Bullion Takes Center Stage – Part 2

2012 American Eagle Gold Proof ReverseToday we continue our discussion of bullion as an investment strategy. As a Grand Rapids coin dealer, we can provide some thoughts on what affects the prices of precious metals, although of course we urge all of our clients to do further research before making a move.

Historical Gold Prices
Gold is the most popular precious metal for investment, and as we stated earlier, historically gold has performed very well in slow economies. In fact, adjusted for inflation, the all time highest price of gold was in 1980. Since 2000, the gold price has been steadily rising with each year, but we have not yet the all time highest inflation-adjusted price.

Historical Silver Prices
In general, historical silver prices have also been rising each year since 2000. There is a bit more fluctuation within the silver prices each year relative to gold prices. For example, in 2008, there was a 136% change in price within the year. The fluctuation within silver prices is related to the fact that the price per ounce is lower, so it is easier for investors to purchase small coin denominations, and to enter and leave the market.

What affects the spot prices of precious metals?
The prices of precious metals fluctuate by the minute, and are actually affected by many variables at once.

  • Precious metals, like any commodity, are used in industry and manufacturing, so industrial demand affects spot prices. Demand for jewelry affects spot prices as well.
  • In other respects, precious metals are different than other commodities, and some are affected primarily by sentiment (or demand) more than supply, meaning that investors’ decisions to save or liquidate affect the spot price.
  • The spot prices of precious metals are affected by inflation, and global social and political unrest.
  • And finally, when governments such as China and India decide to invest in bullion, their investment affects the market and spot prices on metals as well. Today, some nations’ central banks are buying gold, which affects the overall price.

Gold: a volatile asset
The gold market is subject to speculation, particularly through the use of futures contracts and derivatives. However, gold’s low correlation with other commodity prices and its pricing in relation to fiat currencies during the 2007–2012 global financial crisis suggest that gold behaves more like a currency than a commodity.

What’s happening today with bullion?
To understand prices and expectations today, we first should look at historical data mentioned previously, and realize that today with bullion, two main market forces are fighting to a standstill. In the United States, the Federal Reserve announced that it will continue quantitative easing until unemployment gets to 6.5%, increasing inflation expectations and making investors interested in buying gold. On the other hand, some indicators also point to a chance at continued recession, so other investors are selling gold.

Am I paying too much?
If you pay the spot price for a precious metal, you may still wonder if you are entering the market at a good time. For precious metals, the price is what it is. We can only base our decisions to invest on the history of the performance of precious metals, and our confidence in other investment vehicles in this economy.

What should I expect from my investment in bullion?
Ownership of physical gold or silver means that you possess the asset, or in the case of IRA holding have it in the custody of a holding firm.  While it may rise or drop, it will not zero out. Those who are brave (or foolish) enough to predict the future may be buying or selling at any given time based on their personal portfolios.

Where are the precious metals headed?
As with any investment, it is not possible to tell with certainty where the market for precious metals is headed. It is reasonable to expect them to continue to be a very effective store of value.

Do foreign investors buy a lot of bullion?
The governments of China and India, in particular, invest in bullion. Individual investors in foreign countries also tend to invest in gold depending on the stability of their currency. And in certain cultures, such as India, gold is a very popular investment as a store of value.

Possible bullion investment strategies:
Possible bullion investment strategies include the following:

  1. Buy and hold.
  2. Buy bullion as a % of your portfolio, and rebalance annually.
  3. Use a dollar cost averaging strategy.
  4. Carry a certain position, dollar value.
  5. Use it as an IRA investment.

Investing in bullion can be a rewarding pursuit, and, as with any investment, it’s important to do due diligence. It is equally important to have a trusted and knowledgeable advisor for the process, so contact the experts at Mullen Coins if you are interested in learning more about bullion investment.

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