(Money Metals News Service) We get lots of questions from the public about precious metals. Some people are curious about the basics.
Others are skeptical about the case for owning gold and silver. Still, others are longtime customers who have highly specialized inquiries.
Here are two very common questions…
QUESTION: What’s Money Metals’ overall philosophy as to what precious metals products one should buy?
ANSWER: We encourage folks to focus on the lower premium items so virtually all their investment goes into acquiring the metal itself.
Most importantly, that means avoiding so-called “rare,” graded, or proof coins which generally carry high premiums, mostly unrecoverable upon a later sale.
You will almost certainly be better off if you stick with bullion coins, bars, and rounds where the cost is mostly determined by the spot price. Within that group, bars and rounds almost always offer the best value.
QUESTION: What are the reasons to own physical gold and silver versus owning mining stocks?
ANSWER: Gold or silver bullion and mining stocks are two entirely separate asset classes.
Bullion is money itself, a tangible asset with eternal value. You own it for insurance against a collapsing financial and monetary system. The profit – and there certainly can be great gains when measured in both nominal and real terms – is gravy.
When times get difficult, though, the action in the gold and silver mining stocks can get quite ugly.
These stocks are typically the most volatile area of the entire stock market. They are not for the short-term risk averse. They are for those who believe the potential long-term rewards are worth the risk.
Bullion functions better than the mining sector as a portfolio diversifier (physical gold is less correlated with the stock and credit markets). Over the long-term, gold bullion also performs better on a risk-adjusted basis (similar expected returns with a fraction of the volatility).
Start by owning physical bullion – whether it be gold or silver.
Build a solid foundation in the metals themselves before even considering the purchase of mining shares, which aren’t suitable for all investors.
You own gold and silver mining companies not for their eternal value (they could go bankrupt), not for insulation from the financial system (they are financial assets which are affected by credit conditions and general market volatility), but for their profit potential as operating businesses.
There can be more upside on your investments in mining shares during a bull market (and more downside in a bear market), but you also take on an array of risks, such as:
- rising energy and labor costs
- political risk (including threat of nationalization)
- wider economic/financial turmoil
- credit market tightness
- peculiarities affecting profitability in the industry
- investor sentiment/risk aversion
