Investor's Digest of Canada

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How to buy Gold

A Guide for Today's Turbulent Market

There has been a considerable amount of talk lately about gold. It appears to show signs of promise in an otherwise bleak financial time. But is gold really all that it is cracked up to be? If so, what is a good way to buy it, and what is wise to avoid?

Richard Young, editor of Richard C. Young's Intelligence Report, has been following the gold market since the 1960s. “At one point” he writes, he “even owned a small private gold company.” Here is what he has to say on the topic.

No to Futures

According to Richard C. Young's Intelligence Report, August 2011, you should avoid buying gold as a future. The reason he gives is what you want when buying gold is the actual physical ownership, rather than a piece of paper that is a futures contract. There is just too much hassle, with worrying about margins and ensuring that the contract doesn't expire. ETFs that are based in gold futures are also a no-go according to Young, because “though the ETF structure simplifies the management of a gold futures position, you are still just investing in paper contracts.”

Gold Stocks

Good in theory, not necessarily in practice. Why? Too many factors that can turn against you. On the side of theory, “the gold stock bulls argue that gold miners are a better buy because they are leveraged to the price of gold” says Young. This is all fine and good, so long as your proverbial house of cards remain standing. Hence he continues with this caveat: “Yup, as long as your gold stock hasn't hedged protection for decades into the future. And as long as your gold company can profitably extract the gold it claims it has. And as long as the country where your gold miner operates doesn't decide to nationalize their gold mines or jack up their royalty rates as some nations have recently done. But yes, in theory, gold stocks should offer greater leverage to the price of gold.”

Physical Gold

“Most investors will want to stick to ETFs that own physical gold. If you go the coin route, stick with bullion coins. Stay away from numismatics” Young advises. Unless, of course you already own some gold Pandas, in which case, hold on to those. They are not for trading but for passing down through the generations. This is due to “the dealer markups on numismatics is stiff and liquidity is poor.” How much so? “Even on bullion coins you'll pay 3% - 5% (which) equates to as much as 10% on a roundtrip trade.” Young's overall view on gold coins, however, is that you buy them because you simply like to collect them. Otherwise, he advises “there are better ways to buy gold.”

So what's a better option than gold coins? Young strongly recommends SDPR Gold Shares ETF (GLD). It is convenient, liquid, and secure, he notes, and you can use a Fidelity brokerage or Vanguard account to hold it. The physical gold for GLD is held in vaults in London, with HSBC Bank as custodian. The trustee can audit it twice a year, and the independent auditors of the trust “may audit the gold as part of their financial statement audit.” Furthermore, “every bar held in the trust is posted on the ETF's website daily.”

The Winner

“Gold-backed ETFs are your winning ticket to the gold market” advises Young, who has advised GLD for the past six years, and quite aggressively at that. “I hope you haven't missed the boat. Gold is up over 150% over the last 60 months, 60% over the last 36 months, and 20% over the last 12 months.” Even at these levels though, Young makes a unique case for investing in gold not for the profits from it, but actually quite the opposite! The way he sees it, when gold prices drop, the rest of his portfolio is bound to go up. Young writes “you won't hear this from another investor, but my strategy is to buy gold and pray it goes down. Because when gold falls, everything else in my portfolio is likely to rise.” He does point out that this correlation is not an immediate one, but one for the long haul. “I'm not talking about over the next week or month, but rather over the long term.”

The Long-term View

In order to illustrate his point about the falling of gold on the rest of his portfolio, over the long term, Young points out that “from year-end 1971 to early 1980”, comparing gold with the S&P 500 “gold prices rose over 1,800% from trough to peak – a secular bull market to be sure.” While the S&P 500, during this same period, was flat.

From the 1980s to the 1990s “gold was in a long-term secular bear market.” So much so, that “gold was 70% cheaper in 2000 than it was in early 1980.” In spite of this, stocks still surged. “The S&P 500 was up almost 13-fold not counting dividends.”

Most recently, over the past twelve years, “once again, we see gold in a secular bull market and stocks in a secular bear market.” Leading Young to conclude that the historical evidence speaks for itself, and what it's telling you is “buy gold and pray it goes down.”