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.]

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 [email protected].

[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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