Special Report: How to Buy Gold

[Editor's Note: Commodities expert Peter Krauth - the editor of the Global Resource Alert advisory service and a frequent contributor to Money Morning - expects long-term gold prices to reach $5,000 an ounce. But he actually believes the biggest profits can be made right now. In this "defensive investing" primer, he responds to questions from readers who want to know how to buy gold.]

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As an analyst and editor who specializes in the natural-resources sector, I spend a lot of time writing about gold, gold mining, and gold investing. Those are popular – and even emotional – topics with investors, which means that the columns, essays and advisories I write tend to generate a lot of comments and questions.

I think that's great. After all, an engaged investor tends to be a successful investor.

Not surprisingly, one question dominates. And that's the question we're addressing in this special report.

The question: "How do I buy gold?"

As a service to the Money Morning readers who have asked that question, or who've had that same thought, I've put together this overview – or primer – that addresses the basic ins and outs of buying gold. In this feature, I address some of the more-common and more-timely questions that I've been getting.


How to Buy Gold

Q:  How should individuals buy gold? Who can they look to?

Peter Krauth:   There's nothing like holding a gold coin or gold bar in your hands.  This is the oldest and most direct form of gold ownership.  In some cultures, gold remains the main investment vehicle people use to accumulate their savings. 

You can buy gold bars in a variety of sizes and weights, which is how its price is determined.  Non-collectible coins are bought for their gold content, which is usually a full troy ounce.  Just be sure you have a safe place to store your shiny new asset.

Bullion dealers are the easiest way for most investors to buy smaller quantities of gold.  Do some homework to check them out before you buy.  Expect to pay – under normal circumstances – premiums of about 3% to 6% above the "spot" price for physical gold.  But when things get hairy – as they were back in November 2008, in the depths of the global financial crisis – premiums can go up by three to five times, with some dealers charging 10% to 15% above spot.  Obviously, you'll be better off buying gold on price dips and under calmer circumstances.

A few dealers that have an established reputation are:

  • Kitco.com: Premiums are fair and the selection is usually quite good. They have offices in both New York and Montreal.
  • Asset Strategies International Inc. (assetstrategies.com):  This dealer is located in Rockville, MD.  Asset Strategies also offers gold storage options outside U.S. borders.
  • Camino Coin LLC (caminocompany.com): Burlingame, CA.
  • American Precious Metals Exchange (apmex.com): Oklahoma City, OK.
  • The Tulving Co. (tulving.com): Newport Beach, CA
  • Gainesville Coins (gainesvillecoins.com):  Lutz, FL.

Q: How are gold sales taxed?

Krauth: I was recently reviewing the "Frequently Asked Questions" (FAQ) section of the official Website of the SPDR Gold Trust Exchange-Traded Fund (NYSE: GLD) and found an excellent overview of how the GLD ETF is treated from a tax standpoint. So I've included some of it here:

"The United States Internal Revenue Service (IRS) treats gold as a collectible for long-term capital gains tax purposes. As such, gains recognized by individuals from the sale of SPDR Gold Shares are subject to a capital gains rate of 28% if held for more than one year. This rule extends to all gold held by the Trust. Although there are some restrictions applicable to retirement plans such as IRAs and 401(k)s investing in collectibles, SPDR Gold Shares received a private letter ruling permitting investment by such retirement plans."

Managing Risks/Maximizing Rewards

Q:  Are gold ETFs considered "paper" money for not owning real, physical gold? If so, what is the real risk, if any, of not owning real gold?

Krauth:  That's a matter of opinion.  I'd rather own a nice chunk of an established gold ETF than have no exposure to gold, whatsoever, since it's typically backed by gold, according to its prospectus. 

Let's be clear: Actual paper money is simply a government-issued note, which is deemed legal tender.  That means the issuer says people can use that currency to conduct transactions. The problem arises in the case of inflation, expected inflation, or hyperinflation, because the public using that fiat currency (not backed by a valuable physical commodity) might lose faith that others will attribute the same value to it in the future.

That being said, gold ETFs are an interesting tool as a convenient way to own a claim on gold.  Nothing will ever replace owning actual gold and safely storing it under your control.


One of the easiest ways to buy such a claim on gold is the SPDR Gold Trust ETF (NYSE: GLD).  With a total value of $50 billion, GLD is now the largest physically backed gold ETF in the world, holding 1,300 metric tons (or 42 million ounces) of the yellow metal in a London vault. GLD shares, which represent one-tenth of a gold ounce, can easily be bought and sold by investors through their brokerage account.

