As the Stock Market Reaches New Highs – What About Gold and Silver as Investments?
by Jason Dean
The stock market reached an all-time high on Thursday, and then came back on Friday and went even higher. Whenever the market reaches new highs, there are always people who become wary of a potential “correction” — which is essentially a euphemism for a crash! But even if the sky isn’t falling on these Chicken Littles, it is always wise to have a diverse portfolio of more than just stocks, bonds, and mutual funds. Have you considered hard assets?
The price of gold has climbed from $300 an ounce to more than $650 an ounce in the past five years. Most financial advisors agree that holding a little gold in your portfolio is a good hedge, at worst, and possibly a great investment, as the U.S. dollar continues to show weakness. But does this mean you have to go out and buy actual bars of gold? Not anymore!
StreetTRACKS Gold Shares is an exchange-traded fund (ETF) based on gold. The fund itself owns physical gold, so when you buy shares of it — just like a stock — you are making a claim on the fund’s gold. As it is now, one share of StreetTRACKS Gold Shares (ticker: GLD) is equal to 1/10 of an ounce of gold.
But silver may be an even better place for investors to put a little of their money. This is because there is one tremendously bullish indicator in the silver market: The concentrated net-short position is equal to over 130 days of global production.
Confused yet? What this means is that there is a group of four or fewer silver traders (“concentrated”) who are selling silver futures contracts equal to the number of ounces of silver produced in the world on an average day x 130. By contrast, gold’s concentrated short position is equal to just forty-five days of global production, and crude oil’s is just 1.4 days! The larger that concentrated short position relative to days of global production, the more “paper” pressure being put on the hard asset — and according to most experts, eventually that paper is going to rip!
For those unfamiliar with futures: A futures contract is an obligation to deliver a specific commodity at a stated price and on a stated date — or the sellers can simply buy an offsetting contract to cancel out their positions. This concentration of silver sellers has existed for years and they have not been “making delivery” of the silver — they’ve been buying offsetting contracts and renewing their sell positions, even as the price of silver has doubled in the past two years (meaning heavy losses for the concentrated shorts). Most silver analysts think that, eventually, these short sellers are going to have to throw in the towel and not renew their positions — and when this happens, the price of silver should skyrocket, since it will no longer have the downward pressure of the concentrated short sellers.
So how can you buy silver? Again, you don’t need to buy bullion or coins, and you definitely should stay away from the futures market! The good news is that there is a mutual fund that holds physical silver, much like the gold ETF discussed above.
It’s important to note that investments in hard assets can lose money! The gold price in 1980 reached over $800 an ounce — it still hasn’t gotten that high since! Even this bullish silver scenario could turn out the other way if the short sellers are smarter than the rest of the market. But most investment advisors agree that holding a portion — perhaps just 10% — of your total assets in hard assets is a smart idea. And thanks to advances in mutual funds, ETFs, and the Internet, it’s never been easier to do!