Paper Precious Metals vs. Physical

 

Paper silver & gold are digital products, securities, or derivatives that actually have little direct connection to physical silver & gold. It continues to be discussed that the ultimate purpose of paper precious metals is little more than for a few large corporations to control the market pricing mechanisms. The paper market is full of risks for individual investors, as you are not truly owning physical silver or gold. Many people do not understand this difference between paper and physical metals; this article will look at investing in paper markets vs. owning physical metals.

 

What are paper precious metals?

Paper precious metals are comprised of securities and/or derivatives of fractionally backed physical metals. It does not provide direct ownership of physical precious metals. Most investors buy paper metals as ETFs (Exchange Traded Funds). These funds trade similar to common stocks; the two most common ETFs for paper are GLD and SLV.

 

GLD

GLD is the ETF symbol for SPDR Gold Shares. GLD was originally listed on the New York Stock Exchange in November 2004 and now also trades on The Singapore Stock Exchange, The Tokyo Stock Exchange, The Stock Exchange of Hong Kong, and The Mexican Stock Exchange. GLD was created as an option to invest in gold without taking physical delivery of the gold. GLD is fractionally backed by 400-ounce gold bars held in London vaults. The share price closely follows the spot and futures pricing of gold, along with some fees.

 

SLV

SLV is the ETF symbol for iShares Silver Trust. This fund was created to offer investors a convenient option to invest in silver without the need for physical delivery. SLV began trading on the New York Stock exchange in April of 2006. SLV moves closely with spot and futures prices of silver and is fractionally backed by physical silver held in the fund’s vault.

 

Should you buy paper precious metals or physical precious metals?

The paper markets are much larger than the actual physical markets. The ratio of paper gold to physical gold is over 100 to 1, while the ratio of paper silver to physical silver is over 400 to 1. This means that for every 1 ounce of physical gold supply, there are over 100  ounces of paper gold supply, and for every 1 ounce of physical silver supply, there are over 400 ounces of paper silver supply. Since the supply ratios are so lopsided, a paper investor is buying gold and silver which may not actually exist. The paper market is not fully collateralized by the physical metal and is therefore at risk of manipulation and volatility. There is not enough supply of physical gold and silver to back up all the ETFs. With physical metals, you can hold the asset in your hand. It is tangible and verifiable, unlike paper metals, which could have no actual intrinsic value.

Another risk of ETFs is that the investments are controlled by third parties which involve a lot of trust and risk. The investors have virtually no direct access to the physical metals the fund holds in its vaults. An investment in paper relies on the fund’s structure, leverage, and honesty. As the fund use banks as custodians, the investment further relies not only on the fund’s actions but also on the bank’s actions. If the bank were involved in any fraudulent activities, the investment in the paper metal would be at risk. You do not actually own the gold or silver that is being held in the ETF’s vaults; you only own the share of a fund, whose price is only determined by a potentially manipulated market, not the actual price of the physical precious metal. 

Compared to paper metals, physical metals’ most important advantages are that they are tangible and have actual intrinsic value. An investor can realize the value of the asset in their personal possession. Although there are some added challenges of delivery and storage, the investor fully controls the asset and can decide what they want to ultimately do with it. Physical metals have no counterparty risk like paper metals and have the full upside potential in price. 

For a prospective investor, an ETF could be a possible investment because of its ease of entry and exit, straightforward monitorability, small minimum purchase requirement, and low storage fees. However, for an investor looking to possess physical ownership with zero counterparty risk and the ability to exchange the asset all over the world at current physical market prices, buying physical precious metals is the better decision. 

Paper metals and physical metals are vastly different products. If you are looking to buy actual physical bullion at the current low price, GoldClub Direct offers renowned products with very low premiums. Explore our website or call us at 1-800-700-4715.

 

All Updates and Market info are provided as a third party analysis and do not necessarily reflect the explicit views of GoldClubDirect LLC.. and should not be construed as financial advice.

