Let's Get Physical

Here is an interesting story about the University of Texas Investment Management Co. taking physical delivery of gold.  This endowment fund is the second largest following Harvard University.  Obviously from reading the article, I get the sense that some very smart people are concerned that there may be difficulty in getting physical gold delivered due to the fact that futures contracts that are traded represent so much more gold than actually exists.

This is consistent with information that Eric Sprott shared back in January about having difficulty getting physical delivery of silver for his hedge fund.  It would seem that there just might be a pattern developing here, and it is one that investors in the precious metals would be wise to heed.

No Substitute for Physical

If you really want to own real assets, then there just is no substitute for physical possession.  Any paper derivative is simply not worth the paper that it is printed on.  That is the big problem with the fiat currencies today and what is driving the price of precious metals to all time highs.  Confidence in the paper system has declined.  Investors are demanding to hold something tangible in their hands.

That is not to say that money can't be made using paper.  Trading in the gold and silver ETFs or mining shares is a great way to move into and out of positions quickly and make some additional cash by trading.  However, at the end of the day, you have to realize that you really don't own anything of substance.  Just ask the shareholders of any of the recently bankrupt companies what they got out of any bailouts.  Then decide for yourself--paper or physical.

Until next time--KEEP IT REAL!

Outstanding Week for Gold and Silver

What an amazing week this has been for gold and silver.  Gold has hit record highs heading into the weekend and the strength of silver has lifted it solidly above $40 per share to close within pennies of $41.  The higher gold gets, the more that talk about bubbles begins to surface.  But I found this interesting commentary on the Kitco website which is where I go for all my precious metal related information.

http://www.kitco.com/ind/Holmes/holmes_apr042010.html

I like the information presented that would argue against a bubble especially the comments about the lack of a price spike in terms of standard deviations.  These are the types of moves that mean a market is really stretched pretty thin and will likely snap back.  We are nowhere near that now.  Granted gold could easily settle into the summer since there is a seasonal aspect to gold.  But I think that may be less important with investment demand versus social demand.

I also think the comments about the gold as a percentage of total financial assets is a telling graphic as well.  There is clearly not the widespread interest that there was in 1980.  So until we see that number crossing 2%, we won't, in my opinion, be coming close to bubble territory.  Two percent is probably what might even be considered reasonable in terms of asset allocation.  There are many investors who have zero allocated to gold.

If you haven't invested in gold or silver, you may want to get some exposure.  You could do this quickly and easily with the precious metal ETFs such as GLD or SLV.  This is probably what I would do.  I would also look at using protective puts to lock in profits as they hit record highs along with the underlying bullion.  Also, feel free to learn more about gold by reading books from Amazon such as the one below.

Disconnect Between Paper Silver and Physical Silver?

I ran across these comments from Eric Sprott, Chief Investment Officer of Sprott Asset Management regarding the illiquidity in physical silver:

http://www.zerohedge.com/article/sprott-comments-liquidity-disconnects-between-paper-and-physical-silver-market

As one who is invested in real assets and am involved in the silver market through ounces of silver and a stock investment in Silver Wheaton, I found the comments very interesting.  Honestly, I am not sure what to make of them.  I am sure that with all of the silver exchange traded funds coming to market, there is a lot of increased investment demand for physical silver.

At the same time, I am concerned that money entering the silver market through ETFs can leave just as quickly causing these funds to dump physical silver on the market and exacerbating volatility in the silver price.  We just watched silver climb over 80% in 2010 to three decade highs at over $30 per ounce.  It has since pulled back, and I am worried that the fall could be worse as investors flee the ETF market.  I am planning to look into the potential implications and see if there is some evidence regarding an increase in volatility as a result.  I will keep you all posted.  In the meantime, I will be treading carefully in silver and hedge my stock positions.

Until next time--KEEP IT REAL!

Timing the Real Estate Market

I read an interesting article the other day making the case that now was a great time to invest in real estate, and I must say that I agree.  The premise was that real estate had decreased about 30% from the peak in many locations and that the median price had stabilized and started to increase ever so slightly.  More importantly was that interest rates were at the lowest levels we would likely see for several more decades.

Click here to read the full article.

