cost per ounce. Call this "x"
Divide x by the spot price to get your cost over spot.
Call this number "y"
y minus 1 x 100 equals your percentage premium.
Here"s an example. Let"s say you"re buying a U.S. Gold Eagle.
A U.S. Gold Eagle has a gold content of one ounce. That means each Gold Eagle coin has a fineness of 1.000-it contains its specified weight in pure 24-karat gold. An alloy is added to make it more durable, so a one-ounce American Gold Eagle, for example, actually weighs 1.0909 troy ounces.
So, when the spot price of gold was $935, you could buy a U.S. Gold Eagle for $1,020.
If you want the dollar premium rather than the percentage premium, take the cost per ounce and subtract the spot price. In this case, $1,020 - $935 = $85.
This formula works for all coins, and the cost of gold doesn"t matter.
Here"s another example. Let"s say you want to buy an Austria 1 Ducat. It"s a small coin with a gold content of 0.1107 ounces. And let"s say you buy that coin for $115.80 when the spot gold price is $935.
It doesn"t matter what the price of gold is when you read this book. The same formula will work.
Be sure to check the fineness of the gold coin or bar you are buying, and you can calculate the premium you are paying over the spot price of gold.
What You Should Buy and What You Shouldn"t
Now that you know how to buy gold, below are two types of gold products-one you should buy and the other you should run away from.
Semi-Numismatic and Numismatic Gold Coins. Numismatic or older and rare coins are bought not solely for their precious metal content but also for their rarity and their historical, aesthetic appeal. They are leveraged to the gold price, which means that the price of these coins can increase faster than the gold price in a bull market (due to their historical and aesthetic value and to their rarity) and can decrease by more when gold is in a bear market.
Many investors opt for high-quality pre-1933 gold coins graded MS-60 or better by either the Professional Coin Grading Service or the Numismatic Guaranty Corporation.
These can be great investments. On the other hand, if you"re one of the people worried about a money panic and a potential breakdown in society, you have to wonder how well numismatic value will hold in such a situation.
Physical Alternatives to Coins and Bars. Most people buy gold bars or coins. But gold buyers and sellers also traffic in gold dust, nuggets, wire, and even gold chips used by dentists to fill teeth. But none of these are as fungible as coins or bars and coins are the most fungible of all. The more a gold piece is a fabricated product of known weight and purity, the better off you usually are. Gold dust in particular can be diluted or even counterfeited.
Non-Physical Ways to Own Gold
There are ways to buy gold without taking physical delivery. It "s not my choice, but if it suits you, here"s some information.
Allocated Accounts
Let"s say you want to buy some gold, but don "t have a safe place to keep it. Major bullion banks and specialist depositories offer to buy the gold and store it for you. The gold can be in a pooled account or a segregated account. In a segregated account, your gold is kept separately. A segregated account has higher fees.
For more information, you can check out the pooled and holding accounts description on Everbank"s web site ( Rosenthal is not a big fan of allocated accounts. For one thing, there"s the potential for fraud (see sidebar). For Dan, it"s also the principle of the thing. He says:The whole point of gold, to me, is that you don"t trust the government. It"s the government"s (fiat) money versus gold. You buy gold because you don"t trust the government"s money. If you don"t trust the government"s money, why the h.e.l.l are you going to trust some stranger who could easily be as unreliable as the government?
So, you buy and you take delivery. That"s the only good way.
Buyer Beware-A Cautionary Tale When Dan Rosenthal ran The Silver and Gold Report, he once blew the lid off a gold storage scheme that ripped people off to the tune of $59 million.
The company was called Bullion Reserve of North America, run by a flashy Los Angeles gold and silver dealer named Alan Saxon. He claimed to be holding $60 million worth of customers" gold in allocated accounts that were locked away, 200 feet deep in underground vaults managed by Perpetual Storage, Inc., near Salt Lake City.
Saxon asked Rosenthal for an endors.e.m.e.nt to his newsletter subscribers. Rosenthal gave a temporary endors.e.m.e.nt on the promise that Saxon would send him a certified audit of the gold in storage.
The audit never arrived. After some back-and-forth, Rosenthal arranged to visit Perpetual Storage and check it out for himself.
Within five minutes he knew it was a sham. There wasn"t nearly enough gold in the vaults to back up Saxon"s claims.
"They should have had between 60 and 100 million dollars worth of metal," Rosenthal said. "I looked and said: "This is a real problem." I saw maybe $3 million worth of gold."
