What You Should Buy and What You Shouldn’t Now that you know how to buy gold, below are two types of gold products—one you should buy and the other you should run away from. Semi-Numismatic and Numismatic Gold Coins. Numismatic or older and rare coins are bought not solely for their precious metal content but also for their rarity and their historical, aesthetic appeal. They are leveraged to the gold price, which means that the price of these coins can increase faster than the gold price in a bull market (due to their historical and aesthetic value and to their rarity) and can decrease by more when gold is in a bear market. Many investors opt for high-quality pre-1933 gold coins graded MS- 60 or better by either the Professional Coin Grading Service or the Numismatic Guaranty Corporation. These can be great investments. On the other hand, if you’re one of the people worried about a money panic and a potential breakdown in society, you have to wonder how well numismatic value will hold in such a situation. Physical Alternatives to Coins and Bars. Most people buy gold bars or coins. But gold buyers and sellers also traffic in gold dust, nuggets, wire, and even gold chips used by dentists to fill teeth. But none of these are as fungible as coins or bars and coins are the most fungible of all. The more a gold piece is a fabricated product of known weight and purity, the better off you usually are. Gold dust in particular can be diluted or even counterfeited. Digital Gold or e-Gold. My personal view on e-gold, e-bullion, or whatever you want to call it is simply: Don’t. There are a couple of reputable firms in this business: GoldMoney.com and BullionVault.com, for example. But the lax operating procedures of the Internet make this business attractive to financial predators. There are no specific financial regulations governing digital gold currency (DGC) providers, so they operate under self-regulation. DGC providers are not banks and therefore do not need to comply with bank regulations and there are concerns that unscrupulous operators are operating in this emerging sector. Gold Exchange-Traded Funds (ETFs). Trading in precious metals got a whole lot easier when Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) came along. As seen in Table 4.2, there are a bunch of gold and silver ETFs. The iShares and SPDR funds hold physical metal. The GLD and the Barclays iShares Comex Gold Trust (IAU) are fixed at one-tenth the price of gold, minus a small amount to account for fees. That is, if Table 4.2 Gold, Silver, and Metals ETFs and ETNs Fund Name Symbol Total Expense Ratio iShares COMEX Gold Trust IAU 0.40 iShares Silver Trust SLV 0.50 SPDR Gold Shares GLD 0.40 PowerShares DB Gold Fund DGL 0.50 DB Gold Shares Double Long DGP 0.75 DB Gold Short DGZ 0.75 DB Gold Double Short DZZ 0.75 PowerShares DB Silver Fund ETF DBS 0.50 PowerShares DB Precious Metals DBP 0.75 Fund ETF gold is trading at $800 an ounce, you can buy the GLD or the IAU for about $80. They are backed up by gold bullion in a vault. There are fees associated with gold ETFs, but they’re small, and you can’t beat the convenience. On the other hand, if you ’re a stickler for physical gold, these funds aren’t for you. And some funds, like the PowerShares gold funds, don’t hold physical gold. Instead, they track the performance of a fully collateralized futures position, meaning they capture changes in the spot price of the underlying metal plus any roll yield and interest income. If a fund’s holdings of physical gold are not important to you, you might just go with the fund that has the lowest total expense ratio. However, I highly recommend a fund that is liquid (has plenty of volume). Just as important as getting into a gold ETF is being able to get out when you want to. And then there are the leveraged Gold ETNs—DGP and DZZ. DGP targets twice the movement in gold, while DZZ targets twice the inverse of the daily movement in gold. If the metals do well, long gold ETFs will likely outperform. If the metals do poorly, they will likely under perform. And visa versa for the short and double-short gold funds. Importantly, I wouldn’t use the leveraged gold ETFs as ways to be positioned in gold for the long term. They’re trading vehicles—you move in, hold them for a while, and get out. Hopefully, the short-term trend is in your favor. And the safest way to invest in gold is by buying and holding physical gold. One More Idea—Central Fund of Canada. The Central Fund of Canada (CEF on the AMEX) is a great closed-end fund that invests 90% of its holdings in gold and silver bullion (the rest is in cash). As a closed-end fund, CEF is a bit different from the traditional open-ended mutual fund that you might be used to. An open - ended mutual fund or exchange-traded fund creates new shares every time an investor buys the fund and redeems the shares every time an investor sells the fund. A closed-end fund limits its amount of shares. It is a publicly traded entity that raises capital through an initial public offering and invests the proceeds according to the fund’s objectives. Because closed-end funds limit their shares, they can trade at a premium or discount to their net asset value (NAV). It carries a premium because its limited amount of shares means CEF’s price is leveraged to the price of gold. And as a plus, if silver outperforms gold, CEF will let you participate in that, as well. Gold Investing—Keep It Simple In a nutshell, below are my recommendations for investing in gold. Depending on your personal situation, your investment advisor may have other ideas, but this is a great starting point: Investment #1—Buy gold. And I mean physical gold, the kind you put in a safe. You don’t buy physical gold to get rich; you buy it to preserve wealth. If Treasuries implode, gold will make a mighty fine insurance policy. Also, you might want to pick up gold in forms that you can easily barter if paper money becomes worthless—simple gold rings, for example. Wedding bands are good for this. I know of a guy who has hundreds of wedding bands stored on clothes hangers in his closet. Five Tips for Gold Bullion Buyers Here is a collection of five tips from expert sources. 