a slick con artist calls up a little old lady in Pasadena and talks to her about riches to be made in gold and silver if she could crack open her piggy bank and send off a nice money order chunk of her savings. This is certainly a real risk, and it becomes more apparent when the source of potential fraud is popular. When internet auctions became a hot consumer area, there were more internet auction–related scams. When the real estate market became red-hot in 2005, there were more real estate scams. When precious metals become the “bubble du jour,” then you’ll need to be wary of scammers here as well.
Misrepresentations: I put this as a separate topic from scams because it can be a different animal. Basically, the point is that you may put your money into a venue and you may not be getting what you think you’re buying. A good example is what the respected silver analyst Ted Butler warned about regarding silver certificates. There have been millions of silver certificates issued in recent decades, but there’s the real possibility that there isn’t any real silver backing them up. In other words, there are purchasers of silver certificates who believed that they could convert their paper into actual silver in due time but, in fact, won’t be able to. That sounds like a misrepresentation to me.
Market manipulation: Early in 2020, the financial media reported a serious matter regarding naked short selling among smaller stocks. Short selling can send a stock’s price plummeting. Some large brokers and their clients have been caught illegally profiting through a manipulative technique called naked short selling. This was an especially egregious activity with the stock of smaller mining companies. In naked short selling, the perpetrator can sell massive quantities of stock essentially created out of thin air to force the price of the stock to come crashing down. Imagine if you owned shares of a small mining company, and you saw the share price plummet by 40 or 50 percent or more for no apparent reason.
Minimizing Your Risk
First of all, don’t forget that including precious metals (to whatever extent) in your portfolio minimizes risk because precious metals such as gold and silver have historically helped investors in times of economic uncertainty and political and financial tensions in the world at large. The long-term picture for precious metals should continue to bear this out. But as this chapter points out, nothing is without risk. Precious metals do carry risks, and you can minimize your risks with the help of the following sections.
Gaining knowledge
The more you understand how markets work, the better decisions you’ll make and the more you’ll minimize risk in your financial situation. I remember getting into options on silver futures some years ago. It was early 2004, silver was rising very well, and my account was performing superbly. I thought to myself, “Gee! What a genius I am!” Then along came April 2004. Silver plummeted by nearly 40 percent. I thought to myself, “Gee! What a moron I am!” In retrospect, it worked out just fine, and I made some great profits, but I was sweating bullets that spring. Seeing the value of your “investment” drop by 40 percent can make you freak out. I would have jumped out the window, but I’m on the first floor. The point is that I learned that precious metals futures and options could have very wide and scary price swings. That is the nature of the market.
Being disciplined
When markets go up and down, it can be difficult to stay disciplined. Markets can’t be controlled by individual investors, but they can and should exercise self-control. People can let their emotions overrule their thinking and do the wrong things when they ought to do the opposite. It happens especially in fast-moving markets.
My client (I’ll call him Bob) had put $2,000 in a commodities brokerage account. Under my guidance, he purchased some options (see Chapter 13) on silver futures. Within a few weeks, the value shrank to $900. Imagine that: He was down 55 percent. Of course, he was very concerned (wouldn’t you be?), and we discussed the situation. I told him to stay the course because my research told me that the underlying asset (silver) was in a bull market and that this price drop was a temporary condition. In addition, the options that he purchased had two full years to go before they expired. This is an example of what happens in the marketplace; no matter how solid your research and logic, the market can go against you. If your research and logic were sound, then the odds would swing back in your favor in due course. He decided not to panic and stay the course.
For Bob, the discipline paid off. The $2,000 he speculated with became $4,000 a few months later as the silver market rebounded. Those options were finally cashed in for $5,000 about 12 months after the initial purchase for a gain of 150 percent. To this day, the account is still growing because we stayed disciplined and bought (and cashed in) at points that made sense. Bob could have panicked when it was at $900, cashed out, and jumped out the nearest window, but thankfully he stayed disciplined and reaped some excellent profits.
Having patience
Everyone wants to get rich quick. Who wouldn’t like to make a fast buck? Well, people that reach for the fast gains end up with fast losses. But if they invested in quality assets (stocks of solid, profitable companies, for example), the gains can materialize over a longer period of time. Had you bought quality stocks just before the crash of 2008 or, more recently, the ugly crash during the pandemic crisis of spring 2020, your positions looked ugly in the short term. But in due course, if you chose wisely, those stocks would have risen, and you’d see the hoped-for gains.
Using
