Investing in Precious Metals
Many investment advisors recommend precious metals as part of a properly diversified portfolio to provide capital appreciation, liquidity, and a hedge against conventional paper assets. Because precious metals are counter-cyclical to paper assets, a diversification into gold, silver, and platinum can therefore reduce the total risk of your overall portfolio and preserve your wealth. History supports the premise that investment in precious metals is the best protection against uncertainties in the future.
Because the characteristics of gold, silver, and platinum differ substantially, and because each of the metals reacts differently to economic and world events…we recommend building a position in all three of the metals.
At AmeriGold we can help evaluate your personal investment goals, and recommend the most suitable precious metals investments to maximize profit and minimize risk.
Below, is a profile on each metal, describing its individual characteristics, properties, and uses.
Ever since early times gold has been one of man´s most prized possessions. Monarchs waged war in hope of plundering treasures of gold from their conquered rivals. Kings and princes sent expeditions of the earth in search of new sources of gold; and thousands of people have joined the "gold rush" to any place on each that held either an actual or rumored prospect for finding gold.
From any of the great civilizations of the past, man has treasured gold as a medium of exchange and a store of value in both good times and bad.
What we learn from history is that gold maintains its purchasing power over the long-term and serves as an excellent portfolio diversifier by providing a hedge against the erosion of paper assets such as stocks, bonds, and currency.
Gold is unique, in that it is the only asset that is not simultaneously someone else´s liability. It is not directly influenced by economic (monetary and fiscal) policies of any individual country. Gold is extremely liquid and is universally accepted as a means of payment. Because of these characteristics, gold had long been held by the world's wealthiest people and central banks, as the "ultimate asset."
Gold is scarce-so scarce that all the gold ever mined would fit into a cube measuring just 20 yards on each side. New supply is growing by less than 2% annually. Competing for this limited supply are jewelry manufacturers, industrial and medical users, national governments (central banks) and private investors.
From an investor standpoint, both ancient and modern history proves the importance of holding gold in one´s portfolio. When you realize that all of the world´s currencies are now fiat currencies (money that has no intrinsic value, and is not backed by anything tangible like gold) you quickly begin to understand the need to own gold.
This anonymous quote sums it up best.
"Distrust of 'fiat´ paper money cannot be prevented by even the most powerful dictator. The more a government abuses its money-credit system and impairs the buying power of its currency through inflation, the greater will be the demand for 'hard money´ (gold), the value of which cannot be altered by the whims of politicians or the money managers."
Since 1971 when the United States went off the gold standard, our currency, the dollar, had been a fiat currency. As George Bernard Shaw said, "You have to choose as a voter between trusting to the natural stability of gold and the natural stability and intelligence of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."
Silver has been the most widely used monetary metal for day to day use by ordinary citizens in the history of the world. It has endured centuries of economic and political crisis, yet has always emerged as a universally accepted currency and store of value. While gold has been used for government-to-government transactions, it has been silver that the people have used to buy their bread.
Although silver is relatively scarce, it is the most plentiful and least expensive of the precious metals. Today, the demands of modern technology have revealed the remarkable rage of electrical, mechanical, optical, and medicinal properties that have placed silver as the key metal in many applications. Out of all the metals in existence silver is unsurpassed in its ability to conduct heat and electricity.
The major industrial applications of silver are:
- Medicine and Dental
- Water Purification Computers
Silver is sometimes referred to as "poor man´s gold," but during the last major bull run of precious metals in 1979-1980, silver far-outperformed gold rising to its all-time high of $50.36 per ounce. In 1976 silver was $2.50 an ounce.
Today, silver is once again a tremendous buying opportunity ($21.00) after correcting from the last run to $49.50 in 2011. With current demand outpacing new supply, and the lowest inventory levels in years, the pressure is building to take silver to the next new high, which in our estimation will be well north of $50 an ounce.
During long term secular bull markets in precious metals, gold always outperforms silver in the first three quarters of the bull market. But as the last phase of the bull market begins, silver outperforms gold by a wide margin, thus the need in our view to own both metals.
