The Golden Game

Those serious precious metals investors will know that this isn’t a game – at least not in the long term.  As long as politicians and central banks keep printing money in their attempts to “solve” their economic problems, fiat currencies will continue to lose value and force prices for precious metals and other commodities upward.

However, the recent turn of events in Europe shows that the short term, erratic price movements can turn the most fearless investors into trembling game players, trading their long-term winners for short-term losers.  It’s worth a deeper look into this phenomenon, because the psychology in play here is one that will be predominant when the final crash eventually brings everything down.

If the crash comes via the sudden political transformation that abruptly halts the printing presses, thus forcing austerity by lack of currency supply, then everything, including precious metals, will crash (at least temporarily). In this case, cash will be temporarily enthroned – it will be hard to come by.  Prices will come down on everything and those that have cash will be able to sweep up some sweet deals.

This is what most investors were afraid of during the European crisis of September and October, 2011.  They were “keeping their powder dry” in case this scenario played out.

But eventually, the economy would need a strong, dependable currency again in order to sustain any growth. If the government simply started printing again, they’d only get more of the same problems. There would therefore need to be some kind of guarantee that would prevent the money supply from inflating at will – perhaps by backing the currency with precious metals.  In either case, holding precious metals for the long term is the best strategy.

Investment AllocationsBut how much should an investor allocate his/her investment portfolio to precious metals? The chart to the right suggests that a 33% allocation each, in cash, stocks and physical metal, will best serve to enable good deals to be snatched up when the market drops and still rake in gains during the the long-term bull market.  Keep in mind that owning a precious metals ETF is not the same as owning physical metal – an ETF would be part of the stocks allocation.

Using this type of approach, the investor must continually adjust the allocations as needed when the market fluctuates. Note that this allocation chart is for investable funds only and should not include cash that is needed for living expenses or any non-discretionary items.

Dangerous Derivatives

The Changing World of Investing
Dangerous Derivatives

September 5, 2011

The investing world is undergoing quite a dramatic change. Professional traders and investors have been doing their thing over the past 40 or so years using mostly vehicles in the bond market (securities), stock market (equities) and realestate arenas. The so-called hard assets traded in the commodity markets have mostly been used by legitimate industries in order to hedge their losses in case of temporary, unforeseen economic hiccups.

But now, especially over the past decade, the derivatives market has become an estimated $600 trillion dollar market! No one really knows just how big this market is because there are so many different types of derivatives – and even derivatives of derivatives. And, if you recall, the MBS (Mortgage-Backed Securities) that were packaged up into different investment portfolios and marketed and sold to unsuspecting investors is the particular brand of derivative at the root of the 2008 financial crisis.

But derivatives are not limited to MBS. Financial wizards on Wall Street have mathematically tied pooled investments to Realestate, Bonds, Equities, Futures and Options in order to bring their clients specific opportunites, tailored to their needs. These investment vehicles have gotton so complex and yet so unregulated, it is just a matter of time before this bomb explodes. The 2008 crisis will look like a small ripple on a quiet pond when this next one hits.

In the late 1990’s, Brooksley Born, then chairman of the CFTC, warned about the potential threat to the economic system the unregulated derivatives market posed. But the insiders controlling the banking system, not to mention the political leaders in Washington, wouldn’t listen – nay, they even acted to supress her warnings. The derivatives market was making them too much money and they were not about to give that up.

Fast forward to today and we’ve recently witnessed our illustrious politicians as they’ve recognized the dangers that are still out there. They passed the Dodd-Frank bill into law. This is a bold and comprehensive set of measures, one of which seeks to regulate this dangerous derivatives market.

But the big banking institutions have been lobbying heavily to slow the implementation of Dodd-Frank. In fact, in the first 6 months of 2011, the financial industry has spent over $100 million campaigning to delay or water-down these regulations. Why? Two reasons: One is because it’s a racketeering industry making a lot of money for a select few; And two, because it’s so complex that it cannot even begin to be explained in any rational manner, thus impossible to regulate.

