The precious metals market was stunned when India opted to buy 200 tonnes, or nearly half, of the International Monetary Fund’s gold reserves. India’s dramatic play on gold is good for precious metals investors, and it generates renewed interest amongst traditional investors.
The Momentum is Shifting
Never particularly sought for its rapid changes in value, precious metals were present in only a handful of investment portfolios as recently as one decade ago. However, even amongst the general investing populace who hold greater amounts of debt instruments and stock portfolios than precious metals, a change in tide is occurring. After seeing silver prices rally from $4 per ounce nine years ago to $17, while consumer prices stayed flat during the same time period, precious metals are now more of an investment than a hedging instrument.
Two Untapped Markets
Nations, which have historically held vast precious metals reserves, and the common investor are the last frontier for precious metal investments. As countries and ordinary investors realize the potential of precious metals, namely silver, as both a hedge against inflation and as a way to solidify a portfolio, it is certain that prices will rise favorably higher than the percentage shift in demand.
Even India’s purchase of 200 tonnes of gold (which is approximately 1/12 of all worldwide production in 2006) was valued only at $7.5 billion. In the grand scheme of international debt obligations, gold and silver production is currently tiny to the amount of money that trades hands every day in the world economy. Should nations begin to stock up on gold and silver, the price could ultimately run through the roof, as less than $50 billion in gold and silver is produced each year while trillions of paper dollars are created by inflation and debt.
Why You Must Own Physical Metal
In the world commodities marketplace, there are billions of dollars of gold and silver that trade hands, but are never in existence.
In one recent example, an exchange-traded fund with more than $3 billion ceased trading. The fund was said to track the value of oil through counterparty trades and futures positions. However, after the closure of the fund, not a single oil contract was traded by the company to bring monies back to investors. The only saving grace shareholders had was the health of the Deutsche Bank, which backed the fund. However, had Deutsche Bank fallen on hard times, it would not have been able to pay out to the investors, who would have lost their entire investment – without a single drop of oil to show for it. The Physical vs. Paper Price Disparity
The rarity of physical metals is often understated. In the commodities marketplace, it is easily seen that the supply of paper gold and silver vastly outweighs the amount of physical metals being made available to investors. On the spot markets, investors pay a premium of only a few pennies, while physical trades often involve a premium of 4-5%. Why does this disparity exist? There is more relative demand for physical metals than there is for paper metals. Physical metals can only be created through mining and taking ownership of the metal, whereas paper metals can be created out of thin air via counter-party risk as seen in the oil fund mentioned above.
In today’s economy, cash is no longer king. Instead, paper monies are quickly being replaced by gold and silver, and the adage may easily become, “precious metals are king.”
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