With the world in turmoil and high unemployment in the US, many people are looking at gold as a safe investment that has stood the test of time. You can buy gold in several ways. Let’s take a look at your possibilities.
Would You Like Some More Paper?
Recently, one of the more popular ways to get gold exposure is on the stock market through an exchange traded fund. The biggest gold ETF in the world is “GLD:” easy to remember and easy to buy. But you aren’t buying physical gold here. You are buying “paper gold.” A share in an ETF like GLD is a piece of paper (that you will never see ) which entitles you to a claim on the gold owned by the fund. Here we enter the realm of “counterparty risk.” How do we know, I mean really know those fine folks at our ETF will really make good on your theoretical paper claim to their gold? They won’t give you the gold if you want it.You can only buy and sell the ETF like a stock on the stock market. If the economy really gets bad, and the rising risk of that occurring is why everyone is interested in owning gold, then you can bet this ETF will be the first thing the government lines up against the wall and shoots . The same can be said for bank managed gold accounts. You don’t own the physical gold – you just own the paper . GLD and other exchange traded funds offer you a good way to speculate on the price of gold short term but you don’t want to hold on to that paper going to bed at night thinking you are protected. Because you aren’t!
Gold Miners – a Good Investment?
What about gold miner stocks? These listed companies surely trade in line with the gold price, don’t they? . Er, no, they don’t . Buying a gold mining stock is no different than buying shares in any other company as you are exposed to some of the same risks:
- Management risk
- Employee risk
- Regulatory risk
Plus, you also take on board other risks peculiar to mining :
- Safety risk
- Pollution risk
- Mine confiscation risk by unfriendly foreign governments
- Mine depletion
What about Bre-X Minerals? After the stock hit $286 in 1997 the shares collapsed when it was shown the company’s “proven” gold reserves in a mine in Indonesia wereethereal? That’s not what I want ! I just want to protect my welath and buy some gold. What are the other choices?
A Future in Futures ?
Most gold is bought and sold in the futures and options markets. These financial instruments are complicated and leveraged ways for corporations and sophisticated investors to hedge themselves against gold prices going up or down . Futures are also used, of course, to speculate on the price of gold. Again, you are holding a piece of paper here and this paper has an expiry date. You need to close out the contract before the expiry or you will end up taking physical delivery of a lot of gold (100 ounces per contract). Also, in times of severe economic crisis you can bet this liquid window of paper gold speculation will be slammed shut and just when you need it most!
Expensive Doorstop
What about buying a gold bar ? A gold bar bar of bullion gold would make a great doorstop as they weigh 400 troy ounces. Which means that would be a very expensive way to keep the door open with a current market value of $660,000. Also, “provenance” is important here. Provenance is the history of ownership Most gold bars are kept in central bank vaults and their history is documented . Your doorstop, as soon as you take possession of it, becomes undocumented . In order to dispose of this bar in the future you would have to get it “assayed” . A chemical test would be conducted to determine purity . It would likely be X-rayed as well to make sure the there isn’t a lead core. All in all, gold bars are expensive to own.
Jewelry is another way of owning physical gold. This route is more popular in countries such as India where women wear the family wealth in the form of bracelets, bangles and necklaces to demonstrate status. But I want to warn you, if you buy jewelry for its gold content you are paying too much money! This is because you have to pay the artist for their labor as well. Jewelry isvery difficult to value because of this. Often when it comes time to sell, the premium you paid over gold prices evaporates and you get only what the gold content is worth. This is an unattractive way of getting gold exposure .
The Best Way
Ownership of gold coins carries none of the drawbacks of other methods mentioned above. Gold bullion coins are minted by and guaranteed by national governments. The American Eagle, the Canadian Maple Leaf and the South African Krugerrand are three common examples. These coins are recognized and welcomed worldwide. Their market price is a tiny premium above the current spot price of gold. You don’t need an assayer to value these coins; you know what they are worth every day. Gold coins are straightforward to buy and sell and simple to store. Gold bullion coins are, by far, THEideal WAY to own gold. For pure gold exposure, nothing matches ownership of gold bullion coins.