Today's panic-driven markets are wiping out your portfolio. But a simple investment in gold and silver can provide the safety you need for today's economy. Last week we forwarded to you a special sector alert from editor Zachary Scheidt on today's opportunity in silver. Here's a follow-up to that alert… and four easy ways to invest in gold and silver.
Investing in gold and silver has long been a way for investors - both individual and corporate - to diversify and "weatherize" their portfolios from rainy day markets.
Precious metals act as a hedge against market downturns. For example, when the Dow Jones Industrial Average dropped 380.48 points and fell below 8,000 on February 10, 2009, gold futures climbed $21.40 in a single day.
And since then, gold futures topped $1,000 an ounce.
With these types of movements, it's no surprise that we've seen those "Cash 4 Gold" commercials break into the biggest advertising venue of the year - the Super Bowl.
But is turning in your old jewelry for cash the best way to hedge your portfolio with precious metals?
Probably not. There are a number of different ways to invest in gold and silver, ranging from gold and silver mining companies to actual gold and silver coins. Let's take a look at your options.
Investing in Gold and Silver Mining Companies
Investors may be a bit wary of investing in the stock market right now, even if the stock is a gold or silver mining company. Of all the options for investing in gold and silver, investing in mining companies is the least pure way. Let me explain.
Mining companies can range from large businesses with massive gold and silver reserves all the way down to the tiny development-stage company that owns some land but doesn't even know what's in the ground yet.
And investors have to deal with all different kinds of costs, like energy and equipment, mining licensing, labor, and any number of other things.
But that doesn't mean mining companies can't be a good investment option. In fact, some companies can offer you tremendous gains that surpass the hedging and safety potential of buying the actual precious metals. Here's what to look for if you're considering investing in gold and silver mining companies, aside from actual reserves in the ground and being produced - which is a must.
Factor #1: Cost of Extraction
First and foremost, you need to compare mining companies' cost of extraction, meaning how much money it takes to get an ounce of gold out of the ground. The lower the costs, the higher the profits... for the most part.
For example, the company that can extract gold at a cost of only $300 an ounce will have a distinct cost advantage over the miner with extraction costs at $420 an ounce.*
(*Extraction numbers are only an example, not representative of true extraction costs.)
Factor #2: Leverage
Secondly, you need to look at leverage, which has a direct effect on earnings multiples - which affects how much money investors should expect to make in the future.
Any increase in gold prices affects the percentage profits of a mining company, but for higher-cost companies, profits jump by a higher percentage than lower-cost companies.
For example, if gold climbs from $800 an ounce to $850 an ounce, lower-cost miners see their profits rise from $500 to $550, or 10%. Higher-cost companies see their profits rise from $380 to $430, or 13.2%. That means that higher-cost companies should see a bigger rise (32% bigger) in their share prices compared to the lower-cost companies' shares.
Factor #3: Hedging
And lastly, look at a mining company's hedging policies. Hedging means a mining company enters a contract to sell their gold or silver to someone for a fixed price, no matter what the actual price might be at the time of the sale. Companies that hedge most of their production are severely limiting their leverage, which, as we've said, can have a strong effect on earnings multiples and share prices.
So, for example, let's assume a company with an extracting cost of $400 an ounce hedges production at $800 an ounce, meaning they've entered a contract to sell their gold for $800 an ounce. If gold continues to rally past $800 to $900, they've eliminated a massive chunk of their profit potential, capping their leverage at $800 and profit at $400 an ounce.
An unleveraged company with the same extracting costs can ride that profit all the way up to $500 an ounce - or 25% more than its competitor.
So for investors looking to invest in gold and silver mining companies, they should take these three factors into consideration.
Before you decide to delve into every mining company's leverage and hedging strategies, let's look at some other precious metal investing options, like exchange-traded funds (ETFs).
Investing in Gold and Silver ETFs
Exchange-traded funds have sprung up by the dozen over the past decade. Investopedia.com defines an ETF as "a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange."
