May 28, 2024

Gold and Silver: Investment Similarities

Gold and silver just seem to go together. They’re two precious metals that we love to invest in, especially after the strong performance of the metals during 2011, and gold’s string of consecutive annual gains stretching back a decade.

This year, gold futures have grown as much as 25% this year and silver futures as much as 75%. It’s this last figure that really interests us though. It is indicative of growing investor interest in a metal that is much more affordable than gold, but still offers many of the same benefits in the precious metals market.

Gold and Silver Investment Options

The major similarities that we can point to are related to the various ways that gold and silver are sold and traded among investors. In most cases, a potential investor has a few different options:

  • They can invest in bullion coins
  • They can invest in numismatic coins
  • They can invest in exchange traded funds or ETFs

Gold and silver bullion coins are produced by a number of different world mints. A few of the most widely traded options include the American Silver Eagle from the United States Mint, the Silver Maple Leaf from the Royal Canadian Mint, and the Silver Philharmonic from the Austrian Mint. These coins are issued each year and are generally sold based on the market price of silver plus a mark up. The mark ups might be $2.50 to $4.00 per coin, depending on the quantity purchased.

Numismatic gold and silver coins are those which are valued not only based on their intrinsic value, but also their rarity and condition. In some cases, a rise in the price of precious metals might not result in an increase in value for numismatic coins since other factors come into play. It takes some understanding of the coin market and grading scales to invest in numismatic coins.

For many beginning investors, Exchange Traded Funds provide a useful alternative. Precious metals ETFs are traded on stock exchanges in the same manner as stocks and generally track the price of the underlying metals. There are different types of ETFs, which use either physical metal or futures and contracts to track the price of the underlying metal. The largest and widely held precious metals ETFs are the SPDR Gold Shares ETF (GLD) and the iShares Silver Turst (SLV).

Four Approaches To Gold Investment

In its quest to determine the best way to make money from investing in gold, the Wall Street Journal recently took an in depth look at four different gold investment strategies. Each was represented by a preeminent investor, one whose method has seen some success recently.

Here’s what they had to say:

1. The first investor was John Paulson, who made his money by anticipating the economic crisis and acting accordingly. His current method of gold investment is to buy shares of large mining and exploration companies. The idea at work here, according to Paulson, is that “if gold prices do well, the miners will do even better . . . the higher gold prices go, the more miners can profit from potential and existing projects.” The downside here is that mining for gold is an expensive proposition, so the miners must make enough money to cover that expense before turning a profit.

2. The next investor discussed was billionaire Thomas Kaplan. He is focusing his investment funds on junior miners rather than the big mining companies that Paulson is currently interested in. His argument? These smaller companies are “sitting on valuable assets . . . providing the greatest leverage to a bull market.” He believes that these junior miners have a greater potential to go along with their greater risk.

3. The third investor, John Burbank prefers a different route. He focuses his attention on gold bar investment. Since the bars are an actual physical investment, he believes that they are more likely to return his investment than shares and contracts. According to Burbank, “If investors become concerned that shares and futures contracts aren’t fully backed by physical gold, or if inflation surges, they may begin to demand delivery of the metal, sending the price of physical gold soaring.”

4. The final investor, David Einhorn is also interested in bars, but in addition, he chooses to invest in exchange trade funds that own gold miners. He has also purchased call options or gold futures, which require a relatively small investment to control a large gold position.

Are You Getting Gold for the Holidays or Giving it?

We’ve mentioned the French company that has recently launched a line of gold mini bars in an attempt to increase revenue. Just in time for the year’s gift giving season, CPoR is making the argument that its ingots are an essentially recession proof gift—the ultimate stocking stuffer, in fact.

There are two different principles at work. The first is the fact that gold is a solid investment at the moment. The precious metal is experiencing an amazing market high and many signs point to its continuing growth.

Continued concerns about the economy and the effects of inflation have done much to encourage an investor interest in the metal as a save repository for their funds. This marketing idea is not simply about giving the gift of a solid investment, however. It’s also about the intrinsic allure of the metal itself.

Currently that allure is reflected in the fact that gold bar hoarding is on the rise. According to the World Gold Council it has increased 44% since 2009 and that was an increase of 42% over the numbers from 2008. The fact is people who buy gold can get a deep satisfaction out of having physical access to their purchase. If they take delivery of the precious metal and secure it themselves, then they retain access to it in all its many charms. Just holding or even looking at the bars can be a powerful experience.

The gift of a gold bar for the holidays offers the recipient a chance to have their own powerful moment with the metal. It’s a gift that combines and appeal to the senses, the height of luxury, and sound financial planning in one tidy package.

2010 Third Quarter Gold Demand

Total identifiable gold demand for the third quarter showed an increase of 12% above year ago levels at 921.8 tonnes. Increases in demand from jewelry consumption, industrial sectors, and net retail investment more than offset a decline in demand from electronically traded funds, according to information published by the World Gold Council.

Compared to the 2010 second quarter, gold demand showed a decline of 10%. This was the result of the exceptionally high levels of investment demand experienced in the previous quarter.

During the third quarter, jewelery demand totaled 529.8 tonnes, representing an increase of 8% from the year ago period. Buyers in key markets such as Indian, China, Russia, and Hong Kong were not deterred by record high prices. The highest growth in demand was experienced in India, with an increase of 36%. With the recent focus of the media on gold investors, it’s interesting to note that more than half of identifiable gold demand comes from the jewelry sector.

