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   In recent years, metals have been among the safest and most lucrative investments around, but they are not entirely risk free. Before you begin investing or trading in metals, you need authoritative information and proven investment strategies. You need Precious Metal Investing For Dummies. This straightforward guide eases you into the precious metals market with sound advice on trading and owning these profitable investments, including gold, silver, platinum, and uranium, as well as high-demand base metals such as zinc and copper. You’ll learn how to research their market performance and choose among an array of proven trading plans and strategies. Plus, you’ll get savvy advice on how to choose a broker, buy stocks and futures that involve metals, maximize your investment return, and minimize your risk. Discover how to:
Metals can be an important and valuable addition to any investment portfolio or retirement plan. Make the most out of your investment with Precious Metal Investing For Dummies. Precious Metals Investing For DummiesBy Paul Mladjenovic John Wiley & SonsCopyright © 2008 Paul MladjenovicAll right reserved. ISBN: 978-0-470-13087-2 Chapter OneA Compelling History
In This Chapter * Checking out the history of precious metals * Taking a look at gold and silver's track records * Reviewing the precious metals' bull market of 2000
Long, long before government-issued currency, such as the dollar or the euro, existed, people must have had something else to help them trade with each other. How did people buy stuff they needed? Before there was any kind of currency, there was bartering unless you were a barbarian and preferred plundering. Civilized merchants and consumers traded goods and services, but trade did get cumbersome. For example, what if the merchant selling food didn't really want your 47 pounds of lint in exchange for a head of lettuce? To make commerce a little easier, the buyers and sellers in the marketplace slowly decided on what could be used to facilitate trade. They decided that something had to be used as a currency, and that currency had to be portable and widely accepted as a unit of transaction, a store of value, and a medium of exchange. Whatever they chose as currency needed to be something that performed the role of ... money! For thousands of years, precious metals - primarily gold and silver - filled the bill nicely. Very nicely. Gold and silver came to be recognized as precious, valuable, and desirable in virtually every nation across the globe dating back to the dawn of civilized society. Now, you might ask "What the heck does history have to do in a For Dummies book?" Actually, history is very important because it will impact your portfolio in the coming years. History has shown us that there were (are) two major types of currency: precious metals and manmade (or government-issued) paper currencies. This chapter explains why the vast majority of paper currencies lost their value and are now gone but precious metals are still ... uh ... precious, making them worth a long look from investors. In this book, I even take a step outside the word "precious" because I don't want anyone to call me "baseless." So I give you a look at the great opportunities that base metals (such as zinc and copper) offer investors and speculators (see Chapter 9).
Mining the History of Precious Metals Everyone has used paper currency or credit measured in paper currency, such as dollars, but precious metals have withstood the test of time as a "store of value" and as a "medium of exchange" while most paper currencies in history went kaput - precious metals experts always use such technical terms as kaput.
Understanding why less is more Paper currencies have a big problem: They're "manmade." Precious metals, such as gold and silver, on the other hand, aren't. Depending on who you are, you may consider gold and silver as created by God or Mother Nature's money, but in either case, gold and silver aren't - and can't be - created by mankind. Yes, you can find and extract or mine precious metals, but you can't create them out of thin air. On the other hand, over the centuries paper currencies (also called fiat currencies) were created by simply running a printing press - government-approved, of course. These days, the money creation authorities can do so even easier using a computer! But being manmade gives room for abuse and misuse. Because the primary creators of fiat currencies were governments, those governments (through their power to enforce and mandate) made fiat currencies the money of (forced) choice. Because man can make money, man can then make a lot of money. However, you incur risk by creating a lot of money: if you create too much of it, it can slowly become less valuable, which is known as inflating the currency. Keep in mind that money is a reference to something of value that is used in exchange for something of value (such as goods and services). Currency is essentially a form of money that is generally accepted by a society as a convenient way to pay for those same goods and services.
REMEMBER Money retains its value by being limited or scarce. So, if you make lots and lots of money then each successive unit of that same currency becomes less and less valuable. This flaw in manmade currency explains why most currencies in history became worthless, and this danger still exists today. Yet, throughout time, gold and silver have retained their value. I guess you really can't fool Mother Nature!
