Start hoarding gold and silver right now
posted on
Dec 03, 2010 08:10AM
Edit this title from the Fast Facts Section
Adjusted for inflation since 1980, silver prices should be trading at roughly $128 an ounce
Over the past decade, gold has trounced stocks across the board. No big secret there, of course. But the margin of the beating might surprise you… Let’s get one thing straight, though: Despite the fact that gold prices recently broke through the $1,400 per ounce barrier and the mainstream media keeps referring to “all-time highs,” this is off the mark. Adjusted for inflation, the real gold price record was set 30 years ago at $2,318 per ounce. Nevertheless, the current scorn over paper currencies and their assorted woes is fueling the gold rally. However, two key questions remain: 1. Will gold continue to sparkle? 2. Are there better alternatives than gold as a hedge on inflation and instability? Case for gold’s mojo Let’s deal with Question #1 first by considering the catalysts that could keep the price of gold surging… So what if – like me – you think that gold prices will keep chugging higher? You have a couple of options… Follow the big boys into this easy gold investment The easiest way to gain exposure to the gold market is to buy shares in an exchange-traded ETF like the SPDR Gold Trust (NYSE: GLD). This fund replicates the price movement of gold bullion, which is up 23% this year. The pros are all over the map with this ETF, too. According to SEC filings, the fund run by former Goldman Sachs trader Chris Shumway added 2.1 million shares of GLD during the third quarter, while Dan Loeb’s Third Point LLC bought 115,000 shares. Highfields Capital was also bullish, buying call options worth 1.6 million shares. By contrast, George Soros sold over 500,000 GLD shares to finish the quarter with 4.7 million shares, while Eric Mindich reduced his Eton Park Capital’s stake by two million shares to 4.6 million. Guru John Paulson maintained a 31.5-million share holding through the quarter. But what if you want a more specific investment? Go gold mining with a pick and shovel In this case, many investors prefer to buy individual gold-mining shares. But there are pros and cons… On the plus side, the gold-mining industry has large fixed costs and higher gold prices go straight to a company’s bottom line. Balanced against that, however, are regulatory risks. Revenue-hungry governments are targeting mining companies to fill budget holes. For example, Australia recently tried to impose a 40% “super tax” on resource companies like BHP Billiton (NYSE: BHP) and it resulted in a significant haircut for mining shares. In addition, keep in mind factors like mining accidents, labor issues, management mistakes and particularly volatility. While gold prices held up fairly well during the global financial crisis, mining shares tumbled. I suggest you take a “shotgun and rifle” approach here: That’s the gold story. But what about its partner in crime – silver? I believe it could fare even better than gold at this point. So let’s check out a couple of good silver investments… Could silver fare better than gold? The headlines tell us that silver prices have climbed to a two-year high. But if you adjust for inflation, the price remains more than 60 times cheaper per ounce than gold. Adjusted for inflation since 1980, silver prices should be trading at roughly $128 an ounce. And budget-conscious jewelry shoppers and investors alike are taking note. “People who can’t afford gold will buy silver,” says Seshan Ramakrishnan, head of retail products at HDFC Bank. Investment-wise, in addition to the main ETF – the iShares Silver Trust (NYSE: SLV) – take a look at Coeur D’Alene Mines (NYSE: CDE). It offers more revenue growth and better value compared to its financially stronger rivals Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM). Remember this tip, though – one that goes for any investment: When everyone is talking about a sure thing, be skeptical and diversify. For example, Abu Dhabi’s Emirates Palace Hotel recently opened a vending machine that dispenses gold bars! Choose your investments carefully and be sure to distribute your capital into other hedges like cash, silver and oil. Disclosure: The author does not own positions in any of the stocks mentioned