Yellow-Brick Road Detour

Some precious metals strategists advocate holding silver and platinum along with gold.
By Gregg Greenberg ,

Investors truly bent on spreading the risk in their portfolio by including precious metals need to realize that all that glitters is not gold. There are also opportunities to diversify -- and profit -- by holding other precious metals, namely, silver and platinum.

"Gold may be the most familiar and most liquid of all the precious metals," says Mark Albarian, CEO of precious metals dealer Goldline.com. "But investors should not ignore silver and platinum, especially now that they are trading at a fraction of their all-time highs."

In fact, the pair has outperformed gold since the start of the year. Silver has risen over 14% year to date, from a January low around $6.40 an ounce to its most recent price in the $7.30 range, while gold has risen less than 1.5%. Platinum, the most precious of all three metals due to its scarcity, is up 2.5% over the same period, increasing to more than $865 an ounce from $844. (Note that precious metals are generally measured using a "troy" ounce, which is about 10% heavier than the ordinary "avoirdupois" ounce used by your grocer.)

One reason investors often stick to the yellow-brick road when it comes to precious metals is that they feel intimidated venturing outside the highly publicized gold markets. But that fear is unfounded, says Albarian.

"The same process for buying gold coins and bars applies to silver and platinum, so first-time players in these markets need not be anxious," he says.

Silver bars, also called ingots, are a popular way to invest in silver and can be purchased at authorized dealers nationwide. They are uniform in size, making them easy to handle and convenient to store. While many buyers hang on to their silver stash in a safety deposit box, most dealers offer customers the ability to store their holdings at an independent depository either in the U.S. or in Switzerland.

The silver bars offered by most dealers are 999 fine (99.9% pure). One-hundred ounce and 10-ounce sizes are the most common. One-hundred ounce silver bars are often called investment bars because investors who buy them usually do so for investment purposes and may sell when prices rise. A 100-ounce silver bar weighs 6.86 pounds on a bathroom scale.

Silver and platinum coins are also available for purchase from either authorized dealers or the U.S. mint at

www.usmint.gov. The coins available for purchase directly from the government, however, are the more expensive "proof" coins. These coins have a brilliant mirrorlike finish and are of the highest quality. These commemorative silver coins are also U.S. legal tender and are backed by the government for weight and content (although it would not be advisable to spend a magnificent proof silver dollar coin in a store, even though you very well could).

Due to its scarcity and value, platinum is most often purchased by retail investors in coin form. There is an added incentive as well because platinum coins are exempt from sales tax in many states.

Despite what some analysts say, silver is as much a monetary metal as is gold, which makes it more attractive to investors looking for a secure investment. In the U.S., gold coins were called from circulation in 1933. Standard U.S. 90% silver coins, however, were minted through 1964.

The industrial uses of silver and platinum also boost the importance of these often-overlooked metals, especially when compared with gold, which is primarily purchased for jewelry or investment purposes. Industrial demand for silver has increased in the last half-century in areas like photography, and platinum is used as a component to make catalytic converters for automobiles.

Meanwhile, about 90% of the annual production of gold is turned into jewelry. Investors nervous about tapping the silver markets might also take comfort in knowing that famed value investor Warren Buffett continues to be a player in the silver markets. Between 1997 and 1998, Buffett's

Berkshire Hathaway

(BRKA)

purchased more than 130 million ounces of silver when its price was less than $5 an ounce.

The most famous silver-related story occurred in 1979 and early 1980 when Texas oil billionaire Nelson Bunker Hunt attempted to corner the silver market. The price of silver jumped to $50 an ounce in January 1980 after starting at $8.56 the previous July, and then promptly dropped to $10.80 just a few months later.

Goldline's Albarian does not expect silver to approach those levels again anytime soon. Nevertheless, he says many investors will buy silver over gold precisely because it is trading at a much bigger discount to its all-time high.

"Gold's all-time high was $875 in 1980, which is just a little more than twice the current price," says Albarian. "So many people say that silver has more room to run, and it feels inexpensive at just over $7."

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