Gold Investment Methods

The World Gold Council has published “A Guide to Investing in Gold,” an informative pamphlet that touches on traditional approaches without discussing strategies. The council highlights 10 ways to invest:

1. Bullion
2. Bullion coins
3. Numismatic coins
4. Statement accounts
5. Accumulation plans
6. Mining shares
7. Mutual funds
8. Futures
9. Options
10. Forwards

Except for forwards, which require large financial commitments these areas apply to individual investors and are available for silver, platinum, and palladium, too. Platinum and palladium have few, if any, numismatic coins because these metals were hardly ever used for coin of the realm. In addition, palladium does not have sufficient popularity for the development of statement accounts or accumulation plans. These facts aside, the 10 can be broken into four categories:

1. Physical holdings
2. Custodial holdings
3. Derivatives
4. Equities


I consolidate these further into the traditional, progressive, and participatory. If you own coins or bullion, you’re a traditionalist. If you trade futures and options, you are progressive. If you own equities, you are participatory, involved in the rewards of production and distribution. Strategically, there are times to own metal, times to trade progressively, and times to participate in equities. Further, all three have a measure of overlap in today’s precious metals environment. This is to say that a precious metals advocate can justify owning metal or having a custodial account simply as disaster insurance. If the purpose is to protect against a financial panic, physical metal is favored over a custodial account because the integrity of the custodian like a bank or brokerage house might be challenged. When all else fails, the investor would need coins or bars.

There is a serious question as to whether anyone would be safe in a crisis of such proportions that it requires a flight to gold and silver. Leaving philosophical questions and intellectual exercises aside, nothing would be more secure than physical metal. If some technological breakthrough like cold fusion becomes a commercial reality, demand for palladium and platinum could be so explosive as to justify owning metal for fear of a complete market lockout. Based on current palladium production, its price could climb to $5,000 an ounce while remaining economically viable for supporting the cold fusion process. The original literature touted that as little as a half ounce of palladium could power an entire home for a thousand years. If true, $5,000 an ounce might be a bargain. At the first hint of commercial feasibility, you and I would probably be foreclosed from participating. Yet, if we own 10, 20, or 100 ounces of palladium at prices ranging from $100 to $200, this modest investment can grow into a small fortune.

There is no doubt you would be making a bet on unproven technology. But the gamble is worth the price for those who can afford it. A more likely scenario is the prospect of platinum fuel cells for home and automotive use. Hypothetically, we could see a serious move toward stationary fuel cells for home and office use as a result of the war on terror and the vulnerability of our power distribution grid. Fuel cells can run on natural gas and propane, which are widely distributed through public service companies. As an alternative to the grid, individual cells can be placed in homes for local power generation. This model is more efficient because most of the power generated by utilities is dissipated and lost through the grid. Local generating presents huge efficiencies.

Details aside, the demand for platinum could become extreme while new discoveries remain sparse. The result would be a huge price surge. Again, a small amount of platinum can go a long way when prices rocket from $600 to $6,000. As later chapters demonstrate, equities may easily represent the best precious metals investments. When you own mining stocks, you participate in production and distribution. You make your gains the old fashioned way through earnings. In a reasonably stable stock market environment, stocks and mutual funds are sound and effective.

In particular, gold stocks and mutual funds have the advantage of widening profit margins based on stable prices and falling production costs. Yes, the ratio between price and cost can fluctuate. Some companies will have better numbers than others. But the process of mining and selling gold, silver, platinum, and palladium in a free and open market should maintain better than average performance as demand for these commodities grows.

When trading equities, an investor must be aware of the general market environment. Even gold stocks suffer during an overall market collapse, as seen in 1987 and during the 2000 recession. When picking individual stocks, the investor must consider properties, location, management, technology, financial strength, political environment, and a string of other fundamental factors. Should one invest in a dedicated mine that specifically produces gold, silver, platinum, or palladium? For example, North American Palladium concentrates on palladium, as the name implies.

However, gold, silver, and platinum are a usual consequence of palladium production. Alternatively, should the investor look at a base metal producer that spins off large by-product precious metals production? Freeport-McMoRan produces gold as a consequence of copper, although the company also pursues gold mines. What technology is in place? Are investors looking at deep shaft or strip mines? What are the ore grades and how much does the metal cost to refine? When later chapters review specific metals in greater detail, you will see how many considerations exist. Selection is a complex process.

People come from all over the world to buy gold from Dubai and you can see in the following video of Dubai airport where gold is available to buy for travelers coming and going from Dubai Airport at cheap rates.

If you choose a mutual fund, you should determine the management philosophy. Is it a small-cap fund? Are choices highly speculative, or are investors investing in an established mix of companies? The most popular funds deal exclusively in gold stocks. There are international funds, country- specific funds, and sector-specific funds. Speculative or venture funds may invest in start-up companies, partnerships, or even property rights. You can even seek out funds specializing in mining technology stocks. The variety is almost endless. I should point out that equities have associated options, too. Speculating in stocks can be linked to the general market environment or the specific metal price trend. Understand that production costs are relatively fixed compared to product price fluctuations. Although that statement may appear obvious, rising metals prices will eventually lead to rising profit margins. However, if a company has hedged, it may not participate in the rewards of price appreciation. This has been particularly perplexing to investors who have jumped into mining companies with both feet, only to find that the stock declines because of a poorly placed hedge or badly conceived forward selling.

Sometimes you might miss the move in physical metal but catch the reaction in subsequent stock movement. That is why relationships call for integrated strategies. In the old days, precious metals did not involve so many strategic considerations. Obviously, market structure has changed. It is now far more complex. It is unfortunate that so much of the promotion of gold, silver, and (to a lesser extent) platinum and palladium is based on an assumption of doom and gloom. There is an inherent tendency to link the need to invest in gold and silver with a pending hyperinflation or global monetary meltdown. The truth is no such disasters are required to inspire precious metals higher. Facts indicate that population patterns and general global wealth are the more likely motivators for these markets during the next several decades.

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Yes, inflation can be the catalyst for a new major bull market. Yes, a monetary crisis can drive people back to hard assets. Yes, a change in political atmosphere can ignite a panic. No, these are not the absolute requirements for rising precious metals prices. Consider that gold made a contraindicated recovery beginning in 2001 when inflation was low. The definitive price rise began before oil made its war-related move and before 9/11. Retrospectively, many believe weak stocks and falling interest rates were the motivators. However, accumulation patterns point to another possibility. The combination of gold and associated options created strategies for making gold a performing asset. Like bonds, gold could have a yield in the form of premium, as we have illustrated in this chapter. Using gold as an ultimate hedge while earning a return represents a structural change and a new opportunity. The same holds true for silver, platinum, and (to a lesser extent) palladium. Thus, we see that the ever-changing economic environment can be the ultimate foundation for new strategies using precious metals.