Thursday, February 19, 2015

Precious Metals for you?


I guess one of the things that people know about me is that I really like precious metals. I have to admit, valuations aside, there are some good fundamental reasons to own gold and silver.


While the reasons above are mostly for Gold, much of the same can be said of Silver as well.

People might debate which is the better investment now, gold or silver, but I think both investors will tell you that either way, you should have some precious metals in your portfolio.

In a world where modern developed countries are having close to zero real yield or even negative yield, the BIGGEST argument against precious metals in voided. Simply, there is no longer any opportunity cost holding precious metals as it would a 5 year Swiss bond which yields NEGATIVE 0.4%.

One of the biggest problems that I see now are that central banks around the world are losing control. Below is a list from ZH of the 19 countries that have changed their central banking policy easings recently. In chronological order starting Jan 1st 2015:
  1. Uzbekistan
  2. Romania
  3. Switzerland
  4. India
  5. Egypt
  6. Peru
  7. Turkey
  8. Canada
  9. ECB
  10. Pakistan
  11. Singapore
  12. Albania
  13. Russia
  14. Australia
  15. China
  16. Denmark
  17. Sweden
  18. Indonesia
  19. Botswana
If that doesn't make you uneasy, I don't know what will.

Maybe we can look at Singapore as an example of something we are more familiar with.

 (Credits: Sober Look)

Singapore has been burning through our foreign reserves to defend our currency. Why is it that our currency has been appreciating against our neighbours? They just have been dropping faster than us, so relatively we look stronger. Burning through so much reserves in just 6 months is probably the reason why the MAS had to change their policy. To maintain such a gradient to increase against the USD over time would force them to take larger action. I think if the USD doesn't let up within the year, the MAS will further ease their policy, and this would shock quite a lot of people. What choice do they have?

Many other countries are not like us and fortunate enough to have a strong central bank with deep reserves. So if we are feeling a pinch, the rest are probably feeling a punch.

Basically, central banks around the world seem to be losing control of the markets.

The question of How and Why is less important than What and When. What will happen when central banks lose control? I reckon all hell would break loose in the financial markets. The only safe havens that would be left standing are real assets. Like property or precious metals.

Anyway, I don't want to sound like a "fringe" conspiracy theory kind of guy, but I really don't see how all of this is sustainable. The way that I like to see Gold and Silver is that they are just hard currency that looks pretty undervalued now. Think about it. When you go to the money changer and change money, you get charged a spread, maybe between 1-3%. When you buy precious metals and later want to sell them, it's the same thing. I really don't see the harm of having some precious metals in your portfolio as insurance. On top of that, if you think they are valued cheaply, then perhaps buy them now to sell them at a profit later.

Precious metals has been getting slammed over the past few weeks. Gold has dropped about $100. I do think that now is a particularly fair and attractive time to take up positions if you don't have any already. I am up to the hilt with precious metals and exposure in their derivatives so I am quite fine. I'm sitting in some unrealized losses, but that's all right.  

Things like the GOFO, gold demand from China and India, gold supply for mines, global interest rates.... all these things are much more complex and secondary. You don't need to know and understand all of those things to if you are buying precious metals as a portfolio insurance.

All you have to know is that you now own a very shiny and expensive piece of rare earth metal, that you can bring to any country in the world in your pocket, and you can sell it for pretty much spot value. If that doesn't help you sleep at night knowing you have physical money with you instead of digital bits and bytes in a computer system, nothing will.

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