PRECIOUS METALS

Understanding Precious Metals Investments

© 2015 Four Corners Alliance Group

When equity market investment charts turn south, the promotional drums always beat a positive clamor about the merits of precious metals – some well founded, some not.

In downturns, gold remains relatively strong overall as do most other precious metals.

To better understand gold’s relative psychological strength, take gold’s support base, for example; the U.S. Treasury holds about 4,578 metric tons at Fort Knox, some 368,000 standard, 400 oz. troy gold bars, about 3 percent of all the gold ever produced. The amount is second only to the Federal Reserve Bank of New York's vault in Manhattan, which holds 7,000 metric tons (7,716 tons) of gold bullion. Such official holdings tend to add to the reputation of gold asa solid investment.

Like the stock market, gold trades up or down, depending onthe whims of fortune and our perception of the economy. Gold sold for about $400 an ounce in the year 2000, peaked at $1,900 in 2011-12, and was seen hovering around $1,180in late October 2014. The one sure thing about gold and other precious metals – when other markets correct, the people who push gold for a living will inundate the media with stories of gold as a safe haven. They are well organizedand generally quite credible.

Beware All that Glitters Doesn’t

It’s the lesser known precious metals that may or may not have a great future as investments. American Metal Market worked hand-in-hand with the FBI and Toronto police in the 1990s to thwart Canadian boiler room telemarketers. At the time, indium was valued at $5 an ounce, but the boiler roomssold it at $65 an ounce, actually delivering the metal in small bars. They promised the future value would be $400 and used a CNN telecast tape about indium’s use in Stealth bombers to close sales. The ruse was fraud under wire and © 2015 Four Corners Alliance Group

mail fraud statutes because the boiler rooms created their own in-house markets. They created something that wasn’t real; it was a fraud, an $11 million scam. The operators fled Toronto to the Cayman Island but eventually faced jail and fines. The North American Securities Administrators Association has estimated such fraud losses exceed $100 billion a year. The irony of the indium scam: today indium’s value in the marketplace approaches $20 an ounce.

One AMA story bore the headline: “Warning -- This phone call may be hazardous to your health.”

When it comes to precious metals investing, the FBI advice is: you get an offer by phone, just hang up.

Gold

Obviously the people who earn a legitimate living out of precious metals are the ones you can expect to beat the promotional drums for gold, silver, platinum, palladium, rhodium, iridium, osmium, rhenium, and ruthenium.

Among the gold drummers you’ll find The World Gold Council. Its 20 members are some of the world’s most powerful gold mining companies. They are headquartered across the world and have mining operations in over 50 countries. The council stimulates demand in new and existing markets through research, insight and partnerships with leaders in investment, jewelry, industry and academia. The council works across the entire supply chain, from gold mining through to the consumer marketplace, with offices in New York, London, Shanghai, Hong Kong, Singapore, Tokyo, Mumbai, Chennai and Beijing.

Typically, your investment adviser will develop an asset allocation strategy that will consider long-term versus

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medium-term returns, and how gold investment products perform in positive or negative correlation with other assets. But keep in mind that the value of metals changes over time.For example, with many boiler rooms shut down, indium has been variably valued from $10 an ounce to $26 an ounce, having found a life of its own in semiconductors, liquid-crystal display (LCD) and medical imaging. Scientific American predicted in 2010 that fewer than 14 years were left of indium supplies, based on then current rates of extraction. But Indium Corporation, the largest processor of indium, claims that, on the basis of increasing recovery yields during extraction, recovery from a wider range of basemetals (including tin, copper and other poly-metallic deposits) and new mining investments, the long-term supply of indium is sustainable, reliable and sufficient to meet increasing future demands.

Such forecast fluctuations are what make investing in precious metals both interesting and sometimes risky. According to The Chemical Heritage Foundation, in the mid-1800s aluminum was more valuable than gold. Napoléon III'smost important guests were given aluminum cutlery, while those less worthy dined with mere silver; fashionable and wealthy women wore jewelry crafted of aluminum. Refining inventions changed all that and aluminum, the most abundant element in the earth’s crust, lost its status as a precious metal.

