Saturday, November 14, 2009

Why You Should Invest in Silver Rather Than Equities or Even Property

Mention investing to a lot of people and it'll have them running for the proverbial hills. This can be for several reasons. Some are just afraid; it's risky - I could lose it all. Others don't think they're worthy of it. It's for well spoken people (or alternatively cockney barrow boys) in suits who drive flash cars, I can't cut the mustard with those types. Others still see it as selfish or greedy, or at the outer fringes of this continuum, part of an evil world system destined to be destroyed sooner or later by mass, direct action.

As with most prejudices and mass beliefs, this bears little resemblance to how it really is. I'll look at the above points in reverse order. Investing isn't in my opinion inherently wrong, or evil, or harmful to poor people in itself. Yes, it can be, and ethical investing could be one of the biggest growth areas in years to come as people seek comodities, industries or companies which don't exploit third world labour or damage the environent unduly. A good way to help the poor is to avoid joining their ranks if you can; productive people can and often do create wealth, not just horde it. Certain religions even require a fixed percentage of income to go to the poor and, call me old fashioned, but philanthropy is one of the nicest words in the English language.

It's easy to be intimidated by the appearance of the 'wealthy' , or at least what many people picture the wealthy to be like (but then again is anyone intimidated by a specky geek in Washington State or an old buffer in Omaha, Nebraska?). But it's OK to swim with the minnows. Swim with the sharks and you'll get eaten pretty quickly but starting small and keeping in the middle of the shoal until you've reached a decent size can be one of the smartest things anyone can do, and possibly a lot of fun too. There's no shortage of help out there with the internet, books etc and, surprise surprise, some investors might actually want to help other people to learn investing too. I don't see my ESL students as competition to my English language skills such as they are and am delighted by any progress that gets made.

Back to the first point, the risk. True, investing can be very risky, if you don't know what you're doing. Hand over your hard earneds to someone who has a qualification which may (as is the case in the US apparently) have taken a shorter time to acquire than official accreditation to practise as a masseuse, to invest in little pieces of paper (not even pieces of paper any more, just numbers floating in the ether) which can be extremely volatile, in an environment which no doubt lends itself to favours, incompetence and downright dodginess, and you could spend a good while regretting it. You wouldn't give your weekly food budget to a stranger and say 'go out and buy me some food' after all.

But there are safer, less or acceptably risky ways of investing if you're prepared to do your homework. Equities are possible, and there are indeed day traders here in Tallinn who, so far as I know, make a good living just doing that, sitting at their computers buying and selling and clearing all their positions by the end of the day .You have to know what you're doing there and of course you need the time. And equities markets can and do crash as we all know. Try borrowing money from banks to invest in equities!

Real estate (with the emphasis on the word 'real') can be a better bet. Speaking from experience, again you need to monitor things closely. Handing over your property to an agency and disappearing overseas can come back to bite you on the arse later on if you don't keep tabs on things. Of course you can't manage things yourself from a distance, and if like me you have practically zero DIY ability you'll need to pay people from time to time for the repairs and alterations which will happen from time to time even if you do live in the vicinity.  And there's been a lot of bullshit surrounding the real estate market in the UK; the buy to let bubble in the early '00s attracted squillions of amateurs (like me) who didn't really know what they were doing, on the premise of being able to make a quick buck because they were 'buying at the right time' whatever that means. Suddenly everyone became an expert on real estate and 'knew' when was the 'right' and 'wrong' time to buy (like there's a right or wrong time to buy a bag of potato chips, for example).If only it were that simple. This goes just as well for so-called experts (journalists, surely the lowest in the primordial ooze of the food chain, certainly way below salesmen and women, who at least aren't as a rule bone idle and silly).

