Wednesday, June 17, 2009

Political Risk Of Gold Investing

Political risks affecting gold investment
One of the realities of investing is that political unrest or upheaval can pose a risk to your investment. This is true with a variety of investments, including gold investment. This can happen to your investments in foreign countries or at home.

The government and lawmakers can basically do whatever they want, and can change laws in a way that adversely affects your investment. One of the best examples of this in the US is the Gold Reserve Act passed by Franklin D.Roosevelt in 1934, which made private ownership of gold illegal. People were compensated for their gold, but then the dollar was immediately devalued rendering their investments less valuable.

Some people try to avoid this kind of scenario by diversifying their gold investments and having gold stored in various places around the world. This is probably a smart idea. It is best to understand the stability of the country where your investment lies, though. I would much rather have an allocated storage account in Switzerland or Australia than somewhere in South America or Africa, for example.

These political risks also affect companies, which are sometimes nationalized by governments or have their assets expropriated. If you own stocks in a gold mining company, it is important to be aware of these risks. Some countries are obviously risky, such as Venezuela where nationalization seems to be policy. Other countries may seem stable and pro-free market, but the reality could change with a new election or a military coup. Mexico, for example, seems like a safe bet at the moment but there is certainly no guarantee that it will be in the future.

Share prices often drop due to general instability that is not even related to nationalization. Instability inhibits free market activity, so even seemingly unrelated events can cause stock movements. Understanding the political situation
of the country you are invested in will help you navigate all the fluctuations and understand your investment's performance, and take action to minimize the risks when necessary.

Wednesday, June 3, 2009

Why Silver Will Be a Better Investment than Gold

The investment potential of silver is hugeWhile gold is and always has been money, and its status as the ultimate preserver of wealth is untouchable, in the coming years silver promises to be a significantly more lucrative investment than gold. There are a few reasons for this.

According to (fairly) recent surveys, there are around 400 million ounces of silver bullion in the world versus 2 billion ounces of gold bullion. That means there the supply of gold bullion is 5 times greater than the supply of silver bullion. If we include coinage that can be melted down into bullion, then the supply of gold is three times greater than the supply of silver, with 1 billion ounces of silver and 3 billion ounces of gold. So silver the amount of silver available for use is much smaller than the amount of gold available.

The global supply of gold increases by about 2% per year, largely because gold is normally recycled and reused. But silver has many industrial uses, and silver is largely not reusable, so every year there is a supply deficit. Even in years of low demand, the supply of newly mined silver falls short of demand by about 70 million ounces. In years of high demand, it may fall short by as much as 200 million ounces. These deficits need to be taken out of the existing silver supplies above ground, which are therefore being depleted. Demand for silver has been outstripping supplies for 15 years straight, and there is no sign of this reversing.

In addition to those simple realities of supply and demand, the case of silver is complicated by some of the financial funny business that goes on in this world (which we've seen plenty of over the past year and a half). One of those funny things is the existence of unbacked silver certificates. Silver certificates are like IOUs that indicate that you have paid for an ounce of silver, and these certificates are supposed to be redeemable for physical silver. There are one billion of these certificates out there. But remember -- there are only 400 million ounces of silver bullion in the world. So what happens when the price of silver increases and people want to convert their certificates? A big shortage will occur, and that will send the price of silver soaring even higher.

Another bit of funny business is that there is a massive short position in silver that greatly exceeds the supply of physical silver. When you short an investment, it means that you borrow it and sell it now while the price is high, and you buy it back later when the price is lower. The problem is that when everybody goes to buy back the silver they have shorted, there won't be enough! There are approximately 508 million ounces of silver shorted on NYMEX, but there is only 132 million ounces of supply. Remember that worldwide, there is only 400 million ounces of silver bullion in existence, less than the amount that is shorted on NYMEX. When these people all go to cover their short positions then the rediculous degree of the silver shortage will become apparent.

For all of these reasons and others, silver is destined to be an amazing investment opportunity over the years to come. While gold will protect you from currency devaluation, silver will help you multiply your wealth, if you are significantly invested in it.