Seven Ways Not to Buy Physical Gold

Kiplinger's lists seven ways not to buy gold as follows:

Don't pay too much. Don’t pay more than a 5% to 8% markup over the spot price -- that’s the typical premium, according to Michael White, spokesman for the U.S. Mint.

Don't buy coins for historical value. Some gold dealers engage in a classic bait-and-switch: They offer gold coins or bullion, then try to sell customers on coins with historical, or numismatic, value. In fact, these coins usually have little or no extra value above their “melt value” -- the value of the coin if it were melted and sold as metal.

Don't pay a premium for proof coins. The premium you pay for proof coins may be inflated and may disappear, depending on the market. So, for investment purposes, stick with regular coins.

Don't buy fractional coins. These coins come in fractions of an ounce, such has a half-ounce, a quarter-ounce and even one-twentieth of an ounce. You’ll pay a higher markup for such coins than for one-ounce coins.

Don't buy gold from a cold caller over the phone.

Don't buy based on confiscation scares.

Don't buy using leverage.

Ha! #5 really cracked me up! Is it ever a good idea to buy anything from a cold caller? ;-)

A few thoughts on the above from me:

• These are just some additional reasons why I think buying physical gold is a loser investment. The whole buying/selling system is so rigged against the buyer that it's almost impossible to make money.
• That said, if you are thinking about buying physical gold (or silver for that matter), be sure to read my interview with Doug Eberhardt titled (appropriately enough) How to Buy and Sell Physical Gold and Silver. Doug seems to be a straight-shooter to me, and his company sells gold and silver at a 1% mark-up (noted here), which is much better than paying 5% to 8%.
• Gold seems especially risky right now. Isn't it the biggest bubble since real estate? Buying in now seems foolhardy (even if you were inclined to own some.) Is anyone out there currently buying gold now? Why? Do you think it still has room to run?

One thing though, gold certainly has had a great performance over the past several years. Those who bought early are doing quite well.

Comments

[Dave]

I bought gold in 2006 for about $620 an ounce, Canadian Maple Leaf gold coins. They seem to be doing well. QE3 is causing inflation so gold is still a fine investment.

[Jackie]

I'm with you on gold being a huge bubble right now, and believe it's only a matter of time before it pops. I only have an ounce of gold that I'm hanging onto (a coin, because I like collecting coins and figure having a little gold can't hurt.) But I bought that in...maybe '06?

[Mike]

"Those who bought early are doing quite well."

As long as they sell it before the bubble bursts.

[jim]

This is a good list.

[Rod Ferguson]

Gold seems especially risky right now. Isn't it the biggest bubble since real estate?

Depends on where you get your information from. If you listen to people who hate gold, then yes; it's the biggest bubble since the dot.com bubble. If you listen to people who love gold, then no; it's at the beginning of a permanent bull run. I try to get my information from data - not people - when I can. Depending on your preferred source, gold looks to be in Primary wave V (for Elliott charters), the middle of the K-cycle (for the Super-Cycle followers), hasn't risen outside it's standard deviation (for Keynesians/Monetarists) and is walking in pace with monetary inflation rates (for Austrians). I have found no real data that suggests it's in a bubble. Of course, I have a slightly different perception of the role of gold, so it's sort of a null question for me (gold can't be in a bubble or a bull market, as it's one of the valuation comparisons for wealth). But it's fun to look at charts sometimes.

Buying in now seems foolhardy (even if you were inclined to own some.) Is anyone out there currently buying gold now?

I haven't, but then again, I haven't bought more than an ounce so far. I prefer to preserve wealth in silver, and yes, I'm buying at these prices.

Why?

Because silver is consumed, unlike gold. There is a fairly decent possibility that silver will eventually become more valuable - dollar wise - than gold because of this. We use silver in an awful lot of things, which is one of the reasons it makes a poor monetary metal; it's too useful (although Aristotle would disagree with me), and for many of those things, silver cannot be substituted due to it's unique qualities. There is also some compelling evidence that suggests that we'll run out of global reserves in silver in the next 5-7 years, but the numbers vary depending on the source. So, silver for me can fill two roles - wealth preservation and some investment/speculation.

Do you think it still has room to run?

Yes. The dollar price of my gold has doubled, but the dollar price of my silver has tripled. I believe this has more to do with the devaluation of the dollar than a rise in either price (i.e. - my gold is up about 60% and silver up about 220% in Euro terms). Because QE3 is pretty much guaranteed at this point, I can't imagine any scenario where silver or gold will drop in Dollar terms. It's possible they'll level off in Euro or Swissy terms, but we'll see (Europe has it's own pressures to inflate).

More importantly, my DCA for the silver to gold ratio is 51.5 and current is 37.4; which is suggestive of a return to the 16-1 ratio which is the historical average. Chances are both metals will increase in dollar terms while they chase each other down to 16 ounces of silver equalling 1 ounce of gold in whatever numbers of whatever currency you prefer.

On a side note - I am a bit concerned with the historical gasoline/silver ratio being out of whack; traditionally, it's been 1 ounce of silver will buy about 4-5 gallons of gasoline. Currently, we're at 1 ounce will buy 10 gallons. This could mean that silver is overpriced, or it could mean that oil is underpriced. I'm inclined to think the latter, but I can't say for certain. Suffice to say I'll be paying attention to both prices for a while.

[Squirrelers]

As if anybody would buy gold from a cold caller!

Of course, someone must do it, because otherwise it wouldn't be on the list. Things that seem hard to imagine for personal finance bloggers/enthusiasts might seem ok for those less informed, which opens up opportunity for such interesting things to happen.

