Last Updated: 09/18/2013
Why invest in precious metals?
There are many reasons why people invest in precious metals. The most obvious is the speculative opportunity to earn a profit if the market value goes up. For investors who bought gold at the lows of 2001, selling today would result in a return of about 650%. Investors in silver over the same ten year period would have done even better, netting a return of about 780%. Some analysts say that most of the opportunity for appreciation has already passed. Only time will tell whether or not metals continue to be the brightest component of an investment portfolio. Regardless of this opportunity for quick profits, there are other very sound reasons to invest in gold and silver. While the opportunity for a capital gain remains real, security and preservation of wealth is now the primary reason why many financial advisors are recommending to clients that 10% to 25% of their investment portfolio should be in precious metals.
For more than 3,000 years, gold and silver have been the international currency of the world. Coins have circulated since 600 BCE with standardized weights and markings, with a value about equal to the content of gold, silver or bronze. It was only in 1968 in Canada and 1965 in the United States that coins made of base metal began to circulate. Until about the same time, bank notes were redeemable in silver or gold. Canadian paper money stated "will pay to the bearer on demand", while many United States notes were called "silver certificates" or "gold certificates". Today however, a $100 note has value only because people are willing to accept it as payment for goods and services. The same is true of electronic payments and digital balances in bank accounts. Without confidence in the long term acceptance of this system, a $100 note would become just an ornately engraved piece of paper, and balances in a bank account would just be digits on a computer screen.
For the past forty years of so, this experiment with currency not tied to precious metals has worked fairly well in Canada, the United States, and Western Europe. For most of this time, these strong economies have enjoyed stability and growth with only a modest national debt. Today however, this confidence has been seriously shaken, and investors have started to take notice of historic examples where government spending has gotten out of control, and paper money not tied to gold or silver has become nearly worthless.
The best known instance of hyperinflation took place in Germany in the early 1920s. The German government was in enormous debt from the first World War, and they started to print money to pay their debts. This type of rapid expansion of the supply of money can quickly result in the public losing confidence in the currency, and wealth stored in cash evaporating. From August 1922 to November 1923, monthly inflation averaged more than 300%. Before this hyper inflation in 1921, 60 marks equalled one United States dollar. An extremely wealthy person in 1921 may have had 60 million marks, equal to $1 million US dollars. By January 1924, it took 4.5 billion marks to equal one US dollar. If kept in cash, 60 million marks would now be worth about one US cent, with virtually no purchasing power at all. Interestingly, German hyperinflation only came to an abrupt end in late 1923 when a new currency was introduced that could be converted into a bond backed by gold.
There are many other countries where paper currency has become nearly worthless. For the first decade of the 20th century, paper money and gold coins circulated side by side throughout Russia. The paper money could easily be converted to gold, so it was widely accepted. However, political instability and economic turmoil led to hoarding of gold and silver, and by 1915 paper money was almost impossible to convert to gold. After the Bolshevik Revolution of 1917, gold and silver coins retained their value, while bank notes were no longer accepted as money. Many Russians who stored their wealth in paper currency lost everything.
In more recent times, hyperinflation and devaluation of currencies not backed by gold or silver have resulted in huge losses for people holding cash or funds in bank accounts. From 1980 to 2000, the Mexican government devalued the peso and increased the supply of money so much that it would take more than 700 pesos in 2000 to purchase the same goods as one peso bought in 1980. Through the 1970s and 1980s, cash and bank balances lost nearly all their value in Argentina, Bolivia, Brazil, Chile, Peru and Uruguay. Former Eastern block currencies also experienced a near complete loss of value through the early 1990s. For most ordinary residents of these countries, extreme economic hardships followed. For the few who were able to convert their savings to gold or silver, their wealth was preserved.
Unlike 1980 when the rapid rise and fall of silver and gold prices may be largely attributed to market manipulation, the strength of gold and silver today is broadly based on investors around the world choosing to protect their wealth in a climate of instability. In the United States and in Europe, heavy debt and out of control spending have made these paper and digital currencies seem less secure than they have looked at any time since their currencies were tied to gold and silver. Until the major economies of the world gain strength and implement sustainable fiscal policies dealing with repayment of debt, gold and silver are likely to remain in demand as an insurance policy and store of wealth for investors.
Choosing the best bullion products for your investment
By Steven Bromberg
If you are new to investing in precious metals, the choices of products available can seem confusing. Should you buy gold or silver? Should you buy big bars, small bars, or newly minted bullion coins? There are certainly lots of options, but the choice should not be too difficult.
When it comes to choosing between gold or silver, no one can definitively predict which will turn out to be a better investment. However, your appetite for risk and volatility may help you to decide. While gold has fluctuated substantially over the past couple of years, the price swings tend to be a much lower percentage change in value than the swings in the value of silver. If you are primarily looking for a store of wealth and protection of your assets in uncertain times, investing in gold is likely going to provide more stability and security.
Physical silver has been in short supply compared with market demand throughout the past few years. The price tends to be more elastic in terms of supply and demand. If you feel that precious metals are going to rise from current levels, silver may appreciate significantly more than gold. However, the price could also drop faster than the price of gold when large contracts are sold into the market. Many investors seeking short term returns are attracted to the good possibility of accomplishing this through silver. For smaller investments, silver also allows the opportunity to get into the bullion market on a small scale.
Choosing the right form of bullion depends on your objectives. Are you simply hoping to make a return on your investment, or do you want to hold small denominations that could be used for commerce if the economic system were to collapse? Smaller bars or coins also allow the flexibility to sell part of your holdings at a number of different times when you may need the funds for other opportunities. The largest silver and gold bars carry the lowest premiums above the spot price, so they are the first choice of many investors simply seeking a return on investment. Small bars carry slightly higher premiums, but allow for greater flexibility when selling. Bullion coins struck by the Royal Canadian Mint, the US Mint and the Austrian Mint are some of the highest quality and fineness bullion items produced, and these are instantly recognized and liquid anywhere in the world.
Many investors have more than one investment objective, and a selection of gold and silver, bars and coins may be the best option to balance making your purchase at the lowest cost with ensuring flexibility and liquidity.
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