I have recently been considering the question of investing in real estate with a retired relative of mine who will likely require about 20 years worth of income.  Currently, this individual has a fair amount of cash in a savings account.  Needless to say, that savings account does not earn a lot of income and would be pretty useless as an income source to supplement social security and pension income.

Rather than allow those savings to languish and get eaten away by inflation while providing essentially zero return, I suggest investing that cash in income producing real estate.  The cash could be used to pay for the majority of a duplex which has the potential of generating about $1000 per month of spendable income.  Initially, that income could be used to create a fund for repairs for the duplex and pay off any borrowed funds used to complete the purchase.  After a few years, the money could then be used to supplement income or to purchase additional real estate if not needed for living expenses.

I am amazed at the amount of cash sitting on the sidelines in savings and money market accounts that will barely keep pace with inflation if even that.  It seems to make much more sense to at least purchase real estate with cash and enjoy the cash flow from the property.  It really doesn't matter if the property appreciates.  The point is that the income produced is much more than could possibly be gained in this period of low interest rates.  In this case, there is no need for timing the real estate market.  Now is the time. 

Until next time--KEEP IT REAL!

Silver at Decade Highs--Nearing $25 per Ounce

Have you noticed the price of silver lately?  It seems to be stealthily increasing and over the past month has markedly outperformed the price of gold.  I have especially noticed this because the price of Silver Wheaton stock (symbol SLW) which I own in my retirement account has gone nuts and has outperformed Goldcorp stock (symbol GG) by a wide margin.

To be perfectly honest, I haven't been paying much attention to the silver price and didn't even realize that it was approach the psychologically important $25 per ounce level.  I had simply noticed that SLW was increasing dramatically.  In fact, I have become worried that the stock has gotten ahead of itself so in the past week I bought some puts to protect my paper profits.

Silver is typically more volatile than gold so when the price of these precious metals begins to decline, I would expect silver to decline much more rapidly.  I don't know when that will occur but wanted to be able to protect myself with puts.  I also plan on allowing many of the calls that I have sold on SLW to be called out.  This will decrease my exposure to the silver price since I think it might be getting a little high in the short term.  Longer term I would expect that the fundamentals would argue for a higher silver and gold price.  But I want to take some profits now and buy back in again later.

I did this very effectively with Akamai stock (AKAM) using the collars that I trade.  I had purchased AKAM at various prices over the summer and had a net basis of $40 per share.  As it ran up, I decided to take the opportunity to purchase some $50 puts for October and lock in those profits.  As it turns out, AKAM was well below $50 per share so my puts were exercised allowing me $10 profit per share.  Then, I bought back the stock at two different price points below $50, namely $46 and $48.82.  The end result is that I now have the same number of shares that I owned before along with some extra cash.  I own puts on the stock and have sold some covered calls creating a collar.

My current basis in AKAM is $47.94 with the opportunity to be called out in 3 weeks at an average price of $50.25.  That would make for a one month profit of 4.8% should AKAM rise just a little farther to $52.50.  If not, I will sell some December calls to lower my basis some more.

The point is that I am doing the same thing with my SLW stock.  By owning the stock, I gain exposure to the silver price but have the flexibility of easily managing options to take advantage of the price swings and lock in profit using puts and collars.  My current basis in SLW is $24.15 per share overall with an average call strike price of $27.31 provided SLW is above $29 per share 3 weeks from now.  If not, I will sell calls on the shares I have left although I would expect some to get called out.

Anyway, this is just one example of using stocks to gain exposure to real assets.  I suspect real assets and the companies that deal in them will be a profitable investment for the next several years.  Until next time--KEEP IT REAL!

Gold Season Has Started

I have written lots of articles on gold since I believe that everyone should have at least some gold exposure.  Now, I wouldn't call myself a gold bug, per se.  I would be OK if gold were to drop to $300 an ounce or even less since that means that all of my other investments would be going up in value.  It means that the dollar would be strong like in the 1990's and America would be enjoying prosperity.  Oil would probably be in the neighborhood of $30 a barrel or less so my monthly expenses for heating with natural gas and transportation would be less.  Food prices would decline since transportation costs would go down.  So, I could really care less whether the price of gold goes up or down since I will benefit either way.