Another option to acquire paper gold is through Perth Mint Certificates (PMC).  Locked away in a vault and insured, this is the only bullion-storage program that is government-backed, with the state of Western Australia standing firmly behind it. 

You'll need to commit at least $10,000 to get started in PMCs. There are also small-but-reasonable fees to obtain your certificate and trade your holdings.  It's also a great way to gain some international diversification for your gold holdings, by owning it outside of your home country.  For more info go to Perthmint.com (note that Kitco and Asset Strategies also offer the PMCs).

As for the risks of not owning real gold, that's something each individual needs to come to terms with for themselves. 

What I can say is that it is vital for you to know and understand this: Physical gold coins or bars are an unequalled safe haven, due to their liquidity and lack of counterparty risk.  It is the only liquid, universally recognized form of transportable wealth that is not simultaneously someone else's liability.  That's what makes gold so desirable.

By contrast, owning paper gold means that – at some level – you'll be relying on someone else's promise.  So it may have its place in your portfolio, but you just need to understand it well, and appreciate its inherent risks.

Q:  How much of a risk is there that U.S. President Barack Obama will mirror the move of President Franklin D. Roosevelt and issue an EO (specifically, another version of Executive Order 6102) that would force us all to sell our gold at a fixed (negative) rate to shorten our profits (not to mention also tax us at 40%)?

Krauth:  This is a big question.  If you're concerned that President Obama or his successor (or your own country's administration) will pull a gold confiscation, then you may want to own some gold outside your country of residence.  That could mean renting a safety deposit box in another country, having an established firm store gold for you, or buying an ETF-type fund which is backed by gold that's held physically outside your home borders.  

One example of this for U.S. residents would be the Central Fund of Canada Ltd. (AMEX: CEF).  It's a closed-end fund that owns physical gold and silver, and that's been around since 1961.  It's domiciled in Canada, with its precious metals stored in the vaults of a Canadian-chartered bank.  CEF often trades above its net asset value (NAV), but you should avoid paying more than a 5% premium.  See www.centralfund.com for more info.

It's impossible to know if something like an Executive Order will ever come to pass, or if it does, to anticipate the precise wording it might contain – which would determine how the EO would affect different types of gold ownership.  Frankly, I think the current (U.S.) administration, even at the U.S. Federal Reserve level, is so clued out on gold that it's unlikely to happen any time soon.

But while we're in the speculation mode, I'd propose that if something like that were to happen again, it would be so far into the future, and at gold prices so much higher than today's, that you'd still benefit from a considerable gain off today's levels.

Given that outlook, let's just say that I'd rather own gold now, even with the chance for an EO someday.

Indeed, the bigger question to ask yourself – in my view – is this: What are the risks of not owning any gold?  Well, the risks are that we wind up in the midst of serious, sustained inflation, or even hyperinflation.  In that case, any cash you own will quickly lose value, while precious metals soar.  And that's something that, frankly, I'd rather not have to worry about.

Action to Take: Buy some gold – in one or several forms – store it safely, forget about some of these non-issues, and take comfort from the fact that you've taken a decisive step to protect your financial future.

Also, if you have follow-up questions, please feel free to send them in to the "Money Morning Mailbag" at mailbag@moneymappress.com.

[Editor's Note: Peter Krauth, a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy commodities and other natural-resource-related topics. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture. He even makes his home in Canada - to be closer to the action. And several of his recent predictions have generated a genuine Internet buzz.

All of his research led Krauth to the discovery of the "Gold Spike Indicator," or GSI, which signals the near-term direction of key commodity prices, including gold.

However, because it's tied to quarterly disclosure data, the GSI is available only four times a year, meaning it offers investors only a short time to act. If you want to find out more about this before this "profit window" closes, please click here.]

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About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. J L Galbreath | July 23, 2010

    I have been buying the "hard" stuff for over 15 years from several different dealers.

    • FIDO | July 23, 2010

      the problem is, what do you get when you sell it-less than you have given? (That,s my experience!!!)

  2. FIDO | July 23, 2010

    what would happen, if someone finds the hidden treasure El Dorado-the gold the indians of south america (Bolivia?) hided for the spainards?
    Or the russian gold that Napoleon sank in a lake outside Moscow? (The russians are diving after it!)
    Or the German goldreserve that the Nazis sank in a switzwerland lake?

