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What you need to know before you buy your first ounce of gold
Some initial guidelines from one of America's top gold experts
Online interview of Michael J. Kosares
Question. What kind of gold should I buy?
Answer. We probably get that question more than any other -- pretty much on a daily basis. The answer, however, is not as straightforward as you might think. What you buy depends upon your goals. We usually answer the "What should I buy?" question with one of our own: "Why are you interested in buying gold?" If your goal is simply to hedge financial uncertainty and/or capitalize on price movement, then contemporary bullion coins will serve your purposes. Those concerned with the possibility of capital controls and a gold seizure, or call-in, often include historic pre-1933 gold coins in the mix. Both categories carry modest premiums over their gold melt value, track the gold price, and enjoy strong liquidity internationally.
Q. When should I buy?
A. The short answer is 'When you need it.' Gold, first and foremost, is wealth insurance. You cannot approach it the way you approach stock or real estate investments. Timing is not the real issue. The first question you need to ask yourself is whether or not you believe you need to own gold. If you answer that question in the affirmative, there is no point in delaying your actual purchase, or waiting for a more favorable price which may or may not appear. Cost averaging can be a good strategy. History tells us that panics, mania, crashes and collapses are as common to financial history as thunderstorms to placid summer afternoons. The real goal is to diversify so that your overall wealth is not compromised by economic dangers and uncertainties like the kind generated by the 2008 financial crisis.
Q. Why not wait for the necessity to arise, then buy gold?
A. Over the past few years, as concern about a financial and economic breakdown spread, there were periods of gold coin bottlenecks and actual shortages. In 2008-2009 at the height of the financial crisis, demand was so great that the national mints could not keep up with it. The flow of historic gold coins from Europe was also insufficient to meet accelerating demand both there and in the United States. Premiums shot-up on all gold and silver coins and a scramble developed for what was available. There is an old saying that the best time to buy gold is when everything is quiet. I would underline that sentiment. As you can see from the chart immediately below, the demand for newly minted bullion gold coins shot up dramatically in the aftermath of the 2008 financial crisis, reached a plateau and has remained stubbornly in place ever since. For 2016, the U.S. Mint reported gold bullion coin volumes at the highest level since the record years of 2009 and 2010. (The chart below will be updated for 2016 once data is collected from the various mints.)
Q. Can you give us a profile of the typical gold investor?
A. Gold owners are a group of people I have come to know very well in my 40+ years in the business. Contrary to the less than flattering picture sometimes painted by the mainstream press, the people we have helped become gold owners are among those we rely upon most in our daily lives -- our physicians and dentists, nurses and teachers, plumbers, carpenters and building contractors, business owners, attorneys, engineers and university professors (to name a few.) In other words, gold ownership is pretty much a Main Street endeavor. A recent Gallup poll found that 34% of American investors rated gold the best investment "regardless of gender, age, income or party ID. . ." In that survey, investors rated gold higher than stocks, bonds, real estate and bank savings.
Q. What about high net worth investors?
A. Traditionally, wealthy, aristocratic European and Asian families have kept a strong percentage of their assets in gold as a protective factor. The long term economic picture for the United States has changed enormously over the past several years. As a result, that same philosophy has taken hold in the United States particularly among those interested in preserving their wealth both for themselves and for their families from one generation to the next. In recent years, we have helped a good many family trusts diversify with gold coins and bullion at the advice of their portfolio managers. Few people know that the United States is the third largest consumer market for gold after China and India.
Q. You frequently mention gold as insurance. What do you mean by that?
A. Gold's baseline, essential quality is its role as the only primary asset that is not someone else's liability. That separates gold from the majority of capital assets which in fact do rely on another's ability to pay, like bonds and bank savings, or the performance of the management, or some other delimiting factor, as is the case with stocks. The first chapter of my book, The ABCs of Gold Investing, ends with this: "No matter what happens in this country, with the dollar, with the stock and bond markets, the gold owner will find a friend in the yellow metal -- something to rely upon when the chips are down. In gold, investors will find a vehicle to protect their wealth. Gold is bedrock."
Q. What percentage of my assets should I invest in gold?
A. If you were to take a cross-section of advisors who recommend gold as part of an investment portfolio, the level of diversification would range between 5% and 30%. We recommend between 10% and 30%. How high you go within that range depends upon how concerned you are about the current economic, financial and political situation.
Q. In your book, you state: "Who you do business with is one of the most important aspects of gold investing." Why is that?
A. A solid, professional gold firm can go a long way in helping the investor shortcut the learning curve. A good gold firm can help you avoid some the problems and pitfalls encountered along the way, and provide some direction. It can help you in the beginning and through the course of your gold ownership both in making additions to your portfolio and liquidations. A solid companion piece to the interview you are now reading is How to Choose a Gold Firm offered on this website. It offers clear guidelines for newcomers and is well-worth the five or ten minutes it takes to read it.
