Investing in Precious Metals

Investing in Precious Metals: 5 Smart Reasons to Add Metals to Your Portfolio
A Taipan Publishing Group Strategy Report
by Irwin Greenstein, Senior Research Analyst, Taipan Publishing Group

Escalating gold prices will continue to shatter one record after another in 2008. That’s the message of hope delivered by the financial media, Wall Street and coin dealers when it comes to investing in precious metals.

Every investor who lives and dies by The Wall Street Journal can expect gold to surpass its 28-year high of $850 per ounce -- with a growth chart shaped like a hockey stick. But what you won’t see is the carrot at the end of that stick that baits investors hungry for a safe place to put their money in a world gone mad.

Investing in Precious Metals: Gold Fever

In fact, gold itself can be a form of madness. There was Klondike Fever in the late 1890s that drew 100,000 adventurers into Alaska only to discover grizzly bears, avalanches and con men.

And do you know the legend of Pegleg Smith?  He was a horse rustler, trapper and miner who fruitlessly wandered the high dessert of California in search of a legendary butte laden with gold.

Today, we still see symptoms of gold fever everywhere we turn. Read on and I’ll reveal…

• Why gold ETFs could be the ultimate con on Wall Street

• Why you need to dump gold now

• And why five other precious metals could make for more intelligent and rewarding investing (with far lower potential risk).

Today, more than ever, the odds for making long-term gains in gold are stacked against you. Why?

Investing in Precious Metals: Pump and Dump

Because gold always seems to fall into the hands of madmen -- speculators, hedge-fund hotshots and third-world gold bugs -- who are driving the price of gold to unsupportable highs.

You could seriously call the gold market of today a widespread pump-and-dump scheme, where dark characters jack up the price to sucker investors into believing that the demand for gold is real. When everything falls into place for these gold hucksters, and the price of gold becomes laughably high, they walk away with huge profits -- leaving you holding the bag.

Any day now, Wall Street’s pump and dump of gold is about to go all dump. Here’s why…

Investing in Precious Metals: Why Gold Is Bogus

The gap is growing between rising gold prices and diminishing demand for gold in the United States. Gold jewelry sales plunged 13% during the third quarter of 2007 in malls across America. It’s the second consecutive year that gold jewelry sales dropped in this country, and the first time that gold ETFs bought more gold than American consumers (more on this important revelation in a moment).

This new distorted buying pattern is your first real peek at the difference between the true demand for gold and Wall Street’s artificial demand for gold.

You see, gold ETFs let investors participate in the gold market without actually having to own and store physical gold. It’s a speculator’s dream where you can create this artificial demand by giving the appearance that more gold is moving around the world.

But where is that gold really going? Nowhere -- literally.

Investing in Precious Metals: Wall Street Is a Nation of Gold

By playing gold ETFs to the hilt, Wall Street’s slickest traders can bid up options on gold that’s sitting in their vaults. Their gamble is that someone else will outprice them -- and the bidding war continues upwards without a single ounce of gold leaving the vaults.

In fact, as of December 2007, the world’s biggest gold ETFs -- StreetTracks Gold Shares, Gold Bullion Securities, iShares COMEX Gold Trust and the JSE-listed NewGold Debentures -- hold 788.40 metric tons of gold, valued at $20.24 billion.

Wall Street now controls more gold than the central banks of Japan, China, the Netherlands and 30 other countries. And so the reason Wall Street buys up gold is to prop up the price. For Wall Street, gold has no other intrinsic value (such as jewelry, electronic components or as an isotope for treating some forms of cancer).

In effect, the hotshots who run these gold ETFs have formed their own nation-state with their own currency, and they can dictate what that currency is worth regardless of the real demand for it.

Investing in Precious Metals: Big, Honking Gold

So when you read about the demand for gold outstripping supply, you have to ask yourself, “Where the heck is all this gold going?”

Sure, you’ll hear that international sales are responsible for the rising demand of gold at the retail level. But that’s penny-ante stuff.

The big, honking gold transactions each year are made on Wall Street.

And maybe the word “transaction” is a misnomer; because, in most cases, the gold never leaves the vaults controlled by Wall Street.

Investing in Precious Metals: The Gold Sell-Off

Simply put, gold goes up because gold goes up. And gold goes down when the profit is juicy enough for a big sell-off.

It’s the consummate pump and dump.

And like all pump-and-dump schemes, the perpetrators need to give it an air of legitimacy.

Wall Street tells you gold is reaching sky-high prices because the dollar is sinking, oil is rising and the war is endless.

They’ll tell you gold’s ancient luster is immune to the ravages of our modern entangled world. Come wild fires, droughts and door-to-door fighting gold is the currency that could buy you out of a jam and into a safe, little cottage in the country.

Even once-sacred real-estate values don’t hold up anymore against gold. As foreclosures reach an all-time high in the U.S., so does the price of gold. (What a coincidence that the same Wall Street sleazeballs that brought us today’s subprime mortgage meltdown introduced us to gold ETFs in 2002.)

For Wall Street, gold is an easy pitch; it’s universally understood, satisfies greedy impulses and endows the owner with an aura of royalty (just check out the red-carpet coverage of the Oscars). But with an artificial demand, big-media profile and all previous resistance levels shattered, now is the time to get out of gold and into five metals that promise steady, long-term returns for prudent investors.