Giving the gold standard a gold medal Now before you think I totally love gold and silver while totally hating paper or fiat currency, guess again - it's the competition between the two that I'm not so crazy about. History tells us that the middle ground is actually a great place to be: Backing up manmade currency with gold - called the gold standard - works. Some forms of currency was backed up by silver by usually silver was used directly (in coinage, for example) since it was less valuable than gold. In modern times (the 1960s and later) silver generally disappeared from circulation as a form of money and was replaced by coins made of base metals. Throughout history, the strongest and most stable fiat currencies were backed up by precious metals. Having a gold standard in place made the currency stable and its ability to purchase goods and services also tended to remain stable. Problems usually occurred when the currency was taken off the gold standard. Just take a look at American history for an ideal example: When America was on the gold standard from about 1800 to the late 1920s, general consumer prices were stable. However, as America gradually got off the gold standard and subsequently started to increase the number of dollars circulating in the economy, prices started to skyrocket. Alan Greenspan pointed out in 2002 that consumer prices doubled in the immediate years following the abandonment of the gold standard and had quintupled by mid-20th century.
TIP A great primer on the history of money is available at the venerable Ludwig von Mises Institute (www.Mises.org). There are both a video and audio (MP3) to explain in laymen's terms the role of money and the Federal Reserve (America's "central bank"). This primer presents an excellent explanation of why gold and silver are critical to our economy's well-being.
REMEMBER The most common financial collapse occurs when too much money is created (inflation) thereby debasing it, resulting in a currency collapse or devaluation. The U.S. dollar is currently being created ("increasing the money supply") at a record pace and its value is shrinking at an alarming rate. History tells us loud and clear that diversifying even a small amount into precious metals is a prudent move.
Going for the gold Nobody knows the exact details regarding the origin of gold usage, but the use of gold as money goes back to ancient times. Gold became an ideal form of money because of its durability and easiness to carry. It quickly became the most widely accepted currency among many different societies. Gold became widely used as money in the American colonies with the Coinage Act of 1792. It played a major role in the U.S. economy up until 1933 when President Franklin D. Roosevelt prohibited the ownership of gold by private citizens. This prohibition only affected gold assets that could have been used as a competing currency, such as gold coins, bullion, and gold certificates. (For more information on gold coins and bullion, see Chapters 10 and 11.) Imagine that you do the smart thing in accumulating gold to preserve your wealth during the Great Depression and the government ends up confiscating it. Let's hope that it doesn't happen again. Fast forward to our times and to what is unfolding in our economy and financial markets and you see that the conditions are ripe for gold to return as a necessary element in not only investors' portfolios but for consumers in general. As currencies lose valuable across the globe, more sturdy forms of money will emerge and nations will return to what has worked for centuries; precious metals.
Seeing the silver lining Silver over the centuries had a unique dual role: monetary (used as money) and industrial. Going back to ancient times, silver was very commonly used as money, whether as minted coins or as a backing to paper money (such as silver certificates). Since it typically had a much lower monetary value than gold, it was actually more commonly used in commerce since it was great for smaller transactions. After all, wouldn't it be silly to buy a candy bar with gold anyway? Silver also proved to be a very versatile and useful metal for industry. Because of this, silver actually has some outstanding qualities for investment-minded folks. (See Chapter 6 for more details.)
Mentioning other metals No book on precious metals would be complete without mentioning the other metals that have such great potential for investors. Here are some to consider:
Taking a Look at Track Records Before you check out each metal's track record, keep in mind that precious metals undergo major multiyear bull or bear markets reflecting the overwhelming economic and financial factors of that era (see the section, "Grappling with Bulls and Bears," later in this chapter for more about those markets in specific eras). Metals, both precious and base, are solid considerations for investors and speculators to get involved with but the bottom line is really the profit potential. The simplest way to judge the future potential of something is to check its past performance: the track record. Since 2000, metals and their related investments have had an enviable track record. I get into the specifics in the following sections.
Gold Gold is the quintessential precious metal. "Good as gold" is more than a catch phrase; it 's the essence of gold's performance in recent decades. Some years from now they may change that phrase to "as sensational as gold."
