Precious Metals Investing For Dummies

Introduction 1

About This Book 1

Conventions Used in This Book 2

What You’re Not to Read 2

Foolish Assumptions 2

How This Book is Organized 3

Part I: Breaking Down Precious Metals 3

Part II: Mining the Landscape of Metals 3

Part III: Investing Vehicles 4

Part IV: Investment Strategies 5

Part V: The Part of Tens 5

Icons Used in This Book 6

Where to Go from Here 6

Part I: Breaking Down Precious Metals 7

Chapter 1: A Compelling History 9

Mining the History of Precious Metals 10

Understanding why less is more 10

Giving the gold standard a gold medal 10

Going for the gold 11

Seeing the silver lining 12

Mentioning other metals 12

Taking a Look at Track Records 12

Gold 13

Silver 14

Other metals 15

Grappling with Bulls and Bears 16

The precious metals 1980–1999 bear market 16

The precious metals bull market of 2000– 17

Chapter 2: Diversifying with Metals 19

Working with Rising Inflation 19

Understanding the Versatility of Metals 20

Reaching Your Financial Goals 20

Seeking appreciation 21

Looking for the home run 21

Preserving your capital 22

Using precious metals to generate income 22

Discovering Your Investing Style 23

Distinguishing between styles 23

Understanding yourself first 24

The saver 25

The investor 25

The trader 26

The speculator 27

Knowing Whether to Get Physical or Own the Paper 28

For the conservative investor 28

For the growth investor 29

For the speculator 30

For the trader 30

Getting the Amount Just Right 31

For the conservative investor 31

For the growth investor 31

For the speculator 32

For the trader 32

Chapter 3: The Beauty and Benefits of Metals 35

Protecting Your Portfolio Against Inflation 35

Precious metals against the dollar 36

Diversification against all currencies 38

Benefits for Investors 39

Safe haven 39

Privacy 40

Inflation hedge 40

Dollar hedge 40

Confiscation protection 41

Liquidity 41

Portfolio diversification 42

Benefits for Traders and Speculators 43

Supply and demand 43

Huge gains potential 44

Trading versus speculating 44

The benefits of speculating 45

Chapter 4: Recognizing the Risks 47

What Risk Means to You 48

Physical risk 48

Market risk 48

Exchange risk 49

Political risks 50

The risk of fraud 51

Minimizing Your Risk 52

Gaining knowledge 52

Being disciplined 53

Being patient 53

Diversification 54

Making risk your friend 55

Risk-Management Tools 56

Weighing Risk Against Return 57

Part II: Mining the Landscape of Metals 59

Chapter 5: Gold: All That Glitters 61

The Ancient Metal of Kings 62

Gold for the Record 63

Explaining all the bull 63

Telling the tale of the tape: Gold versus other investments 64

Assuring gold’s success 66

Securing a Safe Haven from the Coming Storm 67

Reading and understanding inflation 67

Watching the dollar 70

Buying and owning gold 70

The Gold Market 71

Gold market data and information 72

Industrial supply and demand 73

Investment demand 74

Central banks 74

Gold Bugs 75

Gold Investing Resources 76

Chapter 6: Discovering the Secret of Silver 79

Understanding the Hybrid Potentials of Silver 79

Monetary uses for silver 80

Industrial uses for silver 80

Researching Silver 82

Sources of data 82

Sources of informed opinion 83

Owning Silver 83

Physical silver 83

Paper silver 84

Silver’s Compelling Future 85

Market fundamentals 85

The demand side 85

The supply side 85

The world needs more silver 86

The Legends of Silver 86

Jerome Smith 86

Ted Butler and the silver shortage 87

David Morgan 88

Chapter 7: Platinum and Palladium 91

The Platinum Group Metals 91

Platinum 92

Palladium 92

Rhodium 92

Osmium 93

Iridium 93

Ruthenium 93

The investor’s best choices in the group 94

Platinum Group Investment Vehicles 95

Bullion 96

Futures 96

Stock Investments 97

Mutual Funds and ETFs 98

Research Resources 99

Chapter 8: Uranium 101

Controversial Past, Bright Future 102

The uranium market 102

Uranium supply 103

Uranium demand 103

Uranium’s market performance 104

That ’70s metal 105

Peak oil and uranium 105

Uranium Investing Vehicles 106

Futures 106

Mining stocks 106

Uranium exchange-traded funds 107

Options 108

Resources 109

Chapter 9: Base Metals 111

Understanding How Base Metals Fit into Your Portfolio 111

The building blocks of society 112