It’s a house of cards waiting to implode. And when it does, look out. If you’re not holding hard assets like gold and silver in your hands, you’ll be in big trouble because all those derivatives contracts are denominated in a fiat currency – for the U.S., it’s dollars.

Both sides of the trade (buyers and sellers) settle the trade in cash. When (not if) the major defaults come, the sellers won’t be able to cover. That will kick in yet more derivatives action – that of the CDS (Credit Default Swap) derivatives market. And when that happens, the major players won’t be able to cover those either.

Massive defaults will lead to yet another bail-out of major financial institutions. The inflation of the money supply necessary for these bail-outs will exceed anything we’ve seen before. This is a crash of truly epic proportions!

You will want to have something of value in your hands in order to trade anything because the fiat currencies will not be worth the paper on which they’re printed. Gold and Silver will be the preferred currencies.

So be sure you have your ounce(s) of gold or silver!!!

Contact the author of this article by sending an email to: Jon K

Precious Metal ETFs

Gold & Silver ETFs
September 5, 2011

There are many ways to take advantage of the current bull market in the precious metals – gold & silver. It can get a little confusing, especially to the investor just beginning to look into the matter.

The easiest, though not necessarily the safest, way to take part in the precious metals market is to utilize the stock market and invest in an ETF (Exchange Traded Fund). An ETF is essentially a derivative because it derives its stock value based on the price of the underlying precious metal. For example, the biggest gold ETF is the SPDR GLD Trust (Ticker=GLD). The GLD ETF claims to hold a certain allocated amount of gold in a vault somewhere in London. It is this physical gold that would give value to each share of the GLD stock.

However, it would be preferable if the ETF in question would allow the stockholder to receive his/her gold upon request. According the the GLD prospectus if a certain stockholder has a Basket of 100,000 shares, they may act through an Authorized Participant to redeem their shares for physical gold. But most people aren’t wealthy enough to own that many GLD shares.

So what would happen if some unforeseen economic crisis caused such a stir that all those stockholders who are wealthy enough to have that many shares decided to redeem their Baskets? There is a very good chance that the value of the stock itself would crash because there isn’t enough gold supporting the outstanding shares – some shareholders would be left with shares that don’t have any supporting underlying metal. To see the reasons why this could happen, one only needs to investigate two things:

  • First, look at the NAV (Net Asset Value) of a basket of GLD shares in terms of ounces of gold. From the perspectus:

    “The number of ounces of gold required to create a Basket or to be delivered upon the redemption of a Basket gradually decreases over time, due to the accrual of the Trust’s expenses and the sale of the Trust’s gold to pay the Trust’s expenses.”

    This means that as time goes by, even those wealthy enough to own 100,000 shares of GLD, will get less and less physical gold when they redeem them.

  • Second, there is a huge amount of short interest in the GLD stock as can be seen here. At the time of this writing, the short interest is about 6%. And that represented 24,570,100 shares which had absolutely no metal backing up those shares. If this were a temporary occurance, one may forgive the situation as it would be necessary during the periodic volativity of trading activity to temporarily issue shares while the Trust’s sponsor accumulated the metal in the open physical market. But since this short situation is rather constantly above this percentage, it is not a temporary thing – indeed it is an aberration! There shouldn’t be naked short shares exceeding the neighborhood of 1% of the outstanding share base (and that’s even extreme for this kind of investment vehicle which attempts to map a certain amount of physical metal to each share).

The same situation results in an investigation of the largest silver ETF, iShares Silver Trust (Ticker=SLV).

There are, however, other ETFs which do offer better odds for the investor and have much more responsible trustees. Two that come to mind are the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV). There are similar management overhead situations in both of these ETFs, but their short interest seem to be much more under control. (At the time of this writing the short interest was 0.05% and 1.4% respectively.)