Investing in Precious Metals: Five Metals Better Than Gold

The five metals you’re about to discover make real things of lasting value. They help emerging economies thrive, drive innovation in the marketplace and are easy to trade. Best of all, these five metals are rewarding investors handsomely -- and are expected to do so moving forward.

#1 - Silver

The global silver supply is disappearing at an alarming rate. Decades of massive consumption that exceed productionhave decimated world silver inventories.

Roughly 97.5% of the silver ever mined has been consumed by the global photography, technology, medical, defense and electronic industries.

World demand for silver has exceeded annual production every year since 1990. That means for over 15 years, we’ve been devouring silver faster than we can mine it.

The U.S. government’s silver stockpile is all but gone, and sales from other official sources -- China, Russia, India -- are declining, too. This opens the door for silver to run wild. Why? Because in 2006 silver investors shifted from being net sellers to net buyers.

Silver saw a nice increase in 2007. As you can see in the chart below, silver is a steady earner. No hype. No spikes. No insanity.

This trend is expected to continue through 2008. Investors who get in now could enjoy a dividend-steady price increase in the coming months.

#2 - Copper

Copper will continue to rise in line with China’s explosive economy. China accounts for 21% of the world’s copper consumption. But last year, China backed off a bit on demand last year. Still, 2007 saw copper ended the year up 7.3%.

Short term, copper could easily remain flat or inch up slightly. Long term, though, copper could be the place to put your money. There are tentative signs of Chinese copper picking up, with a move to restock inventories boosting prices this year.

China's strong copper market was driven by the government’s massive buildout of new power-generation facilities in 2005 and 2006 to support manufacturing. When demand for electrical power outstripped capacity, copper along with other metals took a hit as the factories suffered from chronic energy shortages.

Last year, though, China was expected to add 70 million kilowatts. Spending some $79 billion on power generation through 2012, China could add 1,000 gigawatts of capacity through the construction of new coal, nuclear, gas and alternative energy plants. This extra capacity could give copper manufacturers the long-term jolt they need to boost demand.

We predict that copper prices will continue to rise with China’s growing energy supply. Case in point, copper ended the session up $310 at $7,220 a metric ton on January 8, 2008, on the London Metal Exchange. That’s the kind of momentum we’re talking about.

#3 - Zinc

Our friends in China (and throughout Asia) are also driving the global demand for zinc. For the past several years, zinc consumption has steadily increased about 5% per annum -- or about 550,000 tons of new metal annually.

China’s growing automobile industry, along with its prolonged building boom, are absorbing just about all the zinc that can be imported.

As the fourth-most consumed metal after steel, aluminum and copper in the world, zinc is used for galvanizing steel, in alloys, batteries, rubber, paint, electroplating metal spraying and several other sectors -- everything that goes into assembling new cars.

When it comes to the auto industry, China is on fire. In 2006, China surpassed Japan to become the world's second-largest auto market as total vehicle sales came to 7.2 million units, up 25.1% year-on-year. Passenger vehicle sales soared 30% to reach 5.14 million units. Experts now predict that, over the next seven years, China’s auto industry will produce 10.3 million units.

In an interesting twist, zinc prices fell in 2007 -- after rocketing 142% in 2006. With stockpiles depleted, everyone expected zinc to trend up last year. But it didn’t. What happened instead is that both prices and stockpiles tumbled on the London Metal Exchange.

With inventories still low and China ramping up car output, 2008 could be a big bounce-back year for zinc.

#4 - Uranium

Now that uranium is the new green energy source, it could hit $200 per pound in the next three to five years due to a lack of new mine supply. A lack of new mining capacity is the key that could make uranium investors wealthy.

Uranium prices in 2007 started at $71 per pound and closed it out at $90 -- a gain of 26.7%. But in mid-2007, uranium flirted with $140 per pound. The mid-year drop could be blamed on speculators -- while long-term demand for uranium is expected to be very strong.

With worldwide uranium production pegged at 600 metric tons, and consumption forecast at 780 metric tons, the difference certainly substantiates a price of $90.

The insane speculative days that characterized 2007 may be behind us for a while. Still, uranium should be a safe play -- possibly returning 26% or more this year.

#5 - Molybdenum

Don’t worry if you can’t pronounce it. Here you go: muh·lib·deh·num.

Or you could just call it moly.

Moly is used as an alloying agent in steel, cast iron and super alloys to make them harder, stronger and tougher. It’s frequently combined with chromium, nickel, tungsten and other alloy metals. Add moly to the mix and you’ll have yourself a metal that can stand higher stress, expanded temperature ranges and fight corrosion.

The beauty of moly is that there are no other acceptable substitutions. That explains why roughly 75% of the moly consumed globally is used in the production of long-distance higher pressured pipelines for the transport of oil and gas, diesel engines and power plants that operate at extremely high temperatures.

Historically, moly demand has grown 30% per year since 1997, and experts predict a supply deficit through 2009 of up to 6%. So we’re talking about moly going up to about $36 per pound in 2008, from an average of $30 in 2007.

Moly is blue-chip metal and returns should be in line with what you expect from a blue-chip stock. It’s a long-term opportunity that could go up in the years ahead.

Originally published January 21 , 2008.

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Copyright 2007-2008, The Taipan Publishing Group, Taipan Daily and Chart of the Day, 808 St. Paul St., Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.

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