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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Diversify your portfolio with gold and silver Investing and trading in gold and silver is always a sound idea--and that goes double in a time of unusual market fluctuation. As people look for safe places to diversify their investment risk, you'll likely see the value of your investment go up where other stocks are vulnerable. Gold and silver saw increases in value of 16% and 15% respectively in 2019--putting them among the top ten most desirable commodities out there--and are projected to experience even more of a bear market as the dollar wobbles in an uncertain post-COVID world. This year, 2020, gold and silver are set up to have their best year of price appreciation over the past 40+ years. Written in an easy-to-follow, no-jargon style by CFP and bestselling author, Paul Mladjenovic, Investing in Gold & Silver For Dummies explains the different complex processes and vehicles for buying gold and silver. You'll find out the best ways to add these to your portfolio, how to balance risk and reward, and how to adapt time-tested investing plans and strategies to your goals. * Identify your goals and form a plan * Buy gold and silver safely to diversify your portfolio * Use ETFs and options to profit from market ups and downs * Understand when a gold and silver investment is legitimate * Use technical analysis to time your market entries Whatever your current familiarity with gold and silver, this book gives you the extra expert knowledge you need navigate your gold and silver investment portfolio safely through a bear or bull market.
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Investing in Gold & Silver For Dummies®
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2021 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2020948676
ISBN 978-1-119-72399-8 (pbk); 978-1-119-72398-1 ISBN (ebk); ISBN 978-1-119-72404-9 (ebk)
Investing in Gold & Silver For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Investing in Gold & Silver For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: Getting Started with Gold and Silver
Chapter 1: Exploring the World of Gold and Silver
Considering Gold and Silver for Your Situation
Taking Action Before You Invest in Gold and Silver
Chapter 2: Understanding Gold and Silver’s Greatest Benefit
Looking at Counterparty Risk in Today’s Investments
Knowing That Gold and Silver Have Risks, Too
Chapter 3: Adding Gold and Silver to Your Portfolio Mix
Defining Saving, Investing, Trading, and Speculating
Building Your Financial Profile
Making Other Portfolio Considerations
Chapter 4: Recognizing the Risks
Exploring Different Kinds of Risks
Minimizing Your Risk
Weighing Risk against Return with the 10 Percent Rule
Part 2: Spanning the Gold and Silver Landscape
Chapter 5: Investing in Gold
Comparing Gold to Other Investment Assets
Understanding the Gold Market
Going Over Gold’s Recent Bull and Bear Markets
Making the Case for Gold Today
Chapter 6: Surveying Silver
Comparing Silver and Gold
Digging into the Silver Market
Starting with Silver’s Modern History in the 1970s
Picking Apart Silver’s Performance during 2000–2020
Resources for Informed Silver Investors
Chapter 7: Making the Most of Mining Stocks
Examining the Essentials of Stock Investing
Knowing What to Look for When You Evaluate Mining Stocks
Distinguishing Different Types of Mining Stocks
Considering the Risks of Mining Stocks
Boosting Your Returns
Spotlighting the Pros
Chapter 8: Examining Mutual Funds and ETFs
Choosing Mutual Funds
Selecting Exchange-Traded Funds
Part 3: Looking at Other Gold and Silver Investing Vehicles
Chapter 9: Going Direct: Buying Bullion
Weighty Matters: Troy Ounces
Making the Case for Physical Ownership
Going for Gold Physical Bullion
Seeking Out Silver Physical Bullion
Gold and Silver Commemorative Coins
Bullion Costs, Fees, Dealers, and Resources
Chapter 10: Numismatic Coins and Collectibles
Understanding the Basics of Numismatic Coins
Considering Collectible Coins
Exploring Coin Organizations and Services
Selling Your Coins
Chapter 11: Leveraged and Inverse ETFs
Feeling Bullish: Leveraged ETFs
Feeling Bearish: Inverse ETFs and Inverse Leveraged ETFs
Using Leveraged and Inverse ETFs during the Market’s Ups and Downs
Looking at Resources for Leveraged and Inverse ETFs
Chapter 12: Focusing on Futures
Back to the Futures
The Players in the World of Futures
The Fundamentals of Futures Contracts
Metals Futures Contracts
Basic Futures Trading Strategies
Using Fundamental and Technical Analysis with Futures
Futures versus Options on Futures
Futures Resources
Chapter 13: Considering Options
Discovering How Options Work
Placing Orders for Options
Options: Offering Something for Everyone
Minimizing Risks with Options
Trying Some Profitable Combinations
Checking Out Options in the World of Precious Metals
Following Golden Rules for Options Success
Consulting Options Resources
Part 4: Digging into Gold and Silver Investing Strategies
Chapter 14: Trying Out Trading Approaches
Like a Scout: Being Prepared
Picking Out Your Vehicle
Selecting Your Trading Strategy
Trading the Gold-to-Silver Ratio (GSR)
Chapter 15: Using Technical Analysis
Defining Technical Analysis
Comparing Technical Analysis versus Fundamental Analysis
Tracking the Trend
Checking Out Charts
Picking Apart Chart Patterns
Assessing Moving Averages
Investigating Indicators
Focusing on the Short Term versus the Long Term
Resources for Technical Analysis
