Worst Hedge Investments: Gold Mining, Silver, Platinum

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gold-mining-and-silver-2008-2013Caution: silver is not a hedge but an anti-hedge. A “hedge” loses less often than usual–an “anti-hedge” loses more often than usual. Silver lost more than stocks during 2008 and also lost more than gold during 2013.

So, if someone says that silver is a hedge–please ask, what is it hedging? In fact, silver will negate the ability of stocks to hedge against gold and also negate the ability of gold to hedge against stocks.

Of course, silver often can be profitable–but so can many other investments–and which do not have special storage and tax problems. In addition, gold coins are just as easy to buy as silver coins, less bulky to store, far easier to authenticate and therefore more certain to sell quickly and at a fair price. It is foolish to buy silver coins when you can buy gold coins!

Of course, silver is more certain than any stock to rebound after losses “someday.” If you are a millionaire or a savvy trader in Futures or Options, then hoarding silver artifacts or making short-term exploits on SLV might make sense. Silver mining and processing can also be a good investment for the average investor with above-average chutzpah–if you focus on silver mines and processors that are buy-rated by several major analysts–and if you always maintain tight Stops so as to minimize the downturns–and always rebuy for at least one day a month so as possibly to maintain low long-term US tax rates. There are many more reputable silver mines than gold mines–and the higher volatility of silver makes for higher potential trend-trading gains–and unlike most investments in individual companies, there need be no concerns about managerial innovation or product competitiveness. So, some hands-on trend-trading in silver mines and processors can make sense. Otherwise however, there is nothing more foolish than either silver or silver mining for most investors who primarily want low-maintenance long-term investments.

Our Planet EarthPlatinum and palladium are like silver on steroids. In addition to having even greater volatility, platinum and palladium prices are highly dependent on catalytic converters. Possibly the need for catalytic converters will continue or possibly other uses will be found for platinum and palladium. However, this is not certain–and for a “hedge” or a “safety” investment you want to be certain. Platinum is also a monetary metal, thereby slightly reducing its volatility–but not at all in the class of gold or silver in that regard. Platinum and palladium also are extremely rare, therefore fairly certain to increase greatly in value someday. However, it is equally likely that the supply of new gold will run out in the next few decades and therefore the price of gold might leap up and stay up. In addition, you can meanwhile be certain that–unlike gold bullion–the values of platinum and palladium will plummet during a stock market recession. You could possibly take advantage of the volatility of platinum and palladium by trend-trading. However, it is much better to trend-trade in silver mining because of the possible tax advantages. Also, in addition to the ups-and-downs of silver itself, investing in silver mines has double-edged underpricing opportunities created by the relatively high number of reputable silver mining companies. As for platinum or palladium mines: there are very few of them and substantial uncertainties surrounding them, as you will soon discover with a little research.

Lured on by the potential for long-term gains, for several years I myself held some shares in physical platinum and palladium ETFs. Aware of their volatility, I held only 1/10 as much in my platinum-palladium allocation as in my gold allocation. However, that 1/10 allocation lost about half as much as the entire gold allocation during a multi-year downswing. Even worse, during the sudden stock market drop during August of 2015, my gold successfully hedged the stock market with large gains–but my platinum-palladium, even though 1/10 the size, generated a huge loss that almost entirely canceled out those much-needed hedging gains. Of course, the stock market soon went back up and gold went back down. However, what if the stock market had not rebounded? The gold would have stayed up. That is what gold is for and that is what even a small amount of platinum and palladium will sabotage. For me, that August experience was the last straw. I sold my platinum-palladium and will never think about it again. I can now say with both head and heart that platinum and palladium are definitely not worth the bother.

Now a few words about gold mining. Contrary to many books and articles, gold mining is not a second-best replacement for physical gold–nor a third-best nor a fourth-best. On the contrary–gold mining is like “anti-gold” because its market-dependent losses will cancel-out the most important gains of gold during a stock market crash.

Possibly you could include gold mines in the trend-trading of silver mines as explained above. However, you will seldom find gold mines that are both undervalued and monitored by major analysts. It is unsafe to invest in obscure gold mines–or any business that is not monitored by major analysts. Firstly your data will be less reliable. Secondly, even if your data is correct, it will be less reliable that enough investors will learn about the company so as to make for a substantial and sustained increase in share value. It is also unsafe to trend-trade in generalized gold mining ETFs because the general supply of gold is expected to peter out during the next few decades. In short–while as I said that it is foolish to buy silver coins as opposed to gold coins–ironically it is similarly foolish to trend-trade in gold mines as opposed to silver mines. Silver mines will offer more opportunities, more certainties and more gain potential for attentive trend-traders.

gold-mining-and-silver-2008-2013In summary: gold mining, physical silver, palladium and platinum all have zero hedging ability. Even worse, they are actually anti-hedges because they will generate losses that sabotage the gains of any true hedge at the most critical times. Anyone who says otherwise has not bothered to check the obvious facts. (See the performance history graph.)

As explained above, attentive trend-trading in silver mining offers a possible exception for investors with above-average initiative.

As a general rule however, please think about this. There are two arguments for gold: “get rich” and “be safe.” Many writers will attempt to inspire gold fever by implying, “look how much gold has gone up!” They then tack-on the implication that “silver has gone up even more–so buy silver, too!” However, please be clear that gold has an additional “hedging” and “safety” argument. Gold mining, platinum, palladium and silver do not have any “hedging” or “safety” arguments. The only argument for gold mining, platinum, palladium or silver is that “it recently went up a lot.” That is never a well-rounded argument for buying anything.

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