How Precious Metals Offer Safe Harbor, Ways to Diversify from Volatility
04/06/2018 11:36 am EST
Investors who like to buy assets on the cusp of an advance may find gold and silver appealing, since both have fallen in the past five years with gold down 14.81 percent and silver sliding 37.88 percent. Precious metals are a traditional safe haven for investors when the market slumps.
For investors looking to diversify into precious metals, there are multiple ways to acquire gold and silver. These ways can range from buying shares of exchange-traded funds (ETFs) to purchasing the precious metals themselves and coins that contain them. Large and liquid ETFs that investors can buy and sell easily to invest in precious metals include SPDR Gold Shares (NYSE: GLD) and iShares Silver Trust (NYSE: SLV), which have produced a gain of 7.19 percent and a loss of 19.27 percent, respectively, during the past 12 months.
The expense ratios are a modest .40 percent for GLD and .50 percent for SLV. Of course, brokerage commissions would add to the cost for investors.
Alternatively, investors can look at a fund recommended on April 2 in the Fast Money Alert trading service: the VanEck Vectors Gold Miners ETF (GDX). This gold and metals mining ETF seeks to replicate the price and yield performance of the NYSE Arca Gold Miners Index and has an expense ratio of .53 percent, while offering an .80 percent yield.
GDX’s largest holdings are Newmont Mining Corporation (NEM), Barrick Gold (ABX) and Franco-Nevada Corporation (FNV). The stock market’s recent sell-off, led by the slipping technology sector, contributed to a gain of roughly 3.5 percent in GDX between Friday, March 30, and Monday, April 2. Expect gold to rise further if technology stocks, in particular, keep falling.
“Given the current environment, we’ve seen safe-haven plays such as gold and gold stocks make a nice move to the upside,” Fast Money Alert’s April 2 update stated.
Another way to gain exposure to precious metals is to invest in Franco-Nevada Corporation (NYSE: FNV), which Dr. Mark Skousen recommends to subscribers of his Forecasts & Strategies advisory service. Franco-Nevada is a precious metals royalty company that helps to finance mining companies rather than operating mines, developing projects or conducting exploration of its own.
As a result, Franco-Nevada’s business model is to manage and grow its portfolio of royalties and streams by commodity, geography, revenue type and stage of project. Some advantages of this business model are the chance to reap high margins, to produce cash flow throughout the commodity cycle and to limit exposure to many of the risks endured by mining companies themselves.
Plus, precious metals and coins still are available at modest prices right now, said Rich Checkan, president and chief operating officer of Asset Strategies International, a full-service, tangible asset dealer in Rockville, Maryland, that offers precious metals, rare coins and foreign currencies.
When asked why precious metals offer a good investment with the market recently trending down and Fed officials talking about boosting interest rates several times both this year and next year, Checkan responded, “premiums for many bullion products are absurdly low.”
In addition, Checkan offered the following observations about the current climate for investing in precious metals:
- Consumers have been trained to be very price sensitive, and premiums have come to reflect that demand;
- Gold Eagles, for example, are currently available at ultra-low premiums, but investors are still buying and selling them at an equal pace;
- Abnormally large interest has been shown in secondary products that combine low premiums and an interesting story;
- Pierre Lassonde, chairman of Franco-Nevada, argues that gold is priced fairly at current levels, but it won’t truly enter a bull market again until prices climb much higher and, in hindsight, make now the time to buy gold before prices get another boost; and
- Many other experts see recent trade war tensions and Fed rate hikes as a sign of more upside ahead for gold.
For investors who seek to buy precious metals, Checkan said “one of the safest” ways to do so is through the Perth Mint Depository Distributor Online (PMDDO) program.
This program enables investors to buy and sell gold, silver and platinum securely and directly online seven days a week and 24 hours a day at some of the lowest premiums in the industry, Checkan said. The precious metals also can be stored, in some cases, for free, “Just like investors can log into their brokerage account and buy and sell ETFs, investors can do the same with their PMDDO account,” Checkan said.
Once logged into an account, investors see both their live cash and bullion balance, and have the option to purchase, sell, or withdraw their metals. When clients make a purchase or a liquidation through the program, the metals are automatically added to or withdrawn from their account. Clients who want to take delivery of their metals should receive their shipment within 2-10 days.
“Looking at the worst case for the PMDDO, there is a 1% premium to gold or silver when buying and a 1% discount to gold or silver when selling at the minimum transaction of $50,” Checkan said.
Aside from a straight price comparison, the Perth Mint program helps to mitigate the risks of liability, security and delivery, he added.
“All in all, PMDDO is the clear winner when compared to other forms of physical precious metals ownership,” Checkan said. “When compared to ETFs, it compares quite well, but delivers so much more aside from premium.”
When the stock market is volatile, investors have other options. Precious metals have offered a safe harbor for investors seeking refuge from market volatility in the past, and they can do so again as part of an asset diversification strategy.