Personally I am on record saying that within the next five years (currently 2014) gold and silver prices will go to levels the average investor simply cannot understand. When I say gold $10,000 an ounce and silver $400 an ounce I am being conservative. I actually believe that when the financial system crashes, (not if in my opinion, just when) that gold and silver prices will go to much higher levels. How high depends on the severity of the crisis.
This will be due to a collapsing fiat currency system worldwide that will drive precious metals prices into the stratosphere. When you understand how tiny the physical gold and silver markets are you begin to realize what must happen to precious metals prices when literally oceans of failing fiat currency suddenly wants physical metal. There will be no room to receive it. It will make the dot.com bubble look tame by comparison.
At AmeriGold, we highly recommend building a position in silver.
Investors have generally focused on gold and silver when seeking to diversity their investment portfolios. However, there are several reasons to consider adding platinum to the mix of precious metals in one´s portfolio to enhance performance even further.
Platinum and palladium are considered sister metals and are often times mined together. They both have a very high melting point of 3,215 degrees F and are uniquely qualified for many high tech applications.
The two main factors that investors can look to for platinum price appreciation are:
1. Platinum´s Scarcity - World platinum output is less than 1/15th that of gold. It takes roughly 8 tons of raw ore being mined to produce just one pure ounce of platinum. The two countries that produce nearly 90% of the world´s platinum, South Africa and Russia are very unstable politically and economically. Any disruption from one of these two primary sources of supply would be a catalyst to propel the prices of platinum much higher. Unlike gold and silver, there are no significant overhangs or large stockpile of platinum to meet demand, if a serious supply situation were to occur. The platinum market has been in supply deficit for many years running, and a similar situation is anticipated through the year 2018. So if "precious" is measured in terms of scarcity, platinum is the most precious of them all.
2. Platinum´s Growing Demand - Platinum demand has grown an average of over 5% per year throughout the last 10 years. Of the five million ounces of platinum that are used each year, the two main usage groups are jewelry fabrication (40%) and catalytic converters (34%) used in automobiles.
The rise in popularity of platinum jewelry over the past two decades has been remarkable. Japan has long been a traditional source of platinum jewelry demand, but double digit growth rates over the past several years in both China and North America now make these two markets highly important. Combined they count for over 40% of world total platinum jewelry demand. Platinum is prized the world over for its understated elegance and its tensile strength, making it the most secure precious metal for setting precious stones.
Platinum is known as "high-octane gold", for its stronger price moves and prospects for a higher upside. Buying platinum is an easy way to invest in worldwide economic growth because the metal is essential to the economies of many industrialized nations.
Pure platinum legal tender bullion coins provide a liquid, convenient and reliable way to invest: the Platinum American Eagle, Australian Koala, Canadian Maple Leaf, Isle of Man Noble and Chinese Panda.
All coins are 99.95% pure and are available in one-ounce and fractional sizes. Investment-grade bars are also available in 10-ounce and smaller sizes from various refiners.
Precious metals have long been recognized for their tendency to appreciate when other financial instruments, like stocks and bonds are declining. Savvy investors, however, are not content with just securing their assets against inflation and other economic dangers. They also demand the opportunity for capital appreciation. Platinum’s unique fundamentals offer investors both: The ability to hedge against uncertainty and the potential for profit.
Platinum’s supply/demand fundamentals are tight. In fact, were platinum mining to cease today, above ground reserves would last less than one year. In contrast, gold reserves would last nearly one quarter of a century. Platinum’s supply is tight even during periods of relatively normal mining production.
New clean air legislation in the United States (Tier II Emissions Standards) and in many of the world’s fastest growing economies is significantly increasing the total amount of platinum group metals used in automobiles.
Platinum is used in a rapidly increasing array of products, from industrial refrigerators to spark plugs. The small amount of platinum used in each product means that the firms that manufacture them and the consumers that buy them are relatively insensitive to significant increases in the price of platinum.
Investment demand by individuals around the world is rising. Many are attracted to the vastly improving fundamentals in the platinum market. In rising markets, platinum normally develops a significant premium over gold. Platinum has historically tended to be more expensive than gold because it is considerably rarer and has more extensive and irreplaceable applications.