Precious Metals Supply & Demand

 

 

In order to understand the precious metal market, it is important for investors to recognize the effects of supply and demand. Supply and Demand are the factors that determine the market price of precious metals. An increase in supply will shift the supply curve to intersect with the demand curve at a lower price and a higher quantity demanded. An increase in demand will shift the demand curve to intersect at a higher price and a higher quantity demanded. The opposite effect will happen with a decrease in supply or demand. 

 

Gold Supply

Gold has been smelted down since at least 3600 B.C. To this day we are continuing to mine gold around the world. Mining gold accounts for 75% of the new supply, while the remaining 25% comes from recycled material. Gold is a limited supply and cannot be created, meaning what we have on the planet will be the total amount of gold. Every year, around 120 million troy ounces (3,700 metric tons) of gold are added to the world’s gold supply. The best estimates suggest that about 205,000 metric tons of gold have been mined throughout history, with 50,000 metric tons discovered, but not yet extracted from underground reserves.

Gold is virtually indestructible. Pure gold cannot corrode, rust, or be destroyed by fire. Some of the gold in circulation today could have been mined thousands of years ago. A good example of gold’s reusability is Perth Mint’s public gold pour. Ever since 1993, they have held a public gold pour into a cast multiple times a day. This gold bar has been melted and recast over 65,000 times, without any destruction of the gold.

Gold is produced in countries around the world. China is the largest producer, accounting for 9% of output. Output is followed by Russia, Australia, Canada, and the United States. South Africa once accounted for a majority of the gold production, but their output has declined recently.

 

Silver Supply

Like gold, silver has also been mined for thousands of years and continues to be mined today. Estimations predict that over 1.5 million metric tons of silver have been mined throughout history. Today, more than 30,000 metric tons of silver are mined each year.

 One major difference between the supply of gold and silver is that approximately 90% of the silver supply that has been used was discarded without being recycled. This, along with an increase in industrial uses, has led the world’s above-ground silver stock to fall since World War II. 

The mining costs of silver compared to its price also make silver a less profitable mining business than other precious metals. There are very few silver-only mines, with most silver being mined as a byproduct in other mines (70%). This leads to the silver mining supply being vulnerable, as it must rely on the mining of other metals. The weakening supply trends have also led to a drop in global reserves of about 4%.  Silver production, however, did grow 5.3% in 2021 due to the recovery in output from the Covid-19 pandemic. Silver mining was led by Mexico, followed by China, Peru, Australia, and Poland.

 

Gold Demand

The demand for gold plays a significant factor in determining its price. Gold is the most demanded investment commodity. Central banks, investment funds, and individual investors all have a large amount of gold in their reserves.  Gold has emotional, cultural, industrial, and investment value, leading it to be demanded all over the world. 

Other than being an investment asset, gold is used in jewelry and manufacturing. Jewelry, although decreasing, is the largest sector of the demand for gold, accounting for 46% of the total gold demanded. Gold coins and bars demand the next most amount of gold, approximately 22% of the supply. Individual investors are demanding more as a result of high inflation and economic concerns. Central bank reserves have about 17% of the total amount of gold. Emerging market central banks are increasing their reserves, and European banks have stopped selling gold, creating a significant source of demand. Technology, electronics, and other uses make up the remaining 15% demand for gold.  All of these sectors help to increase its value as a precious metal. 

 

Silver Demand

In 2021, Silver demand strengthened to 1.05 Billion oz of silver. This leap is an impressive gain of 19% from 2020. The demand increase mostly reflected the resumption of manufacturing after the closures from the Covid-19 pandemic. Like gold, silver has many functions that lead to its demand worldwide.

Silver demand is increasing faster than its supply, which is creating a supply deficit. Its increasing demand is mainly due to its industrial need for green technologies. For example, silver inputs for solar panel production (photovoltaics) grew 13% in 2021. Green energy initiatives are growing and will continue to grow as more countries adopt green energy. The Russia-Ukraine conflict is also pushing countries to adopt a green, self-sufficient economy to promote energy security. This trend will drive the demand for silver further. 

As of 2021, Industrial demand accounts for about half of the annual silver demand. Silver is also used in electric vehicles, and it is forecasted to surpass photovoltaics in the future. Silver’s industrial demand has led it to have a strong correlation with the Energy Transition Index, an index comprised of energy transition ETFs (solar, renewables, carbon, wind, etc).