But, I believe that gold prices will go up.  I also believe that they will be increasing to new nominal highs before the end of the year.  I don't have a specific target price since it really doesn't matter.  I am simply positioned such that gold serves as a hedge to my portfolio.  About one-third of my retirement portfolio is in Goldcorp stock (NYSE: GG).  It has been by far my best performing stock over the last several years.  This year hasn't been quite as good but it is still positive.  I create equity collars using the stock and try to sell a little bit when the stock spikes and buy back some when it falls.  I don't always hit the highs and the lows but try to trade around a core position in the stock.

I believe that gold prices will go up because of the seasonality of gold.  There has been a great deal of writing on gold's seasonality.  As I write this on the day after Labor Day, the price of gold is up over $11 per ounce and is clearly within striking distance of new nominal highs.  And yet few people outside the financial world are talking about gold as an investment.  I remember when the Nasdaq was making new highs, people up and down the hallway at work were constantly talking about tech stocks and getting in on IPOs.  And yet I am hearing nothing about gold or silver, which is one of the reasons that I don't believe they are in bubble territory yet.  I think that a bubble will occur for sure.  But I just don't think now is the time.  I think there are several more years yet to go before we get through this portion of Kondratiev's cycle.

So, I am just simply asking you to pay attention to the price of gold over the next several months and see what happens.  You don't have to invest if you don't want to.  You can continue to use the excuses that gold is a relic, that it pays no dividends, that you can't really buy anything with it, or whatever excuse you want to use.  Just know that I do hold some physical gold and silver and have stock in Goldcorp and Silver Wheaton but that I still hedge my stocks with protective puts and sell some covered calls against them.  Know that I try to buy a little more during the off season and sell a bit when the prices rise.  And think to yourself whether or not there may actually be something to investing in assets that protect wealth from the eroding purchasing power of fiat currency.  Until next time--KEEP IT REAL!

Natural Gas Investing Update

If you have been reading this blog from time to time, I mentioned that I made an investment in natural gas by purchasing shares of Chesapeake Energy (CHK). I ended up buying these shares at $25.40 but also purchased some October 25 puts.

Well, it turns out that I didn't sell any covered calls since the account in which I hold the shares is a margin account and selling calls affects my ability to borrow against them. Unfortunately, I needed to borrow a little to manage some problems with cash flow over the past few months. (When one of your teens takes out the quarter panels of two different cars in your own driveway, you have a cash flow problem.)

However, I did manage to purchase a few additional shares today at $22.07. Since I purchased the puts for $2.45 and can sell those shares for $25, I will make a profit of $0.48 per share in a stock that dropped 10%. Isn't that great! I also purchased some January 2011 puts at the $21 strike to protect the shares that I picked up today. I am hoping that next month I can sell a few calls since I believe the cash flow issue will be improved.

As mentioned in the earlier post, I had no idea which way natural gas prices were headed. It turns out that the hurricane season has been fairly mild so far. Regardless, I did have myself hedged such that I have been able to make a slight profit rather than a loss. It sure makes it easier to sleep at night knowing that I can't lose everything.

It is possible to use the above principles for any stock trade. Simply buy a partial position in a stock and the protective puts to go along with it. Then if the stock drops significantly, you can purchase additional shares that will sell at the strike price of the put making a profit. Of course, be sure to purchase additional puts to protect those other shares in case the stock continues to fall in price. Until next time--KEEP IT REAL!

Buying Gold at Record Prices

I recent wrote an article at HubPages entitled, Buying Gold at the Peak.  Essentially, I looked at what would happen if someone had begun in 1980 buying gold paying $1000 each January to buy gold.  I assumed that our investor paid $850 per ounce in January 1980 (buying at the peak) and then spent the next 31 years through 2010 spending $1000 each January to buy gold.

I then took that same individual and had them purchase the S&P 500 index using $1000 each January.  So two investors each spending $1000 each year from 1980 through 2010.  You might think that the investor buying stocks would have made a killing compared to someone buying gold.  I certainly thought that they might do better.