Catalytic converter platinum consumption in developing nations is becoming an increasingly important factor for the platinum market. Much of the world runs on diesel, a fuel that works best with platinum catalysts as opposed to palladium catalysts. Countries that, two decades ago, might have had little if any environmental legislation, now have restrictions on auto pollutants in place. While there has been some loss of automotive catalytic converter market share to palladium that resulted from shifts made when palladium traded at $130, current palladium prices (now near par with platinum) have reversed this trend back toward platinum usage. Implementation of Tier II standards in North America and requirements for diesel engines in Europe will bring further growth in platinum demand.
Catalytic converter legislation is spreading quickly in Latin America. In the past five years the nation with the largest economy in the region, Brazil, and the nation with the fastest growing economy, Chile, have both passed legislation mandating catalytic converter use.
Hong Kong, Malaysia, Singapore, Taiwan and Thailand all have passed legislation enforcing domestic catalytic converter use before the end of the decade.
Auto sales in Latin America and in the emerging market economies of East Asia have grown rapidly in recent years. It is estimated that in the coming 10 years, platinum consumption for catalytic converters in emerging-market economies will surpass the total now consumed in North America, Japan and Europe.
The many other industrial uses of platinum are best summed up by Nina Lipton, Director of Market Research for the Platinum Guild International:
"You may not realize it, but platinum is literally all around you! Over 20% of all consumer goods either contain platinum or are produced using platinum. Eyeglasses, pacemakers, unleaded gasoline, polyesters, colored paints, jet fuel, many pharmaceuticals, lasers, plastics, fine jewelry pieces, explosives, endoscopes, light and oxygen sensors, fuel cells, some anti-cancer drugs, pollution control devices for autos and industry, even the fiber optic-based information super highway, and countless other goods all rely on platinum."
Haven't heard of palladium before? Don't feel bad; I suspect most investors haven't either.
Palladium is one of a group of six metals often referred to as PGM's, which stands for Platinum Group Metals. This group includes the well-known platinum and the relatively obscure metals called rhodium, iridium, ruthenium and osmium. Platinum is 15 times more rare than gold. All the platinum man has ever mined, for example, would fit into a 25-cubic-foot room. And palladium is as rare or rarer than platinum.
Palladium has another advantage over platinum. A catalytic converter works only when hot, but 90% of tailpipe emissions occur before it heats up. To cut warm-up times, carmakers have moved the converter closer to the engine. Palladium, which is more heat tolerant than platinum, is better suited to this design.
Palladium has unique physical properties that are used in diverse industrial applications and in jewelry. The unique characteristics of this group include strong catalytic properties, excellent conductivity and ductility, resistance to corrosion, strength and durability, and a high melting point.
Palladium production is typically a by-product from platinum mining operations. South Africa is currently responsible for approximately 38 percent of world mine production. Norilsk Nickel's mines in Russia account for approximately 41 percent of world mine production and North America contributes approximately 14 percent to the world's supply.
Palladium is currently trading at a 15% discount to its recent high in 2011 and is projected to remain strong through 2017 as the supply deficit is expected to persist in the future. The outlook for palladium over the next ten years predicts a return to historically high prices, strong fabrication and investment demand, and constrained supply.
Global palladium supply consists of mine production combined with secondary recovery which is derived by recycling. In 2012, the supply of palladium was approximately 8.7 million ounces with approximately 6.3 million ounces from mine operations and 2.4 million ounces from secondary recovery.
Palladium is a rare precious metal with only a few palladium producing regions worldwide and even fewer ore bodies where it is economically feasible to mine and extract the metal. As mentioned earlier, Russia and South Africa account for almost 80 percent of global mine palladium production. However these regions are known to be higher-risk jurisdictions.
Bottom Line: Not only is palladium a play on its historic and unsustainable discount to platinum; it is also a play on the global move toward more stringent air quality standards. Because it is priced in dollars, it is also a back-door play on a weaker dollar. Should these powerful trends continue, I would not be surprised to see palladium rally back well above the $1,000 per ounce level within the short to mid-term. With such a high and increasing demand for platinum around the world I don't see platinum correcting much to the downside as palladium closes the gap.