This is the 10th in a series of 11 Posts that will be published on this Blog each Monday and Wednesday from November 3 to December 8.  All 11 Posts will be filed under the Blog Category ‘Gold as an Investment’.  For previously issued Posts in this Series click here.  We hope you find this series of Posts useful.

While preparing this Post Series, I found two recently published books I think particularly helpful:  The Goldwatcher:  Demystifying Gold Investing, John Katz & Frank Holmes, 2008, John Wiley & Sons, Ltd. and Guide to Investing in Gold and Silver, Michael Maloney, 2008, Hachette Book Group USA.  I highly recommend both.  Where I have adopted ideas from those books, I have put them in italics.  Page references to The Goldwatcher and Guide to Investing in Gold and Silver are denoted by (Goldwatcher – page xx) and (Guide – page xx) respectively.  I also recommend www.theGoldwatcher.com Blog and www.GoldSilver.com, websites related to those respective books, to those of you interested in gold. Subsequently I found a 3rd recently published book, Buy Gold Now, Shayne McGuire, 2008, John Wiley & Sons, Ltd.  Like the other two, Buy Gold Now is available at Amazon.com.  Again, I recommend this book to you. Page references to Buy Gold Now are denoted by (Buy Gold Now – page xx).

General Conclusions

My reasoning behind my conclusions with respect to Gold as an Investment are set out in this Post Series.  Succinctly, they can be summarized as follows:

1.    Gold is ‘real money’, fiat currencies are not.  This is because at any point in time gold satisfies all components of the definition of ‘money’ where as a ‘store of value’ that definition in part means that ‘money’ must be able to be reliably retrieved and ‘predictably useful’ when retrieved.  Fiat currencies do not meet this test as ‘money’.

2.    At any point in time the U.S. $ is a measure of the price of gold, not a measure of its value.

3.    At any point in time Gold’s value needs to be thought about in the context of its then current and prospective purchasing power, having regard to prevailing and prospective macro-economic conditions.

4.    Whether the future economic circumstance is inflationary or deflationary some gold is a good thing to own as a ‘safe haven holding’.

Conclusion #3 – Physical Gold

1.    I think a good maxim to keep in mind when reading this Post and the next and last Post in this Post Series which deals with Gold Mining Stocks is set out in The Goldwatcher as follows:  ‘Bullion is for value investors and gold stocks are for growth investors’ (Goldwatcher – page 217).

2.    With respect to ‘physical gold’, it is available in at least the following forms:

•    directly as bullion bars – available in .9999 Fine Gold bars of as little as a single gram of gold, although most commonly held bullion bars are ½ ounce, 1 ounce, 5 ounce, 10 ounce and larger.  Small certified gold bars are sold by bullion merchants.  Bullion bars generally are sold close to the market spot price, although typically the smaller the bar by weight, the greater the premium to the gold spot price;

•    directly as bullion coins – available in denominations as low as a quarter of an ounce.  Commonly available coins include the American Buffalo, the American Gold Eagle, the Australian Kangaroo, the Austrian Philarmonic, the Canadian Maple Leaf, the Chinese Panda, the South African Krugerand.  With the exception of the American Buffalo cast in .9999 Fine Gold, bullion coins tend to be cast in 22 carat gold.  Bullion coins typically trade at a premium to the gold spot price (based on their bullion content) of 4% or more over the spot gold price;

•    directly as rare gold coins – which have numismatic value incremental to their bullion value.  This post does not address ‘rare coins’.  The price of ‘rare gold coins’ is based on subjective elements beyond the ‘point in time price’ of gold bullion.  The point in time ‘value’ of ‘rare gold coins’ requires an expertise I don’t possess – and on a personal level have no interest in; and,

•    indirectly through an Exchange Traded Fund (‘ETF’), the most predominant of these being SPDR Gold Shares, formerly called StreetTRACKS Gold, trading symbol GLD on the New York Stock Exchange.  GLD was first introduced to the market in late 2004, at which point it had no physical gold ‘in trust’.  Four years later, at the end of November, 2008, GLD held 24.4 million ounces (or 681 tonnes) of physical gold in vaults in England.  In the case of GLD each share traded on the NYSE represents 1/10 ounce of gold.  It is important when investing in ETF shares that it is certain the physical gold backing the shares exists, and that it is held in trust for the ETF in circumstances where the Trust Company that is the custodian of the physical gold has no ownership interest in it.  Persons holding ETF units need to ensure that in the event the ‘custodian’ Trust Company is petitioned into bankruptcy the creditors of the Trust Company have no claim against the physical gold it is holding ‘in trust’ for the ETF (and hence holding indirectly for the ETF unit holders).

