Gold - is it too late to buy?

Today we’re going to be talking about the ABC’s of gold – how to buy it, how to sell it, the advantages, the disadvantages and why it is important to consider it as part of your portfolio.

From the earliest days of recorded history, what is that makes gold the most valuable commodity in the world?
According to Dr. Claude Mariottini, Professor of Old Testament in Illinois, in the US,
“It is a fact that in times of economic uncertainties, many people invest in gold as a way of dealing with the unforeseen problems caused by inflation or recession.

It is also a fact that in the ancient past kings and conquerors were fascinated with gold, not only as currency or as a means of commerce and trade, but for the beauty and splendor it conveyed to its owners.” One of the theories that he mentions is that in King Nebuchadnezzar’s time an ounce of gold was worth 350 loaves of bread and depending on the unit of measurement that was used at that time, and the unit of measurement that we use today, that same ounce of gold might still be worth 350 loaves of bread. If we use the current price of gold against the current price of a loaf of bread – so for example an ounce of gold at the time of this writing is $1100 an ounce and the price of bread is just over $3.00 a loaf, thus showing that the purchasing power of gold has not diminished since biblical times.

It’s astounding that in more than 2000 years, gold is still being used for the same things today as it was then – as a hedge against inflation, for commerce, beauty currency and insurance against the possibility of total economic collapse.

In the East, people are used to owning gold. In the West, governments and corporations own gold. In China for example, gold is sold nationally by the banks, in the West, however, you cannot just go into any bank and buy gold. It is sold and bought by bullion dealers and mints.

We know that major changes are taking place if a department store like Harrods in the UK is now selling gold coins and bars to the public.

So, should you own gold, how do you buy gold, what are the advantages what are the disadvantages?

The advantages

Coins and small bars are generally a liquid market, and you can find sellers and buyers when you need them. Easy to cash in.

They are relatively accessible to smaller investors

Insurance against collapse of economy

In volatile times it has always proved to be a safe haven

You are in control of your money and are not subject to a bank going bust or having to freeze your assets, the government being unable to guarantee your funds and thus lose all your money.

You have got cash if a good opportunity arises – you can move quickly

It is tradeable around the world

They are mostly recognisable, which makes them exchangeable for goods in some circumstances.

Just recently, I saw an advert on the internet for a landlord who wanted to rent out his house. He didn’t state the dollar amount, what he asked instead was for a certain number of gold coins as payment. If you will comb through the adverts on the internet, you might be surprised to see many of these adverts are now offering goods in exchange for gold coins. So as the expression goes, “these times are a-changing.”

Disadvantages of having gold

Hard to store safely

It may stay at the same price for years and years

Governments manipulate the price

If gold becomes really valuable gold coin usage is made illegal by governments, or is so heavily taxed and constrained that it is no longer a viable option. For example, the government may tax the sale of gold bullion at 50%. Bullion on a black market would be just as hard to sell without getting cheated. What you are unable to sell, you don’t really own.
(in April 1933, FDR forced US citizens to turn in their gold – it was under a threat of a 10 year prison sentence and/or a $10000 fine. Then in January 1934 just 9 months later he raised the price from $20.67 per ounce to $35.00 per ounce – an increase of 69%).

There can be a considerable premium to purchase the gold – anywhere from 4-10% or even more in times of scarcity – so you have to build this into your costs.

There are fakes and these are usually only spotted by dealers

Currency fluctuations can affect the price in your country

To summarise:
Advantages of owning gold
- easy to sell and buy
- accessible to small investors
- insurance against collapse of economy
- you have control over your money
- tradeable around the world not only for cash, but also for goods and services

Disadvantages of owning gold
- hard to store safely
- may be confiscated or taxed by governments
- premium of at least 4% to pay to the bullion dealer when you buy
- there are fakes out there so buy from a reputable dealer

When it comes to buying gold, the average person doesn’t really know how to get started. There are a number of gold bullion coins in circulation in the world. The attraction of these is that they retain near full bullion value regardless of either change of government or being transported outside their country of issue.
So the starting point would be to know which gold coins are sold in your country.

Major bullion coins:
Issuing country Coin
Australia Nugget
Canada Maple
New Zealand Kiwi
South Africa Krugerrand
United Kingdom Britannia or Sovereign
United States Eagle

For simplicity’s sake, let’s look at the country in which you are living. For the moment, forget about buying coins from other countries. Let’s just concentrate on what will be the easiest way for you to start your collection. If you know someone who routinely buys gold and silver and has a reputable dealer, that would be your starting place. If not, I would strongly suggest that you start researching the dealers in your area and do some comparison shopping. Find out how long they have been in business, find out if they have ever gone bankrupt, if they have ever had any lawsuits against them, if they follow through on what they say. Find out how much of a premium they charge you for purchasing your gold. Most dealers charge you a premium up front when you buy the gold, but do not charge you at the other end when you sell it back to them. But since things have a way of changing rapidly, you should still question whether or not you are being charged at the other end too.

Other ways of buying gold: gold mining shares – too risky as the quantity of a mine’s reserves is never accurately known. There can be unforeseen engineering problems in extracting ore. These can increase production costs and thus eat into the mine’s profitability.
The mine can be all played out and there is no more gold there
They are traded on the stock market and can just as easily disappear off the boards and you can lose all your money.

Egold
Now, let’s take a look at buying gold over the internet – or otherwise known as E-gold. There are various companies who offer online purchasing and selling of gold bullion.

What are the advantages and disadvantages of this method of investing in gold?

Advantages
You can buy very small quantities of gold at relatively economic price– you do not have to buy in ounces, but you can purchase grams of gold which at the time of writing is $35.00 per gram.

You can buy and sell your gold 24/7 and are not limited to store opening hours of the bullion dealers.

The premiums charged for purchasing the gold are much lower than bullion dealers or mints. Typically you will pay between 2-3% of the purchase price.

You can either allow them to keep your gold in their depository or, depending on where you live in the world, you can take delivery of your gold. These companies are currently based in the northern hemisphere and they will not deliver gold to the southern hemisphere at present.

You do not have to spend your gold grams. You can sit on them or you can sell them in return for straight cash.

Disadvantages of e-gold account:
There is a degree of intermediation in the holding. Your gold is the legal property of trustees who have a fiduciary duty to you. This means that it is not quite the same as outright ownership of the gold in your hot little hand.

There could be security issues in that a hacker may get into your account and make an unauthorised payment. Similar to the risks of doing internet banking.

Other ways: gold futures, gold backed shares – e.g. ETF’s – too risky for the average investor
Jewellery
It is a profitable business for those who buy at wholesale and sell at retail. But it’s a poor way of investing in gold.

Advantages:
Enjoyment of wearing it
Very easy to buy

Disadvantages
Acquisition costs are high. Retail jewellery is often marked up by 300% or more in the shops
The real value of jewellery is in the gemstones, the design and craftsmanship. These greatly outrank the value of the gold
All pieces are different and their values are subjective. If you don’t have experience you probably won’t know a fair value.
It is easily stolen.

Ways of buying gold:
Bullion dealers and mints
Gold mining shares
Gold shares – ETF’s (Exchange Traded Funds)
Egold
Jewellery

In conclusion, make sure that whoever you buy your gold from is a dealer or a business that has been in operation for a long time, that they have a good reputation and that they are not fly-by-nights.