It would be a mistake to invest in any one segment of the market or any one investment vehicle. However, if one were to choose a market segment that is currently on a roll and likely to go much higher over the coming three to ten years or more, it would be hard to do better than gold and silver (and platinum).
Gold has gone up 28%/year since 2001 and went up 33% just last year. Both gold and silver made a high in 1980, gold at $850/oz and silver at $50/oz. In the beginning of 2008, gold made a high of $930 and silver broke through $17. Silver is currently lagging gold, currently less than half of its 1980 high. It is expected to catch up and perhaps surpass gold.
There are many reasons for gold and silver to be good investments right now. The naysayers keep saying that gold has peaked. They said it peaked at $400. They said it peaked at $500. Every new high brings out the anti-gold crowd to call a new peak. In inflation-adjusted terms, gold would have to be at $1,200 to match its $850 high. Silver would have to be much higher than it is now.
Why gold? The drivers of gold are diverse and they feed one another. Probably the biggest and most familiar driver of the gold price is the falling dollar. When the dollar goes down, gold goes up. While this is still the case, many gold experts believe that gold has decoupled from the dollar and will go up regardless of dollar strength. One sign of this is that gold is going up in all currencies.
The other factor driving gold is the U.S. and world economies. Gold is real money and has been real money for some 3,000-5,000 years. When the U.S. and other economies print lots of fake money to pay their debts and create new ones, the smart money goes to real money, gold.
Gold will go up in price because of scarcity. Some say that we have reached peak gold just as we have reached peak oil. There is not an unlimited amount of gold in the ground. It is getting harder to find and more expensive to extract.
Finally, large world economies like China and Russia are realizing that they need to boost their gold reserves. China has historically had very small gold reserves but they are going to use some of their U.S. dollars to correct that. Also, China has opened up the gold market to its increasingly flush citizens.
Some of the same factors will support a rising price in silver. Silver is also money and was the original coin of the realm in the early United States. Unlike gold, silver has many industrial uses. Even though there has been a decrease in silver used in photography, there has been an increase in other uses for silver. It is an excellent antiseptic and is being used in medicine as well as for lining refrigerators, washers, and other appliances.
Silver will benefit from the same difficulties of mining new silver as gold. There’s less in the ground and it’s more expensive to bring it out. Silver is often an extra product of mining for gold and base metals. There are very few pure silver mines.
As noted, the price of gold has already passed the high of 1980 but silver has lagged behind. This simply means that silver has a lot farther to go and may very well pass gold when the final run-up begins.
As for how to invest in these metals, there are more options today than ever before. You can buy silver and gold coins or bars. You can take possession of this metal or leave it in storage for a fee. You can buy certificates representing gold or silver. You can invest in precious metals miners. You can invest in gold and silver exchange traded funds. You can buy precious metals mutual funds. You can buy gold or silver futures. And the list can go on.
The point is, the precious metals bull has a long way to go and even buying gold at $900/oz or silver at $17/oz can be a very profitable endeavor. Gold has risen nearly five times as much as the DOW from 2001 to the present. The stock market as a whole is a bit shaky right now. The entire U.S. economy is shaky right now. Gold and silver are traditional safe havens and many are going to wish they had a safe haven when things begin to seriously collapse.