Wednesday, July 28, 2010
A question I am frequently asked by both new and experienced buyers of precious metals is just how much of one’s portfolio should be devoted to gold, silver, and rare coins?
There is no one-size-fits-all answer to this question. Factors that affect the allocation decision include someone’s current financial position, their amount of liquid assets, their age, the level of potential risk versus reward they can accept, and their commitments that may tie up assets in the future.
To help people, I have come up with a range of answers, using the percentage of net worth as the standard. For some it may be easier to think in terms of percentage of an investment portfolio.
The easy part is how much of someone’s net worth in total should be allocated to hard assets. For the conservative person, who may need quick access to cash for living expenses or may have a short time frame for ownership, I currently recommend a 10% allocation. I consider this to be the bare minimum to hold for insurance purposes. Gold, silver and rare coins tend to rise in value when the values of stocks, bonds, currencies, real estate, and other assets are falling. They also tend to rise when inflation is running rampant. Professional planners have confirmed that investment portfolios that own some amount of what I call hard assets tend to perform better over time than those that omit precious metals.
For a moderate investor, I now recommend approximately 20% of net worth or of an investment portfolio be allocated to gold, silver, and numismatic coins.
For the aggressive investors, which includes people who have significant liquid assets that need not be touched for a long time (at least five years), expect to live long enough to enjoy long-term appreciation, and are comfortable with a higher risk of loss, I suggest at least 25% but no more than a 33% allocation to precious metals and rare coins.
Under no circumstances do I suggest that anyone unload all their other assets and focus exclusively on gold, silver, and numismatics. Having all assets from just one investment class would be even riskier than not owning any hard assets.
OK, so now you can place yourself in a comfortable spot on the spectrum between conservative and aggressive, calculate your net worth or your total investment portfolio, and figure out how much you want to devote to hard assets in total. The next question that people then ask is how much should they allocate among gold, silver, or rare coins.
Silver is a more volatile metal than gold in its price movements. In bull markets, it will appreciate more than gold. In weak markets, it will decline by a greater percentage than gold. I use the gold/silver ratio to give me some clues as to which metal I expect to outperform the other in the future. Some analysts insist that a ratio like 16:1 is the long-term equilibrium ratio. I don’t know that this makes sense any more. However, I am much more comfortable projecting an eventual ratio in the range of 35:1 to 40:1. Since the gold/silver ratio now is in the mid-60s, that indicates that silver has the better prospects from here into the future. Accordingly, I allocate a somewhat higher percentage to silver than to gold, though I think it makes sense to have a significant allocation to both metals.
For conservative investors, I suggest that they avoid owning any rare coins at all for investment. Rare coins have a wider buy/sell spread than bullion, normally require a longer time for holding, and are less liquid. You may own some numismatic coins for the pleasure of ownership, but do not consider them as part of your investments. Thus, my conservative allocation would be 40% to bullion-priced physical gold, 60% to bullion-priced physical silver, and 0% to rare coins.
For a moderate person, I consider a small allocation to numismatics to be reasonable. So, for them I suggest an allocation of 35% to bullion-priced physical gold, 55% to bullion-priced physical silver, and 10% to rare coins.
As for the aggressive investor, I tilt even more toward numismatics and silver and somewhat less to gold. For this person, I recommend an allocation of 25% to bullion-priced physical gold, 50% to bullion-priced physical silver, and 25% devoted to rare coins.
I emphasize the purchase of physical gold and silver. And take delivery! There are a number of pitfalls of “paper” precious metals where I judge the risks of the seller or storage company defaulting on delivery are high enough to avoid them. Consequently, I don’t recommend certificate programs, London Bullion Market Association contracts, commodity contracts, allocated or unallocated storage arrangements (segregated storage accounts in your own name should be safe), and exchange traded funds.
I also strongly recommend not owning hard assets in precious metals Investment Retirement Accounts. There are a number of problems and limitations with owning precious metals accounts, not the least of which is the risk of confiscation of them as part of a program under consideration in Congress to potentially confiscate all private retirement assets. For further information on the problems with precious metals IRAs, see my article dated August 18, 2009 titled “Will U.S. Government Seize Bullion IRAs?”
In my precious metals and rare coin allocations, I purposely did not include either platinum or palladium. Neither metal had any significant use as circulating money in the past. The platinum market is running a surplus about half of the past decade, while palladium supplies have exceeded demand every year in the past decade. These two metals may do well in the future, but I expect gold and silver to outperform them on a percentage basis.
By finding your place on the investment spectrum and considering the allocations listed above, I anticipate that you will enjoy solid long-term results compared to many other asset classes.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes "Liberty's Outlook," a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles". His periodic radio interviews can be heard on WILS 1320 AM in Lansing, www.talkLansing.net, and on www.yourcontrarian.com.
