|
|
Spring is here, but if you have any money invested on Wall Street,
things aren’t exactly coming up roses for you. The fallout that began
with the subprime mortgage collapse continues, and for many investors, the
recent demise of Bear Stearns brought new meaning to the phrase “March
Madness.” If you’re wondering if there’s any safe haven for
your money, you’re not alone. But here are two words for all the
(justifiably) nervous investors out there: silver & gold. The recession
that many have been predicting is finally coming to fruition. Hard times are
ahead of us and few will escape completely unscathed. But there is a good way
to protect at least some of your capital. Invest it in either gold or
silver…or both.
Unless you’re
already well-versed in all things Wall Street and thus have the know-how to
safely purchase gold and silver, you might be saying, Thanks for the advice
but I’ll just stick to my mutual fund. That’s why it’s
important to take a look at both why and how you should buy gold or silver.
Let’s start with the why. The first thing to understand is that gold
isn’t an investment in the traditional sense of the word. Investments
have a return on capital, and you won’t find that with gold. Gold is a
form of money, whose most appealing characteristic is that it is stable in
value. That’s why the gold standard worked so well. Because of its
stable value, owning gold is like putting a stack of $20 bills in a
sock—except that instead of some government’s paper nonsense,
you’re owning Universal Money instead. You can look at the “gold
price” like a foreign exchange rate. When gold goes up, it means that
paper currencies are going down. Inflation follows soon after. Gold has one
obvious flaw: There’s no interest income. That is actually true of any
currency. To earn interest, you have to have some counterparty that pays
interest. When you are dealing with a counterparty, you’ll also be
dealing with all the issues of lending, including credit risk and all the
issues of the chain of ownership between you and your brokerage and a money
market fund, and so forth. Usually this is no big problem, but these are not “usual”
times. Between the asset-backed commercial paper (ABCP), the auction-rate
securities, the various “enhanced” money market funds that have
blown up, and the regular money market funds that have stumbled, many forms
of “cash” are showing rather dramatic divergences from the ideal.
On top of this is the
risk of devaluation, which comes with any paper currency. To take this risk,
you get paid about 1 percent in the U.S. (for T-bills), about 3 percent in
Europe, and about 0.5 percent in Japan. If all this is making you wonder why
you would own anything but gold in these times, you are starting to get the
picture. So now that you know a little more about the why, let’s take a
look at the how. Pirates had the right idea…gold coins are the way to
go. I place high importance on having direct ownership of physical gold. The
most basic path to direct ownership is to buy some coins, and to keep them
somewhere secure. There are different kinds of coins, each with a premium to
gold bullion. Krugerrands, South African gold coins,
tend to have the smallest premium—typically a small dealer cost to buy
and sell gold coins. However, U.S. Gold Eagle coins have some legal
advantages in the U.S., as they can be used as legal tender. The best way to
protect yourself when buying gold is to buy from a reputable dealer who has
been around for decades.
Silver is another great
option. Just as smart an investment as gold these days is silver.
That’s good news for people who already own silver but not so good for
those seeking it out. Why? Because there just isn’t as much of it to go
around as there is gold. In fact, these days small investors are having
difficulty obtaining even a half-dozen 100-oz. bars of silver. The commodity
is usually traded in 1,000-oz. bars, 100-oz. bars, and bags of silver coins.
All of the tradeable silver in the world might come
to about 1 billion ounces, while there are about 4 billion ounces of gold.
Thus, if anyone gets the idea of holding silver as an investment rather than
as an industrial commodity, there won’t be much to go around.
Historically, silver traded at a 15:1 ratio with gold for literally thousands
of years. You can buy about 50
oz. of silver for the price of 1 oz. of gold today.
It’s highly likely that silver will go to 15:1 sometime in the next few
years, and if it does, y ou should then sell it and
hold gold instead. As for the form in which you own the silver, I personally
like the bags. Old pre-1965 U.S. silver coins were 90 percent silver. The
bags are typically $1,000 face value, so you’re looking at about 715 oz. of silver. The old
silver coins are legal tender, and come in convenient teeny sizes. They are
also about the same price or cheaper than the bars.
The best way to own large
amounts of gold and silver? Make sure you know what’s yours. For
holding larger amounts of either gold or silver, say with a value of $1
million and up, look into some kind of segregated, allocated, direct holding.