After close physical inspection, with laborious inspection and logging of the bars, Rosenthal went to Los Angeles to confront Saxon. "I expected him to be jumping to give me answers and he just bulls__ed me," Rosenthal remembers. " I left, and I wrote him up according to my Mommy Rosenthal test. And that is: If this was my mother"s money, would I tell her to store her money there? In this case, the answer was no."
The way he put it to his readers was that if Mommy Rosenthal had any money in Bullion Reserve of North America, he would tell her to get it the h.e.l.l out.
After his report hit the press, all h.e.l.l broke loose, Rosenthal remembers. Other dealers rallied around Saxon. Rosenthal received death threats and thugs tailed him.
But six weeks later, Alan Saxon was dead. He had run a hose from the exhaust pipe of his motorcycle into the sauna of his luxury condo in Venice, California. He apparently started the engine, and then sat in jeans and socks while the sauna filled with carbon monoxide. When his body was found, so was a tape recording-naming Rosenthal"s expose and Saxon"s mounting business losses as the problems that drove him to kill himself.
When accountants examined the books of the company, every word Dan Rosenthal had said was proved true. The FBI came in later, but too late to save the customers who had been hoodwinked by Saxon.
Digital Gold or e-Gold. My personal view on e-gold, e-bullion, or whatever you want to call it is simply: Don"t. There are a couple of reputable firms in this business: GoldMoney.com and BullionVault.com, for example. But the lax operating procedures of the Internet make this business attractive to financial predators.
There are no specific financial regulations governing digital gold currency (DGC) providers, so they operate under self-regulation. DGC providers are not banks and therefore do not need to comply with bank regulations and there are concerns that unscrupulous operators are operating in this emerging sector.
Gold Exchange-Traded Funds (ETFs). Trading in precious metals got a whole lot easier when Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) came along.
As seen in Table 4.2, there are a bunch of gold and silver ETFs. The iShares and SPDR funds hold physical metal. The GLD and the Barclays iShares Comex Gold Trust (IAU) are fixed at one-tenth the price of gold, minus a small amount to account for fees. That is, ifTable 4.2 Gold, Silver, and Metals ETFs and ETNs Fund NameSymbolTotal Expense Ratio iShares COMEX Gold Trust IAU 0.40 iShares Silver Trust SLV 0.50 SPDR Gold Shares GLD 0.40 PowerShares DB Gold Fund DGL 0.50 DB Gold Shares Double Long DGP 0.75 DB Gold Short DGZ 0.75 DB Gold Double Short DZZ 0.75 PowerShares DB Silver Fund ETF DBS 0.50 PowerShares DB Precious Metals DBP 0.75 Fund ETF
gold is trading at $800 an ounce, you can buy the GLD or the IAU for about $80. They are backed up by gold bullion in a vault.
There are fees a.s.sociated with gold ETFs, but they"re small, and you can"t beat the convenience. On the other hand, if you "re a stickler for physical gold, these funds aren"t for you.
And some funds, like the PowerShares gold funds, don"t hold physical gold. Instead, they track the performance of a fully collateralized futures position, meaning they capture changes in the spot price of the underlying metal plus any roll yield and interest income.
If a fund"s holdings of physical gold are not important to you, you might just go with the fund that has the lowest total expense ratio. However, I highly recommend a fund that is liquid (has plenty of volume). Just as important as getting into a gold ETF is being able to get out when you want to.
And then there are the leveraged Gold ETNs-DGP and DZZ. DGP targets twice the movement in gold, while DZZ targets twice the inverse of the daily movement in gold.
If the metals do well, long gold ETFs will likely outperform. If the metals do poorly, they will likely under perform. And visa versa for the short and double-short gold funds.
Importantly, I wouldn"t use the leveraged gold ETFs as ways to be positioned in gold for the long term. They"re trading vehicles-you move in, hold them for a while, and get out. Hopefully, the short-term trend is in your favor. And the safest way to invest in gold is by buying and holding physical gold.
One More Idea-Central Fund of Canada. The Central Fund of Canada (CEF on the AMEX) is a great closed-end fund that invests 90% of its holdings in gold and silver bullion (the rest is in cash).
As a closed-end fund, CEF is a bit different from the traditional open-ended mutual fund that you might be used to. An open - ended mutual fund or exchange-traded fund creates new shares every time an investor buys the fund and redeems the shares every time an investor sells the fund.
A closed-end fund limits its amount of shares. It is a publicly traded ent.i.ty that raises capital through an initial public offering and invests the proceeds according to the fund"s objectives.
