Investing in gold: Leveraging precious metals

Silver has been on the rise and leverage accounts seem to be marketed more in today's environment. Leverage accounts are nothing new, but as silver tears up the charts there are companies that are pitching them as the way to reap profits quickly.

With a leverage account a person does not buy physical silver, but rather a stored product. Companies store your silver to guarantee you will cover any margin calls in a dropping market. The silver never leaves storage and you are allowed to "control" up to five times the actual number of ounces your investment would have bought. In controlling a larger number of ounces when silver gains in value you gain in multiple of your initial investment.

Silver has risen over 27 percent in the last 60 days and looks to be climbing to even greater heights. With gains like that salesmen are quick to point out the fact that if a person had bought on margin they would have made a killing in recent times.

So why not buy silver with a leverage account? When a salesman is making their pitch the best side is always presented. But if one asks about the downsides and can get a straight answer it would be wise to think twice. First of all, if the price of silver drops you will receive a margin call. This means that you must come up with the difference of what the ounces you now control are worth versus what they were worth when you bought them. Example: If you could buy 100 oz. or margin to buy 300 oz. With silver at $30 your investment would be $3,000. If silver drops $1 per ounce your loss is either $100 or $300. In the margin account you may be required to come up with an additional $300 to cover the fall in silver pricing. Simple math could conclude that if the price were to fall just 33 percent your entire investment could be wiped out.

In truth the accounts are much more complicated than that scenario, but the principle is the same. Regardless of commissions, fees, and costs to set up the account the fact is that if silver gains you gain faster, but if it falls it chips away at your value faster too.

Margin accounts remind me of the housing market in the early 2000s. You could leverage your house (refinance) to buy more houses. The only trouble was that if you were not out by 2006 the three houses you owned were now dropping precipitously fast. If you still owed on the three house, you could be quickly under water.

Yes, we expect silver to continue upward in price, but it probably will not climb straight up and if you are buying on margin, the calls could end up costing you your entire investment. The more conservative way is to just buy what you can afford and be happy with what ever gains you can make.

• Allen Rowe is the owner of Northern Nevada Coin in Carson City.


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