But in reality the difference was only about 2% total in favor of stocks.  I was really surprised given that gold was in a terrible bear market and stocks had the greatest bull run in history.

I mentioned this on another blog in the comments (did not spam with a link) and was criticized for not including dividends of the S&P 500.  It is a legitimate concern for sure but one that is not correct.  For if you include dividends (which are currently 2%), you need to include inflation as well and figure out the reduced purchasing power of the dollar. 

It turns out that the dividends and inflation cancel each other out and doing a simple calculation as I described is in fact legitimate, and the results are valid.  When I added in dividends and then adjusted for inflation, the results were incredibly close.  The bottom line is that gold does produce income but protects purchasing power.  Stocks produce income to make up for the loss of purchasing power.

It really didn't matter if you invested in gold or stocks, you still ended up in the same place with the same wealth at the end of 31 years.  The key was investing on a consistent basis and buying whether the price was high or low.  So don't be afraid to start investing in gold now.  Or don't be afraid to invest in stocks now.  Just keep a long term perspective.

Until next time--KEEP IT REAL!

A New Investment in Natural Gas

I reestablished a position in natural gas yesterday by buying shares in Chesapeake Energy (CHK) as well as buying October 25 puts.  My plan is to wait until next month and sell covered calls if the stock is up or buy additional shares if the price is down.  You may be wondering about the rationale of such a strategy, but think about it this way. 

If the price of the shares is down to $22 or $21 per share, I have an automatic profit on those shares since I have purchased the puts for October and can sell those shares for $25.  Granted the puts cost some money, but I will sell some covered calls to ultimately pay some (if not all) the cost of those puts. 

If the stock is up from my purchase price, then that is also good.  I can sell covered calls at a higher strike, get some immediate cash and then additional profit in the form of capital gains.  I think it will turn out to be a good trade.

There are several factors that might impact the price of natural gas over the next several months which will have some bearing on the price of CHK.  Natural gas supplies are about 15% higher than normal for this time of year which would tend to push prices lower.  Hurricane season in the Gulf of Mexico could push prices higher if a lot of damage is done.  A warm summer could push prices higher since electricity generation needed for air conditioning is often provided by natural gas generating plants.

Truthfully, however, I have no idea what will be happening to prices this summer.  That is why I have hedged my position with puts and will also be averaging into a larger position over the next few months.  Over time, I believe that inflation and demand will eventually bring down the over supply but that could be a year or several away.

Nonetheless, I still like having exposure to real assets.  My house is warmed by natural gas as is my water year round.  If my bills start to rise, I want to be able to make money in the process.

Until next time--Keep it REAL!

Gold Breaking Out of Trading Range

Have you been paying attention to the price of gold lately? It appears to be breaking out of a trading range and has pushed past resistance at $1135 per ounce. As I write this, spot gold is trading over $1157. The latest push has been ascribed to uncertainty surrounding the financial situation of Greece.

I find this interesting since the last time investors were concerned about the financial crisis, the dollar was allegedly the beneficiary of the uncertainty. I find it hard to believe that this could be the sole reason. While it may be part of the equation, I think that many investors are setting up for the inflation trade.

I, for one, have felt that the Fed will be late in raising interest rates just as they were late in lowering them and raising them the time before. It would be almost guaranteed that they will do little before November elections. You can bet the political pressure is enormous. For this reason, I see inflation as a potentially huge concern in the next several years. Just look at what the price of oil has done lately also, and you will see that the concern is unlikely limited to the Greek situation.

Have you benefitted from the gold trade? I have seen my holdings in Goldcorp go up in the last several weeks although not as much as I would have expected. My Silver Wheaton stock has done very well over the past week since the price of silver is also doing well. You should definitely consider investing in a little gold and silver since I see several more years (maybe up to 10) left in this commodity super cycle.

Until next time--Keep it real!

Make Money with the Silver ETF

Getting convenient access to real assets can be difficult. It can be tough to buy 1000 ounces of silver, store it, and make money with the large spread from a physical dealer. Furthermore, trading in and out is not practical when dealing with physical silver.


Now, I will always advocate holding physical metal but only as a store of value, not as a way to make money. If you want to make money from silver, then you should be trading the silver exchange traded fund (ETF) which has the symbol SLV.

