By: John Fisher
Whether you are just now considering entering the gold and silver market, or you have been investing in precious metals for years, there are many options to participate in the precious metals bull market. In this 6-part series, I will provide an overview on each method and the positives and negatives of each. Watch for all 6 parts to appear over the next 3 weeks.
Part 2 – Futures and Options Contracts
Futures and options contracts are intended to allow producers, manufacturers and end users the opportunity to lock in their respective buying and selling prices for a commodity that will come to market sometime in the future. In most cases, those markets are dominated by speculators and traders who have no intention of ever exercising the contract or taking delivery of the commodity. By borrowing money to pay for a small part of the cost of the futures contract (buying on margin) or by buying an option, they can realize significantly more profit for the same amount of capital invested than they could have done if they owned the physical gold and silver – as long as the price moves in the right direction!
If prices, on the other hand, move in the wrong direction, losses are magnified substantially.
On most commodity exchanges, there is only a very small amount of the physical commodity (gold and silver) to cover the outstanding contract obligations. This works fine as long as only a small percentage of contract owners take delivery of the physical commodity. If a significant number of contract owners began to demand delivery, there may not be enough supply to go around. This actually happens quite often, but most exchanges allow parties to settle in cash instead, as long as both parties are amenable.
But what if contract holders begin to want the metal and refuse to take cash? Then, a supply squeeze occurs and prices skyrocket.
There is a very, very small available inventory of gold and silver on the COMEX and other commodity exchanges – certainly nowhere near the quantity to cover all outstanding futures contracts. Futures and options are a very high risk method in which to participate in the gold and silver bull market. If the music stops, there will not be enough chairs to go around – and the price for those that remain will soar.
In Part 3 of our 6 part series “The 6 Best Ways to Own Gold and Silver!” I will examine Precious Metals Certificate Programs
Action to take now: Continue to accumulate cautiously, with a weighting towards silver over gold. Add on dips. Accumulate silver on a 2 to 1 ratio to gold. The next stops for gold are $1,250 and $1,640. What to do now? You can try to time a dip below $1200, but market timing is seldom successful.
What to buy now: The best values in silver are US 90% silver coin. In gold, there are very good values in British Sovereign fractional coins, Mexican 50 Peso and Austrian 100 Corona coins. Call for pricing. For a limited time, most coins in quantity are shipped Fed Ex with a 1-week or less turn around.