Gold, on the other hand, offers various gold-related investment products that have different risk and return profiles, liquidity characteristics and fees. In recent years, innovation has led to products that offer greater flexibility andaccessibility to investors, such as exchange-traded funds (ETFs) as well as additional risk management tools for sophisticated investors, including derivatives and structured products. Investors can buy physical gold through coins or

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bars; they can buy products backed by physical gold, which offer direct exposure to the gold price; or they can buy other gold-linked products, which are directly related to the gold price but do not include ownership of gold.

Exchange Traded Funds are known as ETFs.

An ETF is a type of fund, some entity such as a corporation or trust that owns assets (bonds, stocks, gold bars, et cetera) and divides ownership into shares that are held by shareholders.

The most reliable Internet sources note that details of the structure can vary by country, or even by state in the United States. The shareholders indirectly own the assets of the fund, and they will typically get an annual report. Shareholders are entitled to a share of the profits, such as interest or dividends, and they may get a residual value in case the fund is liquidated. Their ownership of the fund can easily be bought and sold.

ETFs are similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a stock exchange through a broker-dealer. Unlike traditional mutual funds, ETFs do notsell or redeem their individual shares at net asset value (NAV). Instead, financial institutions purchase and redeem ETF shares directly from the ETF, but only in large blocks varying in size from 25,000 to 200,000 shares, called creation units.

The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares.

In the United States, most ETFs are structured as open-end management investment companies (the same structure

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used by mutual funds and money market funds), although a few ETFs, including some of the largest ones, are structured as unit investment trusts. ETFs structured as open-end funds have greater flexibility in constructing a portfolio and are not prohibited from participating in securities lending programs or from using futures and options in achieving theirinvestment objectives.

Here’s an example of a gold ETF performance over the past decade as widely reported:

SOURCE: SPDR Gold

The plus sides of gold ETFs include the following investor advantages: You can buy an ETF in one transaction, makingit easier to target a certain price. Because you’re not buying a basket of stocks, commissions are lower, and ETFs have no load fees and smaller management fees than mutual funds. Capital gains taxes usually are lower for exchange © 2015 Four Corners Alliance Group

traded funds than for traditional mutual funds. Many ETFs list futures contracts, which help risk-managing your portfolio. ETF companies publish a list of the assets in the fund on a daily basis. Because exchange traded funds are meant to follow a particular index, not outperform it, usually only minor adjustments are needed to the ETF, unlike an aggressively managed fund which is looking for a higher return than its underlying asset. This lowers risk. Most ETF companies immediately reinvest dividends back into the fund.

Other Gold Choices

You can purchase gold coins and bars, either to store personally, or to be held securely on one’s behalf by a bank or other financial intermediary. Examples: coins, collector coins, and gold bullion bars. You can also acquire gold bullion stored and managed by a bullion dealer or depository. Examples: Allocated gold accounts, unallocated gold accounts, and gold accumulation plans. Other gold-linked products include indirect investments in gold, via financial instruments, without direct ownership of the metal. Examples: Gold mining stocks, futures and options.

The World Gold Council offers statistical analysis that examines how gold acts as a portfolio diversifier, vehicle for risk management and store of value. “To explore our range of reports and publications,” notes the council, “visit our Investment Research Library or review our featured publications” http://www.gold.org/investment/gold-investment-research.

In precious metals, there’s no shortage of choices. You and your investment adviser can find at least 40 precious metals ETFs in the marketplace and another 17 Exchange-Traded Notes (ETNs). This is a type of unsecured, unsubordinated debt security that was first issued by Barclays Bank PLC.

