Precious Metals Investing us a great way to invest in the future of global industrialism. It is an area that is very easy to understand, perhaps the easiest to understand of all investments. You buy something that is scarce, and you sell it when it’s more scarce, and still in just as much demand as before. Since it’s harder to find, people must pay more for it.
Scarce resources will become more scarce, and it doesn’t take a rocket scientist to realize if there are things vital to our way of life that become more scarce that the price will go up.
This is true in the precious metals market, but like any market, over a short or even pretty long duration of time, there will be lots of volatility. If you bought gold in 1980 at the peak, even today you would have lost purchasing power as gold has not beat inflation. However, if you bought in the early or mid 70s or in the year 2000 you would have made a fortune. Currently, there is about 45 years left of gold if consumed at the current rate. 40 years ago there could have been said to be around 85. Gold was still consumed, but investment grade metal had been bid up significantly, and speculators became less interested in the metal, and the inexperience of the investors that got in at the top took over as they sold the metal as it became more rare, at lower prices.
There are only a few things that people buy more of when it goes up in price, and get scared to buy when it goes down in price. These are Stocks, Real estate, and Metals… Actually just about any investments that the general public is involved in, you can say this is true. As much as people preach “buy low and sell high” history shows they have in fact done the opposite. Like a ponzi scheme, as more people find out about a particular investment, they buy and as they start to gain money they tell their friends, and the spreading of the idea of buying spreads until prices are artificially high. It is only when there is no one left to buy these investments that the price drops. In addition, when credit and money is most freely available, is when the peak will be. So even though people may have wanted to invest for awhile, only near the top do they have the most amount of available money to do so.
I say this to communicate the importance of the philosophy of the successful metals investor. The successful metals investor will look at the very long term picutre, and continue to add on as prices go lower, with the intent of holding for a very long time.
There is much discussion about precious metals as a form of investment. For one thing they are actually consumed. As anything becomes more scarce, it becomes more valuable, in the event that it still has use and there aren’t any adequete replacements for cheaper prices. That last part is often ignored, but it’s actually possible for a currency to become irrelevent due to it’s scarcity, resulting in hyperinflation in a unique way in that everyone is exchanging that currency, no matter how rare it is for something they believe actually will be prevelent in the market place in the future. Particularly where there is counterfeit or the possibility of counterfeit or even the fear of it. If I made my own currency, I could make 1 unit or a million units. I might convince people that it’s valuable, but that would not last. Eventually people would realize that other people will not accept such a currency, and quickly try to sucker people into giving even a miniscule amount for it.
Precious metals investors invest for a variety of reasons
1)They want to protect their wealth from inflation
2)They want to protect their wealth from government mismanagement of money
3)They want to speculate that other people will rush and buy the metal.
4)THey want to bet on the long term decline of supply of available precious metals and long term consumption of this particular metal.
While 1-3 may be valid reasons, and there may be other reasons such as they want to protect themselves from a complete breakdown of the financial system and a return to the barter system, I am only going to look at #4. Inflation may or may not happen, and the government may change their stance. As such, by looking at these factors, I have to recognize that changes in precious metals speculator’s #1 through 3 outlook, prices will fluctuate significantly at times. There are only a few things we can do to prevent large declines in our portfolio due to fluctuations which we will get to later.
If you look at the foundation of any great investment that involved buying and selling, (as opposed to buying at a fixed price to collect regular income) the reason something gains in value is that the perceived value remains the same or increase, but the availability of such an investment is reduced. Econ 101. “Generally speaking the more scarce something is, the more it is worth.”
Precious metals are similar to Oil in this regard. Another advantage is they gain from inflation, which the federal reserve and all governments on fiat currencies around the world have a vested interest in maintaining, but this should be looked at as secondary. There will be periods where governments are forced to make budget cuts, and where interest rates will have to rise.
The fluctuations due to disinflation, deflation, speculators panic selling, and so on will lead to declines. Sometimes even over a very long period of time. This is a reality. In fact, in a bad economy, there will be less industrialization… There will be less of a need for various metals, and prices will drop. Fluctuations are inevitable. You know there will be major declines just as you know there will be a winter after fall, but you just may be unable to identify when.