Chapter 16: Using Dealers and Brokers
Starting with Some General Points on Dealers and Brokers
Working with Gold and Silver Dealers
Getting the Scoop on Stock Brokerage Accounts
Distinguishing Types of Orders
Introducing Types of Futures Brokers
Selecting a Futures Broker
Dealing with Futures Accounts
Chapter 17: Tax and Retirement Considerations
Assessing Taxable Activity in Different Accounts
Understanding Capital Gains and Losses
Looking at Tax-Deductible Activity
Surveying Special Tax Considerations
Tax Resources to Keep You Up-to-Date
Adding Physical Precious Metals to an IRA
Part 5: The Part of Tens
Chapter 18: Ten Reasons to Have Gold and Silver
Gold and Silver Provide Diversification
Gold and Silver Allow for Privacy
Gold and Silver Are Portable Wealth
Gold and Silver Ease Retirement Concerns
Gold Is a Safe Haven Asset
The Value of Gold and Silver Is Never Zero
Gold Retains Its Value in Bear Markets
Gold and Silver Have Enduring Demand
Gold and Silver Make Good Inflation Hedges
Gold Guards against Financial Bubbles
Chapter 19: Ten Ways to Add Gold and Silver to Your Portfolio
Major Gold and Silver Stocks
Junior Gold and Silver Stocks
Mutual Funds
Physical Metal ETFs
Bullion Coins
Numismatic Coins
Leveraged ETFs
Junk Silver
Gold and Silver Cryptocurrencies
Buying through Goldmoney and OWNx
Chapter 20: Ten (Or So) Tips for Gold and Silver Speculators and Traders
Focus on a Specialty
Do Research and More Research
Be a Contrarian
Limit Your Grubstake
Stagger Your Entry
Use the Right Speculative Vehicles
Have Multiple Positions
Use Technical Indicators
Do Some Hedging
Take a Profit
Use Brokerage Orders
Part 6: Appendixes
Appendix A: Resources for Gold and Silver Investors
Websites and Blogs
Newsletters and Advisories
News and Commentary Sites for Gold and Silver Information
Gold and Silver YouTube Channels
Books about Gold and Silver
Other Books of Interest to Gold and Silver Investors
Trade Associations and Industry Sources
Government Agencies
Gold and Silver ETFs
Gold and Silver Dealers
Buying Services
Futures and Options Resources
Cryptocurrencies Related to Gold and Silver
Technical Analysis
Brokers
Appendix B: Gold and Silver Investments
Major Gold Mining Stocks
Major Silver Mining Stocks
Gold-Related ETFs
Silver-Related ETFs
Mutual Funds
Index
About the Author
Advertisement Page
Connect with Dummies
End User License Agreement
List of Tables
Chapter 4
TABLE 4-1 Risk Levels of Precious Metals Investments
Chapter 5
TABLE 5-1 Gold’s “Tale of the Tape”
Chapter 6
TABLE 6-1 Silver’s “Tale of the Tape” in the First Part of 2020
Chapter 8
TABLE 8-1 Precious Metals High-Profile Performers, 2000–2020 (In Alphabetical Or...
TABLE 8-2 ETF Issuers
Chapter 9
TABLE 9-1 Paper Assets and Potential Risks
Chapter 10
TABLE 10-1 Sheldon Scale Rundown of Grades
Chapter 12
TABLE 12-1 Precious Metals Futures Contracts
TABLE 12-2 Delivery Month Symbols
TABLE 12-3 Mini-Futures Contracts
TABLE 12-4 Calendar Spread Trade
*
Chapter 13
TABLE 13-1 Call Options: Rights and Obligations
TABLE 13-2 Put Options: Rights and Obligations
TABLE 13-3 The Zero-Cost Collar in Action
TABLE 13-4 The Straddle in Action
TABLE 13-5 Options on Regular Futures
TABLE 13-6 Options on Mini-Futures
Chapter 14
TABLE 14-1 Possible Choices for Stock Trading with Options
TABLE 14-2 Possible Choices for Futures Trading with Options
Chapter 17
TABLE 17-1 Precious Metals Assets and Gains
Chapter 22
TABLE B-1 Major Gold Mining Stocks on the NYSE
TABLE B-2 Major Silver Mining Stocks on the NYSE
TABLE B-3 Gold-Related ETFs
TABLE B-4 Silver-Related ETFs
List of Illustrations
Chapter 1
FIGURE 1-1: Unlike most other investments, you can hold gold and silver bars fo...
Chapter 5
FIGURE 5-1: Gold’s price performance since the beginning of this century.
Chapter 6
FIGURE 6-1: Silver’s performance for January 2000 to 2020.
Chapter 9
FIGURE 9-1: Gold Eagle Coin.
FIGURE 9-2: Krugerrand.
FIGURE 9-3: Canadian Maple Leaf Coin.
FIGURE 9-4: Gold bars.
FIGURE 9-5: Silver Eagle Coin.
Chapter 10
FIGURE 10-1: The ultra high relief $20 Saint-Gaudens double eagle gold coin iss...
Chapter 11
FIGURE 11-1: JNUG chart December 2019 to February 2020.
FIGURE 11-2: JNUG chart February 2020 to July 2020.
FIGURE 11-3: Typical highs and lows include A start, B upleg, C downleg, and D ...
Chapter 12
FIGURE 12-1: Chart of gold price as it ebbs and flows across 2019.
FIGURE 12-2: Chart of gold from 2000 to 2020. It’s bullish and slopes upward.
Chapter 15
FIGURE 15-1: Generic chart sloping in a definite downward direction.
FIGURE 15-2: Generic chart showing a sideways pattern.
FIGURE 15-3: Chart that simultaneously shows an uptrend, downtrend, and sideway...
FIGURE 15-4: Chart that shows the jagged edge going upward along with the trend...
FIGURE 15-5: Chart showing channel.
Guide
Cover
Title Page
Copyright
Table of Contents
Begin Reading
Index
About the Author
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Introduction
The world economy and financial markets were hit with shock waves in 2020 that had lasting impacts and opened the door to many issues, challenges, and problems that we’re all facing now. One of the changes is that this profound year catapulted the prospects of gold and silver. Both have embarked on what is possibly their greatest bull market. This means historic potential gains for those who are positioned for them — hopefully, you, my reader! The public may catch on, but usually, they’re late. As you read this book, you have the chance to profit before the crowds come and witness the tail end of what is coming now.
