Saturday, December 16

5 Things to Know Before You Buy Gold

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Gold is hot. It is pitched by various TV pitchmen hourly and its price is near historic highs. Some congressmen attack the pitchmen – others claim that Fort Knox is empty. Economists debate whether or not a return to the gold standard would cure what ails the world economies.

Gold has inspired these passions for 5,000 years. In the recorded history of mankind, it has never not been valuable – something that can be said of no other commodity.  Through war, peace, famine or any other time of human travail, no other commodity has so consistently functioned as a store of value or medium of exchange. Entire civilizations have been based on gold – and some collapsed for lack of it.

So you should probably buy some. Gold, after all, is widely known to help defend against inflation and provide diversification from other assets you may own; like stocks, bonds and real estate.  But, if you’ve never owned a gold coin or ingot – or cashed out a piece of gold jewelry – be advised that there are a few decisions to make and pitfalls to avoid.

  1. Have an Objective.   Why do you want to buy gold? Because you think its price will rise? As a hedge and diversification against your other assets? In order to buy ammunition, come the revolution? Maybe you just think the coins are cool. (They are). Knowing your objective will help you to…  
  2. Determine Which Form of Ownership is Best for You.   You can buy coins or ingots and pay to have them shipped to you – or pay to have them stored. If you would rather not pay either, you can buy “paper gold” in various forms. Gold mining stocks, exchange traded funds (ETFs), and gold certificates will all gain value as the price of gold rises. But each form of ownership has its own risks and disadvantages. The value of mining company stocks, for example, is subject to bad decisions by their management, not just the price of gold. And physical gold not only requires secure storage – it can be counterfeited.
  3. Know the Spot Price  If you decide to buy actual gold, the spot price is key.That’s not the price you’ll pay, unless you’re investing half a million dollars or so – but it’s a starting point. Gold prices fluctuate on a daily basis and you should expect to pay that day’s price (spot price), plus a markup based on the size of your purchase. The smallest quantity normally sold is the gram, about 1/31st of an ounce. Expect to pay 20-25% more than the actual metal’s value for such a small quantity and receive another 20-25% discount when you sell. You’re much better off buying in minimum quantities of at least an ounce, in which case a 5-8% markup is reasonable.
  4. Avoid Leverage   You can buy gold futures or options with 10% or less of the metal’s actual value. There are also non-futures brokers of physical gold who will accept 10% down to secure your purchase and then liquidate your ownership if the spot price falls only slightly. Leverage tends to push owners out of any market as the price falls. Save your money until you can pay the entire cost of your gold and leave leverage to the professionals.
  5. All that Glitters is Not…  Gold. Scams and counterfeiting aside, jewelry is almost never pure gold and its value as a ring or bracelet is quite different from its melt value, which is based on actual gold content. Gold coins may be nearly pure or merely gold plated. Coins (numismatic gold) and jewelry come in a wide variety of purities and their pricing is complicated by their degree of rarity or craft. Understand these factors before buying gold in these forms.

Getting successfully started in gold ownership is not unlike most new endeavors – it demands that you learn before you leap. There are many reliable information sources online – and a few sketchy ones. Visit a few, learn the difference, do your research and limit your purchases to those dealers with the best reputations.

Don’t expect gold to make you rich – do expect it to retain its value through the ups and downs of other markets.

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