Tuesday, July 27, 2010
U.S. economic data releases this week could indicate improving new-home sales, declining consumer confidence and rising durable goods orders. The eurozone is scheduled to release unemployment numbers, confidence measures, and retail sales data. These data releases could be mixed to positive for the dollar, while the eurozone macroeconomic factors are showing an upturn. Markets may be weighed down by the dollar, which has been deteriorating during the past seven weeks. Overall, a weaker dollar may push silver prices higher.
Silver could maintain a bullish momentum this week on technical indicators as well. Last week, silver gained 1.76% on the COMEX to close at $18.10 an ounce and scaled as high as $18.28, breaching the resistance level of $18.05. This week, the metal is likely to test resistance at $18.38. Since silver is trading above exponential moving averages, the white metal could find support at $18 levels. The momentum indicator RSI (14) is treading at 0.517, indicating a marginal upside.
Silver outperformed gold last week gaining nearly 1.8%. COMEX silver traded in the range of $17.44 to $18.28 an ounce. Silver futures for September delivery settled higher at $18.10 an ounce during the week. Silver tracked gains in base metals, which rose sharply last week. The London Metal Exchange Index for base metals jumped more than 7% for the week.
The gold-silver ratio dropped to 65.62 from 66.80, as silver gained and gold declined. Gold was down 0.03% last week, in comparison to silver's 1.76% gain. Silver prices for spot delivery on the COMEX closed at $18.11 an ounce, while futures ended at $18 an ounce, suggesting that silver prices are in backwardation. Similarly, COMEX gold prices for spot delivery closed at $1189.20 an ounce, while futures ended at $1187.80 an ounce, indicating that gold prices are in backwardation as well.
The calendar spread, the difference between two future contracts, between silver Sep'10 and Dec'10 continued to remain thin at -0.057, signifying that the far-month contracts closed higher than the near-month contracts. Meanwhile, the calendar spread between gold Aug'10 and Oct'10 contracts closed at -1.90 during the past week.
Source; The Street
Sunday, July 25, 2010
The London Bullion Market Association has just taken the highly unusual step of blocking access to statistics relating to the trading activities of its member bullion banks. This information has been available to the public since 1997 but as of this week it is available only to LBMA members. (See http://www.lbma.org.uk.)
I have recently written a series of exposes of the LBMA (see References 1-4 below) using the association's own data to show that the LBMA's bullion banks are operating on a "fractional reserve" basis. My analysis indicates that the bullion banks are holding only 1 real ounce for about every 45 ounces of gold that they have sold, a reserve ratio of just 2.3 percent
At the March 25 public hearing of the U.S. Commodity Futures Trading Commission on precious metals futures markets I cited the LBMA's own statistics to label the "unallocated gold" accounts of the bullion banks as a Ponzi scheme. (See Reference 3 below.) There were bullion bank representatives at the hearing but no one expressed an objection. That hearing was videotaped and posted at the CFTC's Internet site but the bullion banks have not made any public statement rebutting what I said. In fact at that hearing Jeffrey Christian, CEO of the CPM Group, acknowledged that what is widely called the "physical market" is in reality a largely "paper market" trading gold and silver as if they are financial assets and not physical metals. Christian stated that 100 ounces of paper gold are traded for every 1 ounce of physical gold.
When the LBMA first made its trading statistics available in January 1997, observers and analysts were shocked. (See Reference 5 below.) No one could reconcile the statistics with other market data, nor comprehend how the bullion banks could be trading on a net basis more than 240,000 tonnes of gold annually while the global mine output was only 2,400 tonnes. Over the years the furor over these statistics had subsided until the end of 2009, when I commenced writing about my studies, showing that the statistics can be reconciled with other market data if the bullion banks are operating a fractional-reserve bullion banking operation with a recklessly low reserve ratio. I have also shown how the price of gold is suppressed because 45 ounces of demand are being diluted to result in purchase of only 1 ounce of real metal. If instead all 45 ounces were to be sourced and purchased, the gold price would be multiples of the current price.
Typically when people are exposed in a scandal their first reaction is a cover-up. The most notorious examples of this are the Nixon administration, when it doctored the Watergate tapes, and Arthur Anderson, which shredded millions of pages of documents relating to audits of Enron Corp.
The LBMA has now commenced a cover-up with respect to the gold trading activities of its member bullion banks, withdrawing statistics from the public domain.
This appears not to be the only cover-up going on in the gold market.
For years the International Monetary Fund has made great fanfare of its mere contemplation of selling some of its gold, and actual sales by the IMF have been widely publicized. Since February the IMF has been surreptitiously selling large tonnages of gold each month, but these sales now are to be found only by digging through the IMF's financial statements, and even there the recipients of the gold are not disclosed. (See Reference 6 below.) One has to wonder why the IMF now is trying to fly under the radar with its gold sales.