During 2019–2020, I told my clients and students that precious metals are (and will be) a necessary part of a healthy and growing investment portfolio. I don’t tell people that gold and silver are great considerations because I’m the author of this book; I wrote this book because I thought that 2020–2022 would be a great time for those two timeless metals. The time is now, and the place to be is in gold and silver (and investments related to them such as stocks, exchange-traded funds, and other vehicles).
About This Book
Investing in Gold and Silver For Dummies comes at the right time and place for both me and you. As I write this, during the opening rounds of what may become a great bull market (cool!), there’s plenty of information to share with you on these enduring metals that have been a store of value for thousands of years yet still are as fresh and as vital as today’s varied events and headlines.
Nearly anything (or almost everything) a beginner or intermediate investor needs to know about gold and silver is inside this book. At the very least, I also include those analysts and experts who I think know more than I do so that you have what you need at your fingertips (or your screen) to make knowledgeable decisions with gold and silver. As with all For Dummies guides, you won’t have to read this book from start to finish like so many other books. If the only thing you’re interested in is how to buy gold or what you need to know about investing in silver, the information is here, easily found, and ready to be read and comprehended in minutes.
A quick note: Sidebars (shaded boxes of text) dig into the details of a given topic, but they aren’t crucial to understanding it. Feel free to read them or skip them. You can pass over the text accompanied by the Technical Stuff icon, too. The text marked with this icon gives some interesting but nonessential information about investing in gold and silver.
One last thing: Within this book, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending as though the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy — just click the web address to be taken directly to the web page.
Foolish Assumptions
Dear reader, I make a few assumptions about you. No, you’re not a dummy, but you want more information on the topic of investing in gold and silver. You have some very basic knowledge about investing, and you understand that diversification means considering investments beyond merely stocks or bonds. You also understand that inflation and other pressing financial concerns and risks are problems of modern life and that investing in gold and silver as a diversifying strategy is a good consideration for both long-term investors and speculators in the turbulent and uncertain 2020–2022 period.
Icons Used in This Book
I include some handy icons that you may notice in the margin of this book. They point you to certain types of information, so be sure you know which is which.
I include some text that tips you off into certain directions — this icon makes sure you notice. These aren’t shady tips of the “Psssst, Mac, have I got a tip for you” variety; they’re joyfully more like “Holy smoke — such a great tip!”
Although I’d like for you to remember everything I say, I do have two kids and realize that’s a losing battle. However, if you see this icon, be sure to ingrain this info on your brain.
Just like I want you to remember everything I say in this book, I’d love for you to do everything I say, but again, having two teenage kids, I can calculate the rate of return on that. But to truly stay away from pitfalls that can cause you serious financial harm, you should heed any warnings you see associated with this icon.
Just like any expert, I do have nuggets of knowledge that only participants on game shows like Jeopardy and/or my uncle from Bratislava could love. But I guarantee that after discovering the value of gold and silver and how they could enhance your portfolio, you could fall in love with some of this technical stuff, too. However, if you prefer, you can skip the info associated with this icon. This is the only icon that points you to info that you can skip if you choose to.
Beyond the Book
In addition to the material in the print or e-book you’re reading right now, this product comes with some access-anywhere goodies on the web. Check out the free Cheat Sheet for interesting statistics about gold and silver investments and questions to ask a dealer before you buy physical gold and silver. To get this Cheat Sheet, simply go to www.dummies.com and search for “Investing in Gold and Silver For Dummies Cheat Sheet” in the Search box.
Where to Go from Here
At this point … browse! Check out the detailed table of contents and go straight to those chapters that pique your interest. This isn’t a novel that you need to read from start to finish. It’s like opening your fridge and pulling out what interests you. (If you’re totally new to gold and silver investing, though, why not start with Chapter 1?)
As you watch the precious metals markets become more popular (for many good reasons), come back to this book and discover more information; you’ll be pointed in the right direction for more and better ways to profit from gold and silver. Good luck!
Part 1
Getting Started with Gold and Silver
IN THIS PART …
Discover why gold and silver are great additions to your investment portfolio.
Figure out your approach in gold and silver — investing, trading, or speculating?
Get a handle on what you should know (and do) before you invest.
Minimize all sorts of risk facing your money (and how gold helps you better than typical investments).
Chapter 1
Exploring the World of Gold and Silver
IN THIS CHAPTER
Exploring reasons to consider gold and silver
Discovering strategies to use before you invest
Chaos. Mayhem. Crashes. Massive unemployment. Scandals and collapse. And that was only last week! The world throws plenty at us, and we must do what we can to get by. As they say, we can’t control the world, but we can control our response to it.
As a “Raving Capitalist” (I’m not kidding; that’s my website, too), I believe that building wealth and financial security is a two-pronged approach where you build your prosperity using both passive wealth-building strategies (having your money work for you such as with stocks, mutual funds, and options) and also active wealth-building (such as starting a home-based business in your spare time). You are your own greatest asset, so you can do plenty of things to assure greater financial security.
Given that, I’m delighted that you have this book in your hands. As part of your wealth-building approach, I want you to seriously consider adding some gold and silver, especially when you take a full, realistic view of what’s going on in our society, economy, and financial markets.
Yes, there’s ugliness out there. You and I can’t make the world pretty, but we can add some attractive positions in our assets so we can sleep better. Those positions start with some gold and silver. In this chapter, I briefly explain the benefits of gold and silver in today’s world and give you some actions to take before you jump into investing.