More importantly, any shareholder who has enough PHYS shares to exchange for the equivalent cost of a 400 ounce good delivery bar can do so on a monthly basis:

“Unitholders that own the equivalent dollar value of approximately one LGD gold bar (~400oz), or more, have the ability to redeem their units for physical gold bullion.”

So, that’s about 40,000 shares necessary for redemption in physical metal in PHYS versus 100,000 share Baskets via Authorized Participants in GLD.

It get’s better. There seems to be tax advantages PHYS & PSLV have over other ETFs:

“For U.S. non-corporate investors who hold units for one year or more and timely file a QEF form, PHYS units are currently taxed at a capital gains rate of 15%, versus 28% applied against most gold ETF’s and physical gold coins*.”

But even these ETFs have potentially negative side-affects. It should be pointed out that not all analysts agree and here’s one article that disses PHYS.

If you just want to play the bull market by trading paper money and don’t expect to need the physical metal in the near future, then perhaps the ETF is a vehicle you can use to book profits. Just make sure you understand that the profits (or losses) will be in paper-based fiat currencies like the U.S. dollar. And as you should already know, all fiat currencies of the world are now racing to their nominal values (=zero). This article explains why that’s happening.

It’s just better and safer to own and hold your own physical metal in your hands. Especially if a catastrophe hits the global monetary system, as could happen given the situation with the dervatives market.

Contact the author of this article by sending an email to: Jon K

The Gold in GLD

September 1, 2011
Many people are suspicious and doubt that the SPDR GLD ETF actually has all the physical gold it says it has. Here’s a CNBC video, where Bob Pisani was one of the few people in the world who was able to visit HSBC’s vault somewhere in London and was able to see all those beautiful stacks of gold bars.

This may have eased some suspicions, but some are still concerned. Some people suspect that the GLD ETF may not have sole ownership ties to these bars of gold due to central bank gold leasing programs in addition to the fact that there isn’t enough physical gold in the world to back the volume of daily paper trades in the gold futures and options markets.

September 9, 2011
Wow, talk about trashing a concept – here’s a video that lays out all the weaknesses in the GLD prospectus. As you watch the video and learn about the prospectus, keep in mind the three main players behind the SPDR GLD Shares:

Precious Metals Crash

The precious metals investor has to ask, “Why?” All the fundamentals that made gold and silver rise to the highs they saw in August are still in place. How can it all be erased in 3 days?

First of all, looking at a multi-year chart of gold performance, one can immediately see that the price rise was ascending at a much accelerated pace since July. Here’s the GLD chart which exemplifies this pattern.

Two year GLD chartThere were good reasons for gold to take off like it did – as political and economic problems persisted in Europe, the middle east and the U.S., things were looking bad. And nothing’s changed. In fact, much has gotten worse! For example, the Swiss have effectively pegged their currency to the Euro, which means there isn’t any true safe haven currency to flee to anymore. In the face of all that, why the sudden plunge in precious metals?

The “leap” in the slope shown in the graph above is more speculation of future prices, rather than an indication of current prices. And the markets love to take advantage of speculators on both the long and short sides when they can make money from it. And that’s exactly what’s happened here.

There isn’t a bubble in precious metals. Gold and Silver will continue to rise until the governments of the world stop their incessant spending programs and central banks stop accommodating them by printing paper money at will.

There are two levels of investing going on here:

  1. Speculators on the long term trend of gold and silver due to the fundamentals;
  2. Traders taking advantage of short-term, irregular trends in the market.

Keep your cool & stay the course. Watch the trends for good times to buy back into the market (like RIGHT NOW!!!!)


Buying Silver Mining Companies


Investing in the mining sector in an attempt to profit from the bull market in precious metals can be successful for those investors who understand the industry. Others may come up on the lucky side simply due to the overwhelming price advances of gold and silver.

In past precious metal markets, the mining company stocks have tended to move in the same direction of the underlying metals, but their volativity have far surpassed that of the metals – sometimes causing exponential price fluctuations compared to the price changes in metals.