Q. How can the average investor distinguish between the good gold firms and the bad?
A. First, and most important: Check the Better Business Bureau's profile on a company before you do business with it. Check not only its rating but the number of complaints lodged against it and how those complaints were handled. A consistent record of complaints can be a warning sign even if the company has managed to keep an A+ rating. This is a simple and straightforward step every first-time investor should take, but it is amazing how many ignore it. Second, choose a gold firm that has a solid track record. Ten years in business is good; fifteen years or more is even better. Third, choose a firm with a commitment to keeping you informed, i.e., one that is interested in answering your questions now and keeping you informed in the future. If a sales person gives you short shrift or hits you with a heavy sales pitch take it as a warning.
Q. Can you briefly describe what you believe to be the biggest mistake investors make when starting out as gold owners?
Answer. The biggest trap investors fall into is buying a gold investment that bears little or no relationship to his or her objectives. Take safe-haven investors for example. That group makes up 90% of our clientele, and probably a good 75% of the current physical gold market. Most often the safe-haven investor simply wants to add gold coins to his or her portfolio mix, but too often this same investor ends up instead with a leveraged (financed) gold position, or a handful of exotic rare coins, or a position in an ETF that amounts to little more than a bet on the gold price. These have little to do with safe-haven investing, and most investors would be well-served to avoid them.
Q. What about the high profile gold companies that advertise on talk radio and cable television?
A. The same vetting rules outlined earlier apply. Check them out. Too often investors make the mistake of believing that the gold firm that sponsors their favorite political commentator is also the best place to make their gold purchases. National media campaigns are expensive and those costs are usually covered in the prices paid by investors for their gold and silver coins. In some instances that mark-up can be twice the underlying metal value. Take care that you are not paying too much for your gold and that you are buying the gold items best suited to meeting your goals.
Q. How has the very-low-to-negative-rate environment affected the gold market?
A. Positively. Most of the strong demand globally since the beginning of 2016, has been driven by the low-to-negative-rate environment. At a time when fixed-yield investments pay little to nothing, gold and silver at least provide some upside potential. In addition, these metals protect against the downside risks implied by the low to non-existent rates of return. Those two very persuasive arguments have translated to strong institutional and fund demand at the ETFs as well as demand among individual investors for physical coins and bullion. A mid-2016 Bankrate survey of investors is telling in this regard. One in six chose gold as the best place to park money they would not need for the next ten years, the same number that chose stocks.
Q. What is your view of gold stocks?
Answer. Many of our clients own gold stocks and we believe they have a place in the portfolio. However, it should be emphasized that gold stocks are not a substitute for real gold ownership, that is, in its physical form as coins and bars. Instead, stocks should be viewed as an addition to the portfolio after one has truly diversified with gold coins and bullion. Gold stocks can actually act opposite the intent of the investor, as some justifiably disgruntled mine company shareholders learned in the recent past when their stocks failed to perform as the price rose. There is no such ambiguity involved in actual ownership of gold coins and bullion. When gold rises, they rise with it.
Q. What about gold futures contracts?
Answer. Futures contracts are generally considered one of the most speculative arenas in the investment marketplace. The investor's exposure to the market is leveraged and the moves both up and down are greatly exaggerated. Something like 9 out of 10 investors who enter the futures market come away losers. For someone looking to hedge his or her portfolio against economic and financial risk, this is a poor substitute for owning the metal itself.
Q. What about ETFs?
A. Since, for one reason or another, it is difficult to take delivery from any of the ETFs, they are generally viewed as a price bet and not actual ownership of the metal. Most gold investors want possession of their gold because they are buying as a hedge against an economic, financial or political disaster. When disaster strikes, it does not do you much good to have your gold stored in some distant facility by a third party. For this reason, over the past couple of years the trend even with hedge fund operators has been away from the ETFs. In 2011, ETF sales plummeted while purchases of physical coins and bullion for delivery skyrocketed.
Q. Please summarize -- What is the best approach for the safe-haven investor?
Answer. If you want to protect yourself against inflation, deflation, stock market weakness and potential currency problems -- in other words, if you want to hedge financial uncertainties, there is only one portfolio item that will serve you in all seasons and under most circumstances -- gold coins and bullion. Make sure you do your homework on the company with which you choose to do business, and make sure that the gold ownership vehicle you choose truly reflects your goals and aspirations.
Though this interview will help you start safely on the road to gold ownership, it is just an overview. If you would like more detailed information, I would recommend my book, The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold, which covers the who, what, when, where, why and how of gold ownership in detail. You can also shortcut the learning curve by contacting our offices and asking to speak with one of our expert client advisors who will be happy to answer your questions and help you get off to a solid start.