Apr 8 2010 9:06AM

Think Outside the Box: Maverick Investing in the Age of Obamanomics Part 4

Investing In Gold and Silver

How about making money with gold and silver?

Buying the metals strictly for investment purposes is not for short-term timing—but for long-term bull markets like now! Fortunately, now the timing is right because the Obama government is creating dollars by the trillions.

Bad News Bulls

Gold and silver tend to do well when everything else is going to hell. Bad news can be good news indeed! When the stock market or real estate is in the grip of inflationary an inflation-induced recession or depression, gold and silver will thrive. The worse things get, the higher they will go. They are classic contrarian investments.

If the essential elements are not there, gold and silver are lousy investments, as they were for two decades. Although the very long-term prospects are just fine, the metals can be near dead for years at a time—like those two decades between the end of the last bull market in 1980 and the beginning of the current one. All the factors are now lined up, and will remain that way for years, perhaps forever.

In all probability, you will eventually make money in the metals in the long run, no matter when you bought them or how much you paid for them. Any investment in gold and silver now at almost any price will eventually pay off.

After 1980, when I finally got it through my thick head that the bloom was off the (golden) rose, I waited patiently (impatiently?) for two decades while gold and silver went sideways and down for many years. As it was not the right time for the metals, I made money for my subscribers in carefully selected stocks and bonds and real estate for more than two decades, while keeping an eye out for today’s conditions.

A Word About Investment Attitudes

Let me digress for a moment for a brief dissertation on dysfunctional and functional investor attitudes. If you are a realistic optimist like me, you are always looking for the silver (or gold) linings in the gathering clouds, if that is reality. I just want to be right, not because my ego requires it, but because in my profession, being wrong costs me subscribers, or missed opportunities for them. True optimism includes realistically looking for opportunities among bad developments.

Gold and silver are bad-news bulls!
You won’t be bullish about gold and silver if you think everything will be hunky dory in the world at large. You would have to believe in Obamanomics or that trillion-dollar bailouts have no inflationary implications, or that Social Security and Medicare will be cured without printing money.

If the world should suddenly turn sane and the metals should tube, the true optimist will cut his potential losses and look for new opportunities, as I finally did after the gold bull market of the ‘70s, when I finally accepted the fact that the gold bull was dead. When the current gold bull market has run its course, if the currency and the economy have hung together, we should be able to put the Wall Street Journal on the wall, throw darts at it, and invest in the holes.

But for now, we must buy silver and gold until it is stock-dart time. That will probably be years from now. Ironically, gold bugs can be just as ideologically blind as stockbrokers.
Many of those who were ideologically turned on to gold because their crusade to reinstall the gold standard, confused those things with gold’s periodic merits as an investment. I had loved gold for six years in the ‘70s, and found it hard to turn seriously bearish in the ‘80s.

Lesson well learned!

Ideology is the enemy of investment, because it obscures reality.

You can be a Pollyanna on gold and silver, and may be right or wrong, but not because of your optimism or pessimism. You need to be an optimist to perceive opportunity when things don’t measure up to the world you would like to see, as opposed to a realistic view of the world and the markets as they really are.

A real optimist knows when to plant corn when everybody else is expecting a drought, and when not to. Although optimism and pessimism are states of mind, and have nothing to do with truth, they have a lot to do with guts—the ability to be comfortable looking north when everyone else is looking south. I may be wrong about a lot of things, but I try to be driven by realism and objective truth, not some socially approved state of mind.

Conditions Favorable to Investing in Gold and Silver

So if timing is everything, what conditions make gold and silver good investments?

1. Money-creation (monetary inflation) must be in a long-term upward trend. Obamanomics has made it so.
2. The dollar losing exchange value against foreign currencies. This is so essential, that I finally turned bullish when the dollar began its recent decline when I did the final edits on a book in December 2003. Without a weakening dollar on the exchange markets, any moves in the metals will be temporary. Now we have moved beyond that into the next currency phase —the metals rising against all currencies, which is immensely bullish.

3. War or the prospect of war. The wars in Iraq and Afghanistan are beginning to meet this condition, although the shooting has been contained locally, mostly to the Middle East. War breaking out further into the world—a terrorist nuclear, biological or computer-system attack, or Iranian fanatics nuking Tel Aviv—would meet this requirement. We’re on the brink, but not there yet. War is a wild card because it triggers inflation due to wartime spending and national and international fear, and is basically unpredictable.

Not all three conditions have to be met at the same time to make gold and silver good investments, but conditions one and two are essential. War would help a lot. Wait a minute—that sounds perverse!

The Right Strategy

What is the proper strategy for long-term investors in bullion and coins? Simple. Buy bullion or coins, take them home, hide them, be patient, and wait out the declines—or treat those temporary declines as opportunities to buy more. I lust after those retreats. I will be marketing The Ruff Times for a few more years and I want to get new subscribers into gold and silver as cheaply as possible.

When all commodities are in a bull market, gold and silver are the only commodities that are practical for the typical middle-class American. Unlike zinc or copper or steel or soybeans, you don’t have to take on a lot of risk, like a leveraged futures contract, or have a truck back up to your door and dump a pile of copper on your porch.