Okay, so how do we prevent large declines? For one thing, we can recognize that most of the speculation is done in areas of gold and silver. This is most likely going to result in large price changes. But we should not stay away from an area just because of price fluctuations. Instead we must take a very long term time perspective, and use voliltility to our advantage. Being that we are investing in one particular area, we will just have to stay focused on the long term picture and respect the fact that we can’t completely mitigate short and medium term losses. Money from investors will flow in and out of a particular asset class and into another. If you choose to invest in multiple asset class, it’s a good decision for this reason. We will also diversify among precious metals, putting larger amounts into the more rare metals, and dollar cost average as prices go down, and rebalance occasionally when there are significant price inbalance. Although there will be multiple asset class movement of capital, among this investment group there will be strictly metals investors that decide to sell some gold and buy silver or vise versa. We can prevent large losses by spreading our risks among these assets, but focusing them more so in areas that have the largest potential of price appreciation. Save some money so that you invest at a fairly stable rate over time, rather than all at once.
To determine a fair price, and what we should invest more in, we first look at the foundation of any great investment as mentioned before. Scarcity! Some people look at metals based on the amount of ounces in existance under the ground, or above the ground and label it as the most scarce. This ignores demand, one of the most important elements.
Instead we will look at how many “years left” of supply based on the rate of consumption. A trillion ounces may be a lot, but if 100 billion ounces gets used up for things vital to our way of life without the ability to be replaced, this is considered “very scarce” by this definition, and more scarce than something where there is 20 ounces of if only 1 ounce per year is consumed.
So we must look at all precious metals available to invest in. Theoretically, as an investment approaches 0 in supply, the price approaches infinity, provided there still is demand at that price. It’s possible that this is the “golden age” and some day LCD screens won’t exist or will only for the upper .0001% of the world, but right now they are available for many. This demand may be key to an investment, so we will have to note changes in the actual demand, but as for now, we will just look at the number of years left based on CURRENT demand, sometimes including some CURRENT trends.
First observe the following chart on years left:
We will use these metals. I’m sorry if I missed some. Not that while I intend to accurately represent the data, I cannot verify it’s validity.
Gallium 6 years left
Indium 6 years left
Hafnium 6 years left
Platinum 15 years left (this is based on a very large increase in demand of fuel cells for cars, catalysts, etc. If not for this massive increase we would have a 360 year supply)
Silver 20 years left
Germanium 20 years left (data available is not very clear on this)
Zinc 30 years left
Uranium 35 years left
Tin 35 years left
Gold 40 years left
lead 40 years left
tantalum 40 years left (not easy to predict as it is used in cell phones and camera lenses, causing huge rise in demand recently)
Copper 60 years left
Nickel 90 years left
chromium 135 years
Phosphorus 345 years
Aluminium 1027 years
Rhodium (very tricky… scarce, but can be replaced by palladium, platinum and silver in enough instances that it won’t be a huge demand or problem if we run out as far as I can tell. It’s used in cars and as far as I know we can make cars without it. However, it’s useful to track the price of palladium and platinum and silver and consider investing in it if it’s affordable relative to these metals. Also it offers a significant discount from the peak price.
Since it’s replaceable I am going to estimate there is going to be much more supply left than what I’m given and say it’s about ___ years left of supply)
Zinc 30
Now we will go a step further and determine an average “price per ounce… per years left of supply” of the given metal. This gives us a basis of value and helps us know which are undervalued and overvalued. For example, the price of silver should be twice the price of gold. Since it’s not, this represents a great price inbalance. As such significantly more silver than gold should be owned. While the net years left would indicate we should invest twice as much money as silver than gold, the actual price per years left of supply indicates we should instead invest significantly more than twice as much into silver as gold.
Price per ounce
However, please understand that it’s very likely that it is only near the last few years that prices may finally appreciate drastically, as people may not factor in such price changes until it’s gone and there will be far more known information about the true availability and true demand at that point. So we will partially weight our investments on overall years left, and partially based on the current price to years left ratio.