I tend to agree with your take on physical gold. I can see keeping a small percentage of a portfolio in gold as a hedge, but what I don't like about gold is that it's a speculation play. No cash flow gets generated directly by gold.

The price of gold is quite high, have to agree with you there. Seems like it's had quite a run up already, which doesn't make it as attactive an investment anymore IMO. There would have been better times to buy in.

[Emily]

IMHO, you have to have a real handle on how the economy is doing to do well with precious metals. Eg, you had to have some idea five yrs ago that gold was going to skyrocket soon, and then you need to know when to sell it.

We don't invest in gold b/c we don't want to have to think that hard. ;)

[Old Limey]

My gold has quintupled since I bought it, however our investments have done way better than that.
However all I own is one Krugerand that I had mounted in a gold bezel for my wife to wear as a necklace.
I can't even remember the last time she wore it, it's been that long. Can you imagine wearing it around your neck in some neighborhoods in the USA - it wouldn't last long.

We were walking through the marketplace in Cuzco, Peru in 1981 when my wife had a thin, gold necklace ripped from her neck by a youth. Later on he must have been very disappointed though because it was a very cheap imitation.

[Sunil from The Extra Money Blog]

we (Indians) have accidentally become very rich because of our obsession with physical possession of 24k gold. that said, i started purchasing physical silver (kept in bank locker) 2 years back and have seen very good results. i expect it only to go up

[Antonio]

Sunil put it right in the middle.

For those who don't know it, India population is about 1 billion people and growing. Part of their culture is getting married and get some gold (24K) during the wedding ceremony, for the spouse normally, to support herself (as "emergency fund").

Considering the growth of India and the growth of their middle class, I don't think the gold will be going down if you just imagine these people alone buying gold for the weddings (as 3rd world country, India young population is big, and most of them are going to get married).

Some markets analytics say it will go to $1600 this year and $5000 soon.

[Doug Eberhardt]

Thanks for the plug FMF...

The Kiplinger article has some good info in it. I agree with it. I try to talk people out of buying certain types of gold and silver at the risk of losing a customer. Those that want to buy on credit card for example. Sure, they can get gold and silver at 1% over my cost, but they want to pay a 3% or higher fee for the privilege of getting points? Makes no sense and goes against my entire philosophy.

As to why gold and silver will move higher in the future, the word "unsustainable" is one I use quite often. Pretty much everything our government (congress) and Fed do is unsustainable. Fighting wars that have no end; health care for all; defined benefit plans; bank bailouts, private company bailouts, quantitative easing to infinity.

Until said time congress has passed a Constitutional amendment that holds their spending to the taxable means, one better be diversified in gold and silver as a hedge against that portion of their portfolio that is U.S. dollar based (U.S. stocks, U.S. corporate bonds, U.S. government bonds, U.S. treasuries, CD's and money market accounts).

What most people don't realize, is it is impossible for gold to be in a bubble. One buries gold in their back yard 10 years ago, digs it up today, it's the same gold. What changed? What it is priced in changes. What it is priced in, is the bubble.

Here is a good place to start for those who have the time: What Really Backs the U.S. Dollar? http://buygoldandsilversafely.com/gold/what-really-backs-the-us-dollar/

Thanks again FMF...I understand your thinking about gold being priced high, but even though gold may be due for a pullback, when the price is even higher, and potentially much higher because the Fed's only solutions is bailouts and quantitative easing, the decision to get in will be more difficult than today when prices are lower.

Keep an eye on treasuries for the clue as to what will come. TBT for example is a good long term play. It is the ProShares UltraShort 20+ Year Treasury and I think it bottomed in September of 2010.

Unless of course people believe that the same Harvard, Yale and Wharton boys who got us into this mess can magically somehow get us out of it. Also keep an eye on the $4 trillion of sub-investment grade derivatives maturing in the next 5 years, more than at the height of the financial crisis. Who will be the counterparty to these derivatives? Answer: the lender of last resort, the Fed.

The Eurozone has their issues too. It's not just the U.S. who will be buying gold as a hedge moving forward. Remember, pension plans have less than 1% invested in gold. We are still in the second and longest stage. Euphoria in the price of gold doesn't come until the third stage.

Thanks again...

[Eric]

Any time I hear people debate gold, I hear the argument that people are buying gold in case of a complete economic meltdown (ie. we'll be trading guns for bread and water) and in this case gold will be worthless compared to the necessities. The other side of the argument is that everything will be fine and life will go on just as we know.

Those seem to be the extremes, what about something in the middle. The US continues to destroy the dollar and if they keep it up, eventually the dollar will be worthless. Gold is a storage of wealth (due to its scarcity and cost to mine) and although I don't think we'll ever get to the point where we need to trade physical coins for food. I can definitely see a scenario where a world currency replaces the dollar. The reason to own physical gold is to be able to exchange the gold for the new currency. The value of gold is in the higher exchange rate compared to the worthless physical dollars.

For example: On 4/7/2011 you start with $1450 in US Dollars and $1450 in gold (1oz).
If the dollar crashes and a world currency takes its place. Gold has maintained your purchasing power if you can trade the oz of gold in for, say, 100 world dollars and you can only get 10 world dollars for your $1450 in US dollars. That's how gold acts as a storage of wealth. Silver does the same thing and might even be better due to the fact that its used in the manufacturing of goods.

Remember, just because there is going to be an economic disaster, doesn't necessarily mean we're going back to the stone age, with a system of bartering goods and gold coins. The world should be advanced enough to avoid this.