The following is a guest post from Cindy who writes at Midlife Finance.
After my post on ways to hedge your bets for expenses and investing, one commenter asked about investing in gold. Was it a good option for safeguarding your money?
First, it’s necessary to decide how you want to deal with these precious metals. (I’m adding silver into the discussion, though other metals, like platinum and copper, are also significant.) People have been using them for coinage and ornamental purposes for thousands of years; early civilizations like the Sumerians and Egyptians seem to have focused primarily on gold for jewelry and ornamentation.
Weighing your choices
Gold is measured by troy ounces (12 troy ounces to a pound). It’s extremely heavy for its volume; ‘specific gravity’ gives it a weight more than 19 times heavier than water. (Gold-panning miners rely on this, looking for gold in river bottoms, where it would sink and become lodged in crevices.)
Silver is also weighed by the troy ounce. Sterling silver is 92.5%, or 0.925 pure. ‘Fine’ silver is typically 99.9% (0.999) pure, though some countries’ silver can vary — Mexican silver, for example, can be 95% (0.95) and British silver 95.8% (.958), instead. (Look for the markings to help you determine this on jewelry — a Google search on ‘silver markings’ will produce a number of lists and tips on how to do this.)
When gold is used in jewelry, it’s measured by the karat; a word related to the carob seed, which was used to balance scales in the Orient. (‘Carats’ are for measuring gemstones.) Pure gold is 24 karat; however, most jewelry in Europe is only 14 or 18 karat. In the Middle East, India and Asia, however, jewelry can measure 22, 23 or even “chuk kam,” nearly 24 karat.
How to invest
Gold is sold as bullion (bars) and coins. Popular choices for the latter are the American Gold Eagle, South African Kruggerand and the Canadian Gold Maple Leaf. Each of these modern coins weighs an ounce, and as of this writing, are selling for approx. $1400-1600 each. Silver is also sold as bullion and coins, though many of the coins seem to be more commemorative than legal tender.
There are other options. You can pay a company to ‘hold’ your gold. (They store it, you get a certificate saying you own it.) You can buy stock in mutual funds or ETFs based on gold, silver and other precious metals; short and long-term futures; or stock in companies who mine or process ore. (Look for an IPO if you want to get in on the ground level, though that’s not necessarily a guarantee of overall value.) Or, like Robert Kiyosaki of Rich Dad, Poor Dad (affiliate link) fame, you can buy your own mines. (He currently owns gold, silver and copper mines, as well as shares in other mining operations.) Interestingly, silver mines are less common than gold ones; in fact, silver supplies have decreased more significantly over the decades than gold, in spite of gold’s higher price.
And of course, there’s always jewelry. Some regions, like Taxco, Mexico, are famous for their beautifully heavy silver bracelets, necklaces and rings. (‘Pawn silver,’ a term for antique silver-and-turquoise squash blossom necklaces, bracelets and other jewelry from the American Southwest, is also highly valued.) The gauge, of course, is purity and weight. A typical gold ring, for example, generally weighs from 3-7 ounces, depending on how much gold is actually in the ring. (However, you would probably only get 25% or less of its ‘spot’ value, if selling to a ‘scrap gold’ firm.)
Precious metal prices fluctuate, depending on what’s happening in world and financial events. Gold’s ‘spot’ price, as of this writing, is $1385 USD per ounce, with coins slightly higher. (It dropped to $1377 the night I finished writing this article.) That price is an improvement — gold has taken a beating in recent months, 10-18% or so less than what it valued 5 months, or even a year ago. (At least 6% of that loss has come just in the last month alone.) Experts are explaining the drop by mentioning a stronger U.S. dollar, the lack of inflation, consumer price indexes dropping, etc. as well as a huge recent “sell-off:” investors who’ve cashed in short and long-term futures contracts. (So many occurred that these were being resolved in cash, without a bit of precious metal exchanging hands.)Who knows for sure.
