Gold & Silver Company Investing (Pt 3)

by Wes Bridel on August 18, 2010

in Stewardship

We’ve been discussing gold and silver miners.  Today, we’ll wrap up this 3 part discussion. Part two is here.

Leverage Gold ETF

Gold and Silver investing can be turbocharged for greater profit (or loss).  We’ve been discussing asset management in a crazy economy.  Today we’ll look at the use of leverage in gold and silver investing.

A leveraged gold or silver ETF is designed to achieve a multiple on the price of the underlying asset.  We’re only going to list a leveraged gold ETF here because the leveraged silver ETF’s we’ve seen underperform so badly due to the volatility that we don’t even want to mention them.

Leveraged gold & silver funds are designed to achieve twice (or more) the movement in the price of gold.  Like all leveraged funds, you run the risk of the volatility squeezing out the gains the longer you hold the fund.  So it’s important that you carefully monitor the performance of your fund and only hold during periods where you expect the price of gold to really appreciate.

For instance, if August/September and you know that the price of gold is really strong from September through January, perhaps you would hold this fund during this period and then sell at the end.  Or if you feel like gold is running and will be up much more often than down, this is a fund to hold during that time period.

But remember, the fund will achieve twice the losses of gold too, so this is much more volatile than the price of gold and can lose value quickly as gold falls.  Be ready to sell and have disciplined stop losses when gold takes its customary declines.

Last Few Words on Gold & Silver Investing

Gold and Silver are going to be very important investments in the coming years.  For some it might make sense to stick to the physical metals because they have less risk and should provide stability and appreciation.  For others who have the assets to assume more risk, we’ve detailed many ways for you to take advantage of an environment where the price of gold and silver quickly appreciates.  (Remember this could be because the perceived value of the metals increases, or because the value of the US Dollar drops….or both!)  Reuters reported on May 28, 2010 that of the 30 largest hedge funds, 12 have substantial gold & gold mining stock holdings.  This should give you an idea what many of the largest money managers in the world feel about this asset class.

We mentioned the gold/silver ratio when we talked about Gold & Silver, but we’ll do so here again.  As this is written, the ratio of gold to silver is very high historically.  The traditional ratio is 15 or 16 to 1 which means that if gold is at $1,200/oz then silver would around $75 to $80/oz.  In the most recent century, the ratio was more like 40 to 1.  Today’s ratio above 60 to 1 is extremely high.  In past financial scares people have rushed into silver to drive the ratio back towards the traditional one.  If this happens again, silver would appreciate more dramatically than gold.   Of course, with this potential upside comes more volatility.

Next, we’ll look at energy investing.  If you have any thoughts or questions on this or other topics, please let us know.

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