This is largely due to the fact that investments in miners are essentially investments in the stock market. Hence, they are vulnerable to anything affecting the general economy and can move in the opposite direction of the metals, depending on circumstances.

The mining stocks are particularly vulnerable to political climates and even environmentally-motivated uprisings in countries where the companies are mining. For example, Hugo Chavez announced that he is nationalizing Venezuela’s gold miners. And in Peru, after the latest round of elections, the newly elected president, Ollanta Humala, would definitely like to have a share of the miner industries’ profits in his country, but it isn’t clear if or how that may happen. Nevertheless, just the rumors of government intervention of any kind can send a stock down dramatically.

Between the threats of government intervention or increasing mining taxes and environmental concerns, one walks a tight rope in determining companies in which to invest.

On top of these factors, the investor must decide which market-cap range is the best area of investment.

  • Large Cap (Market Capitalization in Billions of dollars & well established)
  • Mid Cap (Market Capitalization in high Millions of dollars)
  • Small Cap (Market Capitalization in low Millions or unestablished)

Large caps can be more stable, but not have much growth potential. In fact, most large caps depend on buying up small and mid caps in order to sustain growth. Some small caps can yield huge returns. But some are risky because they can run out of cash and go belly-up before any significant find is established. The trick is knowing which ones have the greatest potential.

So it is worth repeating…if the investor doesn’t know the industry, then perhaps a better label for the activity of investment would be gambling.

But there are knowledgeable people in the industry. And one way to take advantage of that knowledge is to invest in minor-related ETFs and Mutual Funds. These types of funds hold baskets of various stocks, chosen by the funds’ management.

Below is a table of some precious metal equities, but it should be noted that these are not recommendations – each investor should initiate his/her own investigations prior to making any investments. The table is provided for informational purposes only.

Disclaimer: The author either owns, has owned, or is contemplating owning the listings in this table.

Large Caps

SilverSaver(R) - Save Physical Silver and Gold
Stock – AgniCo Eagle Mines Ltd
Stock – Eldorado Gold Corp
Stock – Goldcorp
Stock – Kinross Gold Corp
Stock – Pan American Silver Corp
Stock – Silver Wheaton Corp
Stock – Silvercorp Metals Inc
Stock – Yamana Gold Inc
Mutual Fund – Tocqueville Gold
Mutual Fund – U.S. Global Investors Gold & Precious Metals
Mutual Fund – U.S. Global Investors World Precious Minerals
ETF – Market Vectors Gold Miners
Mid & Small Caps
Stock – Almaden Minerals Ltd
Stock – Bayfield Ventures Corp
Stock – Columbus Gold Corp
Stock – East Asia Minerals
Stock – Fortuna Silver Mines
Stock – International Tower Hill Mines Ltd
Stock – Trade Winds Ventures Inc
Stock – Exeter Resource Corp
Stock – First Majestic
ETF – Market Vectors Junior Gold Miners


Buying Silver-Based ETFs

Using ETFs to Participate in the Precious Metals Bull Run
The number of available Exchange Traded Funds (ETFs) has dramatically increased over the past decade. They allow the common investor to participate in classes of investments that used to be accessible to a select few, specialized investors & institutions.

But the relative ease and convenience of an ETF doesn’t necessarily mean they are safe investments. In fact, quite the opposite – they can be quite volatile. And since they are a derivative of the underlying asset or financial instruments, every investor should understand that the ETF does not yeild any ownership of anything but a share of stock. (It is not as if the underlying asset or financial instruments are being purchased.) At best, any ETF can only propose to have similar price-performance compared to the underlying instrument.

While it is true that some ETFs provide for the exchange of stock shares for the underlying assets, this option is closed to most investors simply due to the minimum number of shares necessary to execute such an option.