Considering Gold and Silver for Your Situation
In the modern age, most investors keep their investments in either paper or digital form, and each of them has a risk that hard assets such as physical gold and silver don’t have. Yes, we’re talking about gold and silver that you can hold in your hand and in your safekeeping and looks something like Figure 1-1, which shows gold and silver bars. (As you find out in Chapters 9 and 10, gold and silver also come in bullion and numismatic coins and commemoratives.)
Content: © Konstantin Inozemtcev/123RF.COM
FIGURE 1-1: Unlike most other investments, you can hold gold and silver bars for safekeeping.
In the following sections, I take stock of current global financial issues (pun intended) and explain how gold and silver can help your investment portfolio.
Before you invest in gold and silver, you need to realistically assess yourself and your financial status (assets, debt, career, and so on), and you need to ask yourself, “Am I adequately prepared for what is happening now and what will likely come my way tomorrow?” I have some suggestions you can start with later in this chapter.
Assessing the world’s financial issues
As I write this in August 2020, the world and financial markets look so radically different from what they looked like back in January 2020. I thought that the world had many problems and challenges that were percolating and financial bombs whose fuses were lit, but the game changed for the worse. Those events and conditions are part of the reason that gold and silver are a necessity in many portfolios.
Here is a short list of global issues and problems to be aware of:
Unemployment is up. In January 2020, unemployment was at a 50-year low, but six months later, with 50-plus millions of lost jobs due to the COVID-19 pandemic and government lockdown, unemployment is at a multi-decade high. Although unemployment is coming down, there are still millions of jobs that may not come back.
Because of job losses, more than 5 million folks are behind on their mortgage or rent. This will cause problems with debt, home sales, and more.
Government debt is exploding. Federal and state/local debt is skyrocketing. This may lead to high inflation.
Due to the government lockdown, hundreds of thousands of businesses were temporarily shut down for months, but a huge swath of those may never reopen.
Pensions and Social Security are dangerously underfunded by trillions. If the federal government bails these out by printing trillions, that can also cause high and punitive inflation.
Before I ruin your day, I’ll cease adding more items to that list (there was more, you ask?!), but diversification and financial planning are urgently needed before the next crash in the stock market or the next leg of the economic downturn. Keep reading to see how gold and silver fit into this plan.
Knowing how gold and silver can help you
There are many solid, reasonable, profitable reasons to own gold and silver, and all those reasons are spread across this chapter. If you want a neat list of reasons, check out Chapter 18. But here I mention the top reasons that consumers and investors should take a hard look:
Diversification:
Having stocks, mutual funds, and cash aren’t enough to achieve true financial safety. Gold and silver are true diversification that complements your paper and digital assets and investment vehicles (
Chapters 2
and
3
flesh this point out).
Safe haven:
Gold and silver (although more with gold) are considered a safe haven asset, meaning that in times of economic decline and uncertainty, investors move to these “safe haven” assets, typically precious metals and cash (the U.S. dollar). But the dollar (and other currencies) are now at risk (see the next point). That leaves … gold and silver!
A guard against inflation:
For 2020–2030, currencies are in danger of being overproduced in an attempt to resolve economic and financial crises unleashed due to the pandemic of 2020. This means … inflation! Gold and silver excel during inflationary times.
Taking Action Before You Invest in Gold and Silver
I know what you’re thinking: “Holy smoke! I’m so glad I’m reading this book!” So what should you do next? The following sections describe steps to take before you dive into the world of gold and silver investing. (You should be doing these anyway, and given recent market chaos and volatility, you should do them today.)
Reviewing your portfolio
You should understand what’s in your portfolio and why it’s there. If you’re talking about stocks that are part of your foundational, long-term positions, they should be quality stocks where the company is profitable, has a good balance sheet, and has products/services that are a necessity in the economy.
In recent years, I’ve told my clients and students (I teach about investing and speculating across the nation) to make sure that at least 80 percent of their investment stock portfolio is tied to “human need.” Those companies should be (profitably) selling goods and services that the public will keep buying no matter how good or bad the economy is. Think of things such as food, water, beverages, and utilities.
To find out more about prudent stock picking, check out the latest edition of my book Stock Investing For Dummies (Wiley). In this edition, I share what to look for when you’re choosing quality stocks, and I also give you the “heads-up” on what I see coming for 2020–2030, so you can be a step ahead of the crowd.
Boosting your cash position
Although cash can lose long-time value during inflationary times, here I’m talking about its short-term value. Everyone should have (during bad times) a minimum of three to six months’ worth of gross living expenses sitting in their savings account for unexpected events, such as losing their job, money for big-ticket necessities, and so on.
In other words, if your gross monthly expenses are $3,000, then you should have a minimum of $9,000 (three months’ worth of gross living expenses) to $18,000 (six months’ worth). This is cushion money, or emergency funds.
Using your talents in your spare time
I’m one of the few certified financial planners (CFP) who recommends to his clients and students that they should have (or start) a part-time, home-based business in their spare time to be diversified in their active wealth-building pursuits. The primary reason is to generate income and be diversified from their job. During the COVID-19 pandemic and government lockdown of 2020, nearly 50 million people lost their jobs between March and June 2020. These are folks who didn’t see this catastrophe only a few months earlier.
My point is that if all your active wealth-building income (100 percent) is coming from a single job, that means you are not diversified.
A home-based business gives you the ability to generate extra income in your spare time. It also means tax benefits and the ability to turbocharge your ability to save and invest for retirement. With your own business, you can qualify to have more generous retirement accounts (such as a SEP-IRA). To get more details about launching a home-based business, check out my book Micro-Entrepreneurship For Dummies (Wiley).
