How to Invest in the Precious Metals Market

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Knowing that there are growing numbers of precious metals investors who are new to this sector, I've tried to provide some educational commentaries to help people learn to invest in this sector on their own. Previous commentaries have explained the “leverage” offered by precious metals miners, grouped these companies into specific categories, and provided criteria for evaluating these investments.

This time I will seek to pass along some strategic advice on how investors may want to manage their precious metals portfolio. Given that investors have different needs/goals, different levels of risk-tolerance, and different perspectives on this sector, these tips should be considered merely guidelines – rather than some rigid formula.

The place to start in planning your strategy for precious metals investments is to decide on how you wish to allocate your capital between gold and silver. I have made no secret that I consider silver to have superior supply/demand fundamentals. This is due in large part to the fact that global silver inventories have been severely depleted, with two-thirds of current inventories comprised of silver supposedly “held” by silver bullion-ETF's.

However, more conservative investors may prefer to focus their holdings on gold – given that (currently) it has superior status as both a “store of wealth” and a currency, in most markets around the world. For convenience, I will simply assume that investors have no preference for either metal, and base my advice accordingly.

Many commentators in this sector (including me) have urged investors to focus on the gold/silver price ratio to guide them in which metal to buy at any given time. As I have mentioned on several previous occasions, during the roughly 5,000 years that our species has used these metals as currencies, the average price ratio is roughly 15:1. As of this moment, the gold silver ratio is very close to 60:1. Thus, even accounting for a preference for gold over silver, this ratio is clearly skewed to favor silver.

For those who would like a very simple means of allocating their precious metals dollars, let the gold/silver ratio dictate where your dollars go, through purchasing silver in a percentage equal to the current ratio. In this case, with the ratio at 60:1, this would dictate putting 60% of new dollars into silver/silver mining stocks, and the remaining 40% into gold/gold mining stocks.

Even as someone who strongly favors silver over gold, this is approximately the ratio I'm using with my own investments. The reason for not investing even more heavily in silver (given my own preference) is that commensurate with a price ratio which values gold heavily above silver, assets in the gold sector are currently getting better valuations than in the silver sector.