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February 16, 2005

The Psychology of Gold and Silver
by T. Stein / S. McIntyre

For some time, we have been instructing our readers to place a small portion of their net worth in physical precious metal assets. This does not mean buying futures, mining stocks or vault certificates; rather, it means buying the metals themselves in their purest form. Certain mining stocks are fine if you can stomach severe volatility, but they should not be substituted entirely for the safety of physical ownership.

While the advantages of physical ownership are well known, we believe going out there and buying the actual metals has one benefit that most people ignore. Let's call it "exposure to the psychology" of gold and silver.

It was during the late 1990s when we first became aware of the need to hold gold and silver in physical form. At a time when the public was infatuated with NASDAQ stocks, America's last remaining national coin shops went out of business. Because the two-decade bear market in gold and silver had eradicated all interest in precious metals investing, it was quite difficult to learn how one should go about buying coins or bars. Fortunately, the internet was full of Y2K websites published by paranoid survivalists explaining how to prepare for the collapse of society. While we didn't stock up on dried food or emergency generators, we were able to research everything we needed about buying precious metals.

Since nearly every coin shop in America had disappeared, our first trip to buy precious metals was to a jewelry store. (Some collectible shops will sell numismatic or rare coins, but we are not collectors, rather we seek only the coin's metal content). As we walked into the store, there were two dozen glass display cases containing necklaces, diamonds and bracelets. It was only in the very back of the store where one could find a display case containing Eagles, Maple Leafs & Krugerrands. Wanting to inspect the coins before our purchase, we asked a saleswoman to remove ten 1oz Eagles from the display. Not knowing what an Eagle was, the young lady had to go the backroom and bring out "the man who handles the coins". After a several minute wait, an elderly World War II veteran with a U.S. Marines tattoo came to our assistance and the purchase was completed.

Looking back on that day explains quite a few things about precious metal investing. Suppose instead of buying $10,000 worth of gold and silver, we would've bought $10,000 worth of Amazon.com stock. Society is set up in a way where buying Amazon is much easier than buying Gold Eagles. All it takes is a few minutes online or ten minutes at any brokerage firm outlet, and all the Amazon stock you could afford would be yours. Furthermore, if you walk into any retail brokerage outlet, there are dozens of brokers that will gladly take your money and exchange it for Amazon shares. Contrast that to requiring the services of an 80 year old D-Day veteran working in the back of a jewelry store in order to acquire physical gold.

Every time we go to a new jewelry store to add to our holdings of physical coins, we like to chat with the salesperson who, most of the time, happens to be an elderly man similar to the Marine veteran. The first question we ask is how coin sales have been over the last few months compared to one year earlier. The answer we usually get is that things are pretty much the same - although when the gold price runs, there is a little more interest. The next question is if he has seen anyone who appears under the age of 30 (i.e. inexperienced investors) buying gold or silver coins lately. Fortunately, the answer is a resounding "no" nearly every single time. Except for a few weeks after 9-11, the average Joe's interest in physical gold & silver has remained quite low. This information from the horse's mouth tells us that there is plenty of upside ahead (measured in terms of untapped buyers) for precious metals.

In addition to going out into the field and monitoring the market for physical coins or bullion, there are other ways to examine the psychology of gold and silver. Go to the local bookstore and look at the finance or investing section. Five years ago, it seemed like every CNBC personality had his or her own book about the market. Likewise the shelves were chock full of the "Dow 36,000" drivel of the day. Today, it seems that real estate has taken over the bookshelves of this section. Except for an occasional book about futures or commodities, there is nothing on gold and silver. This analysis can be applied to popular culture as well. With stocks, it was the movie Boiler Room and TV series The Street. With real estate, it is Trading Spaces, Extreme Makeover and The Apprentice. Once again, the lack of any best-selling books or popular television shows about gold or silver shows that precious metals have yet to be discovered by the general population. Granted the gold/silver universe is much smaller than stocks or real estate in general, but we see virtually no signs that the masses have awoken to the best anti-dollar plays in the world. Meanwhile, the U.S. gold ETFs (ticker: GLD and IAU) continue to accumulate more and more ounces (over 5 million ounces) and we think their popularity will grow many-fold in the coming years. Gold and silver, despite the increasing ease of purchase and their 50% run up since 2001, are still vastly under-owned and the contrarian in us loves that knowledge.

Todd Stein & Steven McIntyre
Texas Hedge Report

Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets. For more information, go to http://www.texashedge.com

Copyright © 2004-2008 Todd Stein and Steven McIntyre

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