Investment Bullion Portfolios 3
The Portfolio Options

Your need based investment bullion portfolios 3
Depending on what your asset creation goal is, you can design your bullion portfolio. In this article are 4 portfolio options:

1. Portfolio 1- for Women
2. Portfolio 2 - Saving for daughter's marriage
3. Portfolio 3 - For asset protection and wealth building
4. Portfolio 4 - For asset protection, wealth building and the joy of collecting

'How much and how to...'
How much gold and silver bullion to hold depends upon your mental comfort zone. Buy as much only as you can have and sleep well at night without worrying about the fluctuations of gold and silver prices which will happen. This amount can be be anywhere from 10% to 30% of your asset portfolio, calculated after excluding the value of any real-estate holdings you may have.

• The reason I would exclude real-estate holdings from investment bullion portfolios 3 is, that many do not own real estate, or are top-heavy in owning real estate. If you have real estate, then experts agree that 5% to 15% of your total net worth should be in gold and silver bullion. This is not a large amount actually.

Consider a typical middle-level Indian family unit of working professionals in their late thirties or early forties with two children. Assuming their taking home around Rs. 75,000/- per month and they have a home loan. (A quick check for your home loan eligibility based on your disposable income using this calculator.)

The family is repaying a 15 year insured loan for a residential property worth 25 lakhs. They have savings in mutual funds and shares of two lakhs and have jewelry worth at two lakhs. This is l6% of the asset value of the real estate property. After their home loan installments they would have about Rs. 40,000/- per month for living expenses and savings.

Of this amount, if they put away 15% or Rs. 6,000/- per month into savings and investments, they could allot about half of this or Rs. 3,000/- per month for bullion investment.

So, for the family in our example, adding about thirty to fifty thousand rupees or so of gold and silver bullion gradually over a year is an achievable goal.

'RIP your bullion wealth!'

• Of the budgeted investment amount, first buy silver then gold. Buying on a regular monthly or quarterly investment plan will help to average out the acquisition cost of the precious metals over time to your advantage. This Regular Investment Plan (RIP) will average out your cost of purchase at less than if you buy infrequently in larger lump sums. We will also use the gold silver ratio to increase our beneficial purchases to rip higher returns. This is detailed next.

Using the Gold-Silver Ratio to Rip more wealth
A point to note regarding silver is that, when the silver price is more expensive relative to gold it can be exchanged for gold. This can be readily seen on the basis of the gold-silver (g-s) ratio.

• The g-s ratio is a calculation as to how many grams/ounces of silver it would take to buy a gram or an ounce of gold at current prices. In the past few years this ratio has been varying between 50 and 70. This means that it would take between 50 and 70 ounces of silver to buy 1 ounce of gold.

You can see this current chart of the g-s ratio which shows the past 2 month's ratios. In the current historical context, if the ratio is below 60, silver is 'expensive' relative to gold.

• The closer the ratio to 50--or even below, better the opportunity to sell some accumulated silver in exchange for gold, and/or allot more of the budget for gold purchase than silver. Here, gold is 'cheaper' than silver.
• Conversely, a higher g-s ratio number means that relative to gold, silver is cheaper and silver may be bought. At that time I would not suggest selling gold to buy silver but rather allot more of the budget to silver purchase than gold.
• Our strategy is not to 'trade' in gold and silver as such, but to rip our returns higher by utilizing the volatile nature of silver prices to our advantage in accumulating more gold. One can balance one's bullion portfolio this way every couple of years where indicated, by exchanging some part of accumulated silver for gold.

In our example, for the first month's investment of 2,500 to 4,000 rupees one could get about 12 or 16 silver coins of 10 grams each of .999 or .995 purity at March 2008 rates. To get a 10 gram .995 gold coin you would need between 12,000 and 13,000 rupees at March '08 rates. Put these coins in your Saturday Box for saving and wealth building. The principle of 'like attracts like' will get you more.

A regular monthly acquisition plan will enable you to systematically add to your portfolio. Remember that gold and silver bullion attract a wealth tax (as does jewelry).

An alternate way to hold gold
If you want to invest in gold but do not want the trouble of holding the metal you could buy shares in gold exchange traded funds (ETFs) that are traded in the stock market. The cost of each unit or share represents one gram of gold plus the fund house's administrative costs. In general the share trades for about 2-5% over the spot gold price. An advantage of these ETFs is that there is no wealth tax levied on gold ETF holdings. Gold ETFs can form some part of your bullion holdings after you have physical gold.

• The purpose of this portfolio is to have some gold and silver bullion that can be handily traded for goods and services should there ever be a need due to some personal or economic crisis, and also to enjoy wearing part of your wealth as an ornament.

Owning gold and silver in gold or silver bars and coins alone can be boring if you like wearing jewelry. Gold and silver transmute negative energy and deflect it as well. By the principle of like attracts like, wearing some gold or silver is generally good for you. You can own gold and silver with some portion of it as wearable 'investment grade' jewelry.

One of the ways that investment grade bullion is used as jewelery is to set such gold coins like the British sovereigns (guineas) or Laxmi coins into a necklace and earrings using a 14 to 18 karat gold bezel (clasp frame) setting. In this way the gold coin is not damaged and can be removed from the bezel for re-sale if needed.

