Basics of Precious and Base Metals Investing

Nathan 17 July 2006 8,792 views 14 Comments

There are two types of metals for investment: precious metals as opposed to base metals. Precious metals include gold, silver, platinum, and some other less known materials such as ruthenium, rhodium, palladium, osmium, and iridium. Base and/or industrial metals include copper, nickel, aluminum, zinc, lead, and iron/steel. The reasons for investing in precious metals and base metals can be very different. But their prices are correlated nevertheless because of inflation.

Here are some ways to invest in metals:

1. Leverage your bets in futures market. Only recommended for professional traders.
2. For precious metals, you can try the following holding ETFs. IAU (0.4% expense), GLD (0.3% expense) for gold, SLV (0.5% expense) for silver, and CEF for about 50:50 gold & silver.
3. You can invest in physical bullions or gold/silver coins. Check out my post on investing in silver .
4. Invest in metals/mining stocks. This gives you some leverage compared to holding physical metals, as explained in my previous intro to investing in natural resources .

If you want to invest in physical gold/silver, my personal opinion is that physically obtaining your gold/silver is probably the best. You will need to deal with authentication of your purchase, physical storage & insurance, and deciding which forms, bars or coins. But all those efforts are worthwhile I believe. Investing in holding ETFs such as GLD and SLV are convenient, but they are still a form of paper assets. Paper assets are easily traceable by the government. If you’re investing for fear in a monetary system-wide breakdown caused by the government, it is probably preferable not to have the “thieves” watching over your money. In the history of United States, President Roosevelt confiscated gold from US citizens. In the name of protecting the power of States, the government can declare any sorts of national emergency or for any security reasons to physically confiscate your assets, or pay you with more worthless dollars for your real assets at a discounted price, or tax you so heavily either for holding or trading (currently 28%) to practically extract all the asset values that you have. There will be nothing that you can do against a much bigger power that is trying to protect its own survival. Confiscation of gold has happened before, and no one can be sure that it won’t happen again. In time (hopefully it will never come), before things start to go crazy, one should convert paper assets in the form of these ETFs & stocks into real physical assets.

There are many many metal stocks, and I will suggest that you should try the bigger market cap first. Bigger companies almost always have less upside, but also have less risk too. You still should have probably more than 5 stocks, or at least have 3 different stocks for sufficient diversification, assuming that you don’t use mutual funds or ETFs.

For the base metals, here are the stocks that you can look into:

1. Copper: PD, PCU, FCX (also a very good gold stock)
2. Aluminium: AL, AA
3. Nickel: N, NILSY.PK
4. Steel/Iron: RIO, TS, MT, PKX, NUE, GGB, X
5. Diversified metals: BHP, RIO, RTP, FAL (being acquired by N)

For silver, you can look into PAAS, CDE, SIL, SLW, BCM.V, SSRI.

For gold, you can look into ABX (not really recommended, due to its heavy hedge book), NEM, FCX, AU, GFI, GG, HMY, GLG, MDG, BVN, KGC, LIHRY, AEM, EGO, BGO, IAG, GOLD, RGLD, CBJ, AUY, GRS, VGZ, NXG, NG, NAK, SA, NSU, etc. There are indexes that you can use for your trading and investing references: XAU (Yahoo’s symbol is ^XAU) and HUI (^HUI in Yahoo). Please note that you can click on both indexes which are market cap weighted. And if you want to invest in gold stocks ETF, there are XGD.TO. or GDX (I got the weightings from billcara.com ).

If you buy individual stocks, pay attention to the physical locations of the mines. The local currency exchange rates have screwed the performance of GFI, HMY, and PDG in the past. Right now, currency exchanges are helping GFI, HMY. Read my post on Intro to Investing in Natural Resources for details in the effect of currency exchange rates. And the most important thing about physical location is the political stability. KRY just got sacked recently because of politics. In general, geographic stability and diversity is very positive for the miners.

For precious metal mutual funds, you can get the list from the Yahoo’s fund screener. I personally hold GOLDX and TGLDX (historically a slightly more conservative holdings including moving to cash on sideline and sometimes have gold bullion). UNWPX is more aggressive, and seems very good to me, the choice by investmiddleway.blogspot.com. I personally considered seriously about VGPMX (too much energy-like, such as BTU and CNX), and BGEIX (over 7% in ABX, track XAU index most of the time), but didn’t make any purchases at the end.

From my personal investing experiences, I recommend everyone to use mutual funds and ETFs as their core positions in this precious metal sector, and mix & match using individual stocks for tailoring personal taste. For more active traders, they can use more ETFs as their core positions rather than mutual funds. My personal goal is to move to the following allocation, because I currently hold too many individual stocks, and my time is very limited for investing:

1. Total of 5% to 15% in “physical” precious metals such as GLD, SLV, and/or CEF. Between gold and silver, I will probably allocate about 40% gold and 60% silver.
2. The rest goes into equity market. I will probably have 25% to 35% in gold mutual funds, 30% to 35% in ETF (except that just having GDX may not be such a good idea), and the rest I will use individual stocks for tailoring.
3. In the equity portion, I will probably allocate 60% to 75% in gold and 25% to 40% in silver.
4. In the equity portion, I would like to allocate 65% to 75% to major producers, and 25% to 35% to mid/junior producers and/or exploration companies.

Obviously, the above is just a goal. It may not be possible to fulfill every criterion. Using ETF and stocks will be better for trading & tax, assuming that you don’t want to initiate separate short positions against your mutual funds. And it also depends on your size of portfolio. The smaller the portfolio is, the less flexibility you have. I would also advise a minimum of 5% of your total networth to be put into precious metal sector. Depending on how aggressive you are, or how nervous you are about $US depreciation, you could go to 15% to 20%. I would not recommend anyone doing what I am doing, currently having about 25% of my networth in precious metal. The primary reason that I can afford to do such allocation is that on a leveraged view of my networth. the precious metal allocation will drop to below 15% which is the true effective influence on my leveraged portfolio.

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