Ways to own gold and what is the risk

WAYS TO OWN GOLD

There are many ways to own gold. The best way is to buy a few one-ounce gold coins, preferably American eagles if you’re in the United States, or Canadian maple leaf coins if you’re in Canada. With one-ounce coins, you pay the lowest commission.

The trouble with gold coins is also their advantage: they are in your possession. They can be lost or stolen. They must be mailed back to a coin dealer to sell them for money. There are commissions to pay. But, in a time of national crisis, coins are the best way to hold gold for the small investor.

In a true panic, you will have a problem selling—not because of low demand but the opposite: you won’t be able to get through on the phone. There are probably fewer than 400 full-time retail coin dealers in the country, and most of them are small operations. This number must serve up to a hundred million American families. If one percent of these families ever decide to buy a single one-ounce coin during a panic, the phone lines will jam up.

You can buy gold shares. Buying gold stocks is the standard approach of most investors. The problem is, you’re not buying gold. You’re buying a company that says it has gold in the ground. You are also betting on future mining costs, management skills, and the possibility than the company has already sold its output for a fixed price.

You can buy small gold units (grams) at a company like GoldMoney, which holds the gold in a bonded warehouse outside the United States. GoldMoney uses a warehouse in London. Using digital accounts is convenient. Commissions are low. Transactions are easy. You can take delivery of your gold. You must pay storage fees, which is evidence that your gold is really there. There are no free lunches and no free vaults.

There is a fund, the Central Fund of Canada, that holds mostly gold and some silver bullion. The prices of the two metals move in tandem most of the time. Owning shares of this fund is a surrogate for owning physical gold.

Recently, a new firm has been approved by the Securities & Exchange Commission to trade in units of gold as low as a tenth-ounce: streetTracks Gold Trust (GLD). This firm is part of the World Gold Council. It is receiving considerable publicity. It is likely that Americans who are looking for an easy way to participate in the rising price of gold will use this firm. If the firm becomes profitable, there will be imitators. ISHARES Silver Trust (SLV) quickly proved its potency in helping drive the price of silver to over $15.

Always remember: if there is no proof of physical possession of gold, and if there are no storage charges for gold held in reserve, then you may be trading a futures contract, which is a promise to pay gold on demand. Promises to pay are never as reliable as gold in hand. Third-party verification of gold held against receipts issued for gold becomes important.

I think an electronic approach to holding gold is the wave of the future. There will come a day when banks and other financial services companies will offer these services. But that change will require a few currency crises that will catch the attention of people with money.

You should ask yourself what you are hedging against. Answers include the 15 reasons in the report, plus these more specific ones:

* Dollar inflation/depreciation
* Terrorist attack on the U.S.
* Crisis in the bank payments system (cascading defaults)

Retirement

* Capital gains taxation rather than ordinary income taxation
* Speculation: Asians may start buying gold

You should also ask yourself this question: “What do I intend to do with my gold?” Answers include these:

* Hold it as a speculation: buy low, sell high
* Hold it as a way to pass down wealth to my heirs
* Hold it as a way to hedge against a monetary disaster
* Hold it as a way to avoid paper trails

WHAT IS THE DOWNSIDE RISK?

The standard ones are these:

* Net central bank sales of gold to public
* Recession reduces price inflation
* Recession reduces demand for commodities
* Asians turn out to love paper money more than gold
* Government outlaws gold for Americans
* Gold-owning Americans actually obey the government

The political pressure is very strong to keep a higher price of gold from identifying reduced confidence in the dollar. We have seen the government take steps to push down gold’s price. But the government also sells gold coins. It maintains the official position that gold is not relevant for monetary affairs. To outlaw gold would be to admit that gold is relevant. This might turn into a gold-buying panic. Because Americans can easily buy and sell gold on the Web, there are ways for people to evade the law.

A worldwide recession is possible if China suffers a major recession. China at some point will have to go through a recession because of today’s inflationary policies. But the question is: When? Gold may fall 30% from $700 an ounce. If you have no gold, it’s not wise to bet the farm on a fall in price. Besides, if gold falls, you’ll probably think, “It’s going to fall even more. I had better wait.”

CONCLUSION

People postpone doing what they don’t really want to do. They don’t want to take action that implies that the present system is shaky, that the government is following policies that will debase the currency, and that there is no way for the government to preserve the purchasing power of the dollar by anything other than ceasing all monetary expansion, which the Federal Reserve System never does.

I suggest that you re-think all of the reasons you have come up with for not buying gold and gold stocks. See if they still make sense in the light of the facts presented within.

This article is a combination of key points from an article by John Embry titled 15 Reasons to Own Gold and a six-point summary by Blanchard Economic Research Unit titled “Why Own Gold?”, with additional notes by Gary North. and Jason Hamlin.

via Goldstockbull