There are professional investors out there who know what they are doing, but to join their ranks you need to have a bit of capital behind you for deposits (especially now, since although banks will still queue up to lend you money to buy property, the days of self-cert. mortgages, the UK equivalent of sub-prime, are over) and that's just the beginning. You need to have a good idea of why you're buying a certain property. Just so that you can say you own property like everyone else isn't a terribly good reason. One sensible reason is for capital gains, ie how much it will go up over the years so you can sell it at a profit - and remember the property market can sort of crash too, though not like equities. The other is for the income. If the rent you get from it is higher than the outgoings from the mortgage, insurance, service charges etc then it's a (taxable, probably small) income. You also need to know how you're gonna pay off that mortgage - is it interest only (in which case you're just giving money to the bank) or repayment?; are the tenants gonna be able to pay it off for you through their rent payments (something called amortisation)?, is the rate fixed or variable? (mine is variable meaning it goes up or down with the Bank of England base rate - since that is low right now in an effort to rejuvenate the economy it's nice 'cos the monthly payments are much lower than the rent, but when the economy picks up they'll go up again. It's not possible for me to change to a fixed rate at the moment, that's how tight the banks are right now, they're seemingly not taking on any new business from existing customers;  what is the yield? (ie the profit you can expect to make in relation to property value - calculated by total rent for the year x 100 divided by market value, this naturally changes but 5 per cent is considered a benchmark minimum); what you're gonna do when there are void periods (when there is no income cos the flat's empty - I've just had two and a half months of empty flat simply 'cos one of the tenants was a freak who disturbed other residents in the house and caused the co-tenant to move out, thus ending the agreement); what's the plan if the roof caves in or the boiler breaks down?..

..so the key word is control., how much influence you have over what goes on at the property. If you've not done your sums and continued to do them, you'll slip up sooner or later. As I'm overseas I have very little control over what goes on and so have to pay fifty quid every time a lightbulb needs changing (I'm only half joking) and I didn't do my sums in the beginning, I got an IFA (read: salesman, same as for equities) to do them instead. He told the banks my income was twice what it actually was. So I'm selling. Fortunately even in the downturn there's capital gains there so all is not lost, though this is largely down to chance.

An alternative is to do the same here in Estonia, and I may well do in future, but again, knowledge, control and, here, contacts are necessary if you wanna minimize risk, along with ideally Estonian language skills, and I don't have these fully yet.

Which brings us to the silver thing. If you'd mentioned this in the past it'd have conjured up images of pirate mapes with little Xs on them or shrewd, one eyed (not necessarily Jewish) dealers looking at things under magnifying glasses, but things have moved on since then. You can buy actual physical silver in the form of coins or bullion bars, but of course need somewhere safe to keep them. You can also invest online, for example here. Be sure to check out the credentials of the website beforehand of course (the aforementioned is kosher). So you don't need any physical silver in your home, they'll store it for you...at a cost, naturally.

But why silver? It's often dubbed the 'poor man's gold' and that's seldom if ever been truer than today. Silver has been hovering around the 17 USD per ounce (about 28 grams) mark in recent weeks, whereas the yellow metal is as high as 1100 USD for the same amount. So if you've got that kind of money lying around then go for gold, but otherwise, you don't need to be rich to start investing in silver. Furthermore it's a precious metal, of course, so it's never going to be worth nothing. Not ever. The only crash I'm aware of was in the early 80s after changes in regulations following the aptly-named Hunt brothers' attempts to corner the market led to a hugely artificially inflated price. Gold's price seems way high right now and we may see something of a downturn there in the future.

Silver is also likely to become scarcer. According to one figure I read, 95 per cent of silver has already been mined, so unless they suddenly find a whole load more, supplies will dwindle Add to this the fact that, unlike gold, silver has an industrial application. So a lot of it gets used up (compare that with gold - most of which that has been mined is still in existence somewhere). Photography is still an important use, even with the advent of digital cameras. It's value seems likley to rise more, although over the last ten years it has seen a steady increase from a little over 4 USD per ounce 10 years ago, to around 17 today (though the peak was in December 2007 at about 21 USD). So put simply, if you bought silver ten years ago (as I'm fairly certain, no less a man than Warren Buffet did) you'd have seen more than a quadruple return if you sold it now. Which sounds pretty good to me. Compare that with real estate in the UK at least, where over the sane period you'd be looking at less than double your money at current prices, depending on when and where and how etc. Then you'll have to deduct the mortgage debt from that.

