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                                           Guide to Owning Precious Metals




Contents
Precious Metals as Money.......................................................................................................... 1
Reasons to Invest in Precious Metals .......................................................................................... 2
   Inflation (or Fear of Inflation)................................................................................................. 3
   Loss of Value in the U.S. Dollar .............................................................................................. 3
   Stock Market Turmoil ............................................................................................................ 3
   Interest Rate Spikes ............................................................................................................. 3
   Commodity Shocks, Especially Oil ........................................................................................... 3
   Banking Crises ..................................................................................................................... 3
   Debt Crises and International Debt Defaults ............................................................................. 3
   Geopolitical Issues ................................................................................................................ 3
Many Ways of Investing ............................................................................................................ 4
Why Invest in Precious Metals Now ............................................................................................ 4
Aren’t We in a Precious Metals Bubble? ............................................... Erreur ! Signet non défini.6
How Do I Buy Gold and Silver ............................................................ Erreur ! Signet non défini.7



Figure 1: Gold vs. the dollar ...................................................................................................... 2
Figure 2: Gold against recent Bull markets .......................................... Erreur ! Signet non défini.7


Precious Metals as Money

Gold and silver have been considered a store of value for thousands of years, and have been used as
currency in most civilizations since ancient Rome. The United States used gold as money from 1794
to 1933, and silver from 1794 to 1965, which many people seem to forget.Even after gold had
stopped being used as coinage in 1933, the U.S. was still on a gold backed currency system until
1971, when Nixon closed the gold window and placed the country on a fiat currency system.

You may have heard the term “fiat currency” lately, as it has become a popular term that economists
throw around. It means that the dollar is not backed by any store and value; in fact, its value is
backed only by the full faith and credit of the United States Government. Since Nixon removed the
U.S. from the gold standard 41 years ago, the dollar has lost over 80% of its purchasing power
(value), and gold has risen from $35 per ounce to $1,600 per ounce, a gain of over 4,400%!

To put it into perspective, in 1971,the average home in the U.S. cost $23,900 (source:census.gov),or
682 ounces of gold ($35/oz.). Today, the average home costs $212,300, or 132 ounces of gold
($1,600/oz.). It takes almost nine times the amount in dollars and only a third of the ounces of gold
to buy the same house 41 years later. So if you would have put $23,900 of your money in a savings
account in 1971, it would have bought a house in 1971, but would only buy around 10% of a house
today. If instead you would have bought $23,900 worth of gold, it would be worth $1,092,571 today.

The chart below from sharelynx.com shows the purchasing power of gold vs. the dollar going back to
1965.




                                    Figure 1: Gold vs. the dollar


Reasons to Invest in Precious Metals

The truth is, inflation is only one reason to own precious metals. Here is a more complete list of
reasons why people generally invest in precious metals:

       Inflation (or fear of inflation)
       Loss of value in the U.S. Dollar
       Stock market turmoil
       Interest rate spikes
       Commodity shocks, especially oil
       Banking crises
       Debt crises and international debt defaults
       Geopolitical issues
Inflation (or Fear of Inflation)
Precious metals are world renowned for their ability to hedge against inflation. In the 1970s, the U.S.
witnessed double digit inflation. During that time, gold and silver hit new records not surpassed for
over 25 years. It is said that an ounce of gold today can buy the same amount of goods as it could
100 years ago.


Loss of Value in the U.S. Dollar
Because precious metals are priced in U.S. dollars, when the value of the dollar decreases, there is a
corresponding increase in the value of precious metals. Most of the time, the increase or decrease in
value on any given day is due to supply and demand. Said another way, predominant buying or selling
affects the value of the dollar. If you are looking for a store of value, know that any loss in the dollar
will be offset by an increase in the value of precious metals.


Stock Market Turmoil
A well-diversified portfolio will contain many different types of assets in order to decrease risk. Gold
and silver are great diversifiers to stocks. Typically, when stocks are doing poorly, people get fearful,
and when people get fearful, they buy gold and silver. There have been times throughout history
when gold and the Dow have risen and fallen together, but for the most part, they have a tendency to
be negatively correlated, meaning they will move in opposite directions. For example,after the stock
market crashed on Black Monday 1987, the DJIA saw a loss of over 20% in two months, while gold
shot up 10% during the same time period.


Interest Rate Spikes
When interest rates rise, it creates price increases (inflation) in the cost of borrowing. This in turn
makes cars, houses, and other possessions more expensive to own. People tend to believe that
higher interest rates stop inflation in its tracks, but that is not always the case.