Similarly it was recently discovered that the Bank for International Settlements didn't feel it necessary to announce its involvement in the largest gold swap in history, 346 tonnes. (See Reference 7 below.) The BIS swaps instead were discovered only because a market analyst dug through the footnotes of the bank's financial statements.
These developments have all the hallmarks of cover-ups.
In June the LBMA trading statistics showed that in May 2010 the average net daily trading in gold by LBMA member banks jumped a massive 50 percent from the month before to 24 million ounces each day from 16 million ounces each day. That translates to $7.5 trillion annually. If an operation is running on a razor-thin fractional reserve basis, such step changes are often fatal.
It appears that a run on the bullion banks has commenced.
There is a cover-up of back-door injections of liquidity of physical gold, and the LBMA now is trying to conceal trading information.
There has been much debate about how investors, politicians, and regulators didn't see the 2008 financial crisis coming, and lack of transparency was cited as a key reason. Clearly those who have been manipulating the gold market are trying to skulk deeper into darkness. They have a lot to hide.
Investors could have been blindsided by the events of 2008, but anyone who misses the writing on the wall about what's going on in the bullion markets is just foolish. The bullion banks have sold far more metal than they can deliver, and more and more customers are asking them to deliver. This has led to back-door bailouts and cover-ups.
Anyone who has "unallocated" bullion should be very concerned. The LBMA itself describes owners of "unallocated bullion" accounts as "unsecured creditors." That means that the account holder has no collateral or title to any bullion.
Bullion bank unallocated account agreements require the bank only to settle in cash for non-performance. That means when the physical squeeze that is evolving takes gold and silver prices to multiples of the current price, holders of unallocated metal accounts will not get any bullion, nor will they be compensated at the prevailing market price.
I interpret the LBMA's move to secrecy as a sign that the opportunity to get real metal is closing fast.
I interpret the LBMA's move to secrecy as a sign that the opportunity to get real metal is closing fast.
1. Adrian Douglas: Proof of Gold Price suppression -- Gold and the U.S. Dollar:
2. Adrian Douglas: Price Suppression Follows Inevitably from Fractional-Reserve Gold Banking:
3. Adrian Douglas: It's Admitted to the CFTC: London Gold Market Is a Ponzi Scheme:
4. Adrian Douglas: Jeff Christian's CPM Group Explains How to Make Paper Gold:
5. The Grand LBMA Expose: A Collective-Mind Analysis:
6. Adrian Douglas: IMF Can't Explain Gold Sales Now Without Revealing Squeeze:
7. Adrian Douglas: Mysterious BIS Gold Swaps Are Likely a Bullion Bank Bailout:
Wednesday, July 21, 2010
Interesting article about Precious Metals being used as an alternate medium of exchange (currency)
Sunday, July 4, 2010
Silver has long been a popular metal for investors in America. Many looking for metal investments like the prospects of silver over gold. Silver takes larger swings giving savvy speculators and traders more opportunities to cash in on the ups and downs. Many think that silver is undervalued compared to gold. To top it off silver always seems to have potential for a break out in industrial uses.
In the last year, silver has traded between $12.65 and $19.52 per ounce. In the last 10-plus years, the highest silver has been is $20.79, but there are many that feel silver is looking to go much higher. In 1980 silver reached nearly $50 an ounce on aggressive trading. That price was due to a speculator driven market. Although we are not likely to see that again, it does show how valuable the metal can become with trading pressure. And today many high level speculators are looking for silver to hit the $25 mark.
A ratio that many investors will use when talking about silver is 16 to 1, or the rarity of naturally occurring silver to gold (believed to be 16 ounces of silver for 1 ounce of gold). For many years silver was priced at 90 cents per ounce and gold at $20. Using this logic, one could value silver as one-sixteenth the price of gold. That would make silver about $75 with gold at $1200.
Obviously the investing world does not adhere to this ratio for rarity alone, but once again there is an argument that silver is being undervalued for its rarity at the moment.
One major reason for silver to increase is the industrial side of silver. For many years photography was the largest consumer of silver. Today the digital age has lessened that demand as we process fewer pictures (remember processing a roll of 24 exposures to only have about three prints be good, mine always seemed to be that way). Today by printing only the pictures you want, cuts the processing way down, and ink printing cuts it out altogether.
But with silver being much cheaper than gold, industries are always looking for ways to use silver instead of gold to become more cost effective. Imagine if every computer built required just one ounce of silver. One good application and the price of silver could double almost overnight.
Buying silver can be considered an investment as an alternative to gold or as a preference over gold. Either way silver has always been a popular choice, and speculators have more opportunities to catch swings in price.
Nevada has had a long rich history in silver and having our great state founded in silver gives us just one more reason to like it. In my article next week, I will address several ways to buy silver and the physical products available in today's market.