    The prize would go down, of course, you say – but is it really so? How sensitive is actually the goldprize for the total volyme of gold in the world?
    I have read, that the volyme is a square of about 19 meters x 4 !!!

  3. Hollis Biddle | July 23, 2010

    I have read this article from start to finish and I have found Mr. Krause's thorough explanation of the gold adventure we are in – is outstanding to a non-informed person that needed to read this article. I am dabbling in gold and would like to buy more. He gave me several options with great explanations. He covered the confiscation element very well, except I think the Obama regime has started to wake up on gold. I think the recent heath bill has something in there about gold dealers having to list everything they sell in gold over $600.
    Anyway, the article was outstanding and will help me immensely in my decisions.
    Thank you for the article.

    Hollis Biddle, woodway, TX, 254-772-1011

  4. Joe Public | July 23, 2010

    What would happen if a lot of gold suddenly came onto the market? (Fido)
    Some did recently. 380 tones I believe. About that time the price fell about £1 per gram so I'm told. Some think the price will go up next month….

  5. C I Weingartner | July 23, 2010

    How do you think the new reporting of of all gold sells over $600 by anyone. It is buried in the OBAMA health care bill. How will it affect gold selling or owning physical gold? Dealers will be required to report all sells over $600. Interesting, no?

    • john schroeder | July 23, 2010

      i am no longer a buyer. dealers will be so bogged down with paperwork that they're commission will be raised and price will make folks to forfeit buy. another black market commodity that will rival drugs. just what the mafia was hoping for!

  6. Rachel Schechter | July 23, 2010

    If you buy pre-1933 gold worth at least 15% over bullion value, it cannot be confiscated.

  7. JJMcLaughlin | July 23, 2010

    If you worry about the Obama adimistrations movements into a EO. Looks like Canada would be a good place to hold your gold. Closer to US. I have very small holdings in coins but will make move shortly. Good Info.
    JJ

  8. john schroeder | July 23, 2010

    i have been saving up to buy gold, but if i have to receive a 1099 for selling 600 bucks worth-i am now not interested. will this defer folks from this type of transaction or is there a better way to attain gold without all the paperwork(trades or barter types)? p.s. is obama being sneeky with this being added in HC bill?

  9. William Atkinson | July 23, 2010

    Today, July 23, FOX Business News stated the Healthcare Law contains a Gold transaction Tax on amounts over $600 value. This is Healthcare? No, it's a sneak attack on "real" money by the elite who are very affraid of personal hard gold ownership.
    BE AWARE OF THIS ADMINISTRATION's sneak attack intentions, methods and agenda!

  10. distantvoice | July 24, 2010

    Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category coin dealers have been among those most rankled by the change.

    Cash is pretty much anonymous but, soon, any purchase or sale of $600 will “out” you to Unc Sam. Person-to-person transactions should be safe from this regulation. But pawn shops and coin dealers will become reporting agents.

    I expect there will be more attempts to suppress gold and boost the dollar. Good luck with that one.

  11. Gmam | July 24, 2010

    Why pay a 5-10% premium? Why not instead just take delivery of a futures contract?

    • captainmorgan | August 31, 2010

      Evidently you're not as up on politics as you are on investinng. There's a bill in House @ this time that will make it easier for the Federal Government to get their hands on 401k's. stocks, and bonds. Who's to say your futures contract won't be next! It's not bad enough they want to know what your spending and on what. Go to the bank and take out five thousand dollars or more and they won't give it to you without filling out all kinds of Federal and state forms stating why you're withdrawing and what for!! I'll take physical possession any day. If something happens guess what? They have your gold and you have a piece of paper that says you once had money!!!

  12. Bob Curtis | July 26, 2010

    When would this sale of gold over $600 reporting go into effect?

  13. Oscar | August 3, 2010

    Beware gold coins collectors, in 2006 I purchased a gold coin from "US GOLD INC." , I paid $689.00 for the darn coin plus $24.00 shipping and handling , I recently called an appraiser who quoted the price at $ 625.00 , after 4 years that I been holding the coin they tell me its worth less than when I bought it , and I was being presured to buy more , thank GOD I did not listen.

  14. Letta | August 25, 2010

    I appreciate Money Mornings commitment and consistently providing valuable information. I want to buy and sell gold. I am not rich, but I want to be. if I get full information, and client who buy the gold, I will collect gold from local market and sell it to the broader market. I want trusted buyer and its address.

  15. muhannad | September 6, 2010

    I have the gold but don,t have the buyer

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