Other types of Jewelry and bullion items
If you own other gold and silver jewelry, that is a separate consideration and not included as part of your bullion investment portfolio. Selling other types of gold and silver jewelry in times of need will attract a much higher percentage deduction, and hence I do not consider this as 'investment grade' gold or silver.

On the other hand, the tradition of having silver tableware can be considered a practical form of silver investment. This was the origin of 'sterling silver' tableware, flatware and hollow-ware which is popular even today, and includes items such as plates, cutlery, cups, jugs and tumblers ('lemon set'), teapots, milk pourers, sugar caddies, trays, serving bowls and so on. Here also, the simpler the item with more silver content, the less the making charges.

Portfolio allocation

• Invest one-third of your money in silver bullion (.999) consisting of coins and bars of 10 grams or more; one-third in gold bullion where the minimum weight of coins is 10 grams. 20 to 50 gram gold coins/bars are also good. The balance one third in 22 karat gold bangles.

Keep in mind that if you ever need to sell the gold bangles to a jeweler, the jeweler will deduct the infamous ever-present 'making charges'--typically 5 to 10%. However, the bangles can be your 'last to sell', after you first sell the bullion for any need you may have. This way you have a good degree of protection against losses.

Portfolio 2 - Saving for daughter's marriage

• There is a time-honored Indian tradition of saving gold and jewelery for daughters' weddings--even if this is an even to come many years from now. Saving early is a good habit.

Sometimes the savings are done in the form of gold jewelry that the mother might also wear until it is time for the daughter's marriage. We consider this as the mother's individual jewelry and not part of this portfolio.

No gold jewelry need be bought because what might be needed in the form of jewelry many years ahead is unknown. (Pure gold bangles may be bought if desired, though.) Fashions, designs, choices and circumstances change. There is no point buying a lot of jewelry now only to have it melted and re-cast in a new form (or exchanged), paying making charges at both the buying and selling ends. Buy gold bullion bars/coins or pure gold bangles instead.

So, saving for a daughter's wedding, the portfolios can be as below.

• Option 1 - Where you can invest less than 30,000 rupees per year or up to 2,500 per month:
  Buy only silver .999 bullion in the largest weights you can afford given the cash available with you. This way you will accumulate a precious metal on a regular basis rather than waiting for the time you may have enough savings to buy gold.

  Silver has a tendency to appreciate at a faster rate than gold as examined in previous articles. It has a volatile price behavior and for a long-term investor, this is not a significant consideration.

  Keep in mind though, that if you have accumulated silver over time and the current price of silver is sufficiently higher in terms of the gold-silver ratio--you can exchange the silver for gold. Therefore buying silver when it is relatively cheaper and exchanging it for gold when relatively more expensive you can 'trade up' your silver savings conveniently for gold from time to time.

• Option 2 - Where you can invest between 30,000 to 50,000 rupees per year.:
  Buy silver bullion only of .999 grade in bullion bars or coins of the largest unit weights according to available cash, until you have about 1.50 kilograms of silver. Then buy .995 gold bullion upto 30 grams. After that, with the available money buy equally .999 silver bullion and .995 gold bullion.
• Option 3 - Where you can invest more than 5,000 rupees a month:
  Spend half of available money in .999 Silver bullion coins or bars of upto 100 gram weight, which have smaller premiums over the spot price. The rest can be used to purchase .995 gold coins or bars of a minimum of 10 grams weight each.

• Invest half of the available money in silver bullion (.999) coins and bars of 10 grams or more. Invest the other half in gold bullion (.995) where the coins are 10 grams or more in weight each.

  Use the gold-silver ratio 'trading up' strategy as explained earlier in this article. When silver becomes more expensive relative to gold, exchange some of your silver stocks for gold. You should review your averaged cost of silver from time to time --every couple of years or so, and when silver is cheaper relative to gold, buy more silver than gold. (Do not sell accumulated gold to buy silver.) This way you will utilize the silver price volatility to your advantage.

Portfolio 4 - For asset protection, wealth building and the joy of collecting

• Where you can invest more than 10,000 rupees per month or more than 1.20 lakhs per year:
  With half the money buy silver bullion (.999) coins and bars of 10 grams or more. With half or three-fourths of the balance buy .995 gold bullion where the coins are greater than 10 grams in weight. The remainder can be used to buy bullion coins of 22k or collector coins that contain a standard and known weight of pure gold. You can trade up as you become more knowledgeable on the subject.

Many collectors consider the Mexican 20 peso to be the most beautiful coin ever made. This coin is not easy to find, but is often available at very low premiums over the spot price of gold--as little as 3% in the USA. Two dealers who are reputed to have minimum premiums in the USA are-George Parker of Camino coins in San Francisco, and California Numismatic Investments near LAX airport in Los Angeles.

In India such coins are rare--the British sovereign and even the not-so-pretty-to-look-at one ounce South African Krugerrand commands a premium greater than the 7% you would pay for it in the UK. The Krugerrand is the most liquid (bought) coin in the world today.

Coins such as the Mexican 20 peso Aztec would command a high collector price locally--if you could find someone in India who was willing to pay a premium for it. Hence such coins are not of very great importance for the most part for our investment purposes. If you can obtain these coins at low premiums then, of course, these can form a good part of your bullion holdings.

• From an investment point of view, always purchase low premium, locally made or locally available bullion coins that trade for near their gold value.

This article concludes the series on Gold and Silver Bullion Investment starting with the article- "India Bullion"--World's best performing assets.

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