Industrial demand for gold was 110.2 tonnes, marking an increase of 13% from the year ago period. Demand was led by electronics, which accounted for 77.9 tonnes and measured a gain of 18%. A decline in demand was experienced from the dentistry sector, with a drop of 7% to 12.2 tonnes.

Identifiable investment demand was up 19% from the year ago period at 281.8 tonnes. However, this did represent a decline of 16% from the previous quarter. The largest increase in demand for this category came from bar hoarding, which increased 44% to 132.4 tonnes. This is an interesting contrast to demand from ETFs which dropped 7% to 38.7 tonnes.

The average price of gold during the quarter was $1,226.75, ranging from a low of $1,157.00 to a high of $1,307.50 per ounce.

Identifiable Gold Demand (Source:GFMS)

Which is Better to Own – Gold Bullion or Gold Stocks?

Gold investors have two basic choices – buying gold bullion or buying shares in companies that produce or own gold. As we examine the two basic investment vehicles available to gold investors, it becomes apparent that choosing the best investment option can be a complex decision. Some of the questions that a gold investor should consider include the following.

What has produced better investment results – owning gold bullion or a gold mutual fund?

To gain insight into investment returns, let’s compare how an investment in gold bullion compared to investing in the Tocqueville Gold Fund (TGLDX).  I selected TGLDX since it is one of the best performing, actively managed gold funds with a long term track record.  An investment of $10,000 in the Tocqueville Gold Fund in 2000 would now be worth approximately $86,000 for a stunning return of 860%.   A $10,000 investment in gold bullion in 2000 would currently be worth approximately $46,400 or a 467% return.

Since gold mining companies are leveraged to the price movement of gold, it is not entirely surprising that the gold stocks would outperform the metal. Leverage, however, works both ways and in 2008, when gold experienced a price correction, TGLDX dropped from 65 to 19, a horrendous decline of 71%, whereas gold bullion experienced a normal bull market correction of only approximately 25%.   For those investors unwilling to tolerate huge price fluctuations, bullion seems a better way to go. When gold is moving up, expect the gold funds to outperform the metal.  In 2010, TGLDX has increased 42.7% compared to an increase in gold of 27%.

TGLDX Chart : Yahoo Finance

Gold 2000-Present: Kitco

If I decide to invest in gold stocks instead of the bullion, how many different stocks should I buy?

One of the primary tenets of sound investing is to always diversify.   Although selected gold stocks have vastly outperformed the price movement in bullion, many have not and some have dramatically underperformed.   Evaluating the prospects of an individual gold mining company is difficult, even for the experts.  An investor choosing to allocate a large percent of assets into gold stocks is probably better off (from a risk standpoint) investing in a well managed gold fund with a solid long term track record.  For an investor that does not want to hold physical gold nor own individual gold stocks, investment in a gold ETF such as GLD, that tracks the price movement of the bullion, would be an option.

I don’t trust paper assets and want to hold only gold bullion – what are my options?

For a conservative, risk averse investor looking to protect the value of his money,  investing only in gold bullion is a sound strategy.  Holding actual bullion, however raises security questions on how and where to store the physical gold.  Investors who wish to have their gold stored on their behalf can chose from a variety of firms that securely store gold in protected and insured vaults.  For an investor storing gold on his own in a safe deposit box, it would perhaps be wise to diversify storage geographically by using more than one bank.

Is the tax treatment different for gold bullion versus gold stocks?

The IRS considers gold to be a collectible.  Gains on gold bullion or coins and ETF’s backed by physical gold and held for more than a year have a maximum tax rate of 28%, while positions sold in less than a year are taxed at ordinary income rates.   Gold stocks are considered capital assets by the IRS and standard capital gain tax rates apply to profits.

As nations compete with each other to devalue their currencies and the Federal Reserve engages in outright money printing, gold investors should be expecting substantial profits regardless of what investment vehicle is chosen.

Gold Investment Report – 2009 Second Quarter

The World Gold Council is out with their latest Gold Investment Digest, providing an analysis of gold for the second quarter. The most notable aspect of the report is the incredible slow down in investment demand experienced during the quarter.

During the second quarter, the price of gold rose from $916.50 per ounce to $934.50. This slight gain compared to much larger gains in major world stock markets and the Dow Jones Commodity Index. Gold had reached a peak price of $981.75 during the quarter before moving lower.

Investment demand for gold showed a big decline from the previous levels, but remained positive. For the second quarter, Gold ETFs showed inflows of 46 tonnes. This compared to inflows of 459 tonnes during the first quarter.

Sales of coins and bars started the second quarter very strong before tapering from May onwards. The report also notes the decline in margins on coins and bars as availability constraints eased. As I have noted in some of the monthly bullion sales reports, although sales have shown month to month declines, levels remain far above year ago levels.

While some have pointed to the recent slow down in investment demand as evidence that the so-called “new gold rush” is over, I think this call is premature. During the quarter world stock markets and sentiment about the economy rebounded from the depths of despair to the current “don’t worry be happy” mentality. Despite the shift, gold investors have remained patient and continued overall accumulation of the metal. The allure of an investment which has delivered positive annual returns for eight consecutive years, compared to the perpetual boom and bust of other asset classes, seems to have an enduring appeal.