Buying Bullion: The Smart Metals Investment

During the early part of the decade, when others were refusing to look at their brokerage statements, afraid of seeing the dollar amounts that might appear next to their favorite tech stocks, the first few tentative steps were taken here toward what is now a well-developed portfolio of commodity-related investments.

Buying gold and silver mining stocks was easy - buying bullion was another matter.

Mutual Funds
Mutual funds holding precious metal mining stocks have been around for a very long time now and they have quietly risen by 300- 400% or more in the last five years. That's the way most people take their first plunge into the gold sector - buying a fund that holds mining stocks.

Funds such as U.S. Global Investors World Precious Minerals [UNWPX] give you about all that you could ever want from a precious metals stock fund. There are dozens of funds available in this sector and in the relatively small world of gold mining stocks they all move in the same general direction. This offering from U.S. Global Investors happens to be one of the better performers.

Clearly, the year 2001 was when everyone should have loaded up the truck and just sat tight for the next five years. But after considering that during the four years before 2001 the fund above averaged a loss of 27 percent per year, few could possibly have been that bold.

That's the problem with going against the crowd, you can be wrong for a long period of time and look pretty dumb in the process. If you were convinced that the late 1990s would see the resurgence of another great gold bull market, you were probably disappointed as everyone else was furiously plowing money into tech stocks, helping to rewrite the history books in the process.

But aside from the not-so-small matter of timing, buying gold stocks has always been pretty easy.

Gold and Silver Coins and Bars
The purchase of precious metal bullion, on the other hand, was an entirely different matter until ETFs began launching just two years ago. Today, with gold offerings like the StreetTracks Gold Shares (GLD) and iShares Comex Gold Trust (IAU) and a similar product for silver in the iShares Silver Trust (SLV), buying bullion couldn't be easier.

For those making purchases before gold and silver were just a mouse click away, the gains have been much greater, but even those who jumped in on the first gold ETF back in December of 2004 are looking pretty smart today.

Of course they probably didn't feel very smart for much of 2005.

Most people probably never even considered precious metals as an investment option until they were made easy for them to buy - a lesson that should be heeded when considering the purchase of shares for small Canadian mining companies that present similar difficulties in their acquisition.

If you purchased gold or silver bullion more than a couple years ago, there were other options available that still exist today, even after the increased competition from ETFs - GoldMoney and the Central Fund of Canada (CEF) come quickly to mind.

But probably the best way to buy bullion is the same way that people have been doing it since gold ownership was again legalized in the 1970s - buying coins and bars from coin dealers. You'll never know what a thrill it is to take that first trip down to the post office to pick up that first registered mail package with the odd handling characteristics.

You see, gold is very dense, and when it is packaged inside of a much larger box, the box tends to "spin" around the mass in the middle. Silver has its own density problems, this one mostly having to do with sheer weight - if you ever get the opportunity, try holding a handful of pre-1966 silver coins in one hand (90 percent silver) along with the same dollar amount of recent coinage in the other.

Today's coins, made mostly of copper, feel and sound almost like "play money".

You can also just walk into a coin shop, but today you're more likely to see people selling than buying - it's kind of depressing and ironic at the same time actually. It is surely a sign of the times when soaring metal prices cause financially stretched individuals to sell family heirlooms or other precious metals - all during an era of supposedly low inflation.

Something's wrong with that picture, but it shouldn't discourage you from picking up some gold or silver coins - if for no other reason than to experience what money used to feel like.

Disclosure
None of the mutual funds or ETFs above are currently owned by the author however, similar items are included in the model portfolio at Iacono Research.

Comments

[Malkiel:]

Needing the sensual experience of the shiny feel or being an actual coin collecting hobbyist are the only valid reasons in the ETF era for attempting to own the metal as opposed to an interest in some abstracted metal investment. When a financial panic such as the once-a-decade big market plunge happens it's too difficult to liquidate your position before the situation stabilizes; the transaction costs of storage, transport, commissions, and insurance bite deeply; and in the event of a true social breakdown the gold is absolutely worthless (as Robert Lichello pointed out from his experiences in occupied Japan, when the social order and economy are broken only soap, cigarettes, food and alcohol have any value--there are no buyers for gold).

In the modern world any crisis that will raise the price of gold will be short-lived and must be anticipated quickly enough to sell ETF or stock shares on electronic markets and transfer the profit to traditional banks through electronic transfer to lock them into the bricks and mortar economy. Modern crises (at least manageable ones that don't reduce us to the soap and cigarette phase) pass far too quickly to mess around with exchanging bullion if you hope to capture maximal profits...

2006 Dec 01 12:39 PM

[Doug Cottrell:]

For the most ETFs make more sense. ETFs though like any other investment are abstract and held by institutions. In a crisis, they can and will simply disappear - literally, figuratively, legislatively or all of the above. They are subject to regulatory manipulation. Look into the SEC/IRS attempts to attack funds like CEF under PFIC regulations. It's been almost 100 years since there has been a true crisis on American soil.

The people who have truly experienced crisis know that a tin of gold buried in the chickencoop is more real and realistic than any account, fund, asset, bond or paper investment.

Even without a full-fledged crisis, there is no realistic way at all to track holders of bullion and how much they may have gained or lost. It is one of the very, very few investments which you can truly tuck away against any political, social, taxation, bubble nonsense.

If you are fortunate enough, liquid enough, and have the luck of timing on your side, buying and holding a portion of raw, unencumbered bullion is one of the most intelligent investments you might ever make.

2006 Dec 02 01:05 PM

[Bob Kirtley_:]

EFTs are taking gold off the market which will help to drive the price up. However, in the long run we think that gold mining stocks will be the ultimate winners.

2006 Dec 04 09:11 AM