Capital Gain or Dividend Yield

What type of investor you are depends on what type of investment return you are getting. Refer to everything you have invested or consider investing, very often they boil down to ONLY 2 types: capital gain or dividend yield (or sometimes both).

Capital Gain

Buy low, sell high would get you capital gain profit. When you identify an undervalue asset, you buy it with a low price, keep the asset for few years and then sell the asset at a higher price. Take your selling price minus your buying price, if that is a positive number, you are profiting from capital gain.

Silver investment falls into this category. Silver is an asset where you invest when the price is low and sell when the price is high. Typically, it takes a number of years for investor to achieve a minimum double digit profit (percentage) return. Take a look at an example of capital gain at work in silver history price.

silver price history

We won’t pick the bottom or peak because that is simply unrealistic. Assuming you bought silver in year 2009 at price $12 and sold your silver in year 2011 at price around $29. You are making a good profit of 140%. In other words, if you have put in RM10,000 into silver in 2009, your initial capital has become RM24,000. Such return is not too bad for 2 years of waiting.

However capital gains work in both ways. Any asset that involves capital gain will experience market cycle. Price will go up and price will come down. We call the cycle as bull market (price keep going higher) and bear market (price keep going lower).

current silver price

In this example, we picked a price at $34 in July 2011 and hold the silver for 2 years and here we are silver price at $20 in July 2013. We are experiencing a lost at almost 50%. In other words, if you have put in RM10,000 into silver in 2011, your initial capital has become RM5,000. It is a painful experience to make a 50% loss.

Anyone who bought silver in the past 2 years would have experienced bear market and the pain of capital loss. The good news is at the point of writing, precious metal is believed  to have bottomed. If you have bought silver in the past 2 years, now could be the turning point for silver. If you have not bought any silver, you should give serious consideration start buying small amount of silver especially gold silver ratio suggests current silver price is relatively cheap.

Dividend Yield

You receive dividend yield as return when you invest X amount of money and after a period of time, you receive Y amount of dividend (or some call Y as interest) – regardless what is the value of your initial capital. The financial assets that gives dividend yield includes fixed deposit, REIT and dividend stocks. Silver could not be categorized into investment that gives Dividend Yield because silver does not produce cash flow.

Some investors are consistently buying silver in bulk at a low price and selling the silver with a profit margin. That gives the investor cash flow. However, I would not view this as investment gain (dividend yield) because this involves certain amount of labour wiork, which is more appropriate to be view as running a trading business.

Summary

Silver is a simple investment where you profit by buy low, sell high. If you are looking for an asset that you can buy at low price now and sell at higher price in the future, silver is one of the most undervalue assets in the market. Remember, in order to sell high, you first need to buy low. Nothing is going to happen if continue sitting at the side line watching without taking action.

Silver Malaysia eBookIn the eBook: Practical Guide For Investing Silver In Malaysia I discuss 4 strategies you can use immediately to help you achieve capital gain in silver investment. The 1st strategy is designed for beginner. 2nd & 3rd are for average investors. 4th are for the pros. Click here to find out more.

Gold Silver Ratio

Gold silver ratio is an important factor in precious metal investment but is often neglected by investors. Many investors focus intensively on precious metal prices fluctuation rather than the relativity factors. Professional precious metal investors could make money by mastering gold silver ratio alone.

Gold silver ratio is a value (number) by dividing gold price with silver price. Take example of today’s gold price ($1223.80) and silver price ($18.90).

Gold silver ratio = 1223.80 / 18.90 = 64.75

(For simplicity sake, we round it and use 65)

gold-silver-ratio-1-65Professional precious metal investors who focus on gold silver ratio never worry about price of gold and silver dropping or rising. For them, regardless of which direction price moving, they make money out of the market.

Precious metal investment is a long term investment, let’s look at the history of gold silver ratio as far as we could:

gold-silver-ratio-1968

Regardless in which investment market, it is impossible to catch the bottom to buy and sell at the top. Forget about gold silver ratio bottom at BELOW 20 and top at ABOVE 100. Let look at some more reasonable numbers: bottom at 40 and top and 80.

The method they use is simply swapping gold and silver at the correct ratio. When gold silver ratio is high, they convert their gold into silver and wait. When gold silver ratio is low, they convert back their silver into gold. So where is the money being made??

Theoretically, if you have 1 oz gold at the gold silver ratio of 80 (year 1994). You can exchange your 1 oz gold into 80 oz silver. By the the time gold silver ratio drop to 40 (year 1998), you can use your 80 oz silver to exchange for 2 oz gold (2 x 40 oz silver). Because you know how to make use of gold silver ratio, in this swapping process you made 1 oz of additional gold.

When you sell the additional 1 oz gold, that is your profit while you still hold another 1 oz gold as your initial capital. During this process, you pay little attention to and have little worry on the fluctuation of gold price and silver price. You only take the prices to divide them to get your target ratio.

In reality, you cannot simply take gold spot price and silver spot price to swap your gold and silver. Gold and silver prices are determined by spot price PLUS premium. Premium includes minting cost, packing cost, delivery cost, dealer’s profit margin, and depending on the type of gold or silver you are getting, the premium could vary in Malaysia market.

Enough of theory, let’s compare 2 items in the market. 1 oz Canadian Maple Leaf gold coin (from UOB) selling at RM4165 and 1 oz Canadian Maple Leaf silver coin (from BuySilverMalaysia.com) selling at RM85.

uob gold price bsm

The current gold silver ratio in the market is:

Gold silver ratio: RM4165 / RM85 = 49

The swapping process for gold and silver in the market always uses the selling price of the precious metals rather than the theoretical spot price. Hence, you use 1 oz gold to exchange 49 oz silver, OR use 49 oz silver to exchange for 1 oz gold.

Gold silver mining ratio has been around 1 to 9. Since 80% of the silver being mined is a by product for gold, silver is only produced when there is gold. In other words, when 1 oz gold is mined from the ground, there is ONLY another 9 oz silver being brought up together.

Whether you want to use gold silver ratio of 65 or 49, the ratio is still way too high from the actual mining ratio. In order for gold silver ratio to come down, there would be 2 possibilities:

  1. Gold price stagnant while silver price goes up significantly higher, OR
  2. Gold price appreciates at a slower pace than silver

Either way, it is going to make silver looks extremely cheap at current price.

Silver Malaysia eBookIn the eBook: Practical Guide For Investing Silver In Malaysia I discuss more strategies for investing silver in Malaysia. You’ll learn many other “practical issues” in silver investment and I will show you how to solve them – right from choosing your 1st oz silver to storing your 1,000 oz silver.