Diversification In Precious Metals

Long-time readers of my blog knew this one would eventually come...  While I still have not written a piece on Silver (I have long felt that I could draft someone else to do a "Guest Post" on silver...), I include a discussion here, as the dynamics of holding silver are different than holding gold.  And both platinum and palladium have their own dynamics as well.

I use the acronym "PMs" often in this article, short for "precious metals".

"Gold is the money of Kings
Silver is the money of Merchants (Gentlemen)
Copper (Barter) is the money of Peasants
Debt is the money of Slaves"

- "Traditional" (I did a quick Google search and could not find the origin of this saying, "Traditional" found here: http://corp.adjutant.com/about/favorite-quotes)


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An Extremely Brief History of Precious Metals Monetization in the USA

1)  The US Constitution says that money was to be ONLY silver and gold.

2)  They took away our gold in 1933 (Roosevelt's confiscation).

3)  They took away our silver in 1965 (clad dimes and quarters).

4)  They even took away our copper in 1982 (new pennies are mostly zinc).

5)  Will they take away our money in the banks soon (see Cyprus)?


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An interesting forum-style website covering ALL precious metals is pmbug:

http://www.pmbug.com/

Gold and silver are also much discussed at the famous Zero Hedge website (which talks about almost all things financial as well):

http://www.zerohedge.com/


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Gold

Gold has been considered the wealth-preserver of choice for some 6000 years.  Most gold is hoarded, relatively little of it circulates (even back in the days of gold coins as "money", gold did not circulate much).  Because of this primary role of wealth-preservation, gold's highest and best use is sitting very still, held through time, generation-to-generation.

(Re gold and the statement in blue above, I am a follower of FOFOA: fofoa.blogspot.com)

Indeed, gold traditionally HAS been the choice of kings as well as the choice of plunderers for millennia.  Most civilizations valued gold highly (one interesting case that did not were the Incas of South America, who made decorative plates (etc.) out of it, but it was not really hoarded by them, although it WAS called "Tears of the Sun" even by them).

On occasion, LARGE transactions were often transacted in gold.  There is a (an apocryphal?) claim that in Weimar Germany during their hyperinflation that ONE OUNCE of gold bought an apartment building...

Gold is available from 1 gram - 400 oz (troy) sizes.  It is relatively EASY to buy gold coins (Gold Eagles are my choice) in one oz size, but Eagles also come in smaller sizes too (1/2 oz, 1/4 oz and 1/10 oz coins).  Gold Eagles are almost always available at "the largest coin shop in town", the retails price is typically about 6% over spot (6% premium) for Eagles, for certain other gold coins (Krugerrands, Austrian Philharmonics, etc.), the premium is typically less.  LARGE bars of gold (1 kg (31.2 troy ounces) for example) are a little harder to get, especially the 400 oz bars (seen movies...) -- a 400 oz bar would run you some $640,000 now...  One kilo gold bars are typically available at www.tulving.com.  Here is a picture from tulving, showing a typical 1 kilo gold bar: http://www.tulving.com/bullion/kilo_gold_bars_johnson_matthey_jm_kilo_bar.htm

Gold is the only metal stored by the central banks as monetary reserves (most central banks also use US dollars and other currencies as part of their reserves as well).  The central banks and the central bankers may be evil, but they are not stupid...

In my opinion, gold is most suitable for:

-- the already wealthy looking to hold it as a "store of value"
-- those with a long-term horizon (family holdings, to be passed down the generations)
-- those who may want to trade it at some point for other high-valued items (land, fine art)
-- those who might want to transfer a large amount of wealth with them...

Gold is less suitable for:

-- those who cannot afford it (a 1/10th oz Eagle costs about $190, which is not that much)
-- those who plan to "spend it" (for food, etc.) in a SHTF
-- those who do not have children or other heirs they love...

As of the date I write this piece, gold's spot price is about $1605 per ounce.  The price of gold has been range-bound for over a year now, ranging from the mid-$1500s to $1900 per oz.


Silver

The famous economist Milton Friedman has written that silver has been used for money much more often throughout history than gold, indeed his assertion is correct if you define "money" as something that circulates (although the definition of "money" is very slippery, see FOFOA's (very long) blog pieces on money).

One reason why I have not written much about silver is the huge amount of conflicting information about the metal as well as how much the price is manipulated.  In my opinion, there is no question that the price of silver (and gold to a lesser degree, probably...) are manipulated, but how much...?

Silver, it turns out, has a myriad of industrial uses.  I have seen claims that silver is used in more  different industrial applications than any other metal (though usually in very small amounts).  Silver is used (50 lbs worth?) in every Tomahawk missile (and not recycled) as well as iPhones and iPads.  A lot of silver is recycled, but a lot is not.  The fact that a LOT of silver is used by various industries means that its price is influenced by the general economic climate.  "Moar stuff, moar silver is used"

I have seen claims that the amount of the world's above ground (tradeable) inventories of silver are about the same as for gold (about one billion oz each), a claim I cannot verify to my satisfaction (LH!  I need an article from you on silver!!!)

