Gold and silver prices have risen substantially over the past 10-15 years. They are both in secular bull markets that are driven by a variety of factors such as an increase in money supplies from central banks throughout the world, increasing demand — especially from Asia — and rising geopolitical uncertainty. However, since peaking in 2011, gold and silver have been in cyclical bear markets that have been driven by an exit of speculative money and a renewed interest in stocks. But we are nearing the end of the cyclical bear market.
Sentiment is very negative as institutions from Goldman Sachs (NYSE:GS) to Credit Suisse (NYSE:CS) are predicting lower prices while both were predicting higher prices in 2011. Furthermore, it costs almost as much as the price of gold itself to get it out of the ground, and in the case of silver it typically costs more than the actual cost of silver than it does to extract it. Finally, from a technical standpoint, both metals have found firm support: gold at $1,200/ounce and silver at $18.50/ounce. While it is presumptive to claim that the cyclical bear market is over, we are very likely much closer to the end than to the beginning, and it is time to invest. But how should you do this?
There are now more than a dozen ETFs out there that give investors exposure to precious metals in one way or another. There are also literally thousands of mining companies from multi-million ounce producers to companies with five guys, a drill, a plot of land, and a name with the word “gold” in it. The easiest answer is to simply buy gold and silver coins and bars. They are relatively easy to store and you don’t have to worry about reading a complicated ETF prospectus or that your mine will be shut down due to a labor strike.
Gold and silver coins and bars also protect you from your broker and the banking system in general. One of the appeals of precious metals in today’s environment is that they protect you in case something goes wrong with the banking system. Gold and silver ETFs may not give you that protection, especially if you need to access your gold and silver in the event of a bank holiday. If you want to be able to easily trade your gold and silver, then ETFs are a convenient way to do so, although they should complement your physical holdings and not replace them.