Expert: Steve Hach - 1/14/2008

Question
What can you tell me about the company R.J. O'Brien? This is the company we are thinking about using to buy/sell options in silver and gold.

I've heard that if the price drops below what you paid to get in you lose all of your investment. Can you confirm this?

Thank you for your time and expertise.
Crystal

Answer
Hi Crystal,

I am not very familiar with options trading houses.  In my work we mostly focus on stock purchases with well-known internet brokers like firstrade, foliofn, etrade, td ameritrade, etc.

Also, please be advised that we do not do much work with commodities, so I am not very familiar with silver/gold options.

What I do know is that as a rule of thumb it is very complex and difficult for the average individual investor to work with more complex trades and strategies such as options.  It is also more tricky to trade commodities and it is easy to get burned.

I have no knowledge of R.J. O'Brien as a company and I have never dealt with them in my capacity as a stock analyst.  I do know that they are a long-established firm with a good reputation.

As far as the second part of your question is concerned, it basically makes my point here.  You are asking if you can lose your entire investment.  The answer is, of course, YES!

This is what I meant about the complexity of the futures and options trades.  Essentially, you will use your money to control a larger amount of gold/silver and hope that it moves the way you want.  This is typically known as "leverage" because it acts like a multiplier for your money.  If the price goes the way you want your relatively small amount of capital will return a large sum.

If it does not, you will quickly get hammered and lose all of your money.  If you do not even understand the basic principles behind buying/selling futures and options then I would urge you to NOT get involved in such complex investments.

You might better off just placing a portion of your capital into actual gold bullion/coins, gold mutual funds, etc.  

Gold and silver are traditionally viewed as a hedge against inflation.  If you think that inflation is going to be a problem then you move some portion of your portfolio into the metals.  The problem is that gold has been on a tear for a long while now and is currently trading at some of the highest prices in years.

Will this continue?  That is the tough question.  Sure, there are some people that made a bunch of money on gold recently, but that does not mean that this pattern will continue.

I would urge that you do some additional research and read some books on investing before you do put your money at risk in futures trades.  I always recommend "investing for dummies" or one of the various Suze Ormond books for starters.

If you feel that you simply must buy metals now, then I would suggest that you buy gold coins like kruggerands or a similar product in ounce quantities and put them in your safety deposit box.

If you don't want to do that then look for a decent gold or silver mutual fund.

I hope this helps.

Best,

Steve