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Here is a true story about gold, silver….and
a small fortunate fortune.
Cold rain rattled on the window pane and an anxious wind howled.
A diesel taxi rattled outside the house waiting with my family.
We were headed to the airport and were late. Grey dawn filtered
in the study and I listened anxiously as my Swiss banker spoke
on the phone. Gold and silver had been on the move. Gold had
reached $860 and ounce, silver $48.
I was speculating on the precious metals and was leveraged
to the hilt. This was England in the 1970s. We were taking
a trip to visit my folks in Oregon and I needed to know how
much these metals could drop before having a margin call. I
had no idea it was time to cash in on profits.
I was up to my neck in loans so he advised me to sell and
re-establish my position when back from the trip. This created
a huge profit, one of my first good hits. While away, gold
and silver collapsed and have never, in over 20 years, reached
those high prices again.
Those profits came from pure good luck. That trip and that
rushed that morning stopped a wipe out that would have lost
everything, my house, my business and who knows what.
That was a life changing event. Now precious metals are again
on a fast trip up. I have not forgotten. Nor will I press my
luck even decades later. Hopefully you won’t either.
Perhaps gold and silver will rise to and surpass where they
were then. Seems to me they will, but maybe not.
To understand the role of gold and how I invest in it, let’s
look for a moment at money.
Money makes it possible for us to buy and sell without bartering.
Money gives us a "medium of exchange," which allows
our complex economic system to function. Money acts as a way
to put tangible, universal value on commodities and services.
It helps us compare the value of one thing with another. This
gives us a "unit of value," which allows us to make
decisions about purchases and investments.
Money also functions as a way to store wealth -- to preserve
purchasing power for spending at a later date.
Money must be real to carry out these functions. Only money
created by real production can be real money, but there are
six other qualities money must have if it is to work properly.
#1: Money must be acceptable by both parties in a transaction.
To be absolutely universal in value, money must be acceptable
to everyone.
#2: Money must be portable. One must be able to take money
where it is needed. This is what has made paper and plastic
money so much more popular than gold. Paper currencies, checkbooks
and credit cards are so much easier to carry than lumps of
gold and silver.
#3: Money must be rare and require effort (real production
or work) to attain. Gold has the qualities of money. Yet gravel
has most of these qualities, except rarity. Gravel is as common
as dirt and if gravel were used as money instead of gold, the
temptation to just pick it up on the road, rather then work
for it, would be too great. Money must offer an incentive to
work and apply discipline. Rarity creates this incentive.
#4: Money must be divisible and uniform in quality. In other
words, people must be able to know that each unit of the money
is real, not forged or altered.
#5: Money must have some intrinsic value, or be useful in
itself or be backed by some intrinsic value.
#6: Money must be naturally durable. There have been many
times when goods or commodities such as chocolate, coffee,
cigarettes or silk stockings, etc. have been used as money.
The conditions were such that the commodity was so desirable
and so rare that these two qualities were enough to make them
a form of money. Yet they fail to last as a money because they
are too fragile and once consumed cannot be used as money again.
Gold and silver fill the six categories. Some early goldsmiths,
stored gold for others and offered receipts stating how much
gold was being warehoused. These receipts had value, since
they represented claims on a specific amount of gold. The receipts
began to be exchanged as money. They were easier to carry metal,
but were as good as gold? Paper money began as receipts backed
by something of value (usually gold or silver). Then governments
took over the role of creating paper money and slowly eliminated
the precious metal backing.
The U.S. dollar was backed by gold or silver. When this backing
was removed the first big gold spurt took place. Since then
the confidence in the U.S. dollar has continually eroded and
the value of the dollar fallen. As the dollar is still the
reserve currency of the world, other currencies that are backed
by the dollar lose confidence as well. Until confidence in
the dollar is restored or until a new reserve system is created,
there will be global currency turmoil.
Gold has proven itself over thousands of years to be real
money. The price of gold is volatile, can rise or fall dramatically
and can remain depressed for years, even decades (as has been
the case of the price of gold through most of the eighties
and into the nineties). Every historical study of the long
term price of gold shows that over time, it has always risen
versus currencies that are not backed by gold or a precious
metal. Every investor should consider holding part of his investments
in gold on a long term basis as insurance against currency
turmoil.
A study of gold prices dating back into the 1600s shows that
gold tends to rise in spurts every 15 to 25 years.
We are in one of these spurts and the big question is how
high will gold (and silver) rise now.
The price of gold in the 70s was $35 an ounce. It rose way
too high (to $860), then plunged and eased slowly over many
years down into the $200 an ounce range.
If we look at gold as a store of true value it should now
be somewhere between 12 and 16 times its $35 price in the early
70s. Houses, bread, gas, most things cost 12 to 16 times what
they cost in the early 70s. But what was the correct price
then? If $35 an ounce was right, the correct price of gold
now should be in the $420 to $560 range. Gold was probably
worth more than $35 an ounce, perhaps $70 an ounce. If so this
could mean that gold should be worth $840 to $1,120. It certainly
could reach these heights now.
When gold reached from $35 to $860 it was way overvalued.
These means if it is worth $700 or $800 an ounce now, it could
go much higher…for a bit.
Then, assuming the yellow stuff follows its nature (as it
has for 500 years or so or may be much longer), it will crash
again.
There are numerous ways to buy gold. You can buy numismatic
coins (unless you really are a collector and know what you
are doing-don’t do this). You can buy bullion coins.
You can buy gold bullion in Swiss, Austrian, and banks in several
other countries (either segregated or held in common). You
can buy gold certificates. You can invest in shares of gold
mines and gold mutual funds that invest in mining shares. Plus
you can speculate in gold futures and gold options. Ditto all
this with silver.
Since buying and holding physical gold is expensive (because
of storage costs) and because physical gold does not pay interest
or dividends, an alternative to owning gold is gold backed
investments, such as gold shares.
There are many mutual funds that invest in gold shares and
you can see and track many of them at http://www.eaglewing.com
You can learn about how to buy gold shares from Jyske bank.
Contact Thomas Fischer at fischer@jyskebank.dk
You can learn how to hold gold at a very low costs with Perth
Mint Certificates from Michael Checken at Asset Strategies.
Michael is one of the real experts in [precious metals who
has continued dealing in gold over the last 20 years. You can
reach him at rcheckan@assetstrategies.com
If you have speculative blood, you can buy futures, options
or buy the metal with leveraged purchases. This is what I did.
Just remember, only pure, good luck stopped me from losing
my shirt.
Here’s a prediction about gold. Some people will make
fortunes speculating in gold. Most will lose. Some will lose
heavily.
If you are a skilled trader, then by all means speculate now
(you probably already are). Maintain your normal disciplines,
stop losses and never speculate more than you can afford to
lose.
Personally I keep about 5% of my liquid portfolio in gold
and silver and have for years. I am seeing this portion of
my portfolio rise a lot now. Soon, I’ll put some running
stop losses (at about 15%) on my metals and sell during the
high price. Then after the crash I’ll buy back to the
5% level again.
Personally I prefer to take my risks now in real estate, business
and a few shares in industries I know. They pay interest dividends
and don’t hang around in the cellar for so many years.
If you know gold and or silver really well, by all means speculate…but
exercise caution. In the days ahead there will be plenty of
hype about how high gold can go. None of us really know!
If you hold gold as an insurance policy then it is doing well
now. Just remember that profits come from buying and selling.
The price of gold may be nearing where it should be. This does
not mean it won’t go higher…even much higher.
Know that you are speculating on the bubble and don’t
be ashamed to take a profit. |