Now, in the gold and silver sector, ETFs can track a basket of gold and silver mining companies, or the commodities themselves. Let's look specifically at the ETFs tracking gold and silver prices, like the SPDR Gold Shares ETF (GLD:NYSE) and the iShares Silver Trust (SLV:NYSE). There are others, but these two are the most liquid in gold and silver respectively. These ETFs track the share price of gold and silver (respectively), and are in part backed by the actual metals.
That means investors can move in and out of gold and silver like stocks, while profiting from the price moves of gold and silver without worrying about costs, like energy and equipment, mining licensing, labor, as with mining companies.
With ETFs, liquidity is one of the things investors need to take into account. A large amount of trades ensures that investors can buy or sell without any difficulty. It also suggests that the fund will be around for a long time.
ETFs… Great for long-term investors, particularly in the gold and silver sector.
And for faster-moving traders, GLD and SLV offer options, which can mean even more leverage for aggressive investors.
That leads us to the futures market.
Investing in Gold and Silver Futures
Investing in gold and silver futures is not for the faint of heart, nor the shallow-pocket investor. With futures, you take on the risk of the commodity price moving drastically against you, and you can incur significant losses. But the rewards can also be significant.
Here's how it works... The World Gold Council writes, "Futures prices are determined by the market's perception of what the carrying costs - including the interest cost of borrowing gold plus insurance and storage charges - ought to be at any one time. The futures price is usually higher than the spot price for gold."
But when an investor initially buys a futures contract, the cash deposit is only a fraction of the price of the gold's worth. That means investors don't have to pay for the full value of the futures contract until he or she "takes delivery" of the actual gold.
And if the price of gold climbed higher than the price of the futures contract, then the investor has made a profit without forking over a lot of cash.
Now, a lot has just been said in those last few sentences. Let's back up. The World Gold Council says, "Gold futures contracts are firm commitments to make or take delivery of a specified quantity and purity of gold on a prescribed date at an agreed price."
If you're buying a futures contract, expect to be holding that gold or silver in your hand... The investor pays a deposit when they first buy the futures contract, and pays the rest once they have the gold or silver.
That's great if the value of that gold or silver has climbed, but not so great if gold or silver prices fall.
Here's an example. If you buy a futures contract at $950 an ounce, and gold rallies to $1,000 an ounce, you've just made $50 on every ounce that you bought (and most contracts are traded in bundles of 100, just like options).
But if gold falls to $900 an ounce, you just lost $50 on every ounce you purchased, and you still have to pay the full value of the futures contract.
You can see that an investor can really take it on the chin if prices move drastically against him or her.
That kind of risk isn't for the everyday investor. But one method of investing in gold and silver can be used by every investor, and that's simply buying gold and silver outright.
Investing in Gold and Silver
Be it bars, bullion or coins, this sure-fire way of investing in gold and silver cuts out all the worry. You don't have to pay any fees, like you do with the gold and silver ETFs, you don't have to pay for a mining companies energy costs, and you don't have to buy 100 ounces in a futures contract if you don't want to.
Let's talk about coins specifically, because here's where things get interesting. In addition to the actual gold or silver value of the coin, you can also take advantage of the demand and rarity of certain coins.
Here's a specific example: U.S. Mint Silver Eagles.
In 2008 alone, the U.S. Mint shattered its previous sales record of 10.4 million by selling almost 20 million Silver Eagles - and demand still hasn't cooled off. The premiums folks are paying are staggering - some of the highest premiums ever recorded for Eagles.
That means investors are paying more for this coin than the actual value of the silver in the coin. And the U.S. Mint Silver Eagle isn't even a rare coin...
When high demand meets rarity, that's when premiums skyrocket... sometimes even doubling the initial price of the coin.
So coins are an easy way to buy into the gold and silver sector... and they offer the additional benefit of "consumer interest leverage." More than just demand for safety or a portfolio hedge, collectors' interest in gold and silver coins can really boost an investor's profits.
Every Portfolio Should Have Gold and Silver
There are a number of different ways you can invest in gold and silver... through mining companies, exchange-traded funds, futures, options on stocks, funds & futures, and through buying bars, bullion and coins. Each offers its own advantages and risk profiles, and investors can tailor their investments to their own portfolios.
