Gold in the Modern Age, Part 1

The following article was originally published in the International Speculator of December 2004. We think that its content is now more timely and important than ever--considering that the U.S. dollar is increasingly gravitating towards its intrinsic value, and that more and more traditional investment routes have ceased to be the fail-proof ventures they used to be.

With the gold market heating up and the U.S. economy making ominous noises, like an engine that may have blown a gasket but hasn't obviously seized up yet, a lot of subscribers have been asking about physical gold. While our bias is clearly for gold stocks as they can rise exponentially off the back of even a modest rise in bullion price, gold stocks carry more risk and therefore should only form a reasonably modest portion of your broader portfolio. About 10% to 20% seems reasonable at this point in time, but the specific amount will depend on your net worth and tolerance for risk. Regardless, the point is that a little bit of diversification into the gold stocks can go a long way. Physical gold, or equivalents thereof, have different roles to play: protection against inflation and a way to store wealth against the proverbial rainy day.

Some form of physical gold--free of credit risks, carrying costs and storage issues--should be a core element of everyone's portfolio. If you've been a subscriber to the International Speculator for any period of time, you should have already bought your physical gold, but, if you haven't already, it's far from being too late.

Buying and Storing Physical Gold

First, don't rely exclusively on safe deposit boxes in your local bank. In many states, bank vault boxes are sealed upon the death of their owners, forcing the contents to go through probate, delaying access. For that and other reasons, simply keeping some modest amount of gold at hand is not a bad idea. A tube of 10 one-ounce coins will give you over $4,500 (as of this writing) in a highly liquid and compact form you can literally drop in a pocket at a moment's notice. Everyone should have something like this in a good, safe, convenient place--moonlight gardening optional. There are also "attorney's boxes" which, while perhaps too risky for larger amounts, are at least not in a bank vault where access might become an issue during difficult times (or where, in extreme cases such as the L.A. riots, people will go to look for valuables).

If you're looking at a mid-sized position of, say, 50 to 100 ounces, one of the gold substitutes discussed below (PMCs, electronic gold) would be a good way to go. You own the gold, but don't have to worry about storing it, transporting it, etc.

If you are going to take a more substantial position in gold, you really want to make arrangements with a bank or storage company specifically set up to handle bullion storage. You'll want segregated, insured storage so your gold won't get treated as part of the assets of the bank/repository (and hence can't be used as lending capital or collateral by anyone but you). You'll also probably want to pay the fees--ranging from 1/3 to 1/2, to 3/4, but not more than one percent per year of the value stored--separately. That way you'll avoid attrition of your gold holding, so they are there when you or your heirs need it.

Is it worth paying fees just to have gold sitting in a vault?

In a word: yes. You'd be running a terrible risk if you tried to stash a few kilos around your house, and you would have a very hot potato on your hands if you ever had to move the gold. Besides, even if you paid as much as 1 percent per year on the value of your stored gold, that's less than inflation--not to mention highly probable gold appreciation.

Where do you buy your gold?

If you want physical bullion, for convenience and variety you can't go wrong with Kitco.com, the internet's premier bullion dealer. You can buy anything from a 1/10-ounce Eagle or Maple Leaf, all the way up to kilogram bars of gold and silver. Platinum comes by the ounce, or less, or in pre-fabricated bulk forms for jewelers. You can place your orders in U.S. dollars, Canadian dollars, Euros, or Pounds Sterling, and have your order shipped and insured to wherever you designate--or you can buy into Kitco's Gold, Silver, Platinum, Palladium, or Rhodium Pools, and have Kitco take care of storage and insurance for you. Kitco is flexible, but for your own maximum flexibility, we suggest sticking with easily traded bullion coins. Log in at www.kitco.com and check it out.

Dana Samuelson, at American Gold Exchange (AGE: 800-613-9323, www.amergold.com), also does an excellent job in the bullion coin business, and may charge you less than other firms if you're buying more than a few coins (4.5-5.5% over spot). He'll also pay you 1-2% over melt for coins you sell, while many other firms will pay you less than spot. Another long-time friend, Bill Bradford, (R.W. Bradford Coins: 888-792-2646, 360-379-4692 or: [email protected]) has an even narrower spread between purchase and sale of coins, and also deals in many European gold coins that a number of firms--Kitco included--don't sell.

For major bullion buys--defined as being in the millions of dollars range--where you wouldn't want to take actual physical delivery, you want to go straight to an exchange like NYMEX/COMEX and purchase the furthest-out contract you can--several years out. That way, in effect, you just pay (and lock in) the current interest rate, and let the exchange store it for you. You need a good commodity broker for this. We're familiar with the people at Fox Investments, who also can help you with any number of lower-risk options strategies. Call Susan Rutsen at 1-800-345-7026... be sure to ask for a free copy of their IPS Short Course to Futures and Options.

What about rare coins?

Numismatics can be profitable, but tricky. The first thing you should know is that when the price of gold rises, the price of rare gold coins tends to rise even more sharply. By contrast, bullion coins are not scarce, and are worth little more than their melt-down value. Rare coins are just that, and the same psychology that drives people to gold when they worry about their paper money losing value, seems to have a multiplied effect when it comes to the more collectable coins. That psychology may not hold in times of greater economic difficulty, but for now, a good buy in a collectable coin can provide a good return.

The second thing is that, truth be known, many of the dealers in numismatics are a higher form of pond scum. Actually, maybe not. Pond scum might ruin your golf shorts, but it won't clean out your bank account with an over-graded coin. Grading services can be gamed; many dealers will keep resubmitting coins to the grading services (who grade them and return them in tamper-proof, but not indestructible, plastic holders) until they get the grade they want. A difference in a couple of grades can be a difference of thousands of dollars.

The trick is to study the subject carefully and to find a reputable dealer, like Van Simmons at David Hall Rare Coins (800-759-7575), who won't get you into semi-numismatics, or numismatics that aren't quite what they are advertised to be. In the past, premiums on rare coins often ran between 50 and 100%, but now, they tend to be much lower, in the 10 to 20% range. If you are a collector by nature and want to invest the time to really understand the rarity factor and how the numismatic market works, you can do well. But if that's not you, or you just don't have the time, stick with bullion and mining stocks.

[Part 2 will tell you more about physical gold substitutes.]

 

***

If you're a subscriber to Doug's International Speculator, you probably already have loaded up on physical gold and silver. If not, it's high time to think about it--not so much as an investment, but as a kind of "life insurance" for the toughest of times.

For sound investments that give you double- or even triple-digit returns within 12 months or less, precious metals stocks--Doug's area of expertise--are one of your best bets. With the natural resource bull market now really getting underway, making junior exploration companies (which guarantee the greatest upside) part of your portfolio is simply the sensible thing to do.

However, it is important not to jump on the natural resource train without a profound knowledge of the market--too many investors have been burned by listening to the siren song of shrewd PR experts. Let Doug and his Casey Research team be your eyes and ears... and the best, they will teach you all you need to know to become an expert yourself.

Click here to learn more.

 





Posted 10-18-2005 2:02 PM by Doug Casey