QE3 and Gold and Silver

With the announcement of QE3, gold and silver bulls are excited again.  While most people will not benefit from QE3, it is certainly a good idea to ease some of the pain by owning some investments in hard assets, gold and silver included.

I have always favored gold over silver.  It has more characteristics of acting as money.  Gold is primarily used for jewelry and for investing/ saving.  Only a small percentage is used for other purposes.  Meanwhile, silver is used more as an industrial metal.  It is also used for the purpose of investment and savings, but usually to a lesser extent.

Gold also has an advantage right now in that central banks are tending to buy gold instead of sell it.  It hasn’t always been this way.  But this alone has seemed to put a floor on the price of gold.  If there is a drop, a country such as China will buy some.  Central banks don’t buy and hold silver that I know of.

Gold tends to be far less volatile than silver.  This sometimes gives an advantage to silver in a metals bull market.  But when the crash comes, it comes hard for silver.  We have seen that just in the last few years.

Therefore, if you are going to invest in silver, I suggest a much smaller percentage than your gold holdings, in terms of dollars.  Silver is much riskier and you really don’t need the high volatility.

With all of that said, it would not surprise me to see silver outshine gold in the next few years, assuming we don’t have a big crash.

Aside from its history of higher volatility, there is another reason that I think silver might far outperform gold if QE3 continues.

QE3 will hurt the average American, just as QE1 and QE2 have.  While people like to see the stock market go up, this does not mean that much to the average American.  Most Americans don’t own a lot of stocks outside of their 401k plan.  Meanwhile, more money creation, which QE is, will only cause prices to go higher.

This is going to be a theme that I revisit often.  The average American is hurting.  We may not officially be in a recession, but it doesn’t matter.  I can see it on the street.  I talk to friends and coworkers.  I know how hard it is for people who are employed.  I can only imagine how difficult it is for the unemployed.

The average American is paying more and more each year for medical expenses and insurance.  It also costs more for a trip to the grocery store and to fill up a car.  While the price inflation index is going up only modestly, wages are not keeping up.  Real wages are stagnant or even down.  The average American is having trouble understanding why his standard of living seems to be going down, as long as you don’t count the new technological gadgets.

So what does this have to do with gold and silver?  Simply that most Americans do not have much in savings outside of the equity in their homes (which is far less now) and their retirement plans.  Most Americans do not have much in the way of liquid savings.  So if we hit a mania in the metals market and people think that inflation is getting out of control, they aren’t going to be able to buy gold if they want to.  It will be possible for someone to scrounge together $35 for an ounce of silver (who knows what the price will be a few years from now).  Not many people will be able to pay $1,800 for an ounce of gold.  Even a gold coin that is one-tenth of an ounce will still cost you almost $200 today.

The only thing that might counter my argument a little is the invention of ETFs.  It is possible for someone to invest in gold through an exchange traded fund such as GLD.  They could buy as many shares as they can afford, although it would be kind of crazy to buy just a couple of hundred dollars worth and pay a relatively high commission.

In conclusion, I favor gold over silver for your portfolio due to it being less volatile.  However, because struggling Americans will be able to buy silver coins easier, it would not surprise me to see silver do quite well if QE3 continues for a while.

2 thoughts on “QE3 and Gold and Silver”

  1. I was looking to invest in gold last year and have looked at the various
    alternatives available to small investors.
    Here are my thoughts, hope it helps

    1) Futures – Risky, limited life, highly leveraged. Good if you want to
    bet your house that the price will move within a short time frame.
    Unlimited down side risk

    2) Mutual fund – Diversifies risk relating to individual company and
    geographic concentration of reserves. Lots of investing style to choose
    from. Expenses is low compare to commission on stocks.

    3) Gold Stocks – Company involved in gold mining or have a huge reserves
    of gold. Simple to invest, just like all your other stocks. Comes in all
    shapes and size. I’ve picked Alta Gold (ALTA) which has a very high
    correlation with gold price. You can easily find a list of gold stocks in
    Yahoo Finance.

    Happy investing

Comments are closed.