Investors Play Precious Metals as Market Insurance Policy

[Editor's Note: Last week we asked readers if they were bullish or bearish on precious metals, and their responses are listed below. Don't forget to answer next week's Question of the Week, "Does the United States Still Deserve a AAA Credit Rating?"]

Investors have been flocking to precious metals to protect from looming inflation and a weak outlook for the U.S. dollar. The trend has turned investments related to gold, silver and other precious metals into some of the hottest plays of the past year.

The demand for "safe-haven" metals investments continues pushing prices to new highs:

  • Gold is up 7.5% so far this year after a 30% rise in 2010, and hit a record high of $1,476.21 an ounce Monday.
  • Silver has climbed about 40% this year, after an 83% surge in 2010, and hit a 31-year high this week.
  • And Platinum is up 1.4% this year following a 20% jump last year.

While gold was the popular topic of 2010, silver has been the star this year, getting more investor interest as a cheaper alternative to the yellow metal.

"People are quick to take profit when gold reaches a record," Matthew Zeman, a strategist at Kingsview Financial, told Bloomberg News. "The silver market is the one everyone is in love with and afraid of missing the boat. People fully expect silver to get to $50."

Besides investors seeking inflation hedges and speculators pushing prices higher, there is industrial demand for these metals that supports continued price jumps.

Silver is used in thousands of industrial processes and demand will pick up as the global economic recovery continues. The Silver Institute reported last week that industrial use of silver will increase 36% by 2015 from 2010.

Platinum is set to rise on increasing auto demand and possible supply constraints. The metal is used for catalytic converters, spark plugs and oxygen sensors.

While some analysts expect a pullback in precious metals, they're saying it's a temporary one that doesn't change their bullish long-term outlook.

But many investors still worry they missed the precious metals rally and are now too late to get in on the hefty profits. They worry a correction phase is nearing that signals a bad time to enter the metals market.

Others think inflationary concerns are overstated and the risk-aversion attraction of precious metals - especially gold - will lose its luster.

"Anything that takes away the risk premium is going to weigh on gold," said Kingsview's Zeman.

This prompted last week's Money Morning "Question of the Week": Are you bullish or bearish on precious metals? Are you investing in gold, silver, or any precious metals? What's your favorite way to play - physical, ETFs, mining companies? If you are steering clear of the metals and mining sector, what's your reasoning?

Bullish, Courtesy of the Fed

I am bullish on gold and silver, especially silver. I know that they have just had a tremendous run, and a pullback would not surprise me at this point, but until the shorts capitulate I think the market has higher to run, especially as it looks like the government is going to keep printing money, whether they call it QE or something else.

If the Fed really ended QE, by that or any other name, and allowed interest rates to rise, which they must, and if the Fed is not subsidizing government borrowing any more, then gold and silver might drop quite a bit. But this would cause the economy to tank big-time and in this event I think the Fed would blink and resume printing. And when they do, at some point thereafter there will be a widespread panic move into the precious metals, the shorts will be overrun, and the price will go higher than anyone today would believe.

I am holding some physical metal (not enough, but at least I bought it last summer) and am trying to figure out what will be the sign that I should trade it for something else. I don't expect to ever convert it back into fiat currency, but if I see it reaching levels that I think are unsustainable, I would like to use it to buy real estate, or other commodities. I really think that the time may come when 100 ounces of silver will buy me a nice house. If that time comes or anything close to it, I want to make the trade, because I don't believe that silver inherently merits that kind of value.

-- Gordon F.

Time for Metals

I have never invested in stocks or precious metals before -- only some small CDs and IRAs. I now find myself bullish on precious metals, investing my CD and IRA money in physical silver and gold and, to some extent, in start-up mining companies. Reason? The faltering U.S. dollar and collapse as the world currency, overall global commodity pressure, and dangerous government policies/direction.

-- R.S.R.

Metals as a Market Insurance Policy

I'm neither bullish nor bearish on precious metals. I agree that 10% of one's portfolio should be in precious metals and have acted accordingly. I see this as a small market insurance policy against the dangers of a volatile market and currency instability. You don't cash in your insurance policy because you might realize a little profit momentarily. The small investor, like myself, needs to have something safely in reserve for emergencies such as a government perched on the brink of bankruptcy!

-- Louise C.

Approaching A Correction?

Normally the stock prices of the platinum and gold producers rise before the actual price of the precious metals rise. The stock prices of Anglo Platinum Ltd. (PINK ADR: AGPPY) - the largest producer - and Impala Platinum (PINK ADR: IMPUY) - the second largest producer - are not performing well and have dropped since January 2011. It could be forecasting a near-term correction in the precious metal prices before new highs will be made.

-- Charlie

Holding on to Silver

I have my investment in silver, Franklins, 10-ounce bars and silver rounds. I was looking into selling back the Franklins and my advisor said it would be wise to hold on to them, just in case I needed to use them to buy, say, food.

I'm glad I called her. I will not sell this fine coin, just in case!

-- Susan

Coins the Way to Go

Silver is a good investment, money for money. I have been a coin collector since the age of twelve years old; I am now sixty-two years old.

I view coins as a piece of art and one of the best investments. If kids today would take new coins and put them away, one day they would be holding a very good investment.

-- Don H.

[Editor's Note: Thanks to all who responded to last week's "Question of the Week" about precious metals.

Be sure to answer next week's question: Do you think the United States still deserves its AAA credit rating? Can U.S. lawmakers create and implement a budget that stabilizes the U.S. economic outlook and warrants a top-tier rating? Will this "negative" outlook downgrade be a kick-in-the-pants to get Washington to work harder at reducing U.S. debt?

Send your answers to [email protected].!

Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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