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This type of debt security differs from other types of bonds and notes because ETN returns are based upon the performance of a market index minus applicable fees, no period coupon payments are distributed and no principal protections exists. The purpose of ETNs is to create a type of security that combines both the aspects of bonds and exchange traded funds (ETF). Similar to ETFs, ETNs are traded on a major exchange, such as the NYSE during normal trading hours. However, investors can also hold the debt security until maturity. At that time the issuer will give the investor a cash amount that would be equal to principal amount (subject to the day's index factor). One factor that affects the ETN's value is the credit rating of the issuer. The value of the ETN may drop despite no change in the underlying index, instead due to a downgrade in the issuer's credit rating.

If You Want to Track Gold Gyrations Try This Example

SOURCE: Stocks for Beginners.com

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You can track what’s happening with gold by clicking on Google Finance any time during the day or night: (http://www.google.com/finance?cid=702696).

Silver

Like most commodities, the price of silver is driven by speculation and supply and demand. Compared to gold, the silver price is notoriously volatile. This is because of lower market liquidity, and demand

fluctuations between industrial and store of value uses. At times this can cause wide ranging valuations in the market, creating volatility, according to market records. Always seek the advice of your investment counselor.

Silver often tracks the gold price due to store of value demands, although the ratio can vary. The crustal ratio of silver to gold is 17.5:1. The gold/silver price ratio is often analyzed by traders, investors and buyers, as well as your investment advisers.

SOURCE: CONSUMER PRICE INDEX© 2015 Four Corners Alliance Group

Silver, like all precious metals, may be used as a hedge against inflation, deflation or devaluation. The more money that is pumped into deficit-ridden world these economies – the printing of money basically – then the less valuable the currencies become.

Like The Gold Council, The Silver Institute is a nonprofit international association that draws its membership from across the breadth of the silver industry. This includes leading silver mining houses, refiners, and bullion suppliers, manufacturers of silver products and wholesalers of silver investment products. Established in 1971, the Institute serves as the industry’s voice in increasing public understanding of the many uses and values of silver.

If you and your financial adviser decide that buying silver is agood strategy for your portfolio, you should choose the silverinvestment vehicle that is in accord with your own preferences and investment philosophy. As with any investment, you should judge the merits of your silver investments as they relate to your investment needs.

The Silver Institute provides the following digest of some of the advantages and disadvantages of particular silver investments:

Exchange – Traded Funds (ETFs)

For investors who seek exposure to the physical silver market, but have no desire to possess the metal or pay direct insurance, assay, and storage costs, the listed advantages include major exchange listings and trade like equities. Investors can buy shares in a trust that owns the silver bullion. Disadvantages include the market price can beas unpredictable as the price of silver on any given day because the ETFs are created to reflect the price of the silver.

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Silver Bullion Bars of Approved Refiners

Advantages: Usually the least expensive convertible into cash, internationally negotiable, price is widely quoted. Disadvantages:

Must be stored securely, possible need for assay at time of sale, yields no interest.

Silver Mining Stocks

Advantages: Offer capital appreciation opportunities, dependent on the company’s management and operating strength, may yield a dividend. Disadvantages:

May require greater investment than small physical bullion purchases, requires knowledge of equity market.

Silver Mutual Funds

Advantages: Many mutual funds offer investment programs in silver and precious metals, diversified holdings among dozens of companies. Disadvantages: May require greater investment than small physical bullion purchases, requires knowledge of equity market.

Silver Bullion Coins

Advantages: Relatively inexpensive, some less than $10.00, small and easy to store, instant convertibility into cash, easy to transport, internationally negotiable, and prices quoted widely. Disadvantages: Must be stored securely, yields no interest, premium over bullion bar prices.

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Silver Medallions

Advantages: Prices can range from least expensive to most expensive, small and easy to store, easy to transport. Disadvantages: Similar to coins, but not always easily convertible to cash unless they bear the mark of a reputable refiner.

Silver Certificates or Storage Accounts

Advantages: High liquidity but at competitive prices, no storage risk, no sales tax, prices widely quoted, invest by dollar amount. Disadvantages: Several days’ delay in delivery of silver, silver not in physical possession of owner.