2.    If one comes to the view that they ought to own some physical gold obvious questions are:

•    how much should one own, both in absolute terms and as a percentage of one’s total wealth?;

•    does one believe it best to hold physical gold in bullion bar form, bullion coin form, or a combination thereof?;

•    from whom does one buy it?; and,

•    where does one store it?

3.    Obviously the question of ‘how much in relation to one’s total wealth ought to be invested in physical gold’ is a personal decision.  Many commentators and ‘expert’s suggest that gold as an ‘asset class’ ought not to represent more than 10% of an investor’s portfolio, with not more than 5% in bullion and 5% in gold equities – i.e. stocks or funds (for example, see Goldwatcher – page 211).  At least one, Shayne McGuire, says:  “Considering present (2008) financial conditions, I would suggest holding eight to 15 percent of your financial assets in gold and I would not think it insane to hold as much as 50 percent.  But just keep in mind that once you get over, say, 20 percent of your assets in gold you are expressing the conviction – with me – that gold will outperform other financial assets over the next few years, which is educated speculation.” (Buy Gold Now – page 152).  My own view is that we currently are living in extremely turbulent economic and geopolitically risky times, and that in these times investors ought to consider that the long-term broadly held view of owning up to 5% of one’s financial assets in the form of gold bullion presumably assumes more ‘normal economic and geopolitical conditions’ than currently exist.  That leads me to think that one ought to seriously consider a somewhat higher percentage than 5% of one’s financial assets in physical gold – but how much has to be a function of each individual investor’s assessment of prospective economic and geopolitical conditions and their individual risk tolerances.

4.    Again, the question of the form in which to hold physical gold is a personal choice.  Because bullion bars are .9999 pure, are easily stored, and can be purchased at a very low premium to the spot bullion price, they seem to me to be the ‘gold form’ of choice.  The American Buffalo coin, being a ‘pure gold’ coin, strikes me as being the ‘non-rare’ coin of choice for those who prefer to hold physical gold in ‘non-rare’ coin form, although all of the coins named in this Post evidently are popular with ‘physical gold buyers’ as many dealers currently (early December, 2008) have none of these coins in stock.

5.    Where to buy in my view is best addressed by individual investors who ought to seek out alternate sources.  For Canadian investors the Bank of Nova Scotia is an obvious choice for bullion bars, as are the other major commercial banks and bullion dealers.  Bullion coins are available (when in stock) from any number of non-on-line and on-line bullion dealers.

6.    Where to store it is again in my view best addressed by individual investors based on their own individual circumstances.  Unless an investor believes the world is going to come to an end most commercial bank branches have safety deposit boxes available.  However, remember that this is said by a Canadian who has little fear of a collapse or failure of a major Canadian Banking institution.

7.    Having said the foregoing, it should be remembered that in 1932 the U.S. Government confiscated gold bullion from its citizens in circumstances where it paid them U.S. $20 per ounce and immediately revalued the gold it confiscated at U.S. $35 per ounce, thereby debasing its currency by almost half.  There is no reason to believe such an action, or in the alternative price setting of gold, would be beyond the U.S. Government acting individually or in concert with Governments of other countries in circumstances of extreme individual country or world economic distress.

Concluding Comments

1.    From the above and all foregoing Posts in this Series I believe the important question to ask oneself is:  ‘Does gold have intrinsic value in a volatile and unpredictable economy?  I believe in the end gold is all about point in time and long term purchasing power.  If I am correct, then I believe everyone with capital beyond that required to satisfy their basic needs ought to have some as a hedge (a  ‘safe haven holding’) against a ‘fiat currency environment’ operating in a:

•    global economy populated by countries with populations and population segments with different ideologies and ‘end game’ objectives; and,

•    world of increasing uncertainty with respect to the U.S. economy, currently the world’s most important economy and consumer.

2.    That is not to say that based on my thinking to date I am recommending a physical gold holding to the exclusion of owning one or more fiat currencies, equities and other investments. I have simply concluded that I think ‘some physical gold is a good thing to own as a safe haven holding’.

For previously issued Posts in this Series click here.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

© 2008, Stock Research DD Inc., all rights reserved.

Possibly Related Posts:

• The General Public, The Eurozone, and Gold!
• Gold as an Investment – How I Assess It and Why – Post #11 of 11
• Gold as an Investment – How I Assess It and Why – Post #9 of 11
• Gold as an Investment – How I Assess It and Why – Post #8 of 11
• Gold as an Investment – How I Assess It and Why – Post #7 of 11

Trackback URI | Comments RSS