How to invest in gold
Online interview of Michael J.
(Author of The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold and founder of USAGOLD)
Q. Should I invest in gold coins or gold bullion?
A. 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. The initial answer is an easy one - if you intend to take possession of your gold, purchasing gold bullion coins is likely the preferred option. Gold bullion bars typically require some level of independent authentication in order to liquidate, whereas bullion coins trade without much in the way of hindrances. The original rationale at the advent of the ‘bullion coin’ market was that they would offer a competitive price alternative to bullion bars, and they still do.
Q. Which gold coins should I buy?
A. That depends on your goals. We typically answer that question with one of our own, “Why are you interested in buying gold?” If you goal is simply to hedge financial uncertainly and/or capitalize on price movement, then the contemporary bullion coins just mentioned will serve your purposes. Those approaching gold more as a safety-net and/or asset-preservation tool often see value in the added privacy and liquidity advantages associated with the 'historic bullion' coin category - coins minted prior to 1933 - that still trade at modest premiums to the underlying spot price of gold, track the gold price, and enjoy strong liquidity internationally.
Q. When should I invest in gold?
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 should 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 materialize. 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 or the current pandemic related economic crisis.
Q. Why not wait for the necessity to arise, then invest in gold?
A. In the past, whenever concern about a financial and
economic breakdown spread, there were episodes of gold coin bottlenecks and actual shortages. In 2008-2009 at
the height of the financial crisis, for example, 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. To some degree, we have experienced similar supply tightness during the 2020 lockdowns, but nothing thus far like what we experienced a decade ago. There is an old saying that the best time to invest in gold is when everything is
quiet. I would underline that sentiment. The demand for newly minted bullion coins is up dramatically
in response to the pandemic stimulus and rescue programs globally, and many expect it to stay in place even if health authorities manage to get the virus under control. When market sentiment is tightly wound like it is now, the best strategy is to act in advance of the next wave of crisis, if for no other reason than to save on acquisition costs.
Q. Can you give us a profile of the typical gold investor?
A. Gold owners are a group of people we have come to know very well in our nearly 50-years in the precious metals 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 and executives, 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 16% of American investors rated gold the best investment. By comparison, 21% of those polled rated stocks and mutual funds as the best investment.
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 of 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."
(Reader note: For a useful review of gold's role in preserving assets under various worst-case economic scenarios, please see Black Swans, Yellow Gold - How gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation. OPEN ACCESS. )
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, you would find their preferred level of diversification would range between 5% and 30%. How high you go within that range depends upon how concerned you are about the current economic, financial and political situation. Analyst Michael Fitzsimmons offered an interesting take on how much gold is enough in a recent Seeking Alpha editorial, “Assuming a well-diversified portfolio (which does include cash for emergencies),” he says, “my belief is that middle-class investors (net worth under $1 million), should own at least 5-10% in gold. I also believe that as an American investor’s net worth climbs, the higher that percentage should be because, in my opinion, he or she simply has more to lose by a falling US$. For instance, an investor with a net worth of $2-5 million might have a 15-20% exposure to gold; $10 million, perhaps a 30-40% exposure.”
A diversified approach to the precious metals' portfolio works best.
USAGOLD can help you achieve the right balance.
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.
(Reader note: The Better Business Bureau began its Gold Star Certificate program in 2003 and USAGOLD was a recipient for fifteen straight years without a complaint until it was curtailed a few years ago. The firm has been a member of the Bureau since 1986 and accredited every year since 1991 (the year it began its accreditation program) with an A+ rating. To see USAGOLD's full BBB report, please visit this link. Be sure to read our reviews.)
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. What about buying precious metals online?
A. Once again the same vetting rules outlined earlier apply. Some of the most visible online gold businesses have lengthy complaint records at the Better Business Bureau.
(Reader Note: USAGOLD offers an Online Order Desk as a subsidiary service for our clientele. Here you can choose from a full assortment of established investment items including modern gold and silver bullion coins and bullion bars, historic fractional gold coins and historic U.S. gold coins. At our Online Order Desk, you can order confidently any time day or night and on weekends at very competitive rates.)
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 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.
Data source: Bankrate/Claes Bell
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 and options contracts?
Answer. Futures and options 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/options 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 are the pitfalls of gold 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.
For further reading please see our special report "Should I buy a gold ETF?"
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.
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