How to Buy Gold in Today's Troubled World

Email
    Text size
Gold turned in a fairly tarnished performance during the second quarter, falling $80 an ounce, or 4.76%, during the April-June period.

Even still, most precious metals analysts see strong potential for gold prices in the second half of 2012 given the continued sluggishness in the global economy and increasing uncertainty about the Eurozone debt crisis.

Some are suggesting that gold prices could top their previous 2012 high of $1,795.10 an ounce set back in February.

Given that, the big question for investors is how to buy gold in a renewed bull market for the shiny metal.

The answer largely depends on your expectations.

If you expect renewed economic disruptions in Europe and elsewhere, growing tensions in Syria, Iraq, Egypt and the rest of the Middle East, and increasing political discord in the U.S. before and after the election, you'll likely want to take the traditional approach - holding the physical metal itself.

Purists feel this is the only true hedge against global turmoil and declining values in the dollar and other fiat currencies.

How to Buy Physical Gold

For smaller investors, this typically means buying gold bullion bars, rounds (unadorned coin-shaped pieces) or minted gold bullion coins.

Bullion bars - produced primarily by private mints like Engelhard, Johnson Matthey PLC (LON: JMAT) and Credit Suisse Group AC (NYSE ADR: CS) - come in an assortment of sizes to suit the needs and means of every investor.

The smallest bars weigh just one gram, priced this week at about $52.75, while the largest is 400 ounces and was going this week for around $645,000.

Gold rounds are produced by the same private refiners, as well as some government mints, and are also available in a variety of sizes, typically ranging from one-tenth of an ounce to five ounces. Prices range from as little as $15 per round over the spot price of gold at the time of the order for smaller pieces to $40 over the spot for larger specialty pieces.

Jewelry-type pieces, such as pendants, are also available, but generally carry slightly higher premiums.

Minted bullion coins come in a far greater variety, being produced by most of the private refiners as well as a number of the world's leading government mints.

Examples of the latter include the American Gold Eagle, American Gold Buffalo, the Canadian Gold Maple Leaf, the South African Krugerrand, the Chinese Gold Panda and the Mexican Gold Libertad.

Specialty bullion "commemorative" coins are also available from both private and government mints, honoring everything from African wildlife to the spouses of American presidents.

Sizes range from one-tenth of an ounce to two ounces, with the one-ounce size being most popular and readily available. Bullion coin prices typically track the spot price of gold, plus a premium of 5% to 6% for the one-ounce issues, which covers the cost of refining, minting and marketing. Premiums on smaller coins can run as high as 15%.

Beware, however, that the premiums for all sizes will be considerably higher if you buy in small quantities or want to pay by credit card rather than with a bank draft or funds transfer.

For example, late last week one leading U.S. dealer quoted one-tenth-ounce American Gold Eagles at $180.19 each when purchased in quantities of 100 or more using a bank transfer, a premium of 12% over the spot price of $160.88 at the time. However, the same coin, bought in lots of 49 or less using a credit card, was quoted at $188.90, a premium of 17.4%.

Where to Find Reputable Gold Dealers

The most important rule, whether you're buying gold bars, rounds or minted bullion coins - or any other physical metal, for that matter - is to deal only with reputable dealers with proven experience and clearly stated policies and warranties. This is especially crucial if you're purchasing by phone or online.

Several well-regarded, long-standing dealers in the U.S. include:

  • American Precious Metals Exchange (apmex.com) - This Oklahoma City-based firm offers both bullion and collectible metals products, as well as storage facilities. Quotes are updated every 15 minutes during trading hours. Purchase online or call 1-800-375-9006.
  • Asset Strategies International (ASI) (assetstrategies.com) - This Rockville, MD, firm has a large inventory of gold coins, bars and other bullion products, and also offers regular metals markets commentary and analysis on its website. Sales representatives are available at 1-800-831-0007.
  • Goldline International Inc. (goldline.com) - Based in Santa Monica, CA, this company has been in business more than 50 years and offers a full range of gold coins and bars from mints around the globe. You can purchase online or through a sales rep by calling 1-800-963-9798.
  • Kitco (kitco.com) - One of the world's largest metals dealers with offices in New York, Montreal, Hong Kong and elsewhere, Kitco provides a wide range of gold products and services, including real-time quotes and news updates. Purchases can be made online or by calling 1-877-775-4826.
  • The Tulving Co. (tulving.com) - Based in Newport Beach, CA, Tulving provides 24-hour sales and service, tracking trading and price quotes in markets around the globe. U.S. and Canadian investors can call 1-800-995-1708.
Physical gold provides a long-term store of value, but it does carry one added risk - the potential for confiscation, much like what happened in 1933.

That possibility is quite real, as discussed in Peter Krauth's Money Morning Special Report earlier this year. As such, if you're seriously considering gold as a hedge against future U.S. political or economic uncertainty, you might consider a storage site for your coins or bars in Canada or elsewhere offshore.

One added note for coin buyers: If what you want is a true hedge against turmoil, inflation and a weakening dollar, stay away from "collectible" gold pieces.

While such coins are beautiful and their value will no doubt increase along with gold bullion, those values are subjective, they carry far higher premiums than bullion coins and they're much harder to sell on short notice.

How to Buy Gold Without Buying Gold

By contrast, bullion coins and bars are cumbersome for investors to trade given the price premiums, storage, shipping and insurance costs.

In this case, the ultimate trading vehicles are gold futures - the most popular being the 100-ounce contract listed on the COMEX Division of the Chicago's CME Group.

However, that's a fairly high-dollar/high-risk instrument for most investors since a single contract is worth $160,000 or more at current prices. Thus, a move like the $50.10-an-ounce drop we saw in the August contract on June 21 could cost you $5,010 in a single day.

As such, a better vehicle for smaller investors wanting to play gold's next rally - or merely to hold as a longer-term proxy for the metal itself - is one of the exchange-traded funds (ETFs) or notes (ETNs) with shares backed by actual bullion.

By far the largest and most popular of these is the SPDR Gold Trust ETF (NYSEArca: GLD).

The price of GLD shares, which are backed by physical gold and issued in blocks of 100,000, generally tracks the price of one-tenth of an ounce of gold, usually trading at a slight discount.

As of mid-May, the Trust held about 1,277 tonnes of gold bullion - the sixth-largest cache in the world - and the fund's market capitalization at the end of June was about $65 billion. It's also highly liquid with an average daily trading volume in excess of 1 million shares.

Another option for those with smaller budgets would be the iShares Gold Trust ETF (NYSEArca: IAU). Its shares are also backed by physical gold, but they're priced at just 1/100th the price of an ounce of bullion, also typically trading at a small discount. The fund has a market cap of about $9.3 billion and a daily trading value of around a quarter-million shares.

Finally, if you're really bullish, you might want to consider the Deutsche Bank AG Gold Double Long ETN (NYSEArca: DGP). It holds some physical gold but primarily employs futures and options in a bid to produce percentage gains double that of gold itself on any upmove. (Of course, losses on pullbacks are also magnified.) Be aware, however, that this fund is more thinly traded - usually less than 50,000 shares daily - and has a market cap of just $500 million or so.

However you choose to invest, gold's recent price action indicates it could again be ready to move higher, so don't miss your chance to jump aboard the bandwagon on this pullback.

Related Articles and News: