and the Toronto Stock Exchange - Symbols: Cdn. $ CEF.A and U.S. $ CEF.U -- buy in on the Toronto Stock Exchange (why hold US dollars?).
CEF gets audited 2x a year to make sure it holds aroun 90% gold and silver, not paper like the COMEX.
Cheers and good luck this year to all.
On Dec 28 01:24 PM Clavis wrote:
> Chaps, if you are buying gold/silver, remember to buy the real stuff,
> not pieces of paper offering; or not; delivery at some future indeterminate
> date, i.e. AVOID COMEX
Gold seems to be such a popular topic now, but If you look at a big picture charting of the viable gold stocks against their operating cash flow and revenue over the last 10 years, they very typically have the look of a dull, out-of-favor group - a value investor's dream. I've found many of them with price/cash flow of 6 (Gold Fields, Richmont Mines) and 5 (DRDGOLD) and 8 (Aurizon Mines) by Morningstar tabulations. There is a whole slew of them that have been hammered down to near where they were in 2001 before the current gold bull market even began (GFI, RIC, DROOY, GRS) with price/sales and price/cash flow less than general market averages.
Given the fundamental outlook for gold, the gold stocks just don't seem to be overextended in any way - except maybe to the downside!
Fundamentals for the gold/silver miners are improving dramatically to name a few of the important one;
- fuel/energy costs are way down. Most miners are are very sensitive to diesel prices.
-Steel and other related commodities have fallen big time
- junior explorers with good projects and proven assest have been hammered unmerifully. Now will be the time for the majors to go shopping picking up good deals, a recent example is IAG proposed aquistion of OZN most advance deposit.
-Rising bullion price, making a new high will light a fire under the miners chasing shorts to run for cover.
Still my thought would be to use GLD or other ETF type vehicles for trading and buy physical gold to keep on hand.
Another way to trade the miners is via the GDX ETF. Currently around 32, was as low as 17+ in the past few months and was in the low 50s prior to that. It's pretty volatile and so could be used for a trading position.
For example: Buy some for a long term position and then add on dips and lighten up on rallies to build the the core position over time (ie. add $X any time the price dips 5% or more below your average cost and then sell $X when the price rallies 5% or more above your average cost and keep the extra shares that you don't need to sell).
As always, you are responsible for your own investment decisions. I'm just providing ideas for you to consider. Trade at your own risk.
In other words, third party risk.
On Dec 28 10:41 AM david roper wrote:
> Do you think that the US government would actually seize the gold
> in the GLD safes? Is THAT why it is recommended to own physical gold,
> the metal? Buying GLD on my laptop is very easy to do.
GoldMoney also sells silver bullion.
The statistics have been compiled based on information provided by 12,000 corporate executives throughout the world. A system of rating the banking systems of individual countries was conducted by participants answering a number of questions and rating the banks on a scale of one to seven, one being in need of government support seven being entirely healthy.
Canada’s baking system, lead by Royal bank, CIBC, Scotiabank, TD Bank, Bank of Montreal and National Bank, received the highest rank in the world, scoring 6.8 on the rating scale.
The top 10 safest countries for banking are currently as follows:
Canada (6.8)
Sweden (6.7)
Luxembourg (6.7)
Australia (6.7)
Denmark (6.7)
Netherlands (6.7)
Belgium (6.6)
New Zealand (6.6)
Ireland (6.6)
Malta (6.6)