Other than industry demand, Silver has demand in photography, jewelry and silverware, and silver coins and bars. Silver demand in photography, jewelry, and silverware all increased slightly with the suspension of worldwide lockdowns during the pandemic. Silver coins and bars showed the most volatility, with a 36% increase in demand in 2021, representing a quarter of the quantity demanded of silver for the year. Silver supply trends will have difficulty keeping up with the increasing demand for silver, as can be seen by the physical deficit since 2019. 

 

If you are looking to be a part of the growing demand for gold and silver bars and coins, look around GoldClub Direct for the best value products on the market.

 

All Updates and Market info are provided as a third party analysis and do not necessarily reflect the explicit views of GoldClubDirect LLC.. and should not be construed as financial advice.

Government vs Private Mints

Precious metals have been mined for thousands of years all over the world. After being extracted from the earth, these metals must be refined and processed to separate any and all impurities. Once the precious metals have been processed, they can be taken to refineries and mints worldwide to produce bars, coins, or other variations of precious metal products. There are two main types of mints that investors should know about, government mints and private mints.

 

Government Mints

Government, or sovereign, mints are controlled by the national government in which they operate. The main product these mints produce is coinage. Coins produced at sovereign mints are considered legal tender or otherwise commemorative. Each coin has a face value, enabling its use as currency. For precious metals, the intrinsic precious metal value of the coin usually is more than the face value, so they are rarely used as actual currency. Coins minted at government mints come with guaranteed metal purity and specialized security measures to provide authenticity as needed.

The United States Mint is one of the largest mints in the world. They have production facilities in Philadelphia, San Francisco, Denver, and West Point, with a bullion depository in Fort Knox and headquarters in Washington D.C. Products from the US Mint include mintmarks depicting where the coin was minted. A “P” is from Philadelphia, a ”S” is from San Francisco, a “D” is from Denver, and a “W” is from West Point. One of the US Mint’s most popular programs is the American Eagle, which includes gold, silver, platinum, and palladium coins. Other examples of sovereign mints include the Royal Canadian Mint, Perth Mint, Austrian Mint, Chinese Mint, and Royal Mint. Sovereign mints produce some of the most popular products, like the Canadian Maple Leaf, Austrian Philharmonic, Chinese Panda, UK Britannia, and South African Krugerrand. Sovereign coins usually carry a higher premium over spot price due to their collectibility. 

 

Private Mints

Private mints are owned by companies that produce non-governmental bullion products. The main two categories of products private mints create are bars and rounds. If you would like to learn more about the difference between coins and rounds, read our blog discussing this matter. Since there is no government directing their production, they are able to create products with their own branding and design. There are more variations with private mint products, as they can also be any weight, shape, purity, and metal content. There is still some regulation, as private mints must abide by the standards set by the London Bullion Market Association (LMBA) to be authorized for trading.

There are many prestigious private mints around the world. GoldClub Direct offers products from Credit Suisse, Valcambi, SilverTowne Mint, and others. These mints are well-renowned worldwide and offer great quality bullion at low prices. Private mint products tend to have a lower premium as their standards are not as strict as sovereign coinage. 

 

Should I buy from a government mint or a private mint?

Buying from a sovereign mint vs. a private mint is up to individual preference. Products from a sovereign mint will be a good addition to a portfolio for an investor that is looking for legal precious metal coinage backed by a national government. Products from private mints are well suited for investors who are looking to invest in precious metals with the lowest possible premium. GoldClub Direct stocks products from only the most respected government and private mints.

 

All Updates and Market info are provided as a third party analysis and do not necessarily reflect the explicit views of GoldClubDirect LLC.. and should not be construed as financial advice.

Inflation and Precious Metals: 2022

Inflation has been on the mind of investors as governments decide how they should battle the inflationary pressures. Around the world, central banks are seeing large amounts of inflation. In the United States, Consumer Price Inflation reached a new decade high of 9.1% in June, which is the largest annual inflation rate increase since November 1981. Over the past 10 years, we have seen annual inflation rates of around 2%, so a jump to 9.1% is very large. 