That '70s metal The 1970s was a historic time for our country's economy as well as for gold. For decades leading up to this decade, gold had a connection to the U.S. dollar. Gold began the decade at the government imposed fixed price of $35.08. However, the controls on the gold were gradually removed as the Federal government devalued the dollar in 1971. By February 1973, the government devalued the dollar again and raised gold's price to $42.22. During this year, the dollar ceased to be tied to the price of gold; it was now allowed to float and compete with international currencies in a free market. This unleashed the price of gold and its bull market was off and running! By June 1973, the market price of an ounce of gold reached $120 in London. In 1974, the gold market really opened up. Americans were now permitted to own gold and many countries such as Japan lifted restrictions on gold buying and selling. In 1975, trading in gold futures (see Chapter 14 for more details on futures) began at New York's Commodity Exchange (COMEX) and the price of gold was left to find its free-market level. Market demand drove the price of gold per ounce to $180 in early 1975 before temporarily dropping to $100 in late 1976. Gold then steadily zig-zagged upward until it hit $240 in mid-1978 before ... again ... it fell temporarily to $190 in late 1978. 1979 was the big year for gold. By any measure, it had a great performance from the beginning of the decade to this point. Especially since it was a tough decade for the stock market and other investment vehicles. By early 1979, it was evident to all that commodities in general and precious metals & energy in particular. The cocktail parties were soon abuzz with people talking about international tensions, economic problems and ... precious metals. I'm sure that if "The Graduate" came out in that year that some boorish party guest would have told Dustin Hoffman the opportunity of the day ... "gold." The yellow metal zoomed to an all-time $420 by the fall of 1979 before taking a final breather to $380. Within weeks, gold spiked up to its famous-yet-brief high of $870 in mid-January 1980 before it came crashing down like a rocket ship that ran out of gas at the worst possible moment. It was time to switch your money from gold investments to parachute manufacturers. For gold, 1980 started an extended bear market (a long period of dropping prices). However, the 1970s was one for the record books. Those who invested early on and persevered through the roller-coaster ups-and-downs of the gold market were handsomely rewarded with some spectacular profit opportunities: Gold's ride from $35 at the beginning of the decade to its peak of $870 at the tail end of the decade. That represents a percentage gain of a whopping 2,386%. To contrast, look at the performance of the Dow Jones Industrial Average (DJIA), a major barometer of stock market performance. The DJIA started the decade at 809 (January 2, 1970) and ended it at 839 (December 31, 1979). That 30-point gain represents a pretty measly gain of about 3.7% (for a whole freakin' decade!). To be meticulous about it, I realize that I'm off a few weeks; gold's all-time high occurred on January 21, 1980. That month, gold started at $559.50 before it spiked to its all-time high and then settling month-end at $653. Anyway, I think you get the picture. For the late seventies, it was indeed "as good as gold."
Gold stocks go berserk As gold raced towards its all-time high during the late 1970s (hitting $870 in an intra-day high January 1980), gold mining stocks went ape. That's right; there was (and is) more than one way to make money with gold. During the late 1970s, stocks of companies that mined the yellow metal saw their share prices rise far greater than conventional stocks. Seeing share prices triple and quadruple in the gold mining sector was a common sight. There were two types of gold-mining stocks: the large companies ("the majors") and the smaller companies ("the juniors"). Large mining stocks easily beat the stock market averages. Homestake Mining, for example, was one of the majors. Its share price went from under $5 in 1978 to over $25 in 1980. Four hundred percent up in about two years: not bad! As a category, the large mining stocks did better in the last two years of the 1970s than the entire stock market did all decade long. Junior mining stocks did even better.
Silver Silver isn't just a second banana serving as gold's sidekick. Its past, present and future look just as shiny.
Hi-ho silver! Dubbed the poor man's gold, silver did extremely well in the late 1970s. While the world watched the higher-profile gold market, more astute investors and speculators noticed silver in gold's shadow. On a percentage basis, it did far better than gold. Silver started the decade at under $2 an ounce. However, the market for silver was opened up in similar vein to the gold market. Silver steadily rose to $10 by the beginning of 1979. Speculative demand by investors push the white metal's price past $20. The major influence on silver's meteoric rise came from a single private source: the billionaire Hunt brothers. It is now a part of investment folklore but it was an intriguing true story. The Hunt brothers along with two wealthy Arab investors formed the company International Metals Investment Company, Ltd., for the purpose of cornering the silver market. Silver quickly soared to nearly $50 by January 1980. The market was to change rapidly as regulators moved in. Since the buying primarily took place at New York's Commodity Exchange (COMEX), exchange officials took steps to reverse the price rise. COMEX raised margin requirements (explained in Chapter 15) and temporarily allowed only sell orders on silver. These new rules created forced liquidations and caused the price of silver to plummet. By March 1980, silver fell to under $11, a drop of over 78% from its all-time high in less than two months. It was indeed a wild ride for silver at the end of the 1970s. As the dust settled, nimble silver investors and speculators (learn more about the difference between these two in Chapter 3) made some spectacular profits in silver. The metal went from $1.29 in 1970 to its zenith of $49.45 in 1980. The percentage gain for the decade was an astounding 3,733%, certainly a silver lining for anyone's portfolio. (Continues...)
Paul Mladjenovic is the owner of Prosperity Network and www.Super MoneyLinks.com. He is also the author of Stock Investing For Dummies, 2nd Edition. |
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