Commodity Shocks, Especially Oil
There have been many studies in the correlation between gold and oil over the past 40 years.
Although the prices of oil and gold do not mirror each other exactly, they do tend to move up and
down together. If oil prices rise, investors can generally expect a corresponding rise in gold and
silver. The real reason is because the factors that influence gold and oil tend to be similar. If oil
prices rise, it causes inflation in other consumer goods, and simultaneously stifles growth.


Banking Crises
Banks are the cornerstone of all economies. When banks fail, economies suffer, and people become
fearful. When banks fail, people look to stores of value like gold and silver to protect their assets. A
great example is to look at what happened to gold when Bear Sterns and Lehman Brothers failed
when gold rose from around $700/oz. to around $1,000/oz. in just four months (40%+ gain).


Debt Crises and International Debt Defaults
When nations become insolvent, people lose faith in the system, and with all of the banks and
countries in the world so interconnected, a minor hiccup can cause panic. That type of panic increases
demand for precious metals. A great example is how gold and silver reached new highs in April of
2011, when the possibility of a Greek default was all over the news.


Geopolitical Issues
Geopolitical issues create tensions and crisis around the world. They disrupt commerce and distort
economic conditions. When Tunisia and Egypt went into turmoil in 2011, it created a fear that spread
around the world, and deepened uprisings in other countries in the Middle East. This caused precious
metals to rise.
Many Ways of Investing

It is common practice in the investment world to diversify one’s portfolio of investments across many
asset classes, as the practice improves overall performance. In the 1950s, Harry Markowitz wrote a
book that won him a Nobel Peace Prize called Modern Portfolio Theory. This book proved
mathematically that an allocation among different asset classes increased performance of the overall
portfolio. The important concept here is that the some of the assets in an investment portfolio need
to be negatively correlated. If your portfolio only contains stocks, bonds, and cash, you will most
likely experience similar up and down periods. In order to have a fully diversified investment
portfolio,many experts suggest a fourth asset class: precious metals, i.e., gold and silver (the
monetary metals).

There are many ways that you can own precious metals, but adding them to your portfolio should be
based on your goals and objectives. Here is a list of ways to invest in gold and silver:

      Buy physical gold and/or silver bullion in coin or bar form. These include the American Eagle,
       Canadian Maple Leaf, South African Krugerrand, as well as bars manufactured by Engelhard
       and Johnson Matthey, to name a few
      Buy semi-numismatic/numismatic gold and/or silver coins. These include pre-1933 minted
       gold and silver coins like the Liberty Head, Saint Gaudens, and Indian Head gold coin series,
       and the Morgan and Peace silver dollar coins
      Buy rare gold coins. This means buying coins that are rarer issue pre-1933 gold coins and are
       usually encapsulated and graded by either PCGS (Professional Coin Grading Service) or NGC
       (Numismatic Guarantee Corporation)
      Buy mining stocks of gold and silver miners
      Invest in ETFs (electronically traded funds) that represent a share of gold (GLD) or silver
       (SLV)
      Acquire gold and silver inside of a precious metals IRA

At Gold and Silver Online we recommend a blend of physical gold and silver products, including
bullion, numismatic, and rare gold coins so that you are diversified across the precious metals asset
class. Also, we recommend taking possession if possible so that you maintain control, so that if there
is ever a currency crisis, you are not scrambling like everyone else will be to get ahold of physical
coins and bars.


Why Invest in Precious Metals Now

A very common question among investors today is,“why now?” This is true for any asset, whether its
stocks, bonds, real estate, or gold and silver. The answer is simple: follow the trend. Would you want
to invest in an asset that is in a bear market, which is characterized by lower and lower highs? Or
would you rather invest in an asset that is in a bull market, which is characterized be higher and
higher highs? Gold and silver have been in a bull market for eleven years; in fact, gold has closed
higher eleven years in a row and is on track to do the same this year.

Recently, we have seen gold and silver pull back off of recent highs. Gold fell from around $1,900 per
ounce, and silver fell from around $49 per ounce in 2011. We are currently experiencing a precious
metals bull market, which means that both metals should retrace their previous highs. There are no
guarantees; however, many experts, including the investors at Gold and Silver Online, believe that we
will see much higher prices than $1,900 and $49 per ounce on gold and silver in the future.

								
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