Given the high inflation rate, we should expect the Federal Reserve to try to restore stability and lower the inflation rate. Before the inflation rate was released, the Fed was expected to release a half-point interest rate hike, but instead, they released a 75 basis point hike. Now, there are some expectations that the Fed could release a 1 percentage point rate hike during their meeting at the end of July. This would be the highest increase since the Fed started using overnight interest rates in the early 1990s. 

With the aggressive interest rate hikes comes an increased chance of recession. Many economists say there is a high risk of a recession within the next year. 

What does this mean for precious metals?

Precious metals have long been a hedge against inflation. They have intrinsic value, meaning inflation cannot change their real value as you cannot print more precious metals. Most precious metals drive their value from scarcity, as well as some industrial uses. Throughout history, we have also seen the symbolic value of gold remain high, as royalty use gold and other precious metals as jewelry, commemorations, and other meaningful purposes. There is no reason to think that its value will change anytime soon.

In times of unprecedented volatility, many investors choose to invest in precious metals for this reason. Physical gold, silver, and platinum will not feel the same type of shock from inflation or a recession, making these assets an important addition to an investor’s portfolio. For those looking to keep their wealth in a stable and secure fashion, precious metals are a safe, alternative investment.

Precious metals are tangible, meaning you can hold their value in your hand. Unlike stocks or other similar assets, physical metals are controlled by their holder.  If the economy and financial systems collapsed, the precious metals would still hold value. Although a true financial collapse is unlikely, investors have historically flocked to invest in precious metals as a safeguard. Since there is more demand, precious metal prices will increase and become a strong hedge against the devaluation of the dollar. 

In times like this where there is high inflation, along with the possibility of a recession, it is very smart for investors to diversify their portfolios with precious metals. They have the ability to protect wealth from unforeseen financial shocks. The prices are also expected to continue to climb, providing not only safe storage of wealth, but also a possibility to grow your wealth. 

Although gold and silver are considered safe-haven assets, the Fed’s decision to increase interest rates will keep pressure on their prices.  This is because the US dollar and gold prices have a negative correlation. As interest rates are pushed higher, it will increase the value of the US dollar, therefore decreasing the price of gold. This is why we have seen the price of precious metals drop in the past couple of months, and are now reaching 2-year lows. These price changes are partly due to consumer sentiment regarding investing in gold vs. other investment-yielding opportunities. A higher interest rate would lead to bonds and money market funds being more attractive. There are other factors that will affect the price of precious metals, so don’t expect this downturn to last forever.  

Diversification is key for every investor as it will help to keep assets immune from volatility. If you are considering buying precious metals to add to your portfolio, check out GoldClub Direct’s selection of the best gold, silver, and platinum bars on the market.

 

 

 

All Updates and Market info are provided as a third party analysis and do not necessarily reflect the explicit views of GoldClubDirect LLC.. and should not be construed as financial advice.

Why Silver: A Condensed History

Silver has long been an essential asset as a store of wealth. It can be traced back to the start of silver mining in 3000 B.C., in Turkey and Greece.  After mining the raw silver ore, they were then able to create a process for refining the ore, by heating the ore to a high temperature and blowing air over it.  This process is called cupellation and helped to separate the pure silver from other base metals. 

When Europeans first came over to the New World, they found rich deposits of silver running through all of modern South America. These explorers decided to mine all of the silver they could and sell their newly minted products to the entire world.  From 1500 to 1800, around 85% of the silver produced worldwide came from South America.

 

The Start of Silver Coinage

Silver was not used as currency until 600 BC in the kingdom of Lydia in Asia Minor. Their currency was made of electrum, a naturally occurring alloy of silver and gold. Their idea of coinage quickly spread to neighboring kingdoms and soon came pure silver coins, with the introduction of the silver drachma in Aegina, an island inhabited by Greeks. 