Here is some reading material for those interested in silver (I do not include much information about silver here at my blog, there IS extensive information on gold and platinum here):

http://lhmarketwatch.blogspot.com/

https://silverbulletsilvershield.com/

Silver is also easy to get (although Silver Eagles have been hard to get at certain times since 2008, the US Mint apparently cannot keep up with demand for silver from investors), typically in one ounce coins, there are MANY options, I choose Silver Eagles as they are made in the USA and so well-recognized.

Silver is most suitable for:

-- those who want to buy an ounce for less than $40...
-- spending in a SHTF, yes silver would be better than gold for that
-- those who are betting on silver "running out" (a common theme among silver bulls)
-- fabulous gifts that are not too expensive...
-- speculation..., there WILL be spectacular movements (up & down)
-- protection from germs ("a silver spoon...") and vampires...
-- jewelry (notice how hard it is to find GOLD jewelry nowadays?)

Silver is less suitable for:

-- holding in large quantity (this subjective, I know someone who has 5000 oz...)
-- those who prefer less price volatility...

Silver's price today is about $28.80.  Many consider this price grossly undervalued (a bargain).  The gold price to silver price (Au:Ag ratio) is about 55:1, relatively high by historical standards (this means that were the metals to revert back to their traditional 15:1 ratio often seen in history, that silver would outperform gold, although whether this will happen anytime soon is in much dispute...).

Interested in buying silver...?:  "DYOF Diligence"!


Platinum

Platinum has been recognized as a precious metal now for some 150 years or so (depends on who's counting...).  Platinum is used in diamond mounts (engagement rings, for example) as it is harder than silver or gold.

Platinum is much rarer than gold, there are approximately 10 ounces of gold for every ounce of platinum around the world.

Platinum is also used in industry (as catalysts and in alloys), and so is similar in that respect to silver.  The metal's price shows some of the same industrial demand dynamics as silver does.

Platinum is relatively more suitable for:

-- people who already have decent holdings of other PMs
-- people prepared to pay the price (roughly the price of gold per ounce)
-- those OK with price fluctuation (more volatile than gold)

If you do not have gold and silver, I would recommend starting with those two first.  But, if you are not the kind of person who takes advice from the likes of me, well, owning platinum is better than not owning any PMs at all.

Platinum is harder to get than gold and silver, but if you look around, it is there.  tulving (see above) has platinum coins.  But, not Platinum Eagles, which are VERY HARD to find now (except for "proof coins". which are collectible coins with a high premium over metal value).  Platinum from Canada, Australia and the UK is fairly easy to get.

Platinum is priced around $1580 per ounce, less than gold.  This is relatively rare, historically speaking, the ratio of Pt:Au typically varies from approximately 1:1 (now for example) to 1.3:1 (platinum more expensive).


Palladium

Palladium is the last of the PMs as accepted by most commentators...  Palladium (like gold, silver and platinum) are traded on the COMEX, and palladium is used for some jewelry (esp. in China and as one the accepted alloys for "white gold").  Palladium is also used in industry (like platinum), but in lesser amounts.

Palladium's price volatility is very high (it traded over $1000 / oz before crashing to under $200, wow did Ford Motors lose a LOT ($1 billion) on palladium when the Russians let 'em have it...).  Palladium is also even harder to get than platinum, but too can be found at tulving...

Palladium is now trading about $750 / oz.


Other metals (as investments) and comments

With Cyprus the being the "disaster du jour" lately, I have seen various comments on holding metals that are NOT PMs...

Perhaps the most common are people who are (and have been for over a year now) hoarding NICKELS (5 cent coins).  Nickels are 75% copper and 25% nickel.  The US Mint is likely to STOP making nickels very soon, as they cost some 10 cents to produce (transport of base metals is expensive...).  The metal value of nickels is around 4.9 cents now, lately it has been above and below 5 cents.  Metal value, of course, does not include the expenses of melting nickels to separate the two metals (now currently illegal).

Many people also are culling the copper pennies (1981 and before) pennies that are 95% copper from the modern (1982 on, although some 1982 pennies are copper...) pennies which are some 97% zinc with a copper coating...  The copper pennies are worth (metal value, although ZH-er DCFusor has informed us (at pmbug.com) that "penny alloy" is not considered desirable by recyclers of copper...  Also, is it really worthwhile to spend your time sorting PENNIES?!?!

Metal values of US coins can be checked at www.coinflation.com.


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The question probably will arise: "how much of each PM to hold?"  That, kind reader, is up to you!  In the above comments I have discussed suitability in a general sense.  In my own case, here is my $-value percentage holdings of the above PMs (values approximate):

Au:   78%
Ag:     3%    <--- lots of ounces (for "SHTF"), but my gold is worth far more
Pt:    18%    <--- I value platinum's "price density" (value per ounce)
Pd:     1%    <--- token speculative position only