Doing your research on gold and silver
Yes, I realize that some of the preceding points aren’t about gold and silver, but they’re part of a sensible plan with both your passive and active wealth-building, and you can see that gold and silver play a crucial part in the passive wealth-building portion.
Look, many investors and financial advisors are ignoring or avoiding gold and silver, and that will be to their detriment. Educate yourself on the pros and cons of all the major investment categories (covered in Parts 2 and 3 of this book) so that you know what can work for your financial security and what can’t.
Gold and silver can be useful and versatile components of your overall portfolio, but keep your perspective on them. They’re merely tools for your financial security during a time they’re useful. The time will come again that they won’t shine, but that is on the other side of today’s brewing storms. Meanwhile, discover their benefits and how they can complement today’s (hopefully) weatherproof portfolio.
Chapter 2
Understanding Gold and Silver’s Greatest Benefit
IN THIS CHAPTER
Seeing how other investments stack up versus gold and silver
Realizing some major risks of gold and silver
As a certified financial planner (CFP) who teaches and consults on investing, I eat, sleep, and think about diversification all the time (it’s not as fun as it sounds!) because it’s always seen as a positive move for investors. Most financial advisors believe in diversification, but I take it to a level that many don’t. When financial advisors talk about diversification, it’s predominantly about “paper assets” such as stocks, bonds, exchange-traded funds (ETFs), mutual funds, and so on.
Yes, those advisors may also cover “hard assets” such as traditional real estate property and conventional assets such as personal holdings (jewelry, collectibles, and so on), but I’m an advocate for including hard assets such as gold and silver in the investor’s portfolio. And here’s the primary reason why.
Where possible, investors should have a variety of investment vehicles in their portfolio for obvious reasons. Diversification helps minimize risk as well as increase the chances of seeing your overall portfolio grow, and the time has come for investors to diversify with precious metals because the economic and financial environment for precious metals is better than ever. Gold and silver are an important part of your portfolio because they’re the only major assets on the financial landscape without counterparty risk. The bottom line is that gold and silver — hard assets used since the dawn of civilization — offer a unique quality of endurable value that paper assets don’t have.
All paper assets have counterparty risk, so what is it really? Here is the essence of this risk: A paper (or digital) investment asset only has value given the promise or performance of the counterparty involved. If the counterparty fails to perform, it will mean the decline of the value of the asset to the point that the asset can be worthless.
Because each class of paper assets has a different counterparty risk, I flesh out this foundational point in this chapter, and you’ll do an “Ooooh … I see what you mean!” (Flip to Chapter 4 for more information on other kinds of investment risks.)
Looking at Counterparty Risk in Today’s Investments
Having all your money in a variety of paper assets may be diversified, and many (most?) financial advisors may be confident that you’re properly diversified, but an issue occurs, which is getting more and more pronounced during the 2020s.
Maybe the best way I can illustrate the problem with having “all your eggs in the paper-asset basket” is to use the old reliable example of the Titanic (don’t roll your eyes!). If you were onboard the Titanic and you owned a luxury compartment at midlevel, a warehousing unit on the bottom level, and a gorgeous unit with a stunning view of the ocean on the top deck, then you’d be “in like flint” versus that schlub who occupies the unit with no view and the size of a phone booth on level 15.
But if the ship sinks, the great equalizer is that both of you lose. With a “100 percent paper-assets boat,” it’d be good to have as part of your setup a “life boat” that doesn’t rely on the sinking ship. It has the power to float no matter what happens to the paper-assets ship.
The year 2020 is a major, consequential year that reminds us that our paper-assets ship is surrounded by icebergs, and a life boat is a huge plus. (“But Paul, what if your life boat hits an iceberg?” Because you ruined my great example, switch that to a helicopter so I can move on. Sheesh!)
In the following sections, I explain the counterparty risk with paper investments and how investing in gold and silver can help balance that risk.
Stocks
When you buy stock, you’re really buying (or participating in) the performance of a company or, more to the point, a company’s executive management. If the company behaves poorly or in a substandard fashion, then the company won’t succeed. This cuts to the heart of the matter: A successful company is profitable.
Profit is the lifeblood of the company, and I could easily make the case that profit is the lifeblood of a successful economy. Without profit, the company fails. If it continues to lose money, its losses will grow and it will ultimately go out of business and end up in bankruptcy. Given that, the stock will go to zero.
In the history of the stock market, thousands of companies went out of business and we witnessed their stock go to zero. Some famous examples are Enron and Bear Stearns, and you can find many others. The Dow Jones Industrial Average (DJIA) has been the most watched stock market barometer for more than a century, and it lists 30 of the largest and most successful companies in the world. Yet the 30 stocks within the DJIA aren’t the same 30 stocks that were first listed in the original average. In fact, only one stock remains (General Electric). The rest either went out of business or were taken over by other companies.
Yes, stocks can fluctuate and can go up or down given the daily interaction of a huge group of buyers and sellers, but if the company’s management team and the overall company itself ceases to perform profitably, then the stock will suffer.
A stock will be only as valuable as the performance of the stock’s counterparty: the company’s performance. Keep in mind that although mining stocks may have counterparty risk (as any other stock), you can mitigate the risk by focusing on the stock’s fundamentals (profit, market, and so on), so check out Chapter 7 for more details.
Bonds
In times of stock market mayhem and economic uncertainty, many investors tend to flock to bonds. Whether corporate bonds, municipal bonds, or what’s considered the safest category — U.S. Treasury Bonds — bonds are considered a safer bet than stocks during periods of economic difficulty such as a recession.