Because closed-end funds limit their shares, they can trade at a premium or discount to their net a.s.set value (NAV). It carries a premium because its limited amount of shares means CEF"s price is leveraged to the price of gold. And as a plus, if silver outperforms gold, CEF will let you partic.i.p.ate in that, as well.
Gold Investing-Keep It Simple
In a nutsh.e.l.l, below are my recommendations for investing in gold. Depending on your personal situation, your investment advisor may have other ideas, but this is a great starting point:Investment #1-Buy gold. And I mean physical gold, the kind you put in a safe. You don"t buy physical gold to get rich; you buy it to preserve wealth. If Treasuries implode, gold will make a mighty fine insurance policy. Also, you might want to pick up gold in forms that you can easily barter if paper money becomes worthless-simple gold rings, for example. Wedding bands are good for this. I know of a guy who has hundreds of wedding bands stored on clothes hangers in his closet.
Five Tips for Gold Bullion Buyers Here is a collection of five tips from expert sources.
1. Call at least three dealers for a price. The difference between a good price and an almost good price can be the difference between getting 100 ounces of gold and 90 ounces of gold.
2. Make sure you include shipping costs in your calculation of the price of the coin-shipping costs vary wildly from dealer to dealer.
3. You need to be explicit on what you are locking in, including price, merchandise, and terms of payment. If there seems to be any waffling on the part of the dealer, this is a warning sign to steer clear.
4. Look for a dealer who has been in business for a number of years. Ideally, if you go to someone who was in business in the 1970-to-1980 boom, they"ve seen enough ups and downs in the market to handle the challenges of price fluctuations and coin availability.
5. Get to know a local dealer. The advantage is he can call you when he gets new inventory and there will be no shipping involved.
The worst time to buy gold is when it"s going higher. Nothing travels in a straight line, so wait for a pullback and pick up simple gold coins or gold bars.
Investment #2-Silver. Again, I mean physical silver. If our economy, financial system, and paper money go south, you "ll want gold and silver. Flashing around too much gold could make you a target. Silver doesn"t attract as much attention and it"s still a precious metal. In fact, silver is undervalued compared to gold by some metrics.
What to Use as Money If the Dollar Loses Its Value
I think you can see why gold should be in your portfolio, and why you might want to have some at home: If the value of the U.S. dollar collapses, gold will more than hold its value; it will soar in value. The same goes for silver. And I like silver a lot-its lower value means you can use it for smaller purchases, it doesn"t attract as much attention as gold, and silver is also an industrial metal, which means it can do well in the good times as well as the bad times.
What could drive the value of the U.S. dollar much, much lower? Well, if the economy is bad enough, long enough, and the government continues to try and inflate its way out of its problems, there is the potential for hyperinflation. The difference between hyperinflation and inflation is the difference between lightning and a lightning bug, to twist a phrase from Mark Twain.2 Inflation takes place during credit expansion-a virtuous cycle causes GDP to expand. This is what the government and the Fed are trying to revive. Hyperinflation is when inflation spins out of control-prices increase rapidly as a currency loses its value. The breeding ground for hyperinflation is when money velocity increases rapidly while economic output declines at the same time.
Hyperinflation is a horrible time to live through, but it doesn"t last forever. It usually ends with drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis.
During a tumultuous time of hyperinflation, alternative currencies usually come into play, and they can also be used in other times of economic distress. I think we"ll see some of them used in the next 10 years. Those alternative currencies can include. . . .
Local Paper Currencies: These were widely used in the early 1900s up until the early days of the Great Depression, when they were used to organize trade of services and products when there was a shortage of national currency. In 1933, there were three- or four-hundred different scrips circulating in the United States, Canada, and Mexico. A top economist urged Roosevelt to encourage local currencies as a way to stimulate local economies. However, F.D.R opted for The New Deal, which flooded the nation with Federal Reserve Notes, put an end to the currency experiments, and effectively centralized power.3 Today, local currencies are making a comeback in different parts of the United States and Canada. Sometimes they are backed by things like food, and sometimes they are exchangeable for local services.
For example, a farmer who needs to build a grain silo can issue credits to local workmen and suppliers redeemable in his harvest.
This system is how paper currencies originally started. In ancient Egypt, people had to store their grain at government granaries, and when they brought it in they were given a receipt. Whenever they were hungry they could bring in the receipt and get the grain back. Thus, the receipt came to act as a currency, with people accepting it in exchange for non-food goods.
However, rats would eat the grain in the granaries, so the receipts lost value over time. Result: Everyone hurried to spend them as soon as possible. This may seem like a problem, but it"s actually an advantage when towns are trying to stimulate their local economies, and time value is being incorporated into some local currencies today.