Silver’s ‘spot’ price is much less than gold’s – ranging from $22.50- $25 an ounce in recent weeks. It also has dropped in recent months. Some experts suspect that its price is being kept artificially low. (By large banks, they dramatically charge). There have been people who attempted to corner the market on silver, most famously the Hunt brothers in 1980. (They failed, and nearly bankrupted themselves in the process.) At least one expert argues that it will change more quickly:
“Silver should be trading at 128 dollars an ounce, adjusted for inflation since 1980 and probably would be except for the manipulation of the silver price…At that time silver was hovering around the 18 dollars an ounce mark. Now it is…rising, and the possibility of reaching the 128 dollars an ounce level is becoming increasingly real…In addition silver production is not expected to grow in 2010- 2012 with the supply side of the coin expected to remain bullish.”
Silver is also extensively used as a component in manufacturing, including computers, making its pricing even more interesting.
I’m not an investment professional — but these have consistently worked for us. Others are worth considering. (Disclosure: I do own stock in a Colorado gold mine – which has steadily gone down. Husband regularly invests in junk silver – which has been doing great.)
*Gold and silver are traditionally considered a financial hedge. In the past, when the stock market was down, precious metals’ prices were apt to go up. (This hasn’t always happened in recent months, but in the past 30 years, gold and silver has generally held or increased in value.) At the very least, investing in either one will help round out your investment portfolio.
*Some countries are stockpiling. India’s been buying and holding record amounts of gold – and now China is following suit. This can partly be explained by both countries’ appetite for gold jewelry; in India, it’s an integral part of the marriage process. (“No gold, no wedding,” or so the saying goes.) Is something else going on here? It bears watching.
*Purchase modestly. Like stocks, you’re generally better off buying a measured amount over time, rather than one big purchase. Prices tend to fluctuate, and this gives you a better chance of catching the low prices, along with the higher ones. (I like Warren Buffett’s rule of thumb: “Be greedy when others are scared.”)
*Invest in currency you could spend, if you had to. Junk silver coins are still moderately priced, and not too difficult to find. (More about this here. ‘Junk,’ by the way, refers to the coins’ melt, or bullion value, not face value.) Look for half dollars, quarters and dimes minted in or before 1964, when coins were still 90% silver. These include Kennedy half dollars, Washington quarters, Mercury and Roosevelt dimes. (Kennedy half-dollars from 1965-70 have 40% silver content.) Ebay and other sites are full of dealers offering bags or rolls of junk silver; just make sure you know what the melt price is before you buy. (Coinflation.com is a good place to check.)
*Antique coins are an interesting possibility. One Ebay seller currently has a 1913 US ’10 dollar’ gold piece priced at a little under $850; Morgan silver dollars from the same dealer ranges from $65 (worn) to $260 (‘extra fine’). (A decade or so ago, I bought a handful of Morgan silver dollars for $8 each from a dealer — wish I’d gotten a bagful!) Excellent condition (‘grading’), date and rarity can push prices up even more.
*Coins from shipwrecks (the famous ‘pieces of eight’ and such) are a romantic way to invest. Their provenance does increase the price, compared to the metal ‘spot’ value — but they’re also collectible. Case in point: the sidewheel steamer S.S. Central America, which sank in 1857, along with a full passenger list and 3+ tons of gold –an estimated third of California’s Gold Rush output for that year. (Its loss triggered a huge financial ‘panic’ that affected the entire country.) When the shipwreck was discovered and salvaging began in 1987, it yielded an estimated $100-150 million in gold, ranging from coins and bars to gold ore. A number of the coins were rare or unique examples from California mints, preserved in remarkable condition. (The company is currently marketing new reproductions of some of these old coins in 2.5 ounce versions, by melting down some of the Gold Rush bullion.)
*Keep your eyes open. Reading websites from a variety of sources, U.S. and non-U.S., are a good way to compare opinions, statistics and research. (The London Market Bullion Association is a good place to start, especially their prediction pages.) Read any articles you can on investing in precious metals — especially from sites and publications that are not actively marketing it.
*Don’t just stash away your investment – enjoy it. Gold earrings and a graceful chain complement a pretty ear or neck. (A coin is an unusual and oft-appreciated gift too, especially when its value is emphasized.) Why not use or wear some items on special occasions? Brides in India do it — and so can you.
Disclosure: Affiliate link to Amazon included in this article. We make a little commission if you buy something from Amazon after following the link.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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