All things being equal, that’s generally true, especially in conventional times as has been the case in recent decades. But 2020–2030 isn’t a conventional time. Regardless, a bond is a perfect example of counterparty risk. A bond is essentially an asset for the bond buyer (basically the creditor), but on the other side of this, it’s a debt that must be satisfied by the debtor. Given this, a bond’s value is only as good as the promise or performance of the payer of the bond. The payer of the bond (a company, municipality, state, or sovereign government) is the counterparty.
Many times throughout history, bonds went to zero because the counterparty defaulted on the legal obligation to pay back any interest plus principal. But now we’re in unconventional times with epic amounts of trillion-dollar, unsustainable debt. During 2020–2030, you will see defaults. Corporate and municipal entities will default and/or pay creditors (such as investors) only a tiny fraction of what’s due. Bonds are paper assets entering a uniquely hazardous time in history.
Gold and silver that you own and hold in your possession aren’t someone else’s liability or promise to pay. There’s no counterparty that needs to perform so that gold and silver retain their value. Gold and silver have their own, intrinsic value — no matter what’s going on in the world or across the financial and economic landscape. That has been true for thousands of years. For more details on buying and owning physical gold and silver, check out Chapter 9 (on bullion coins) and Chapter 10 (for numismatic and collectible coins).
ETFs and mutual funds
In the world of paper assets, ETFs and mutual funds are great, and a neat feature is that diversification is present to some extent in most of these vehicles. I love ETFs and mutual funds, I own them, and they’re indeed appropriate for many folks.
However, ETFs and mutual funds are only as good as the assets they own. If they own successful investments, the fund will do well; if they own failing investments, then the fund will definitely not do well. If a mutual fund, for example, has stocks and bonds, then these investments have counterparty risk. So do ETFs and mutual funds have counterparty risk? Yes!
I think that investing in gold and silver ETFs that guarantee ownership of physical bullion is as safe as you can get within the boundaries of a portfolio held at a brokerage account (whether a regular or retirement account). You still need to be aware of the counterparty risk of the issuer, but it does have greater safety when compared to alternative ETFs. For more details, check out Chapter 8.
Keep in mind that inverse and leveraged ETFs have financial and market risks, but they can be a good way to speculate in gold and silver in the event of a precious metals bull market. Read up on the details of these aggressive vehicles in Chapter 11.
Cash and bank investments
Typically, if you have a savings account, checking account, certificates of deposit, and other bank instruments, these don’t have market risk. In other words, they’re not usually traded in some marketplace and subject to fluctuation, and they don’t go up or down as you normally see, such as in the stock market. You know that if you put, say, $1,000 in a bank savings account in January, you could reasonably expect that money (plus some interest) to be there in December (unless you gave access to that relative who goes on spending binges).
U.S. banks are considered among the safest banks in the global financial arena, but don’t assume 100 percent safety at all times. When times are extraordinarily difficult, the safety of your funds can be an issue. Bank safety was a major issue during the Great Depression, and as you read this, U.S. banks have entered times that may again be considered difficult, so stay alert. If you suspect that your bank has issues, you can find out about the bank’s safety from sites such as www.fdic.gov.
Cash — whether it’s in your pocket, your sock drawer, that crevice in your couch, or any bank or credit union account — is subject to inflation risk. Inflation risk is a form of counterparty risk.
Inflation means that more dollars (or whatever the currency is) are being overproduced so that more dollars are chasing the same basket or goods or services (or, as in the case of bubbles, chasing assets). When more and more dollars are produced, and these dollars head into the purchase of something, that “something” will see its price rise. Monetary inflation (problem) leads to price inflation (symptom).
So, where is the counterparty risk? Monetary inflation comes from the management of the currency; it doesn’t “just happen.” It’s a direct result of the performance of those in charge of the currency. The “managers” of the currency are the folks at the central bank charged with the creation and management of the currency (also referred to as the “money supply”). Those who manage the currency are said to be conducting “monetary policy.” Ultimately, the central bank will generally follow the edicts of the political leaders, and seriously, what political leaders are immune to the idea of inflating the currency? It’s like creating money out of thin air.
It will happen when they want to be popular with the electorate and spend, spend, spend. This is why we have trillions in national debt. This is how entire countries bankrupt themselves. This is why hyperinflation has commonly dotted history’s landscape.
A currency is only as good as the performance of the counterparty, the issuer (the federal government). If the currency is mismanaged (overproduced!), the currency loses value (perceived or otherwise) and (as history shows) often goes to zero (becomes worthless).
Real estate
I hate to burst your bubble, but real estate is loaded with counterparty risk, too, even though it’s a hard asset. What if the renter doesn’t pay? What if the area has problems and no one wants to live there and whoever is there is leaving? What if the managers of that area (such as a municipal government) malfunction and the area becomes very unattractive due to crime and other social ills? What would happen to the value of your property?
Whether an area “goes bad” or worse, there’s chaos or war, these are real events happening right now across the globe. If you still aren’t sure about counterparty risk with real estate, then I can’t help you, but a trip to a neighborhood next to Chernobyl may.
Futures and options
Okay, do I really have to convince you of the risks of these vehicles? Futures and options are speculative vehicles that come with their own set of risks. They certainly have counterparty risk but also market risks to be aware of. I suggest you find out more in Chapter 12 (futures) and Chapter 13 (options).
Bitcoin and other cryptocurrencies
Cryptocurrencies are the new kids on the block, and many are touting some of their benefits, especially compared to conventional currencies. Bitcoin, for example, tries to maintain its digital scarcity, which can be an advantage in maintaining its value, especially because regular currencies are being overproduced as I discuss in the earlier section “Cash and bank investments.”