There are several ways to make money using the silver ETF. You can buy SLV when silver is lower in price and sell when silver is higher. This follows the mantra of buy low and sell high. But I want to focus on a different way to make money using SLV that has the potential to produce a monthly income.

I want to focus on the ability to sell covered calls on the silver exchange traded fund. This allows the investor in silver to not only gain some inflation protection, but also to generate some ongoing cash flow while holding a real asset.

Selling a covered call works like this:
Let's say that you have enough money to buy 200 ounces of silver or roughly $3400. Instead of going through the trouble of buying from a dealer, storing the metal, and just watching it sit there, you could purchase 200 shares of SLV through a brokerage account. As of this writing, the silver spot price is $17.26 per ounce and SLV is at $16.94 per share.

You would purchase the shares and could then sell a call option expiring in April at a strike price of $17 per share for $0.61 per share. If SLV closes above $17 in April, those shares will be sold and you would get $17 per share. If not, you keep the shares and can write another call for a May expiration. Either way you would get to keep the option premium.

When the price of silver is down, you can buy some physical silver but while waiting you could be making some money each month using SLV. It is certainly something to consider. Until next time--KEEP IT REAL!

My Thoughts on Natural Gas

To be honest, I have no clue what natural gas will do this year. It's kinda anti-climactic to be summarizing the post in the first sentence but let me tell you what leads me to my profound conclusion and what I am doing about it.

First let's look at the factors favoring an increase in the price of natural gas:

1. It burns cleaner than coal and so is a quick replacement for dirtier fossil fuels while the renewable energy movement takes hold.
2. Continued economic recovery will demand more energy (natural gas is used for electricity generation) and chemical feedstock.
3. High temperatures and air conditioning use during the summer demands more electricity.
4. Shale gas may not get environmental blessings.
5. Analysts think the price will rise.

And now the cons:

1. Improved technology in the collection of gas out of the shale deposits will increase supply.
2. There is already an abundance of natural gas.
3. Liquified natural gas from other countries is just going to add to the supply glut.
4. A renewed contraction in the economy will suppress all energy prices.

It is easy to make a solid argument in either direction. So honestly, I have no clue. But I am still invested in natural gas through my investment in CHK (Chesapeake Energy). How am I managing this? By using protective put options. Option expiration was today (although they only trade on weekdays) and I had some expiring. I bought some new April 25 puts to cover those shares so that I am guaranteed not to get any less than $25 per share.

I actually sold some March 27 calls to help pay for the puts. Plus I have the ability to participate in any rally with the remainder of the shares. So no matter which way the price of natural gas goes, I can feel secure knowing that I am hedged both ways.

Dollar Cost Average Into Silver

Looking back at my last post on gold, I have to admit that I was wrong. Gold has overshot my $1070 target and is trading over $1140 as I write this. Good thing I didn't sell anything. I have been selling some covered calls on the way up and will sell some GG stock at various price points on the way up as well. I am surprised that gold stocks haven't been doing better than they have given the record prices in gold and relative strength of the stock market.

I have a hard time thinking about spending more than $1140 for an ounce of gold. It is not the easiest thing to sell physical gold. I don't have as difficult a time paying for GG or AUY stock, but if you want to own some physical assets, consider silver.

Silver is trading at $18 per ounce. That is a lot easier to swallow especially considering that economic times are tough, and there may not be a lot of extra cash available. It would not be much trouble to spend $50-60 every month or two and pick up a few ounces of silver. With gold being as expensive as it is, silver would be a good alternative and should do well for the same reasons that gold is rising in price.

I think it is worthwhile to purchase some asset that will maintain purchasing power over time. Given the risk of inflation with all of the nearly free money entering the circulation, it is certainly worth considering dollar cost averaging into silver.

Until next time--Keep it REAL!

Gold Trying to Consolidate?

The price of physical gold has hovered around $1050 per ounce for the past 2 weeks. The big question would be, "Where is gold going to go from here?" Of course, it is anybody's guess, but let's look at a few of the factors that might provide some indication as to what the next step might be.