But whichever method you use to get invested in gold and silver, keep in mind that any allocation to precious metals can offer a safety net that's much needed in today's markets.
Investing in gold and silver has long been a way for investors - both individual and corporate - to diversify and "weatherize" their portfolios from rainy day markets.
Precious metals act as a hedge against market downturns. For example, when the Dow Jones Industrial Average dropped 380.48 points and fell below 8,000 on February 10, 2009, gold futures climbed $21.40 in a single day.
And since then, gold futures topped $1,000 an ounce.
With these types of movements, it's no surprise that we've seen those "Cash 4 Gold" commercials break into the biggest advertising venue of the year - the Super Bowl.
But is turning in your old jewelry for cash the best way to hedge your portfolio with precious metals?
Probably not. There are a number of different ways to invest in gold and silver, ranging from gold and silver mining companies to actual gold and silver coins. Let's take a look at your options.
Investing in Gold and Silver Mining Companies
Investors may be a bit wary of investing in the stock market right now, even if the stock is a gold or silver mining company. Of all the options for investing in gold and silver, investing in mining companies is the least pure way. Let me explain.
Mining companies can range from large businesses with massive gold and silver reserves all the way down to the tiny development-stage company that owns some land but doesn't even know what's in the ground yet.
And investors have to deal with all different kinds of costs, like energy and equipment, mining licensing, labor, and any number of other things.
But that doesn't mean mining companies can't be a good investment option. In fact, some companies can offer you tremendous gains that surpass the hedging and safety potential of buying the actual precious metals. Here's what to look for if you're considering investing in gold and silver mining companies, aside from actual reserves in the ground and being produced - which is a must.
Factor #1: Cost of Extraction
First and foremost, you need to compare mining companies' cost of extraction, meaning how much money it takes to get an ounce of gold out of the ground. The lower the costs, the higher the profits... for the most part.
For example, the company that can extract gold at a cost of only $300 an ounce will have a distinct cost advantage over the miner with extraction costs at $420 an ounce.*
(*Extraction numbers are only an example, not representative of true extraction costs.)
Factor #2: Leverage
Secondly, you need to look at leverage, which has a direct effect on earnings multiples - which affects how much money investors should expect to make in the future.
Any increase in gold prices affects the percentage profits of a mining company, but for higher-cost companies, profits jump by a higher percentage than lower-cost companies.
For example, if gold climbs from $800 an ounce to $850 an ounce, lower-cost miners see their profits rise from $500 to $550, or 10%. Higher-cost companies see their profits rise from $380 to $430, or 13.2%. That means that higher-cost companies should see a bigger rise (32% bigger) in their share prices compared to the lower-cost companies' shares.
Factor #3: Hedging
And lastly, look at a mining company's hedging policies. Hedging means a mining company enters a contract to sell their gold or silver to someone for a fixed price, no matter what the actual price might be at the time of the sale. Companies that hedge most of their production are severely limiting their leverage, which, as we've said, can have a strong effect on earnings multiples and share prices.
So, for example, let's assume a company with an extracting cost of $400 an ounce hedges production at $800 an ounce, meaning they've entered a contract to sell their gold for $800 an ounce. If gold continues to rally past $800 to $900, they've eliminated a massive chunk of their profit potential, capping their leverage at $800 and profit at $400 an ounce.
An unleveraged company with the same extracting costs can ride that profit all the way up to $500 an ounce - or 25% more than its competitor.
So for investors looking to invest in gold and silver mining companies, they should take these three factors into consideration.
Before you decide to delve into every mining company's leverage and hedging strategies, let's look at some other precious metal investing options, like exchange-traded funds (ETFs).
Investing in Gold and Silver ETFs
Exchange-traded funds have sprung up by the dozen over the past decade. Investopedia.com defines an ETF as "a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange."
Now, in the gold and silver sector, ETFs can track a basket of gold and silver mining companies, or the commodities themselves. Let's look specifically at the ETFs tracking gold and silver prices, like the SPDR Gold Shares ETF (GLD:NYSE) and the iShares Silver Trust (SLV:NYSE). There are others, but these two are the most liquid in gold and silver respectively. These ETFs track the share price of gold and silver (respectively), and are in part backed by the actual metals.