You don’t need a warehouse to store your gold or silver. You can simply go to your corner coin dealer, or call one of our recommended dealers (Kitco is one), pay cash, and take it home, or simply buy it in the ground—as gold or silver mining stock—like any other stock.

With mining stocks and gold mutual funds, you only have to watch one fundamental—the price of the metals. When they go up, all the mining stocks go up. When the wind blows, even the turkeys fly.

Of course, some will fly higher than others for fundamental reasons: production, property potential, management, sufficient capital, etc. My job is to help you pick the best (see www.rufft imes.com).

The Futures Pitfall

Don’t buy gold and silver futures. If you buy a futures contract for any commodity, including gold or silver, you are highly leveraged, and a comparatively small decline can wipe out your “margin,” and your broker will then give you perhaps the only free advice he will ever give you: a margin call! You will have to put up more margin money, or you will be liquidated, and there goes your money.

Gold and silver are dangerous only if you are thinking short-term or in leveraged volatile instruments, like futures contracts. If you have physical gold or silver or fully owned mining stocks, you just wait it out, or use the dips to buy more. Declines are great opportunities.

I will never buy gold or silver futures. The only times I did that over the years, I got my head (and my empty wallet) handed to me.

I don’t have the temperament or the time to continually watch the computer screen to be a short-term trader. Amateur futures traders get killed over and over again, until they are broke or just give up.

Even today, I will sometimes meet someone who says, “Howard, I saw you on TV, so I took your advice in the ‘70s and bought gold and lost a lot of money. I’ll never listen to you again.” Invariably, upon further questioning, he admits he bought gold futures and got caught in a short-term correction. I never told anyone to buy gold or silver futures for the above reasons. And he didn’t subscribe to The Ruff Times, so he didn’t know when I said to sell.

Avoid futures contracts, unless you are a very quick-on-your feet trader who is prepared to accept some big losses to balance against the profits you may make later. And never meet a margin call!

And don’t try to day-trade the mining stocks. This is a very dangerous market for futures speculators and day traders. In the bull market of the ‘70s, I saw retreats as much as 30 percent along the way to the eventual huge profits. A correction could wipe out futures traders in minutes.

Gold and Silver—What and Where to Buy

When you do leave the herd, where will you buy your precious metals? You can either go to the firms I recommend in Appendix A of my book, How to Prosper in the Age of Obamanomics – Kitco is a good one. Or you can go to your local coin dealer.

There is one basic rule—always compare prices. They can vary dramatically from dealer to dealer and from hour to hour, even with my recommended firms.

What kind of metals should you buy?

1) Junk silver.” Start here. These are pre-1965 dimes, dollars and halves sold by the bag. Price is determined by their silver value; it has nothing to do with the face value. A bag is approximately 715 ounces, but you can also buy a half bag. Everyone investing in metals should start there. I suggest you have as much as a bag for each member of your family. If that’s too much for your pocketbook, do what you can, even if it’s just a roll of 90-percent silver dimes.

2) Gold and silver coins which are bought, sold, and priced strictly for their metal content. There is a big variety of gold and silver coins available on the market. I like bullion coins like krugerrands, eagles, or any of the popular internationally accepted coins. Remember that the value of gold coins is several times higher than silver coins, so think of gold-bullion coins as $100 bills and silver coins as small change. (Is that what Obama meant when he promised “change”?) You need a variety of both.

3) Silver rounds, coin-like silver or gold tokens that are created by some dealers. You will pay the bullion value plus a small premium.

After you have accumulated a few thousand dollars worth of the above, if you have money left over (many of you will not) you can look at mining stocks. Gold and silver mining stocks fit into several categories, from big “Blue Chip” producers, clear down to “holes in the ground surrounded by liars.”

The most money in gold stocks will be made over the years by investors in gold Exploration Companies. The stock market might collapse, in which case you may find no place to exchange your mining stocks into dollars until the market reestablishes itself, so be cautious, with a bias towards the physical metals.

4) There are bullion bars, ranging from one hundred to one thousand ounces. If you buy bars and take them home, however, and you want to sell them, they will have to be assayed with additional costs, and probably insured. I am not as interested in them. I prefer coins, which need no assay.


By Howard Ruff
The Ruff Times


Howard J. Ruff, the legendary author and financial advisor, wrote How to Prosper During the Coming Bad Years in 1978. It is still the biggest-selling financial book in history, with 2.6 million copies in print.

His new book, How to Prosper in the Age of Obamanomics is free when you subscribe to The Ruff Times (www.rufftimes.com), or if you buy the book at your favorite bookstore, you can deduct $10 from the subscription price.

Howard is founder and editor of The Ruff Times financial newsletter. This article is from a recent issue of The Ruff Times. The newsletter deals with a broad spectrum of middle-class financial issues. (You can learn about it at www.rufftimes.com). The Ruff Times has served more than 600,000 subscribers – more than any financial-advisory newsletter in the world.


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