The problem with these are risks associated with electronic hacking and … wait for it … electricity. Electronic hacking means that someone with enough technical prowess can get into your digital stash of cryptocurrency and take it. There have been cases of folks seeing their accounts go to zero. Also, these currencies are totally reliant on electricity, which makes them worthless during a blackout.
Given this, cryptocurrencies may not technically have a strict counterparty risk (such as a currency, stock, or bond) because there isn’t a specified, identifiable counterparty (such as a government agency or corporate entity). The risks are more attached to digital piracy and associated risks such as electricity.
Knowing That Gold and Silver Have Risks, Too
Keep in mind that no investment or asset is without risk, as you find out in Chapter 4. Everything has risk. Life itself is risky. Getting out of bed is risky. Heck, I got out of the bed on the wrong side this morning, but my bed is next to a wall (I moved it away from the stairwell).
Gold and silver certainly have advantages (from a risk point of view) when compared to many assets, paper or otherwise. But gold and silver have risks, too. Here are the two major ones:
Theft:
If you own physical gold and silver, it can be taken from you, so find out about safekeeping ideas. Resources in
Appendix A
can help.
Government seizure:
This can be an issue given the type of government it is or if the times are risky. During the Great Depression, gold ownership by private citizens was banned as Franklin D. Roosevelt’s administration implemented gold confiscation. Also, governments that are communist or socialist commonly seize private property (it’s called “nationalizing” or “socializing”).
The bottom line is that the prudent investor learns about the benefits and risks of as many common investments as possible and applies reasonable strategies of diversification. Yes, have a diversified mix of stocks, cash, mutual funds, and so on, along with some gold and silver. For investment approaches and strategies with gold and silver for your situation, head over to Chapter 3.
Chapter 3
Adding Gold and Silver to Your Portfolio Mix
IN THIS CHAPTER
Distinguishing saving, investing, trading, and speculating
Figuring out which approach to take with your portfolio
Making some other important portfolio decisions
In Chapter 2, I give you a big reason why gold and silver deserve a spot in your personal portfolio: They lack counterparty risk. In good times and bad, gold and silver can deserve a modest or relatively small spot (but definitely some type of presence). But for 2020–2030, given how perilous these times will be for many traditional investments, gold and silver (and/or related investments) may deserve a more prominent presence.
In this chapter, I principally answer two basic issues: How much gold and silver you should consider, and what to do in various approaches such as investing and speculating. After all, a conservative investor should approach gold and silver differently from an aggressive investor or a more daring speculator. Fortunately, gold- and silver-related vehicles are varied, and some vehicles could be a good fit for you.
Long ago, the question was gold, and the answer amounted to yes or no. Well, that’s the good thing about today’s world. The choices are now varied and something can be right for you. I devote a chapter to every distinct related investment vehicle. Check out Parts 2 and 3 for more information.
Defining Saving, Investing, Trading, and Speculating
Before you dig into the rest of this chapter, make sure you understand the crucial differences between the following terms because each is distinctly different, and I make an excruciating effort in using these terms appropriately.
Saving
The classical, economic definition of saving is “income that has not been spent,” but the modern definition is “money set aside in a savings account (regardless of the interest rate) for a ‘rainy day’ or emergency.” Everyone should have a savings account with money that is safe and accessible just in case you encounter an unexpected interruption in your cash flow. In fact, you should have at least three months’ worth of gross living expenses sitting blandly in a savings account or money market fund.
Although precious metals in the right venue is appropriate for most people, including savers, you need to have cash savings in addition to your precious metals investments. A good example of an appropriate venue in precious metals for savers is buying physical gold and/or silver bullion coins as a long-term holding (see Chapter 9).
Investing
This term refers to the act of buying an asset that fits an investor’s profile and goals, and that is meant to be held long term (in years). The asset will always run into ups and downs, but as long as the asset you’re holding is trending upward (a bull market), you’ll be okay.
Investing in precious metals may not be for everyone, but it’s an appropriate consideration for many investment portfolios. The common stock of large or midsize mining companies is a good example of an appropriate vehicle for investors. (See Chapter 7 for details.) Another great vehicle for investors is exchange-traded funds (ETFs) and mutual funds (covered in Chapter 8).
Trading
Trading is truly short term in nature and is meant for those with steady nerves and a quick trigger finger. Many “trading systems” are out there, and this activity requires extensive knowledge of market behavior along with discipline and a definitive plan. The money employed should be considered risk capital and not money intended for an emergency fund, rent, or retirement.
The gold and silver venue for traders could be mining stocks (see Chapter 7), but more likely it would be futures and/or options because they’re faster-moving markets. Get more information on futures in Chapter 12 and options in Chapter 13.
Speculating
Speculating can be likened to “financial gambling.” Speculating means that you’re making an educated guess about the direction of a particular asset’s price move. You’re looking for big price moves to generate a large profit as quickly as possible, but you also understand that it can be very risky and volatile. Your appetite for greater potential profit coupled with increased risk is similar to the trader (see the previous section), but your time frame is different. Speculating can be either short term or long term.
Your gold and silver venue of choice could be stocks, but more likely, the stocks would be of mining companies (called junior mining stocks or exploratory companies) that are typically smaller companies with greater price potential (see Chapter 7). Speculating is also done in leveraged and inverse ETFs (covered in Chapter 11).
For shorter-term speculating, my main preference is long-dated options on stocks, futures, or ETFs. If you think that a stock, ETF, or futures contract is going up in the short term, then use call options. If you think their price will decline or crash in the short term, then consider put options. Both types of options are covered in Chapter 13.
The year 2020 was a great speculating year. My clients and I made plenty of money with call options on gold and silver vehicles while we also bought put options on stocks, and both produced fantastic gains.
For more information on successful approaches to aggressive speculating in stocks and ETFs and for details on advanced options strategies, consider my book High-Level Investing For Dummies (Wiley).