That means investors can move in and out of gold and silver like stocks, while profiting from the price moves of gold and silver without worrying about costs, like energy and equipment, mining licensing, labor, as with mining companies.
With ETFs, liquidity is one of the things investors need to take into account. A large amount of trades ensures that investors can buy or sell without any difficulty. It also suggests that the fund will be around for a long time.
ETFs… Great for long-term investors, particularly in the gold and silver sector.
And for faster-moving traders, GLD and SLV offer options, which can mean even more leverage for aggressive investors.
That leads us to the futures market.
Investing in Gold and Silver Futures
Investing in gold and silver futures is not for the faint of heart, nor the shallow-pocket investor. With futures, you take on the risk of the commodity price moving drastically against you, and you can incur significant losses. But the rewards can also be significant.
Here's how it works... The World Gold Council writes, "Futures prices are determined by the market's perception of what the carrying costs - including the interest cost of borrowing gold plus insurance and storage charges - ought to be at any one time. The futures price is usually higher than the spot price for gold."
But when an investor initially buys a futures contract, the cash deposit is only a fraction of the price of the gold's worth. That means investors don't have to pay for the full value of the futures contract until he or she "takes delivery" of the actual gold.
And if the price of gold climbed higher than the price of the futures contract, then the investor has made a profit without forking over a lot of cash.
Now, a lot has just been said in those last few sentences. Let's back up. The World Gold Council says, "Gold futures contracts are firm commitments to make or take delivery of a specified quantity and purity of gold on a prescribed date at an agreed price."
If you're buying a futures contract, expect to be holding that gold or silver in your hand... The investor pays a deposit when they first buy the futures contract, and pays the rest once they have the gold or silver.
That's great if the value of that gold or silver has climbed, but not so great if gold or silver prices fall.
Here's an example. If you buy a futures contract at $950 an ounce, and gold rallies to $1,000 an ounce, you've just made $50 on every ounce that you bought (and most contracts are traded in bundles of 100, just like options).
But if gold falls to $900 an ounce, you just lost $50 on every ounce you purchased, and you still have to pay the full value of the futures contract.
You can see that an investor can really take it on the chin if prices move drastically against him or her.
That kind of risk isn't for the everyday investor. But one method of investing in gold and silver can be used by every investor, and that's simply buying gold and silver outright.
Investing in Gold and Silver
Be it bars, bullion or coins, this sure-fire way of investing in gold and silver cuts out all the worry. You don't have to pay any fees, like you do with the gold and silver ETFs, you don't have to pay for a mining companies energy costs, and you don't have to buy 100 ounces in a futures contract if you don't want to.
Let's talk about coins specifically, because here's where things get interesting. In addition to the actual gold or silver value of the coin, you can also take advantage of the demand and rarity of certain coins.
Here's a specific example: U.S. Mint Silver Eagles.
In 2008 alone, the U.S. Mint shattered its previous sales record of 10.4 million by selling almost 20 million Silver Eagles - and demand still hasn't cooled off. The premiums folks are paying are staggering - some of the highest premiums ever recorded for Eagles.
That means investors are paying more for this coin than the actual value of the silver in the coin. And the U.S. Mint Silver Eagle isn't even a rare coin...
When high demand meets rarity, that's when premiums skyrocket... sometimes even doubling the initial price of the coin.
So coins are an easy way to buy into the gold and silver sector... and they offer the additional benefit of "consumer interest leverage." More than just demand for safety or a portfolio hedge, collectors' interest in gold and silver coins can really boost an investor's profits.
Every Portfolio Should Have Gold and Silver
There are a number of different ways you can invest in gold and silver... through mining companies, exchange-traded funds, futures, options on stocks, funds & futures, and through buying bars, bullion and coins. Each offers its own advantages and risk profiles, and investors can tailor their investments to their own portfolios.
But whichever method you use to get invested in gold and silver, keep in mind that any allocation to precious metals can offer a safety net that's much needed in today's markets.
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