The up and down for base metals 112

Base metals and inflation 112

Base metals versus precious metals 113

Past performance 114

Covering All the Bases 114

Copper 114

Aluminum 115

Nickel 116

Zinc 117

Lead 117

Tin 118

Other metals 119

Base Metal Investing Vehicles 119

Futures 120

Options 120

Mining stocks 121

Mutual funds 123

Exchange-traded funds (ETFs) 123

Base Metal Resources 125

Part III: Investing Vehicles 127

Chapter 10: Buying Metals Direct 129

Weighty Matters 129

The Case for Physical Ownership 130

What could go wrong with paper assets 131

Bullion versus numismatics 132

Other metals 133

The risks of owning physical 133

Forms of Gold Physical Bullion 134

American eagle gold bullion coins 134

The American Buffalo Gold Bullion Coin 135

The Krugerrand 135

The Canadian Maple Leaf 135

Other gold bullion 136

Silver Physical Bullion 136

American Eagle Silver Bullion Coins 136

One-ounce rounds 136

Junk silver bags 137

The $1,000 bag of silver dollars 137

The 40% silver bag 138

Silver bars and ingots 138

Platinum bullion 139

Palladium bullion 139

Bullion’s costs and fees 140

So, what kind of silver is best? 140

Gold and silver commemorative coins 140

Bullion Dealers and Resources 141

Putting Precious Metals in Your IRA 142

Chapter 11: Purchasing Numismatic Coins 145

The Basics of Numismatics Coins 146

Profitable coin investing 146

Making the grade 147

Information sources 148

Collectible Coins 149

Gold coins 149

Silver coins 149

Other coins 150

Still other coins: Commemoratives 151

Coin Services and Organizations 152

Information sharing 152

Grading services 152

Selling Your Coins 153

Back to dealers 153

To other investors 154

eBay and other auctions 154

Pricing information 155

One final note 156

Chapter 12: Mining Stocks 157

Essential Stock Investing 101 157

Stock investing for all 158

Mining stocks 101 162

Mining Stocks — Digging Deep 164

Mix and match 164

The majors 165

Development companies 165

Eureka! Exploratory companies 166

Ancillary companies 166

Getting Down to the Nitty-Gritty 166

The upside to mining stocks 167

The risks of mining stocks 167

Mining properties 168

Hedging practices 168

Resources 169

Boosting Your Returns 170

Generating income 170

Leveraging with warrants 171

Indexes 173

Chapter 13: Investing in Mutual Funds and ETFs 175

Mutual Funds 175

Advantages of mutual funds 176

The downside of mutual funds 178

Keys to success with mutual funds 181

The Prospectus: Netting it out 182

Mutual Fund Resources 183

Exchange-Traded Funds 183

The pros and cons of ETFs 184

The world of precious metals ETFs 184

Other ETFs for the metals-minded 185

ETF Resources 186

The exchanges 186

The issuers 187

Newsletters 188

Web sites 188

Chapter 14: Exploring Futures 189

Back to the Futures 189

How the futures market works 191

What can be traded as a futures contract 192

The Players in the World of Futures 193

The exchanges 193

Speculators 194

Hedgers 194

The regulators 195

The Fundamentals of Futures Contracts 196

Features of the futures contract 196

Metals Futures Contracts 198

Precious metals contracts 198

Base metals contracts 200

Mini-futures contracts 200

Pass the margin 201

Leverage: The double-edged sword 202

Basic Futures Trading Strategies 203

Basic strategy #1: Going long 203

Basic strategy #2: Going short 203

Basic strategy #3: Spreads 204

Futures versus Options on Futures 208

Futures Resources 209

Chapter 15: Options 211

How Options Work 211

The call option 212

The put option 216

Resources for beginners 216

Working Out Your Options 216

Understanding the orders 217

Something for Everyone 217

For those seeking gains 217

Income strategy #1: Writing covered calls 218

Income strategy #2: Writing puts 219

Minimizing Risks with Options 219

Some Profitable Combinations 220

The zero-cost collar 220

The straddle 221

Options in the World of Precious Metals 222

Options on mining stocks 222

An option with no expiration? 223

Options on ETFs and indexes 223

Options on futures 224

Golden Rules for Options Success 225

Options Resources 227

Part IV: Investment Strategies 229

Chapter 16: Choosing a Trading Approach 231

Being a Boy Scout — Being Prepared 231

Be a voracious reader 232

Have your plan 232

Decide your market 233