Silver Accumulation Plans

Advantages: Invest as little as $100, discounted commission rates, highly liquid, no sales tax, offers dollar cost averaging,no storage fees. Disadvantages:

Silver is not in physical possession of owner although some firms will deliver the metal if requested.

Silver Futures Contracts

Advantages: Speculative appeal, leverage reduces capital tie-up, liquidity, contracts widely quoted, no storage risk. Disadvantages: Many trading limitations, high risk factors, unlimited loss potential, requires market expertise.

Silver Options

Advantages: Speculative appeal, leverage reduces capital tie-up, no storage risk, clearly defined risk. Disadvantages: Trading limitations, highest risk, less negotiable and less liquid, investor must be willing to sustain the loss of their entire investment in a commodity option, high degree of knowledge required.

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Platinum

Platinum mining produces only a 16th of the gold mined each year, hence platinum is relatively scarce even among the precious metals. About 31 percent of the platinum sold annually goes into jewelry, roughly 46 percent

into auto emission controls catalytic converters, leaving only 23 percent scattered among investments and such minor applications as electrodes, anticancer drugs, oxygen sensors, spark plugs and turbine engines, according to the USGS Mineral Resources Program which has tracked such information since 1879. Platinum is traded on the New York Mercantile Exchange (NYMEX) and the London Platinum and Palladium Market. To be saleable on most commodity markets, platinum ingots must be assayed and hallmarked ina manner similar to the way gold and silver are. Exchange traded funds, or ETFs, track the value of platinum and allow you to invest through your stock brokerage account. The shares of a physical platinum ETF are backed by platinum bullion held in storage by the fund sponsor. A platinum exchange traded note, or ETN, tracks the value of platinum. But the ETN shares are not backed by the physical metal. ETN shares are backed and guaranteed by the financial assets of the fund sponsor. An inverse or short on platinum ETN can be used to profit from a decline in the price of the metal.

Platinum Miner Stocks

Companies that mine platinum can earn profits even if the price of platinum is flat or rising slowly. Stock shares of platinum mining companies provide a different exposure to the value of platinum. Shares can go up and down

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depending on the company's ability to profitably mine the metal. The major global platinum mines are in Canada and South Africa. Only a few platinum miners have shares trading on the U.S. exchanges. You can also invest in platinum miners through the one ETF that holds shares of platinum mining companies from around the world.

Platinum Futures

To profit from short-term swings in the price of platinum, you can trade futures contracts on the commodities and futures exchanges. To buy and sell platinum futures you must open an account with a registered commodity futures broker. The platinum futures contract which trades on the New York Mercantile Exchange is for 50 ounces of platinum. You must put up a margin deposit of $3,300 for each platinum contract you trade. Futures trading can be used to profit from either a rising or falling platinum value. Potential losses from trading futures are much higher than with other investment vehicles.

Palladium

The numerous applications and limitedsupply sources of palladium result in the metal attracting considerable investment interest.

Ore deposits of palladium are rare. The most extensive deposits have

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been found in the Transvaal Basin in South Africa, the Stillwater Complex in Montana, the Thunder Bay District of Ontario, and the Norilsk Complex in Russia. Recycling is also a source of palladium, mostly from scrapped catalytic converters. According to industry sources, recent years' palladium surplus condition was caused by the Russian government selling off government stockpiles built up during the Soviet Era, at a pace of about 1.6 to 2 million ounces a year. The amount and status of this stockpile is kept as a state secret, hence it is difficult to forecast further selloffs (if any). Insiders believe the stockpile may be exhausted, but Russia is the world's top palladium producer, contributing roughly 40 percent of the world's supply. The ongoing Russian-Ukraine conflict could interrupt supply in the view of some analysts, with such speculation fueling price rises during 2014 to levels not seen in a decade.

Exchange-Traded Products

ETFS Physical Palladium (LSE: PHPD) is backed by allocated palladium bullion and was the world's first palladium ETF. It is listed on the London Stock Exchange as PHPD, Xetra Trading System, Euronext and Milan. ETFS Physical Palladium Shares (NYSE: PALL) is an ETF traded on the New York Stock Exchange.

