Golden Advice About Owning Gold and Silver

I believe investors think about gold and silver in a way that does not fully recognize both RISKS and BENEFITS. Let’s look at TWO commonly held beliefs about buying gold and silver.

BELIEF 1: Gold is a store of value. If you buy it, you have achieved greater safety.

This is true to an extent. Yet gold went from about $850 per oz. at the end of the ’70’s inflation scare down to $296.75 (London PM fix). Gold then reached a new low of $254.20 during the Clinton years of dollar strength. So was it a hold of value considering inflation? Not really and the same is true for silver as I’ll go over in the next section. You certainly did not lose ALL your money as you can in some stocks, but you did very poorly if you bought at the peak.

Gold touched down second time at 256.25 on 2-20-2001 and then rose, and rose, and rose.

I recommended that investors buy gold at $332/oz during the breakout above the prior 2002 highs. I have never advocated selling long-term positions, but have recommended trading in and out with a portion of your assets if you so choose.

On November 9th, 2010 gold hit its ALL TIME high of 1421.00 and since has drifted down a bit to around $1400 per oz. But will it continue higher? The next “belief” suggests that it could go higher. A lot higher.

BELIEF 2: Gold is a hedge against fiat currency printing, but this could never happen to us.

Gold does serve this protective purpose. While currencies can go to near zero as they have in various countries since the beginning of time, gold does not go to zero. They even point this out on commercials written by gold sellers. Sometimes commercials are TRUE. At least they give you the part of the truth that serves their interest.

The way our Fed is printing money, many are advising that you hold anywhere from 5 to 20% of your assets in gold and silver. That way, if there is even moderate inflation of say 25%, you will at least partially hedge against it. If there is hyperinflation, owning precious metals can save your ability to pay your bills. Is that likely? Some say it is inevitable given the course we are on. Some say this is overblown.

The evidence that I find most compelling that you need to protect yourself against a currency crisis is

  • the decrease in Chinese US dollar reserves over the past few months
  • the talk by the oil-producing countries of creating an alternative to US dollar investment
  • a publication by the IMF (International Monetary Fund) that said a “world currency” should be created.
  • There are other signs and symptoms of a pending currency crisis in the US, but there have been for years, whereas I take what China, Russia, and the Arab nations are talking about and are now DOING much more seriously. China HAS dropped its holding of US Treasuries over the past few months.

    My point is to not get caught unprepared. Owning even just 5% of your assets in metals will not kill you if it drops to half of what you paid for it. Jim Cramer recently recommended holding 20% in gold. He holds gold via gold stocks in his own accounts due to restrictions on what he can invest in. Buy a basket of gold stocks (an ETF or mutual fund; ETF’s are cheaper usually) for your “gold stock” portion of your gold holdings is my opinion. Owning both gold and silver may be a reasonable thing to do. How much you own and how you own it can be found on the web. And of course, discuss it with your financial advisor.

    Silver carries economic risk with it. That means silver COULD drop by 50% again, because it is linked to the economy unlike gold. Silver crashed during the 2008; it did NOT rally. The SLV fell from $20.73 to a low of $8.45 and then rebounded to around $30 currently. If you panicked out you LOST big money. If you stuck with it, you have “made” big money and some say that you’ll make even more in silver vs. gold going forward if the currency crisis deepens.

    Realize that trading metals with a portion of your holdings is often more lucrative than holding them. And you don’t have to jump in and out over short periods of time. I follow gold in my newsletter via the GLD.

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    Standard Disclaimer: Remember, it’s your money and your decision as to how to invest it.

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    One Response to Golden Advice About Owning Gold and Silver

    1. Interesting post! This is a complicated matter, I understand what your trying to say. This is a tough business!

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