There are potential pitfalls with silver too. Not everything that's called silver really is silver, rather like those silver stars you used to get as a schoolkid for a reasonably good essay; this is where the one-eyed magnifying glass person comes in. If you're buying physical silver coins or bullion you wanna look for something like Ag 999 which means it's practically all silver (but technically still an alloy). If you're investing in virtual silver you don't need to worry about that as noted above.

Another downside is environmental damage. Silver mines in places like Papua New Guinea, Indonesia or Peru, operated by the big mining companies such as BHP Billiton or Rio Tinto can and do cause environmental damage (silver is rarely found on its own but often along with other metals like lead). And I doubt the miners get paid all that much.

But on the plus side, today's price is today's price, not some wishlist price that can be the case with real estate either 'cos the owner gets greedy and believes they can get an overinflated price, or were hooked in by an estate agent who wanted the business and so overvalued the property, only for things to get protracted for long enough for the real value to drop further than was really the case in the beginning.

I remember laughing at some younger kids of a family friend who, upon visiting them, boasted about their 'real money' that they had, before producing a small gold bullion bar each, but they were right and this is the real reason you should invest in silver (or gold if you can, or why not Platinum, or Rhodium, or Palladium...) - it is real money. The cash we carry round with us, or (in some cases) spend ages squirrelling away for a rainy day, is forever losing its value. You need to spend it on something concrete really. This is why it's called currency. What do currents do but move, if they're any good? I remember as a kid being confused by the wording on UK banknotes about promising to pay the bearer on demand the sum of...however many pounds it was. I hopefully thought it meant somebody had to give me another ten pounds for the one I already had, if I demanded it, that was. This in fact derives from the days when a note was just a receipt for ..... a precious metal like gold or silver! Someone kept your gold for you safely so Dick Turpin or whoever didn't get it and you or the person you paid (or who robbed you) could retrieve that gold or silver at a later date by presenting this promissory note. Over time, it just became easier to pay and be paid in notes but the physical precious metal to back it still existed somewhere. These gold or silver standards have come and gone, but the final coup de grace was delivered by Richard Nixon who removed the US dollar from any kind of gold standard and made it free floating in December 1971, surely his biggest fuck up after (or even ahead of) Watergate.

Most other currencies followed suit if they hadn't already which means we now have'fiat' currency, which essentially means it's the monetary equivalent of the cars, if that...there's nothing backing the currency and government are free to print as much as they want when they feel like it. In the most extreme cases this can lead to crises such as that of the Weimar Republic when, as the story goes, someone going to buy bread left a wheelbarrow full of notes unattended and came back to find the wheelbarrow gone but the money untouched, or more recently, the million trillion dollar notes, or whatever they were, in Zimbabwe.

I wouldn't normally pay any attention to 'survivalist' extremists in the US and elsewhere as such people have an agenda that goes far beyond a mere desire to survive come what may, but I think they are right in their reported practice of  storing silver and gold for the very reason that in a currency collapse, as real money,  this could be the difference between life and death; at least if the hordes of lowlives streaming out of the big cities don't get their hands on it.

Don't just take my word for it, I'm just a humble part-time ESL teacher with an 11 year old Toyota Corolla diesel after all; good advice and information can be found here and here. And just to show I am trying to practice what I preach, I got myself down the Bank of Estonia Museum (much more interesting than it sounds) on Friday to make my first silver investment - 850 kroons (a bit less than 50 quid) on a couple of commemorative coins. These are the kind of thing I used to thing so boring as a child, or something that geeks collected. The 100 Kroon one actually costs 500 Kroons! Shit, I hope my address isn't anywhere on this blog - never mind, there are lots of Puumajas in Tallinn!

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