How to ride the gold and silver bull market: Part 1

Just to step back a little, how is it that investors big and small can be so confident that gold and silver are on an upward march?

Well it will not be a straight line. There will be ups and downs as the graph momentum continues upwards. It could be that gold drops $250 and silver $10 just as this article appears; equally both metals may well add that amount in the next couple of months.

Why? Basically monetary inflation is out of control, and every time the central banks increase liquidity to offset asset price declines that is positive for gold and silver.

Falling interest rates

Right now capital markets are beginning to discount a long US recession and much lower interest rates to counter its impact. This just has to be positive for precious metals which are money that cannot be devalued by central bankers.

As an individual investor, that is reason enough to hold some gold and silver in your portfolio. If nothing else it is a surefire hedge against a falling US dollar – for gold and silver go up when the dollar goes down. And most investors in the Middle East hold dollars or local currency equivalent on deposit, and are watching it fall in value.

Veteran gold investor Jim Sinclair thinks the dollar will reach $1.64 to the euro and has a target of $1,650 for gold that he set at the start of the century and now believes will prove too low. Silver investors like Jason Hommel and Howard Ruff reckon silver will outperform gold by a factor of two due to supply issues and past precedent in financial crises.

Investment options

Investors need to differentiate between buying physical metals and financial instruments based on actual holdings, futures contracts and shares in metal producers and exploration companies.

To buy physical precious metals you can go to the Dubai gold souk or even Dubai International Airport, and buy for a modest premium over the market rate. But precious metals are heavy and a security hazard. Storage is an issue.

A popular alternative is to buy an exchange traded fund (ETF) in either gold (GLD on the NYSE) or silver (SLV). This is a fund which buys and stores the metal and sells shares that reflect the underlying value of the metal.

You can buy and hold these ETFs in any internet brokerage account, and sell them instantly anytime. But be careful to make sure your broker is backed by a blue-chip bank, or you might find that access to your money becomes blocked one day or worse.

Gold and silver future contracts can be bought on the Dubai Gold and Commodities Exchange. They offer considerable leverage against future price movements, but buying a volatile commodity on margin is not really a risk recommended for non-experts.

PM stocks

If you want to lever the price of precious metals then gold and silver shares are the best way to do it, and are like holding options that never expire. It stands to reason that a gold producer will see its revenue rise if the gold price goes up, while most of its costs will be fixed, so its profit increases by a faster rate than the gold price.

Hence you buy gold and silver shares to lever the upward momentum of precious metals. There is a particularly good opportunity to do this right now as the recent turmoil in global capital markets has kept precious metal shares down while the metals themselves have been roaring ahead.

This anomaly can not last for long, and is particularly true for the smaller stocks as hedge funds have been shorting junior gold and silver stocks, and only buying the biggest producers.

See also:
How to ride the gold and silver bull market, part 2: Buying for maximum upside
World's richest sovereign wealth funds
Buy gold to side-step the collapsing US dollar