How to Buy Gold

So What's driving this latest rise in Gold?

It’s a chronic imbalance between demand and supply:

Gold demand:

• Political and economic tensions boosted the appeal of gold as a safe-haven investment. Investment demand grew 36% in tonnage terms, driven by strong growth in India, Turkey and Vietnam.
  
  
• Jewelry demand hit a record annual rate of $38 billion in the past year — 24% higher than last year. When you drill down, you see the numbers are even greater in some regions: Gold jewelry demand in India rose 42% in the second quarter, while Taiwan's gold jewelry boom pushed sales up by 27%.
  
  
• Industrial and dental demand grew by 13% to 112 metric tons in the second quarter, with the Unites States and South Korea driving those markets.

Gold supply:

• Supply fell short by 152 tonnes last year, according to GFMS. Indeed, so far this year, the overall supply of gold is up about 8%, but demand is up even more — 21% in the first half of the year.

• Clearly, this is not an imbalance that’s about to correct itself in the near future. So expect the rise in gold and gold shares to continue, or even accelerate.

Your Investment Routes into Gold

You have the following ways to Invest in Gold and other precious Metals:

• Metal or Mining Shares - if you invest in shares of mining companies you will need to choose which ones: South African, American, Canadian or Australian

• Directly in Gold or Silver Bullion

• Coins - you have to decide whether to elect for collector (high premium) coins or bullion coins, with low premium over gold (Find Everything You Need To Know About Gold Coins Here)

• Futures - in which you take an option on the future movement of prices without taking actual delivery of the physical metal.  

• Commodity And Metals Funds - Trusts that invest specifically in Gold and other precious metals

There are numerous ways. But let’s start with the most basic form: Physical gold bullion.

Gold bullion coins

Best examples: The American Eagle, Canadian Maple Leaf, and South African Krugerrand.

Coins struck after 1850 were used as legal tender during the time of the gold standard. They are traded in bulk in a highly liquid interdealer market offering you easy entry and exit at any time. The value of these coins depends upon:

• their metal content;and

• a premium related to the supply of coins and their popularity. In general terms the premium is at least 5% over gold, typically in the 15-17% range.

Commemorative Coins, medallions and medals

These are issued either by State agents or by private manufacturers. They carry no face value and they have never been legal tender. For many years you've been able to buy such medals to commemorate and help finance major events - for example, the Olympic Games, an important national occasion, anniversaries of independence and the like.

In more recent times this practice has been subject to considerable abuse. Each New Year issues are marketed to celebrate almost every conceivable event. Often promoted by mail order with extremely high premiums to their metal content, these issues have little to commend them. Extra value may occasionally be justified on the grounds of:

• Artistic Merit
• The design of a recognised, reputable artist
• Genuinely limited edition

Gold ingots and bars

Ingots are generally 1 ounce, but can be found in 2- or 3-ounce slabs as well. Bars generally come in sizes of 5 to 10 ounces, with the 10-ounce form more readily available.

Either way, you can get significantly more gold for your money every time you buy simply by buying smart!

For example, at today’s price of $473 per ounce, 100 ounces of gold are worth $47,300. But if you buy 100 of the 1-ounce gold Canadian Maple Leafs, you’ll pay $49,676 for the same 100 ounces of gold content.

The additional $2,376 you pay for the Maple Leafs is the premium over the gold content. It’s the extra you pay essentially for the design and minting of the coin. And in this example, the premium is a hefty 5% ($2,376 in premium vs. $47,300 in gold content).

That’s actually not as bad as it seems, especially when compared to some other gold bullion investments. But you CAN do better.

Here’s how: Instead of buying 100 of the 1-ounce Maple Leafs, buy TEN 10-ounce gold BARS (total 100 ounces) for $48,510.

Then, with the money you’ve saved on the bars plus a few extra bucks, you can buy three 1-ounce gold bars for $1,455.

The extra gold you get by buying smart is a significant addition to your portfolio — like a free bonus.

That’s why I am one of the few who does not recommend buying gold bullion coins. They certainly can be beautiful to look at, but you pay a stiff price for the privilege.

The premiums are even worse for fractional gold bullion coins of less than 1 ounce, selling for a premium of as much as 35% over the price of gold. In general, the smaller the coin, the greater the premium.

Bottom line: For physical gold holdings, I recommend 1-ounce ingots and 10-ounce bars. And for even larger purchases, consider the internationally-traded 1-kilogram bars.

They’re all relatively easy to buy, and easy to store. Just make sure you are buying what is called “four nines fine” gold — the metal that’s .9999 (99.99%) pure gold.

The most common hallmarks are Johnson Matthey, Engelhard, Credit Suisse and Pamp. Most reputable dealers carry these ingots and bars in these hallmarks, or can readily acquire them for you.

