Understanding precious metals and their uses

For a number of years I’ve been convinced that the closest thing we have to a sure bet in the investing world is that gold will gain value over the next decade. The new era of investing we find ourselves in is dominated by central bank money being created throughout the world and thrown into asset markets, creating all-time highs for stocks, bonds, and housing as asset classes.

The past has shown repeatedly that speculative investment money tends to be fickle – once they stop increasing, a lot of the holders start looking to sell and the price can collapse. Speculative investing, to be clear, is looking for asset price gains rather than cash flow. Examples include trading 10 year treasuries instead of holding them for their annual payout, or most stock investing (Warren Buffet has been a historical exception), or buying a house with the idea of selling at a gain rather than living in it or renting it. That being said, it has become increasingly more difficult over the years to find investments that have a potential upside without the increasing significant risk of a major correction to the downside.

Now back to precious metals. Their are a number that can be held in coins or bars, including gold, silver, platinum, and palladium. Here is a chart showing the price movements of all four over the decades:


Chart 1: The price of gold (yellow line, Comex future price, weekly average), the price of silver (red line, right axis, Comex future price, weekly average), the price of platinum (blue line, Nymex future price, weekly average), and the price of palladium (green line, Nymex future price, weekly average).

Recent prices per ounce: Gold $1324, Silver $16.55, Platinum $921, Palladium $975

You can see that some of them are relatively higher at different times. Palladium seems a bit of a newcomer with a big spike in 2001, gold and platinum often switch places for highest price, and silver has a unique trajectory as well.

Plenty of articles will tell you it’s time to buy one when it’s relatively cheaper than the others, but the key is asking why it is cheaper. For precious metals, the answer lies in their uses – who are the big buyers and what are they used for.





I’m out of time so I’ll leave it at that for now. I realize that this is incomplete without including supply, and that Silver is shown in ounces while everything else is on a percentage basis. It is frustrating to type this on an iPad and my tools are very limited, but I hope it gets you thinking.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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