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Monday, December 27, 2010

Best Bang For Your PM Bucks

Back in August - just about 4 months ago - I wrote this observation ("Mr. Orwell?  Paging Mr. Orwell...") -

Also, the price multiple between gold and silver has been narrowing.  Just a week ago, the multiple was 68:1 (68 ounces of silver cost the same as 1 ounce of gold).  As of today, that ratio has dropped to under 65:1.. 
Wut dat mean?  Since 1970, that ratio has been as high as 89:1 and as low as 20:1.  The ratio during the 20th century was 47:1.  In the "olden days" it used to be fixed at around 15:1

Well, folks, the ratio has slimmed even more.  Lots more.  We're now at 47:1.

What does this mean?  We're at the average for the 20th century, but nowhere near the low of the century, nor the historical average of 15: or 16:1.

I think silver is still a better buy than gold, and I still believe that both will continue to rise in price.  Why?  Of all of the economic data that is tossed around - unemployment, green shoots, stock market, housing, blah, blah, blah - the one that I feel very confident in is the US having future inflation.  Maybe even hyper-inflation.

Our government has told us they have a current policy of inflating our currency (QE2).  Their official reasoning is so that we don't have a bout of deflation - price contraction.  I think a big part is that they can still print up money with absolute impunity, so they're doin' it while the doin' is good.

How long that luxury will last is unknown.  I DO know that the buyers of our federal debt are not pleased.

If you're going to buy precious metals (PMs), you have some options.  Different types of gold and silver have different premiums.

Generally speaking, the higher the premium, the more "liquid" the coin or bullion.  For instance, for one ounce of gold, you will pay the highest premium on a US Gold Eagle.  BUT, you also have the greatest confidence that you will be able to convert it into cash or tangible goods at some point in the future.

Take a look at these spread sheets (done a few days ago).  They show the premium you will typically pay for various types of gold.  These are "ballpark" figures.

These are online company purchases.  You'll most likely pay more than this when buying from a PM store.  The reason for this is two-fold:  Carrying cost/market risk, and anonymity.  Most stores like the one I co-own do not carry vast amounts of coin gold in-house.  Too much market risk.

And remember:  If you buy online, there's a paper trail.  I'll just leave it at that.

These numbers are VERY fluid - sometimes higher percentages, sometimes lower (the weights are the amount of pure gold per coin, not the weight of the coin) -

When I did this, there was an aberration in the market.  Usually, the coin with the highest premium is the 1/10 ounce American Eagle.  For some reason, the Canadian Maple Leaf 1/0 ouncer has this distinction.

UPDATE:  Also, the gold Panda's are at a larger premium for some reason.  These are usually MUCH lower than American or Canadian gold.  It's that whole "supply and demand" deal!

As you can see, the best value in "Big Coins" - 1+ ounce - is the Mexican 50 peso coin.  For coins that are more affordable, the gold British Sovereigns and the gold 20 Francs (France, Belgium, Switzerland - plus the Italian 20 lira) are the best bargains for "Small Coins" ( or "fractional gold").

If you don't want to go with government coins, you can opt for Credit Suisse or other similar bars and ingots. You can generally get them in 1 ounce sizes for around 2% over spot.  With that premium, personally, I'd still opt for government coinage, and go with the Mexican 50 peso.


Silver is much the same - American coins rule the roost.

The big winner with silver is the 90% or "junk" silver.  Last January, I did  an article on how to understand and buy this stuff ("Buying 90% Silver Coins").  In August of this year, I did another article on buying bullion in general ("Buying Precious Metals, Part 2").  There's some kind of neat stuff on the actual differences in silver content between differently aged coins.

Any ways, I personally love Junk Silver.  A recent accounting of my "stash" shows that fully one-third of my PMs are in Junk Silver.  That includes gold and silver stashes.

To me, it's the best of both worlds:  It's American coinage, and it is cheap as hell!

I stay the furthest away from Morgan and Peace dollars.  Personally, I think they are way over-rated, at least for the reasons I buy silver.  Although they are 90% silver, they are a bit heavier than $1 face value of Junk Silver.  To have a similar value, you'd need to get them at around $22.60 a piece (at silver spot of $29.20).

If you CAN get the Morgans/Peace dollars at those prices, snap them up.  American's have a love affair with them, and they have a great chance of having numismatic (collector) values in the event we somehow dodge the inflationary times ahead of us.

The big bars - 10 and 100 ounces - have low premiums, but are heavily discounted when you go to sell them.  At least in our neck of the woods, they're not highly desirable.  The 100 ouncers, in particular, are VERY volatile.  Some times you can't give them away, and some times they fly off our shelves.  I've yet to figure them out!

ONLY buy non-governmental coins and bars if they're stamped with their purity and weight.  For the big bars, try to stick to brand names like Engelhard, J&M and Academy.

There are LOTS of silver rounds out there made of Sterling silver (92.5% pure).  Many times, this will be stamped on the edge of the coin.  Try and stay away from these.  Your discount when re-selling them will be very steep, as they are often bought at scrap-silver prices and melted down.

Accept The Challenge

As always, only buy PMs if all of your other preps are up-to-snuff.

Buying PMs clearly have some risk associated with them.  No matter how you slice it, they're an investment - just like buying food storage and ammunition are an investment.  Prices on all of this stuff may collapse.  Our job is to interpret the "economic tea leaves" and hope we make the right decision.

The big difference between investing in tangible goods - PMs, food, ammo, etc. - and "traditional" investments like Mutual Funds is that the value of tangible goods will never be zero.

Stocks, bonds and fiat currency can't make the same claim.

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Copyright 2010 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Anonymous said...

Did you see the front page article about silver in the Wall Street Journal(December 27)?

Chief Instructor said...

Anon, yep, I sure did. "The Price of Silver Soars" or something like that.

Lot's of old mines coming back on line in 2011 because they're now economically viable to mine once again.

Demand is still very high, but I don't think we'll have an approximately 75% increase in price like we did this year. I'm guessing it will be more in the 15-20% range.

As long as the gov't keeps up with the QE2's, bailouts, increasing taxes and other wastes of our money, I'm bullish on precious metals.