1. Economy not getting markedly better

The economy is still in danger, and I don't see it improving significantly any time in the near future. I suspect there will likely be additional stimulus that might be required if the economy is to grow again. This economic weakness and the potential need for stimulus will continue to put pressure on the dollar which is favorable for gold.

2. Commercial real estate risk

There has been lots of talk about risks in commercial real estate. The general impression is that the commercial real estate market will start seeing increasing levels of default as the consumer continues to reign in spending. Consumer spending may not continue to decrease, but I sure don't see it increasing any time soon. This economic crisis has been more severe than most of us have seen in a lifetime. I am trying to minimize my spending since I know that my taxes and education costs will continue to increase. I will be trying to make my cars last 6 or 7 years instead of replacing them at 4 or 5.

3. Season of the year

This is typically a strong season for gold since the Indian harvest and wedding seasons occur at this time of the year. However, there has been a drought in India this year, and I suspect that farmers will not have a lot of money that they will need to exchange into gold. The high prices will also suppress demand. Normally, you would expect gold to be strong from November through February or March. It might be tough to accomplish this year.

When I look at all of these factors and more, I suspect that some will pull gold up and some down. The net effect is that I see gold consolidating and trading in a range between $1000 (possibly $980) and $1070 for the next several months. Of course, I could be wrong. I am surprised that it has been as stable as it has been over the past few weeks. In the meantime, continue to acquire funds that can be used to invest in gold and gold shares in the future.

Until next time--Keep it REAL!

My Philosophy on Real Estate

Here in central Indiana, it is unlikely that we will ever see the type of crazy appreciation of real estate that was seen on the coasts. There are several reasons for this:

1. It is difficult to attract population growth. We don't have the beach or mountains or any other topographical feature that would be considered desirable.
2. As a result of number 1, it is easy to build new houses. Just buy up a farm field and start building. There are no physical restrictions that make the land especially scarce. In fact, builders over-built so there are currently a glut of homes.
3. Lack of major industry growth. There just aren't a ton of jobs being created. When the United Airlines hub pulled out in the early 2000's, lots of homes went into foreclosure adding to the overbuilding glut. We just don't need any more houses for awhile.

Because I can't count on appreciation, I have to look to cash flow for real estate profits. Even that can be difficult since the ready availablility of housing has kept rents fairly stable. When insurance and property taxes increase, that puts pressure on cash flow.

It has been my hope all along that the majority of my real estate expenses can be paid by tenants. Sure, I will have to come up with the occasional repair bill, but my goal is that at the end of the 30 year fixed mortgage (about the time of retirement), I will have a steady cash flow that can be used to supplement my retirement income.

It may take a year or two to get back all the cash I put in, but after that the investment will more than pay for itself. It can be difficult to take such a long term approach to investing in this day of immediate gratification. But, I would urge you to look to the future in 10, 20, and 30 years when you invest.

Consider that when investing in real assets. Will this company be around in 30 years when looking at the stocks and bonds of that company? It may be hard to say. Will this piece of land still be here in 30 years? Likely. Will this gold coin still be here in 30 years? Likely. And not only that, the land and gold will have some value. So if I can simply get the majority of the expenses paid over the 30 years of being a landlord, I will end up with a property which throws off cash or could be sold. I like the thought of that.

Until next time--Keep it REAL!

Turning On the Heat

When my daughter came to me wearing a knit cap and scarf two days ago asking why it was so cold in the house, I broke down and turned on the heat. I had to agree that it felt kind of chilly. It turned out to be 62 degrees. It is a balmy 69 degrees now.

Our heat is natural gas, and I always hate turning it on since I know that my gas bill will skyrocket in the next month and cost as much as a small car payment for the next 6 months. Have you noticed that the price of natural gas has gone up almost 25% in the past month? Just in time for winter.

Have You Hedged Your Living Expenses?

I suppose that is OK that natural gas is rising. Even though my heating bill will go up along with it, I will benefit more from a higher price since I own natural gas. No, I don't store it. I own a natural gas company's stock, Chesapeake Energy (symbol CHK). Every time natural gas prices go up, CHK tends to go up as well. It usually goes up more. In fact, I have some shares that I bought at $14.98 in March. Now, CHK is nearing $30 per share. Over the past month, CHK is up about 25% as well.