“Segregated” means not pooled; in other words, you don’t
own a percent of some legal entity, like a limited partnership, which then
owns some gold. Nobody owns it but you. “Allocated” means that
the silver you own is clearly distinguishable from silver owned by others.
You want to be able to say, “This is my bar. There are many like it,
but this one is mine.” In practice, this means you get the serial
number and specific weights from the bar. You might even visit it once a year
or so, and make sure the bar in the vault with your name on it matches the
serial number. Stay away from pooled accounts. Pooled accounts aren’t a
good idea. Some big full-service brokerages offer custody services for
bullion investing. They will buy the bullion for you, and put it in insured
storage. There is a small charge for this, typically about 30-50 bps per
year.
The problem is, the big
brokerages could be lying. In fact, one big brokerage firm just got busted in
a class-action lawsuit in which 22,000 investors had ordered the firm to buy
and warehouse precious metals for them. The firm even charged them a custody
fee. But never actually bought the metal! You see, the big banks are
terrified of people owning bullion. And what does that make you want to do?
It makes me want to own bullion. When you have purchased bullion, make sure
you get the serial numbers and specific weights, and visit your bullion from
time to time. Do not ask your coin and bullion dealer—a coin
store—to custody the metal. Use caution with safe deposit boxes. People
have mixed opinions about safe deposit boxes. And for good reason: In 1933
the federal government ordered all safe deposit boxes opened in the presence
of a U.S. Marshal, and gold bullion was regularly seized. (It was illegal to
own gold in the U.S. from 1933 to 1974.) Many people fear that something
similar could happen today. Indeed, there are stories out there of FBI-types
quietly going through safe deposit boxes today and making gold coins
disappear. I have heard that some banks specifically state in their safe
deposit box agreements that you are not allowed to hold precious metals in
them.
With that said, it seems
that people are reasonably content to use safe deposit boxes for quantities
too large to store somewhere private but perhaps too small for insured
custody storage. If you do decide to use a safe deposit box, you might want
to consider getting a couple at different banks. Online companies make direct
ownership of gold easier. You might be reading all of this and thinking that
owning gold is just too much of a hassle to be worth it. To ease the pain of
prospective gold owners, a few companies have emerged to offer a type of
bullion custody and trading with Internet convenience. They are not quite the
same as personal ownership, but much better than ETFs or other such
offerings. These reputable online companies allow convenient, low-cost
trading, and some even allow you to make purchases in very small increments,
one gram for example. Once you purchase your gold, sit on it. Gold’s
inconvenience tends to make people sit tight, and that is usually the best
way to manage your investment. A gold bull can be tough to ride. That’s
why for most holdings, it is probably best to simply buy your position, and
sit and wait for years until the bull finally reaches its last stages.
There will eventually be
a time to trade your gold for something else, like bonds, equities, or
property. These are traditional investments that produce a return on capital
and investment cash flow, not just the return of capital. That time will
probably be pretty obvious as it will happen when inflation has become so
intolerable that a political consensus is formed to do something about it.
Derivatives of gold aren’t really gold; they’re paper. When you
invest in derivatives of gold, you aren’t really investing in gold
itself but an investment that provides a return that is linked to bullion.
There are various ETFs popping up, with StreetTRACKS
Gold Trust (GLD) being the biggest. These ETFs are being offered by the Big
Banks to prevent the purchase of actual bullion. But do you really think that
the sort of bank that is going to lie about a direct, allocated, segregated,
custody holding is going to play fair regarding the holdings of ETFs? I doubt
it! Already, there have been suspicions—based on repeated serial
numbers, for example—that there really isn’t as much gold there
as is promised. For now, GLD is a fine trading tool. Use it as you wish. But
remember: It is paper, not gold. And it’s likely in “street
name,” which means that you also have the agency risk of your custodian
broker.
A slightly safer option
might be gold and silver futures, which are obviously derivatives. These have
more of a link with real bullion than SLV and GLD, as you can take delivery
on the contract if you desire. Gold never really changes. The world changes around
it. Bullion can be an unproductive asset for decades at a stretch, as in the
1980s or 1990s. At other times, there is hardly anything better. The times
when gold shines are when currencies are losing value, and there is financial
risk at banks and other counterparties. In other words, today’s
economic climate is ideal for gold, and I think these trends will continue
for some time further. Inflation and financial distress are terrible for
paper assets. If you have nothing but paper assets—the preferred vehicles
for the last era—it might be time to learn about alternatives for
today’s world.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada, call 800-567-4797.
|
|
