The price action in gold and silver is much more positive and these precious metals are seemingly now out of their recent price correction. I firmly believe that an investment portfolio should have some exposure to these precious metals, as the commodity price cycle remains one of the only major investment themes this decade. We’re probably halfway through it.
There are so many reasons to own some gold and very few not to. Being commodities, they are inherently volatile and so are gold stocks. But that’s the risk you take to own a store of value that is unique in the world.
The spot price of silver has also been particularly positive lately. A silver trade is perhaps even more attractive than gold due to its stronger correction. A lot of Street analysts have been saying to buy silver over gold, because it has more potential upside. As a commodity, silver is used in a lot of manufacturing (especially automobiles) and we know that the industrial economy is outperforming a lot of other industries.
There are always attractive trades in mining companies, but you don’t have to take on company-specific investment risk to have some exposure to gold or silver. There are all kinds of exchange-traded funds (ETFs) that have physical ownership of gold or silver bars and/or futures. For a speculator, I’d consider some mining companies along with a physical position in gold and silver. Today, there are even ETFs that allow you to have a leveraged position in the spot price action. A number of funds, for example, use derivatives to give you twice the percentage change in the spot price of silver or gold. You can even use these funds to bet against the commodities.
In this kind of market, there’s no need for investors to rush into anything. However, I do think that the fundamentals are strong enough for investors to have some kind of hedge in their portfolios, even with the spot price of gold near its all-time high. The prospects in the world for sovereign debt defaults, inflation, war, and currency instability are too great not to warrant some exposure to gold and silver. And it isn’t just these factors that make these commodities attractive. It’s the demand/supply factor as well. Despite the fact that many mining companies are awash in cash (see Precious Metals Winners—Three Excellent Wealth-creating Stocks), global supplies of gold and silver are relatively stagnant.
Probably, the better actionable trade at this time would be to buy silver. Large-cap gold stocks haven’t done much of anything over the over the last 12 months and I don’t believe they need to be an area of focus for equity investors. I’d rather own higher dividend paying stocks in other industries. At the micro-cap level, the trading opportunities are plentiful, but event-driven.
This year is going to be a wacky one for global financial markets. There’s so much political interference that is helping capital markets over the near term. Longer-term, however, the structural problems facing most of the world’s mature economies remain and that’s why you want some exposure to gold and silver. Whether economies get better or they don’t, spot prices should still move higher.