How to Store Your Gold

For small purchases, say up to 20 or 30 ounces, I prefer the safety deposit box at my bank. It’s simple, safe and worry free. Even if the bank were to encounter financial difficulties, access to the safety deposit would not be affected. I do not recommend storing any gold in your home or office.

For purchases beyond 20 or 30 ounces, use your dealer’s storage facility. But there are a few things you need to know&

Non-fungible storage is the best form of dealer storage — if you choose to leave your metal with a dealer.

Your bullion or bag of coins is labeled with your name as your specific property and stored separately from dealer assets. With non-fungible storage, your gold is not commingled with the bullion of others. And I feel it’s the only type of dealer storage you can be fully comfortable with.

If your dealer doesn’t offer non-fungible storage, find one who does.

Alternatives to Physical Gold

Always keep some physical gold handy. But for larger quantities, where storage is impractical, there are a number of ways to invest in gold while avoiding some of the hassles of storage and delivery:

Gold ETFs (exchange-traded gold funds)

Late last year, the long-awaited StreetTracks Gold Shares (GLD) was finally introduced in United States. This NYSE exchange-traded fund effectively offers investors physical gold in the format of an electronically-traded security, with each share representing one tenth of an ounce of gold.

A second option is the iShares Comex Gold Trust (IAU). And yet a third is the Central Fund of Canada, Ltd (CEF). However, among the three, I prefer the StreetTracks Gold Shares because of its greater liquidity.

Perth Mint Certificates (PMCs)

These are issued by Western Australia’s government-owned mint showing ownership of a certain amount of specified ounces of gold. Some advantages:

• The Perth certificate comes with a government guarantee carrying a triple-A rating from S&P.
• When buying, specify you want “allocated” certificates, which is similar to the non-fungible storage I described above.
• Your bullion is insured against fraud and theft by Lloyd’s of London.
• There are no storage fees.
• The certificates are transferable.
• You can redeem your certificates at the mint.

For quotes and info, consider Kitco Bullion Dealers. You can get the latest on PMCs by visiting this page on the Kitco web site and clicking on “Perth Mint Certificate” (in the middle of the brown bar near the top of the page).

Gold Mining Shares
Warning: Not All Are Created Equal!

Provided you pick the right ones, gold mining shares not only give you an indirect vehicle for investing in gold, they can also provide additional leverage and profit potential that goes far beyond what you can achieve with gold alone.

For example, let’s say it costs a mining company an average of $250 to produce each ounce of gold. And let’s say we’re back in 2001 when an ounce of gold was selling for $260. At that point, the company’s profit margin is just $10 per ounce.

Now, watch what happens when the price of bullion rises just 4%, to $270 per ounce: The company’s profit margin jumps from $10 to $20, or by 100%. This in, turn, can drive up its share prices by many times more than the price of bullion. Therein lies the leverage you can achieve by buying the right shares

Two words of warning:

First, timing is critical, and if you buy while gold shares are near a temporary peak, you may initially be disappointed. Indeed, even right now, a further correction in major gold shares like Newmont Mining is still possible.

Second, if you own the wrong mining companies, you could be left behind when gold bullion surges.

Some will be unable to meet the gold demand, failing to capture a large portion of the profit opportunity.

Others, mistakenly fearing a decline in gold prices, will run substantial hedging operations, seeking to protect themselves from the decline by selling gold in the forward market or selling short gold futures. This could greatly reduce, or even wipe out, their profits for the year.

So to avoid disappointment, refer to my top six criteria for selecting what I believe to be the best gold mining shares. None are hard-and-fast rules. But all are critical factors to consider.

1. Low debt. I generally like mining companies that have less than 50 cents in long-term debt per dollar of stockholders’ equity.

2. Moderate hedging. Stick with those that do not hedge more than 20% of their annual production. After all, what’s the point of buying into a company’s bullion to ride the bull market in gold when that same company has already sold most of its gold or production at today’s low prices, or worse, at yesterday’s even lower prices.

3. Low cost. Try to stick with mining companies with total production costs no higher than $200 per ounce. The lower the better. If it’s a bit higher, it’s not a deal killer. But this is a good benchmark to work from.

4. Healthy expansion. Companies that are expanding reserves via property acquisitions. Since new exploration can be expensive, I favor companies that are actively engaged in buying proven gold properties and smaller mines.

5. Experienced management. I want to see management that demonstrates not only a solid track record of experience, but also talent for thinking outside the box, especially when it comes to the acquisition of hot properties.

6. Value: Don’t go strictly by P/E ratios. Mining shares should also be valued on the basis of their proven reserves. Generally, the lower the ratio of the company’s market cap compared to the value of its reserves, the better.

For instance, a company with a market cap of, say, $10 billion with gold reserves worth $2 billion at the current gold price ($5 per share for each dollar of gold reserves) is much more expensive than a company with $4 billion in market cap and $2 billion in reserves ($2 per share for each dollar of reserves).