Tuesday, December 4, 2012

How to buy gold

Most financial pundits recommend that every investment portfolio contain some gold, especially retirement portfolios. I’ve written two blog-posts on the subject. Gold and other currencies, in March this year, gave a brief layman’s report on gold’s role as a yardstick, by which the sustainability of paper currencies can be measured. I imagined a new-born baby being given a $35 gift certificate in 1971 and his twin given a one-ounce gold coin (then worth $35), and I asked which of them would be the more pleased today.

Gold, silver & war, posted in October, gave a brief layman’s report on gold as a store of value and its relationship to paper currencies. All aggressive wars are, and have always been, fought for loot. Wars used to be financed by gold, and repaid in loot that was valued in gold. Today, wars are financed by paper money and repaid in loot (oil, etc) sold for paper money.

What the pundits don’t tell us is what form of gold should be in the retirement portfolios, and where it should be stored. Here is a brief layman’s summary.

1. Gold in the ground – shares in mining companies whose prices are quoted on some major stock exchange. Custody: the share certificates are most conveniently held by the bank or broker that carries out an investor’s instruction to buy; the gold itself stays with the mining company, naturally enough! Risk: the company’s managers might not be good at their jobs, or be honest; nor might their auditors.

(Mining companies customarily sell gold-in-the-ground for the current price, and promise delivery some months ahead – when the price may be much different. That practice partly explains the disconnect between the price-charts of the companies’ shares and of bullion.)

2. Gold in an Exchange Traded Fund (ETF) – units in mutual funds that are traded like shares. Custody: the certificates stay with the bank or broker as per #1 above, and the physical gold stays in the ETF’s vault. There are also ETFs that buy and hold shares in mining companies, and hold those certificates as per #1. Risk: gold-bullion ETFs might not physically possess all the gold they claim to own; some of it might have been lent out to professional speculators who won’t pay it back.

3. Gold in jewellery – self-explanatory. Custody: at home or in an outside safety deposit box. Risk: all that glitters is not 24-carat gold.

4. Gold bars of varying sizes and weights – bought through banks or brokers. Custody: usually at a bank or bullion-storage facility. Either specified numbered bars are identified as belonging to specific owners or a custodian holds an entire inventory of bullion for multiple owners and issues a formal certificate of ownership for each client for the weight held in his name. Risk: all banks and brokers aren’t 24-carat ones.

(Alternatively, one can take personal delivery of bars or coins and bury them in the back yard. The risk is the same as in #3 above. Gold-plated bars of other metals would fool most of us; even experts can’t always tell them apart without actually cutting them open.)

5. Gold coins – as #4 – bought through banks or brokers. Custody: as #3 & #4. Risk: Coins sell above the bullion price, at premiums that vary. Also, coins can be counterfeited, too.

6. Gold “futures” – contracts with other gold-owners to buy very large amounts of bullion, with a good-faith deposit that is only a small percentage of the value of the contract. In effect, it is a bet on the price of gold – a gamble, and not an investment suitable for retirement portfolios.

Most financial pundits suspect that Fort Knox has lent some or all of its gold to speculators who won’t ever pay it back. Yes, even Fort Knox! Who can one trust, these days? There is more risk in custody than in price, in these wicked days.