This provides a very simplistic view of metals. Afterall, some very “earth abundant” metals may be very “above ground” scarce and very difficult to mine for and extract without outragous costs. In other words, say there was a metal found just below the earth’s crust and in order to mine for it, you needed to build a huge rig and have it go to the ocean floor and drill from there. To do that you needed to build a submarine elevator. You also needed the man power willing to drill down that deep, the technology to provide him with oxygen and a strong enough casing to prevent the high pressures of the water from crushing him. There’s only a few people in the world qualified and the costs are outragous. However the entire earth’s crust is covered with miles and miles of this stuff. This material would be very “earth abundant” but suppose the need was very high and it cured a certain fairly common disease that would otherwise cause death in 5 years or less. The price would probably be outragous and rightfully so, and if it weren’t and you know that when people that depend on it run out they would be willing to pay almost anything for it, you should buy it now. That’s an extreme example of course. Also, the function the metal performs and it’s ability to be replaced, along with it’s use and function is going to drastically effect it’s value. The rate of consumption vs the rate of production is another valuable metric. This doesn’t include reserves or amount in the ground, but is valuable because people that want a certain metal and are willing to pay whatever price for it and that don’t want to wait, may be willing to pay significantly more, wehtehr there’s metal in the ground or not.
With this all being said, all metals serve a valuable purpose, and it’s not very likely that it won’t increase in price as it becomes more scarce, so this investment philosophy will probably still be a good one.
Now some people may ask “Why is silver so cheap relative to gold”?.
In the short term it makes sense. Supply and demand moves markets, and if people want silver now, it isn’t difficult to get ahold of it. More silver is mined than gold, and it has been that way for awhile so there is excess supply of silver, however silver is consumed so much that all the mined silver is consumed, and there is excess demand where as that isn’t true for gold. Silver is being consumed at a faster rate than it can be mined, and eventually at this rate all silver will be gone if prices don’t change. In the short term, there is no real scarcity because there is plenty previously mined, and a lot still being mined from the ground. If someone says “I want silver, will you sell it” there are plenty of people willing to say “yeah I have plenty of reserves”. If they do not sell it, another mining company will, and the lowest cost producer will always win. So this will probably continue for awhile until the reserves start to get more depleated, and when that happens, the prices will have to correct until the prices are too high for the demand to continue at the same rate.
Gold appears to be much more scarce because silver is close to the surface and also easier to collect. The cost for extracting silver is also less. That along with the fact that people repeat mantras that used to be true like “silver is the poor man’s gold” and “gold is more rare” without realizing that this fact is no longer really true, and you can see why many investors will make mistakes based on incorrect information, and a shorter time perspective. Additionally, storage space with gold is smaller and thus the richest people in the world would not want to buy silver because it cost more to store it. If they just want enough wealth stored away to protect a modest amount such as 5%, and also have less volitile prices, they would probably want more gold than silver.
In the short term gold is harder to access. But in the long run, gold will be mined for and gold will continue to be discovered as silver will be depleted much faster. Most likely, the price of silver will experience a very sharp, almost exponential price increase as it starts to run out and the mines stop being able to retreive silver, while gold will instead experience a more steady price increase as it becomes more scarce at a more gradual rate.
Indium may also be cheap because of silver and gold being more commonly considered choices for investment and indium is not often bought by speculators and instead only bought by those using the metals.
Resources for Precious Metals Investing.
The most helpful website I found for those looking to construct your own portfolio using these principals is minerals.usgs.gov
http://minerals.usgs.gov/minerals/pubs/commodity/
There are other materials to invest in that I ignored because I did not thoroughly research how many years left of supply there is. For elite investors that are able to start their own mines, this site has data on where specifically you might be able to find concentrations of such materials and may provide good mining sites, or at least allow you to make a more informed decision Of course, if you are looking for individual miners, you may use this information as well to speculate what mines might strike it big in the future and use the information of what we determined to be the “true value” of a particular mineral as well.
One thing to note about precious metals is that they tend to go through a cycle as well where we come close to depleting most of the world’s resources, and scarcity becomes the mother of invention. We then find a way to solve society’s troubles, and we start to melt down all the previous uses of the metal and replace them with a more efficient metal. Meanwhile with such high prices there is increased incentive for businesses and thus investors to invest in the businesses growth in that industry that helps contribute to discovering more metals or new ways to access it. It is through innovation that we are able to solve the world’s problems, and ultimately at some point, it’s important to understand that in spite of current scarcity, we may return to having an abundant amount of metals once prices get so high and so much economic activity is surrounding natural resources and effective use of those resources n a more efficient way.