Bullion Coins and Bars

A traditional way of investing in palladium is buying bullion coins and bars made of palladium. Available palladium coinsinclude the Canadian Maple Leaf and the Chinese Panda. The liquidity of direct palladium bullion investment is not as good as gold and silver due to low circulation of palladium coins and wider spread between buying and selling price, according to traders.

Rhodium

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The annual world production of rhodium is 30 tons and there are very few rhodium-bearing minerals. The price of rhodium is historically highly variable. In 2007, rhodium cost approximately eight times more than gold, 450 times more than silver, and 27,250 times more than copper by

weight. In 2008, the price briefly rose above $10,000 per ounce ($350,000 per kilogram). The economic slowdown of the third quarter of 2008 pushed rhodium prices sharply backbelow $1,000 per ounce ($35,000 per kilogram); they rebounded to $2,750 by early 2010 ($97,000 per kilogram) (over twice the gold price), but in late 2013, the prices were a bit lower than $1000. In 2014 the price has varied between$1000 and $1,500,

Rhodium is not a commodity suitable for most investors. Themarket is very thin and its supply and demand characteristics are based to a large extent on the prices for platinum and palladium because it is mined as a byproduct with those metals. You are not likely to find a company searching for rhodium alone. About 81 percent of its use is inautomobile catalysts. Rhodium is used as an alloying agent for hardening and improving the corrosion resistance of platinum and palladium; and electroplated on white gold and platinum to give it a reflective white surface in making jewelry. Rhodium neutron detectors are used in combustion engineering nuclear reactors.

Iridium

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Iridium is obtained commercially as a by-product from nickel and copper mining and processing. Prices have been all over the charts, ranging from $93 an ounce in 2003 to more than $1,000 an ounce in 2014, the higher prices have been explained by industry sources as reflecting the

installation of production facilities for single crystal sapphire used in LED backlights for TVs. According to Professor Martyn Poliakoff, a chemist at the University of Nottingham, it takes about 1 million tons of crushed rock to produce a 3.8 kilogram iridium bar. Iridium is the densest known terrestrial substance at 22.65 grams/cm3. That’s twice the density of lead or 8 times that of granite. A cube of iridium 6 inches on a side would weigh as much as an average adult human. Whether iridium warrants an investment as such requires a thorough scientific analysis of its future uses.

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Iridium Companies

Norilsk Nickel produces iridium ingots and iridium powder. Anglo American, its Anglo Platinum subsidiary produces iridium. Ruiyuan Group Limited makes a number of iridium compounds. American Elements lists an extensive group of iridium products. Johnson Matthey, iridium crystal growing, fabrications, filaments and spark plugs. Lonmin Plc is a British producer of platinum group metals operating in the Bushveld Complex of South Africa. And then there is Zafirro,promoting products with long-lasting sapphire blades including a limited edition razor, with a handle made from super-durable iridium molded at a factory that also makes rocket parts – price $100,000; commented The Economist, “just the thing for the bearded billionaire.”

Osmium

Like iridium, osmium is obtained commercially as a by-product from nickel and copper mining and processing. Because of the volatility and extreme toxicity of its oxide, osmium is rarely used in its pure state,

and is instead often alloyed with other metals. Those alloys are utilized in high-wear applications.

Osmium is usually sold as a minimum 99.9 percent pure powder. Like other precious metals, it is measured by troy weight and by grams. Its price has hovered around $400 per troy ounce (or about $13,000 per kilogram), depending on the quantity and its supplier. Johnson Matthey PGM Market Report reviews and forecasts demand and supply developments in the platinum group metals markets that includes osmium.