Any investor wishing to participate in the precious metals bull market by utilizing the ETF arena should understand that it is not the same thing as owning precious metals. Instead, it’s a paper asset and should be treated as such. It should also be realized that all ETFs are not managed the same, nor are they even structured the same. On top of that, given any specific ETF, there will always be varying opinions among different analysts regarding the validity and expected performance of that same ETF. As an example, here’s an article discussing and comparing some of the prospects of the GLD, SLV, PHYS and PSLV ETFs.

When it comes to ETFs based on precious metals, there are a variety of different types:

  • Standard ‘bull’ ETFs linking the price of one share to the price of a specific amount of a precious metal. The price of the shares tend to move more or less in synch with the underlying metal’s price movements.
  • Standard ‘bear’ ETFs also linking the price of one share to the price of a specific amount of a precious metal. Only the share price tends to move in the opposite direction of the metal. (The share price goes up if the price of the underlying metal goes down.)
  • Leveraged ETFs seek to give double (or sometimes triple) exposure to share price movements of twice (or more) the amount of the underlying metal. Again, these can be either bull or bear type exposure. (Incidentally, these leveraged ETFs are becoming quite a concern to market regulators in Washington. A derivative of a derivative of the underlying asset doesn’t seem so friendly to free markets. This related article discusses the dangers of the derivatives market.)

Below are some of the more popular ETFs in the precious metals space. Please note that this list is not comprehensive and these are not recommendations, but provided for informational purposes only.

ETF Asset Description
SPDR Gold Shares tends to have share-price performance similar to the price movements of gold.
iShares Silver Trust tends to have share-price performance similar to the price movements of silver.
Sprott Physical Gold Trust tends to have share-price performance similar to the price movements of gold.
Sprott Physical Silver Trust tends to have share-price performance similar to the price movements of silver.
ETFS Physical Swiss Gold Shares tends to have share-price performance similar to the price movements of gold.
ETFS Physical Silver Shares tends to have share-price performance similar to the price movements of silver.
Gold & Silver
Central Fund of Canada tends to have share-price performance similar to the price movements of a proportional amounts of gold and silver.
ProShares Ultra Gold tends to have share-price performance similar to twice the price movements of gold.
ProShares Ultra Silver tends to have share-price performance similar to twice the price movements of silver.
ProShares Ultra Short Gold tends to have share-price performance similar to twice the price movements of gold in the opposite direction.
ProShares Ultra Short Silver tends to have share-price performance similar to twice the price movements of silver in the opposite direction.

Precious Metal Investing


There are a few different ways to invest in precious metals. Each investor needs to give serious thought to these ideas and select the option(s) that best suit their own needs.

Below is a quick reference to different investment vehicles available to the average investor interested in the precious metals market.

Investment Vehicle Description
Physical Silver
Physical Metal
Buying physical precious metals requires the investor to take delivery of their gold and/or silver bullion in coin or bar form. This also requires self-storage (using either a home-safe or a bank safety-deposit box). Every serious precious metals investor should have at least some percentage of their entire investment portfolio in this form of physical ownership.
Online Storage
Online Storage
The world wide web makes it possible to do online investing as well as purchase and remotely store precious metals. For those investors that are unable to personally store their metal, this option can be extremely convenient. With the added benefits of having global access to storage facilities in the U.S., Europe and Asia, this option can also build in geographical diversification – always a good thing in today’s political climates.

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Precious Metal ETFs
There are Exchange Traded Funds (ETF) which trade just like stocks in the stock market. These are by far the most convenient, but also perhaps a bit more volatile than the actual physical market itself. This method of investing should not truly be considered an investment in the physical metal, since delivery of the metal would be difficult for most investors.
Mining Companies
Mining Companies
If you’re ultra-wealthy and you want to preserve that wealth, it can be extremely difficult to acquire all the physical metal your money can buy. This is mostly because hitting the market with huge buy orders can make the price spike up and upset the market. For this reason, the elite classes usually buy up their own mining companies. The smaller investor can still participate via publicly offered shares in large, mid and small-cap mining companies listed on stock-exchanges.