The value of gold and silver

4. Buy real gold and silver, not shadows

If we buy gold and silver at the current price $1,325 / ounce and $22.2 / ounce, we have an investment return of 9 folds for gold and 40+ folds for silver. It might not happen overnight except that the market will repeat January 30, 1934 again, it might last for a few years or decades until your current currency fails or a new gold standard system will be reassumed. The bottom line is that you should include gold and silver in your portfolio. History also tells us that silver usually moves in the same direction as gold. As long as gold price goes up, silver price will rise faster than gold price. If you believe that gold price will rise, you have no reason not to buy silver.

I recommend everyone buy some real gold or silver bullion such as bars, coins, U.S. Eagle, Canadian Maple, Chinese Panda, Australian Nugget, etc.  Don’t buy the old coins or commemorative coins if the premium is too high because the high premium will lower your investment return. You can always choose the lower premium bullion to get a better investment return.

You can buy some other forms of gold and silver such as the ETF shares, a certificate by a bank or an organization, mining shares, futures contracts and options, but they are all shadows of gold and silver. Shadows are for trading, not for investment. It’s easy to understand that if you own shadows, you own nothing. There are some unexpected issues in owning shadows. First, some mining companies will finish digging out their underground gold and silver reserve someday; their shares may fall down sharply then. Second, banks may not have enough gold and silver in their vault at all. You might never get real gold and silver. There are rumors that many central banks sold out their gold reserve already or leased to commercial banks and have never bought it back again. I cannot imagine what will happen if that is true. Third, all ETFs are the same as bank certificates. Last, futures contracts and options are designed for arbitragers, speculators or traders, not for investors. If you are a serious investor and not a seasoned trader, you cannot use any leverage or loan to buy gold and silver. Otherwise, you may have trouble in a deep correction. Your own money is the only choice.

Conclusion

I often tell people to buy gold and silver bullion to protect their wealth with money history, inflation knowledge and the trend of paper currency. One month ago, a person challenged me with “The current gold price at $1,300/ounce is too high. I would buy gold at $35/ounce in 1971.” First, I told him: “It is worth to buy gold and silver if the price is under the value.” Then I spent 20 minutes expounding that the current price of gold was cheaper than the price at $35/ounce in 1971 if we compared the price with their monetary value (refer to figure 1).

There are a lot of catalysts for gold and silver prices to rise abruptly. They might be: The peak of global gold and silver production, world war, people get their real gold and silver from the banks or ETFs, short squeeze in the futures markets, some insolvent countries default, super inflation in some large countries, or the next time Chinese government publishes their gold reserve. Anything expected or unexpected can ignite an accelerating uptrend.

As a final reminder: The numbers I gave you in this paper are not the price targets. You must dynamically calculate the value and compare it with the price. If you unluckily purchased gold or silver at a relative high price, don’t complain, don’t worry, you will be determined about the uptrend of gold and silver after understanding their real value.

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About the Author
Xinshan Zhou
Xinshan Zhou is an independent trader with 20 years experience in trading commodities, equities and currencies. Zhou verses both technical analysis and value investment with a multi-disciplinary background including Economics, Finance, Electrical Engineering, Geosciences and Computing Science. You can reach him by email: liketrend@gmail.com
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