As silver currency spread, many different standards for the coinage system came around. The Attic standard, Corinthian standard, and Aiginetic standard used systems that defined the silver coinage based on weight.  Silver coins continued to evolve as time went on, and began to be used internationally to facilitate trade with coins such as the Spanish dollar. Although silver has been used as a monetary standard for thousands of years, it is no longer used. Germany was the last country to stop using the Silver standard in 1873.

 

The Price of Silver – 1960s-Present

With the use of silver for thousands of years, the price has continued to steadily increase. Demand for silver has always been strong, which has kept the price steady.

In the United States, Silver had long been used in the governmental currency. The U.S. had 90 percent silver in all of its circulated coins. However, as seen in the 1960s, this standard was not able to hold up to the demand in the 1960s.

Silver was being used in high demand for industrial output and coinage. The $1.29 per ounce of silver was facing demand stress, and soon the amount of silver in the coins became worth more than the coin itself. The U.S. Mint tried to increase production, but the silver supply could not keep up. President Lyndon B. Johnson decided it was time for Congress to pass legislation to remove silver from U.S. coinage. There was some opposition, but the legislation went through and became known as the Coinage Act of 1965. 

This act removed all silver from dimes and quarters and decreased the amount of silver in half dollars from 90% to 40%. The Coinage Act of 1965 also shut down all production of silver dollars until 1970. Silver half-dollar production was also banned in 1970.

In the years after the act was passed, the silver coins were still being circulated, however, collectors started gathering up pre-1965 coins for their silver value. In 1967, the United States Department of Treasury stopped its intention of keeping the price of silver low.  These events started the quick increase of the price of silver for the next 15 years. 

In the early 1970s, the price of silver hit a low just below $1.30.  By 1974 that price reached above $6.50. That number exploded to $49.45 in 1980. This extreme price did not last long, as by 1981 it dropped below $10 and by the end of the 1980s, the price hovered below $5.

The price of silver jumped so high so quickly mostly due to the efforts of the Hunt brothers from the well-known oil tycoon family. They believed the value of the dollar would plummet, which would lead to a dramatic increase in the price of silver. They began buying a large amount of physical silver as well as futures contracts, where they took delivery on the silver instead of cash settlements.

 This triggered the rise to almost $50, as the Hunt brothers continued to borrow money to buy more futures. As the short squeeze developed, the U.S. government decided to step in and prevent any more long position contracts from being written or sold. This led to the start of the price of silver falling. 

With the price continuing to fall, there was doubt the Hunt brothers could meet margins with new loans. This all led to March 27, 1980, when the Hunt brothers missed a margin call and the price of silver dropped to below $11. This day became known as “Silver Thursday.” 

The price of silver stayed around $5 up until 2004, when we started to see another rise. The price of silver steadily rose, except in 2008 during the financial crisis, up until 2011. In 2011, silver reached a high of $48.70. Due to economic instability silver prices have been very volatile in the past 20 years. Very soon after its high in 2011, silver shot right back down to under $20 an ounce. This was mainly due to the economy recovering and less need to hedge against a crisis in the economy.

Prices stayed pretty constant from 2015-2019 at around $15 to $20 an ounce. With the onset of the Covid-19 pandemic, we saw extreme highs and lows in the price of silver. In early 2020, we saw the price crash as the coronavirus spread to a low of $12. But by August of the same year, the price had shot up to over $29. 

The price continued to fluctuate with the risks of the pandemic, stimulus talks, inflation, unemployment, etc. Silver has hovered around $25 for the past year. This year, however, Silver has dipped below the important $20 mark. It has now reached a two-year low, down more than 5.8%. Silver has had a more severe drop than other precious metals like gold. This is because of rising interest rates as well as silver’s use in industrial production of energy alternatives, which has slowed in other countries. 

Silver is seen as both an industrial metal and a precious metal, so it can see the downsides of both.  However, with this, one can also see the upsides of both. Although silver is dropping in the near term, there is a bright future in the long term due to its intrinsic strength in holding value over time, as well as its importance in the renewable energy industry.

 

All Updates and Market info are provided as a third party analysis and do not necessarily reflect the explicit views of GoldClubDirect LLC.. and should not be construed as financial advice.