Building Your Financial Profile
Your approach to gold and silver will be dictated by what type of participant you plan on being (conservative, aggressive, and so forth) and what goals you have (long term, short term, or intermediate term). Some approaches with gold and silver are great for, say, retirement while others are more short term to fund near-term projects like adding to savings or for a down payment on a real estate purchase. Spend plenty of time analyzing your personal style, your needs, and your goals.
For the conservative investor
A conservative investor seeks quality investments (such as stocks with good fundamentals and undervalued assets such as silver) and holds them for the long term. Conservative investors generally avoid short-term speculating and trading, and they avoid assets that are not undervalued and that offer features such as paying dividends. They also participate in a market where there are favorable trends (such as increasing demand for the product/service offered) so that the stock or asset has steady price appreciation going forward.
The conservative investor should consider a long-term approach with quality vehicles and quality stocks (meaning profitable and financially strong companies). The best vehicles would be some mix of the following:
Direct physical bullion (see
Chapter 9
)
Major mining stocks (see
Chapter 7
)
Physical gold and silver ETFs (see
Chapter 8
)
Major mining stock ETFs
Gold and silver mutual funds (see
Chapter 8
)
You don’t need to get all of those, of course, just choose one or more as you judge your preferences and goals.
For the growth investor
Growth investors hope to add assets or stocks/ETFs that have strong potential in the near to long term to rise in value (strong price appreciation). They see growth as the primary concern, and income (such as dividends) is either a minor or unimportant consideration.
For those who prefer choices that have greater growth potential while tolerating more risk, the range of choices are
Major mining stocks (as a foundational choice; see
Chapter 7
)
Junior mining stocks
Junior mining stock ETFs (see
Chapter 8
)
Mining stock leveraged ETFs (but not a huge amount; see
Chapter 11
)
For the speculator
A speculator seeks rapid price appreciation in the near term (over weeks or months) and accepts the possibility that volatility and (hopefully) temporary price declines may occur on the path to high potential gains.
Speculators want to get set up for outsized gains, so they’ve done their homework and are aware of greater risks. Here are their range of choices:
Junior mining stocks (see
Chapter 7
)
Junior mining stocks leveraged ETFs (see
Chapter 11
)
Long-dated call and put options (see
Chapter 13
)
For the trader
Traders are looking for gains within days or weeks typically, so they want to play volatility and don’t mind seeking short-term profits, say, being bullish on an asset this week and cashing in quickly for a profit and playing the other side (bearish) if they feel the same asset is ready to decline in price the following weeks. My associate Charlie puts it nicely: “While I play the ‘tides,’ typical traders play the ‘ripples.’”
Traders gravitate to the following choices:
Stocks (some play stocks directly; see
Chapter 7
)
Futures (see
Chapter 12
)
Options on stocks/ETFs (see
Chapter 13
)
Options on futures
Of the choices, the most common are options because they’re lower-cost vehicles and offer plenty of upside and downside volatility in the short term.
When it comes to stock speculating and trading, it pays to read the exploits of those who truly mastered the craft. One of the greats in the history of financial markets is Jesse Livermore. In the late 1920s, he speculated on a stock market crash (which famously occurred in late 1929), and he made $100 million on that speculation — an astounding amount at that time. His thoughts on trading can be found in the book Reminiscences of a Stock Market Operator by Edwin Lefèvre (Wiley).
Making Other Portfolio Considerations
Often, the choices in your portfolio aren’t always 100 percent “yes or no” when it comes to making the move to purchase (or sell) an asset or investment. As you find out in this section, there can be alternate, modified ways to proceed as every investor or speculator can have different circumstances, preferences, and so on.
Deciding on a percentage to put in metals
The percentage to invest in precious metals is actually a personal choice, and no hard and fast formula exists for choosing how much gold and/or silver you should buy or what percentage it should be. Plenty of expert folks have an opinion on the matter, and they’re included in Appendix A.
Part of the reason for this is that every situation is different. A senior citizen in her 80s will require much less exposure to gold and silver than someone in her 30s. Someone with positions that may get harmed by inflation will need some significant exposure to gold and silver. Check out the earlier section “Building Your Financial Profile” to see whether a particular approach appeals to you. You can also refer to the later sidebar “The Permanent Portfolio” for a technique from investment advisor Harry Browne.
Choosing gold, silver, or both
When knowledgeable people describe the difference between gold and silver, I like this comparison: Gold is like a jumbo airliner, while silver is like a jet fighter. Gold is that steady large vehicle, while silver can be quick and nimble. Either or both is fine. Many experts on the topic will give different answers like “have X percent in gold and Z percent in silver.” I think they both have different properties found in their related vehicles such as stocks, ETFs, and futures, but in the physical form, I am agnostic.
Go half and half if you aren’t sure. I personally prefer a greater percentage in silver. You may be thinking of both in investment terms, but also consider both in terms of barter. In the worst-case scenario (such as hyperinflation), gold and silver will be very tradable. Gold would be great for large purchases while silver would be great for common, everyday transactions. I think a good consideration is a third in gold and two-thirds in silver, but take into account your own personal circumstances.
Investing for income
Although most investors do gold and silver for appreciation such as long-term or short-term capital gains, there are ways to gain steady income from gold and silver. The most obvious are
Dividend income from major mining stocks (see
Chapter 7
)
Writing covered calls on stocks/ETFs
Writing puts on stocks/ETFs
If you’re holding a mining stock that just had a great rally, that could be a good time to write a covered call on it and generate option income. Many folks have been able to generate up to 5 to 10 percent income just by being proficient on doing covered calls. Find out more in Chapter 13.