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Johnson Matthey has almost 200 years of experience in precious metals and is recognized as a world leader in rare metals. The firm buys, sells and hedges rare metals and canoffers a range of pricing and hedging services (http://www.platinum.matthey.com/services/buying-and-selling). For a less formal look at the market, Tom Skulan runs a website that purports to be “your site for information on investing in rhodium, ruthenium, iridium, and osmium” (http://www.platinumgroupmetals.org/). Skulan notes that theexotic metals market is much less formal than markets for other metals. The spot prices really are just starting points for bargaining between buyers and sellers. Buyers of large amounts of exotics can get prices below spot; people who want to buy small amounts can expect to pay much more than spot.

As with the indium scam cited previously, caution is the wordbecause there are still boiler room scams that tout exotic metals. Again, the FBI advice is: you get an offer by phone, just hang up.

Rhenium

Nickel-based super alloys of rhenium are used in the combustion chambers, turbine blades, and exhaust nozzles ofjet engines. These alloys contain up to6 percent rhenium, making jet engine construction the largest single use for

the element, with the chemical industry's catalytic uses beingnext-most important. Because of the low availability relative to demand, rhenium is among the most expensive of metals,with an average price of approximately $4,575 per kilogram ($142.30 per troy ounce), according to MetalPrices.com. It isalso of critical strategic military importance, for its use in highperformance military jet and rocket engines. In fact, about 70percent of production goes into jet engine parts. Commercial© 2015 Four Corners Alliance Group

rhenium is extracted from molybdenum roaster-flue gas obtained from copper-sulfide ores mined in Chile, the United States, Peru, and Poland.

Ruthenium

Ruthenium usually occurs as a minor component of platinum ores; annual production is about 20 tons. Most ruthenium produced is used for wear-resistant electrical contacts and the production of thick-film resistors. A

minor application of ruthenium is its use in some platinum alloys.

Some ruthenium complexes absorb light throughout the visible spectrum and are being actively researched in various, potential, solar energy technologies. For example, Ruthenium-based compounds have been used for light absorption in dye-sensitized solar cells, a promising new low-cost solar cell system, according to the Journal of the American Chemical Society.

Ruthenium dioxide and lead and bismuth “ruthenates” are used in thick-film chip resistors. These electronic applications account for 50 percent of the ruthenium consumption. According to BASF Corporation, Ruthenium costs about $3,000 per pound (catalyst grade).

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The Best Ways to Invest in Precious Metals

Owning precious metals can be a good way to guard againstinflation and diversify your portfolio, but investing in the physical metal has a number of inherent disadvantages. If you invest in gold bullion or gold bars, you will need to insurethat investment and find a place to store it.

The Golden Rule:

“He who has the gold makes the rules!”

Investing in gold coins introduces the risk of high markups and even fraud. Worse yet, in every empire from Assyria to Rome, to the current day, ultimately, government confiscatesall bullion, whether or not it is numismatic. Do not misled into thinking that precious metals will not eventually be confiscated . . . they will.

Fortunately, you have other ways to invest in precious metals without facing these types of barriers.

Mining Stocks

When the price of gold, silver and other precious metals goes up, the companies that mine those metals can do quite well. Investing in those mining stocks is one way to play the precious metal market. You can find companies involved in the gold, silver and metal mining industry by using the stock screening tools available from your brokerage firm, or you can research and choose stocks on your own by reading financial publications and finding your own opportunities.

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Precious Metal Mutual Funds

Mutual funds combine the money of many small investors and use that money to purchase a widely diversified basket of stocks. This approach tends to reduce the risk associated with stock market investing, while allowing investors to participate in the growth of a particular market segment. Most major mutual fund companies offer at least one fund devoted to precious metal investing, so check with your mutual fund company for a prospectus.

Exchange Traded Funds

Exchange traded funds allow investors to participate in the growth of precious metals, without the need to purchase andstore the physical metal. With an ETF, you can simply purchase a single security that rises or falls along with the price of the underlying metal. The ETF that tracks the price of gold trades under the appropriate ticker symbol GLD. The silver ETF trades under ticker symbol SLV.

Locating Metals ETFs: You can find specific ETFs here: http://etfdb.com/etfdb-category/metals/

Always seek guidance from your f inancial adviser.

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