So, my question is: How have you hedged your living expenses? Do you drive a lot and use gasoline? Buy Exxon Mobil (XOM). Worried about food costs? Buy Kellogg (K) or Pepsi (PEP). Health care costs got you down? Buy stocks in the health sector that are making money hand over fist. Look at what expenses you have that might be impacted by inflation. Then look at which companies might benefit and purchase their stock. It is a lot easier to do that than keeping a grain silo or oil tank in your backyard. Plus you still benefit from increased prices.

So, don't get sad that you have to turn on the heat. Smile and think about all your neighbors turning on their heat and becoming your customers.

Until next time--Keep it REAL!

Getting Exposure to Gold

Purchasing physical gold can be difficult if you have to drive to a gold dealer, look through the inventory and then purchase your gold. You can buy gold online through several dealers as well. The problem is that you will pay a premium to the spot gold price when you buy and will get less than the current spot price when you sell. It is not easy to get in and out of physical gold rapidly. That is not to say that owning physical gold is not useful. It is just not for trading the gold price. I own physical gold but to get exposure to the record gold prices today, I own shares of gold mining stocks.

Why I Like Gold Mining Shares

I like the gold mining shares for several reasons:

• I get exposure to the gold price. If gold is up, usually gold mining shares are up as well.
• I can trade in and out relatively quickly and online through an online broker.
• I can get portions of an ounce of gold. Rather than come up with $1000 to invest at a time, I can purchase a few shares when I am able.
• The exposure I get can be leveraged. This is good when gold is up, but can be bad when gold is down.
• Some gold shares pay dividends.
• I can use options to hedge my gold exposure.

Currently, I own Goldcorp (GG) and Yamana (AUY). I have owned GG for almost 3 years now. The physical gold price is up 24% over the past year. GG one year ago closed at $24.70 and is trading now at just over $42 per share. That is an increase of 70%. See what I mean about leverage to the physical gold price. This is because most gold miners have fixed costs for mining an ounce of gold. Every time the gold price goes up, that usually goes straight to the profit column.

I have written several articles about investing in gold which you should check out:

Is investing in gold at record prices a good idea?

6 reasons you should invest in gold now

These are good articles that you should read. Feel free to look at some of my articles at HubPages as well. I strongly believe that everyone should have some exposure to gold, both through physical gold that you purchase to hold and through mining company shares that you can trade easily.

Until next time--Keep it REAL!

Gold At Record High

Have you been following gold recently? It surpassed the previous record set in March 2008, hitting an intra-day high of $1045 per ounce. The purpose of this blog is to discuss real assets such as gold which will maintain their purchasing power over the longer term. Gold is mainly up because the dollar is down. This means that it takes more dollars to purchase things on the world market.

It will take more dollars to purchase a barrel of oil. It will take more dollars to purchase that foreign automobile. The dollar is worth less today than yesterday and now has less purchasing power. Did your salary go up? Did you make more today than yesterday? You can bet with oil going up that a gallon of gas will cost more in the next day or so if not on your way home from work.

Why is it that gasoline can spike up by 30 and 40 cents per gallon overnight but never fall more than a few cents at a time? That certainly irritates me. Maybe I just ought to own a gas station or at least stock in an oil company. That way when the cost of oil goes up, I will be sad because I will pay more at the pump, but happy because my investments are worth more.

Another good reason to own real assets! So, the question is: Are you sad because the dollar is down? Or happy since gold is up? I'm happy today.

Until next time--Keep it REAL!

Getting Exposure to Real Assets

There are several different ways to get exposure to real assets. This post will be a generalized introduction to the myriad ways that an investor can get exposure to real assets and benefit from the inflation that has become a constant companion of paper currency. Later on as this blog develops, I will discuss specific real assets in detail and ways to invest in those specific assets.