Practice with simulated trading 234

Picking Out Your Vehicle 234

Stocks 234

Futures 234

Options 235

Selecting Your Trading Strategy 235

Choosing your market outlook 235

Stock trading coupled with options 235

Futures trading coupled with options 237

Resources for Trading 238

Chapter 17: Finding and Using a Broker 239

Getting Down Some General Points 239

Futures Brokers and Accounts 240

Full-service futures broker 240

Discount futures broker 241

The futures commission merchant (FCM) 241

Introducing broker (IB) 241

Selecting a Broker 242

Commodities Futures Trading Commission (CFTC) 242

National Futures Association (NFA) 242

Futures Industry Association (FIA) 242

The exchanges 242

Keeping your eyes peeled for ICE 243

Dealing with Futures 243

Interviewing a futures broker 243

Margin in a futures account 244

Avoiding problems in your account 245

Opening a futures account 245

Futures account commissions and fees 246

Futures orders 247

Managed futures accounts 250

Some considerations about CTAs 251

Stock Brokerage Accounts 252

Stock brokers 252

Account types 252

Opening a stock brokerage account 253

Types of Orders 254

Stock brokerage services 254

Margin in a stock brokerage account 256

Chapter 18: Using Technical Analysis 259

Technical versus Fundamental Analysis 260

The guts of technical analysis 260

How about both? 261

The tools of the trade 262

Tracking the Trend 263

Trend lengths 264

Channels 265

Resistance and support 266

Charts 266

Line charts 266

Bar charts 267

Candlestick charts 267

Point and figure charts 267

Chart Patterns 268

Head and shoulders 268

Reverse head and shoulders 268

Cup and handle 269

Double tops and bottoms 269

Triangles 269

Flags and pennants 270

Wedges 270

Gaps 270

Moving Averages 270

Simple moving averages (SMA) 271

Other averages 272

Indicators and Oscillators 272

Oscillators 272

Relative Strength Index (RSI) 273

Moving Average Convergence/Divergence (MACD) 273

Crossovers and divergence 273

Bollinger bands 274

Short Term versus Long Term 274

Resources for Technical Analysis 275

Chapter 19: Following Politics and Markets 277

Precious Metals and Skullduggery 277

The controversy over market manipulation 277

The gold market manipulation controversy 279

The Plunge Protection Team (PPT) 280

The profit in market meddling 281

Precious Metals and Geo-Politics 283

Resources on Politics and Markets 284

Chapter 20: Dealing with Taxes 285

Taxable Activity 285

The regular account 286

Capital Gains and Losses 288

Tax-Deductible Activity 289

Special Tax Considerations 289

Gold and silver as collectibles 290

Tax rules for traders 290

Tax Resources to Keep You Up-to-Date 291

The IRS of course! 291

Helpful tax Web sites 291

An ounce of prevention 292

Part V: The Part of Tens 293

Chapter 21: Ten (Nearly) Reminders about Mining Stocks 295

The Company’s Management 295

Financing 296

Earnings and Cash Flow 297

Balance Sheet Strengths 297

Regulatory Environment 298

Hedging and Forward Sales 298

Valuable Projects or Properties 299

Extraction on Cost Per Ounce 299

Political Considerations 300

Chapter 22: Ten Rules for Metals Investors 301

Diversifying Your Vehicles 301

Having Some Bullion Coins 302

Limiting Your Exposure 303

Watching the Markets That Affect Precious Metals 303

Using Options to Boost Performance 304

Adding Alternatives 304

Adjusting along the Way 304

Understanding the Difference between a Correction and a Bear Market 305

Watching Political Trends 306

Monitoring Inflation 306

Chapter 23: Ten Rules for Metals Traders 307

Faking Out the Markets First 307

Having a Plan 308

Avoiding Committing All Your Cash at Once 308

Taking Profits Doesn’t Hurt 309

Using Hedging Techniques 309

Knowing Which Events Move Markets 310

Checking the Trading History 310

Using Stop-Loss Strategies 310

Embracing the Experience of Others 311

Minimizing Transaction Costs 311

Chapter 24: Ten Ways to Limit Risk 313

Staggering Your Entry 313

Using Trailing Stops 314

Diversifying Positions 315

Diversifying in Markets 315

Diversify among Different Vehicles 316

Read the Best Sources 317

Using Protective Puts 318

Avoiding Unstable Political Markets 318

Looking at Past Trading Patterns 319

Taking Some Chips off the Table 319

Index 321