The meteoric rise of gold and silver continues to astonish even the most bullish investors. It seems as though both metals are hitting new highs each and every day, and those that currently have exposure to these investments are wondering how high they can rise, while investors that have not invested in these metals are wondering if they should be. Are there gains still to be made in both gold and silver?
The price of both gold and silver has been the number one topic of conversation for investors the last few years. Why have these metals gone up so much? Can this rise be sustained?
In my opinion, the number one reason for such a tremendous rise is the weak U.S. dollar. When individuals feel that the U.S. dollar is not even worth the paper it is written on, investors flock to hard assets and precious metals as an alternative. Both gold and silver are priced in American dollars, thus when the value of the dollar falls, you are able to buy even more of the metal which helps to drive up the price.
Another large factor that has helped drive up gold and silver prices are the ETFs (exchange traded funds). There are many more gold and silver ETFs today than ever before and this is also having a positive impact on the price of the metals. Investors believe that gold is a great investment to hedge against inflation, world turmoil and a falling U.S. dollar. All these scenarios seem to be happening at the same time, creating the perfect storm for the yellow metal to rise to all-time highs. I believe silver is being purchased for the same reasons, but also because silver actually has some industrial use as well. Thus, silver is not only benefiting from the same scenarios as gold is, but is also benefiting from the demand in the industrial sector. This, in my opinion, is why silver has actually outpaced gold over the last few years in terms of price appreciation.
I believe the rise in price of both metals, in the short term, can be sustained, but I am very cautious. In the short term, with the U.S. Federal Reserve recently indicating that they have no intention to tighten monetary policy and raise interest rates. Therefore, in the short term, gold and silver can move significantly higher.
However I am cautious, because should the Fed as much as hint at an interest increase, I would not be surprised to see the price of precious metals, particularly gold and silver, fall fast. The price of the two metals can not and will not rise forever. Therefore, investors need to have some sort of investment strategy if they are going to be holding these investments as part of a diversified portfolio. I do recommend having some gold or silver in a portfolio, but mainly for diversification and to try and take advantage of the momentum in the market today. I would not recommend being overweight in this sector at this time.
As of late, I have been recommending investors purchase the metal itself rather than owning stock of companies in those sectors. I have noticed that the mining companies themselves are not moving as high as the metal is. Thus, if an investor would like to invest money in precious metals such as silver and gold, I would rather own the metal directly than try to get exposure through the company that mines for the product. Sometimes the metal rises and the mining company’s stocks are down. The share performance of companies that mine for the metals at times can deviate quite a bit from the actual metals themselves. Thus, I would recommend owning the metal directly.
For investors looking at buying silver or gold today, I would consider averaging into the investment. Buy smaller amounts at different times rather than buying all at once. If an investor makes a lump sum purchase, they must be prepared for the volatility that they will experience going forward. I believe buying into this sector is one of the highest risk investments one could make, especially at these lofty prices. I recommend everyone think twice before taking the plunge into an investment that can make a lot money for investors one day and lose it all the next.
If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.