Ways to Get Exposure to Real Assets

1. Direct ownership. This is the easiest to understand. If you own a piece of real estate outright, then you benefit directly from the increase or decrease in value of that piece of property. Owning a small apartment building, for example, will allow you to rent out the apartments, collect the rents, pay expenses from the cash flow and profit. You will also benefit from any increased value over time. Owning an ounce of gold or silver means that you directly benefit from any increase in the price of gold or silver over time.
2. Leveraged ownership. This is often a way that investors may benefit from appreciation of an asset over time. However, over leverage can be problematic in times of falling values and depreciation as the recent experience for many in real estate would illustrate. It is important that an investor not use too much leverage. That is a topic for another post.
3. Partnerships. You may not have enough money to purchase a real asset outright. Another possibility to gain exposure with or without the use of added leverage is by partnering with other investors to invest in a larger asset than you could afford yourself.
4. Paper control. There are several sub-categories and examples that could fall under this heading. This might include stock in companies with a large collection of real assets such as real estate investment trusts. It could include exchange traded funds, like the gold ETF, GLD. It could include options or futures contracts. The main point is that while you don't directly control or own the particular asset, you can benefit from changes in asset pricing and inflation.

These are just generalized examples of how to gain exposure to real assets that should hold their value over time. This blog is devoted to looking at real assets, gaining exposure to those assets, and benefitting over time from their increased prices while maintain long term purchasing power and lifestyle.

Until next time--Keep it REAL!

Inflation Risk and Your Retirement Investments

There are many different risks that must be considered when investing. The risk of loss of capital or default, the risk of the volatility of the asset, and the risk of foreign currency fluctuations are just a few. But one that is often forgotten about is the risk of inflation. Inflation is like a cancer. Even though it seems as if the value of your investment is increasing, your total purchasing power is decreasing.



Net Worth Means Nothing



People like to think of net worth and being a millionaire when they retire. Being a millionaire now means a lot less compared to what it used to mean. One million dollars 1980 is like having between $2 million to $3 million today. One million in 1940 is worth about $15-30 million today. Here is a fun site that you can play around with: http://www.measuringworth.com/uscompare/



It allows you to compare the value of the dollar from different years in the United States from 1774 to present day. After looking at the difference from 1940 to 2008 compare a similar time period from 1840 to 1908. Look at the change in value of the CPI. There is really not much difference from $1,000,000 to $1,064,439.



The answer to that $64,000 question (pun intended) is that the United States was on a gold standard during the 1800's. The value of the dollar was fairly constant. It was impossible for the government to simply print more and more dollar bills or add some zeroes to a computer entry and create money out of thin air. The paper money that was circulating actually represented gold and silver in a vault. The paper was like a receipt and was redeemable for gold. If the bank didn't have enough gold, then a "run" on the bank occurred, and the banker was out of business.

Purchasing Power

Now, however, the value of the dollar is not constant and can fluctuate relative to many other goods and services. So instead of thinking about how much your investments and savings are worth, you need to think about what they can purchase in terms of food, clothing, shelter, transportation, health care, and travel that you would want to consume during retirement.

Real assets are valuable and tend to keep pace with inflation since people can relate to their value and have a good idea what they are worth. Is a cheeseburger worth $2? You might say yes if you make $8 per hour so that the cost is only 15 minutes of your time. But if $2 was a monthly wage, you wouldn't think so. Would you like to make $10,000 per hour? Of course, unless gasoline cost $100,000 per gallon and that same cheeseburger also cost $100,000.

As you can see, paper currency means little. The values are simply relative and are changing over time due to inflation. Do you really think a gallon of milk will ever cost under $1 again? Unlikely. That is why you want to own investments that will maintain their purchasing power in 30 years when you retire. You want to be able to afford that gallon of milk.

Forget Milk, Got Gold or Silver

I don't have any idea what milk will cost in 30 years when I am retired. I also have no idea what an ounce of gold or silver will cost at that time either. But, I do know that an ounce of silver would be worth about 4 or 5 gallons of milk. I know that I could trade that ounce of gold for about a month's lodging in an apartment. That has certainly been my experience over the past 20 years as I share with you here: Gold, Silver, and Pepperoni Pizza

So, to sum up. Inflation is a cancer which erodes purchasing power. Real assets tend to increase in cost with inflation and will maintain purchasing power. Net worth means nothing. Get exposure to real assets. Next time I will be discussing how to get exposure to real assets.

Until next time--Keep it REAL!