Why Invest in Gold

Should You Buy Gold Stocks? The Answer’s Yes, But Wait

There’s no rush to take any new action in this market. That’s the best opinion I can offer to any equity investor with cash in the trading account. There are all kinds of attractive opportunities out there, but this market needs a break. Stocks need a rest and so does gold and silver. Investors shouldn’t feel any pressure to make any new trades. The timing isn’t quite right yet for bold new action.

With markets in need of a correction, it’s actually quite a difficult environment to be making new picks in. Investing in gold is a good strategy, but the returns are going to be mostly incremental from existing producers. Like always, the big money will be made with juniors who are making new discoveries.

As a speculative investor, I actually devote a great deal of my efforts to the junior mining sector, especially given the state of the global economy. The underlying price of gold is going to stay strong for the next several years, with ups and downs of course, and institutional investors are on board with this view. Also, the domestic economy still isn’t strong enough to generate the kind of growth that a speculative investor is looking for.

I like a junior miner to be an existing producer, have lots of cash in the bank with little to no debt, to be currently drilling for more minerals, and have a strong volume on price rises. There are a lot of these companies out there, but the game has changed now that gold is trading over $1,500 an ounce. Now the business model really makes sense and companies have the cash to go looking for more metal.

The mining business has always been a cyclical industry and the same goes with investor sentiment for the sector. Try and select a number of qualifying miners and put them on your watch list.

It is tough to predict markets and each investor has a different view of things. Over the very near term, I would let both the equity and commodity markets consolidate for a while. Then I would be a new buyer of micro-cap gold stocks.

How to Buy Gold and Silver
by Dr. Alex Cowie on 10 December 2011

When it comes to buying physical gold and silver, there are a range of options you can take.

Precious metals Exchange Traded Funds (ETFs) are the cheapest and most convenient way to buy and sell gold and silver.
But if you take that route, you also expose yourself to counterparty risk. In short, when you buy an ETF, the metal you buy is not held by the ETF provider. It’s held by a large global bank, like HSBC or Morgan Stanley.

If the bank goes bust, your gold and silver could be gone too. Besides, you can never really be sure they’re holding the gold they claim.
Why do you need to worry about this?

Because the US Commodity Futures Trading Commission, with the Gold Anti Trust Action Committee, reports there is now one hundred times more ‘paper gold’ in the world than physically exists above ground.

For this reason we believe it’s much safer to have the bullion in your hand (details on how to store it in a moment).

Owning the shiny stuff…

But, buying physical gold or silver is more expensive than investing in an ETF. Dealers charge a premium. Then you’ve got the cost of delivery, storage and insurance. And when you sell, your dealer will take a cut.

On top of that, buying bullion isn’t ‘risk free’.

The risk, of course, is that gold and silver prices fall through the floor and you take a loss on an asset you can’t always buy and sell easily. Please note: I don’t expect this to happen, but it’s a risk to be aware of.

So what sort of gold do you buy? You have a choice of coins, nuggets or bars…

Coins are elaborate, and more expensive to make than bars or nuggets – so they cost more to buy per ounce. Some may be rare collectables, but this ‘added value’ can be in the eye of the beholder. The same can be said with antique gold and silver coins. This is a specialised market and is best avoided unless you really know your stuff.

Nuggets are beautiful. But the price can vary a great deal depending on purity and other factors. They aren’t as straightforward to buy and sell as bullion bars or coins.

If you’re after a long-term investment, in my opinion it’s best to go with bars.

With silver, one kilo bars are a convenient size and are worth about A$1000 today.

An ounce of gold is surprisingly small – nearly A$1700 of value squeezed into just one centimetre squared. You can get two-ounce, five-ounce and 10-ounce bars. And a kilo bar of gold will set you back about A$53,900. Each bar is iPhone sized – truly portable wealth.
Just remember that with precious metals, the ounces are ‘troy ounces’, which are equal to 31.1 g.

Australia has quite a few bullion dealers, and I’ve listed the main ones in this table below. Click on the name to link to the website.

Australian bullion dealers

Take the time to shop around for the lowest premiums and commissions. It’s quite surprising what the difference can be. And make sure you’re comparing prices to the Australian gold or silver price.

You can head to the bullion office directly to buy gold. But if you don’t have one located near you, you can place an order over the phone or even online. Delivery is easy to arrange, but ask questions about the method used and whether it is insured.

And then you’ve got eBay.

Bizarrely, eBay has quite an active silver market. I’ve bought and sold successfully this way quite a few times before. Selling is particularly good, as you’re the one charging the commission for once!

Using eBay is riskier than going through a registered dealer. So it’s essential to get the metal tested. This is as easy as going to a business that buys scrap gold and silver, and asking them nicely to scan it for you. When you find a good seller, stick with them. It’s also a smart move to get the seller to send it recorded delivery and insure it. Make sure you’re familiar with eBay if you want to go down this route.
The other interesting way to cut out the cost of the middle-man is through SilverStackers, a precious metals forum. This puts you directly in touch with other buyers and sellers, as well as providing plenty of market commentary.

Where do you keep your precious metals?

Now, you’re faced with the problem of storing it. A shoebox under the bed? Your home safe? A bank deposit box? Store it with the dealer you bought it from?

A home safe can be installed for about $500 from a local security company. But you should only store small amounts this way. If you do keep it at home, you need to increase your home and contents insurance to cover the metal. And you’ll need to avoid telling everyone down the pub about your stash…

Most bullion dealers have storage facilities. When you buy bullion from a dealer you can ask about the storage options available.
Depending on how much you buy, it quickly becomes cheaper – and safer – to store it at the dealer, or rent a safety deposit box for a few hundred bucks each year… This is what I do.

Safety deposit boxes are a great option. They provide security and easy access.

Banks offer safety deposit boxes, but then we are back to square one with the risk of having a bank as the counterparty.

If you want to remove counterparty risk, you can store it with a company that has nothing to do with the banking system. These are in short supply. I found just one company called Guardian Vaults that does this. They’re only in Melbourne for now, but they have clients nationwide.

I hope this all helps put some new options forward. Enjoy that bullion!

Alex
Editor, Diggers & Drillers