1. Call at least three dealers for a price. The difference between a good price and an almost good price can be the difference between getting 100 ounces of gold and 90 ounces of gold. 2. Make sure you include shipping costs in your calculation of the price of the coin—shipping costs vary wildly from dealer to dealer. 3. You need to be explicit on what you are locking in, including price, merchandise, and terms of payment. If there seems to be any waffling on the part of the dealer, this is a warning sign to steer clear. 4. Look for a dealer who has been in business for a number of years. Ideally, if you go to someone who was in business in the 1970- to-1980 boom, they’ve seen enough ups and downs in the market to handle the challenges of price fluctuations and coin availability. 5. Get to know a local dealer. The advantage is he can call you when he gets new inventory and there will be no shipping involved. The worst time to buy gold is when it’s going higher. Nothing travels in a straight line, so wait for a pullback and pick up simple gold coins or gold bars. Investment #2—Silver. Again, I mean physical silver. If our economy, financial system, and paper money go south, you ’ll want gold and silver. Flashing around too much gold could make you a target. Silver doesn’t attract as much attention and it’s still a precious metal. In fact, silver is undervalued compared to gold by some metrics. Local currencies resurfaced in the United States in 1991 in Ithaca, New York, with the Ithaca HOUR. One Ithaca HOUR is valued at U.S. $10. It is generally used as payment for one hour’s work, although the rate is negotiable. It can be exchanged for U.S. dollars at participating businesses, including a credit union, in Ithaca. This local currency was created by Paul Glover, a graphic designer. “I had a longstanding interest in local initiatives,” Glover told me. “And it seemed natural, during the Great Recession of the early 90s, to design money. We didn ’t have gold for backing—neither does the dollar—but we had extra hours of time for extra income. As a journalist and graphic artist, it was easy to make the leap from idea to design to launch.” Thanks to the recession, many of Glover’s neighbors were unemployed or short of cash. Glover hoped that the HOURs would encourage local spending and stimulate the economy. The first printing was 2,250 HOURS, but now 10,000 HOURS have been printed, with denominations ranging from one-tenth of an HOUR to two HOURS. “HOURS bring new skills into the market, reinforce small local business and farms, strengthen community capacity to meet needs with least reliance on distant board rooms and bureaucracies,” Glover explains. “And they introduce us to one another as resources for assistance, rather than as competitors for scarce dollars.” Glover says interest in local currencies is steady, and increasing “as the formal economy stumbles. I’ve been contacted by many people interested in creating their own cash.” When he talks to potential currency printers, Glover emphasizes that successful currencies will have at least one full -time employee. That’s because, just as dollars have armies of brokers moving money, each local currency needs a regular Networker to promote, facilitate, and troubleshoot circulation. Does Glover think the U.S. dollar is in trouble? In a word, “yes.” “All national currencies will lose value, some faster than others,” Glover says. “U.S. dollars are particularly vulnerable since we’ve relied on cheap imported fossil fuels to warm our homes and move our cars. ” Glover believes the future is bright for local currencies. “They’ll move in to take up slack as dollars fade. The more they prove stable and useful, the more they’ll contribute to rebuilding America’s economy.” For example, certain stores would take payment in Snickers bars and make change in chewing gum. If you needed a driver’s license, you’d bring along some nice women’s hygiene products to pay the clerk. Pros: Easy to stock up on these small items now. Cons: As long as these are things you’ll use yourself, there aren’t many cons. Black Market Currencies. Alternative economies are typical of decaying societies. Orlov relates that in the Soviet Union, people would engage in asset stripping—pulling the copper out of the wires of abandoned homes, carrying off the vinyl siding and the fiberglass insulation. In a functioning society, this would be called stealing. In a collapsed society, this is raising capital. This junk was a treasure trove of currency for future transactions over food, water, or medicines. Black market drugs became a premier currency in the New Russia, and there was plenty of value in drugs, alcohol, and cigarettes. Doctors and nurses traded their services side by side with carpenters and electricians. And since licensed professional currency carried a premium, some consumers chose discounts from back-ally medical practitioners and Crazy Ivan’s Cut-Rate Carpentry. Much to my lawyer’s relief, I am not going to recommend anyone engage in the illegal drug trade or unlicensed electrical work. However, you can see how a medicinal herb garden could become a secondary source of income if TSHTF. Indeed, the black market already exists all around you. Social prostitution is the name sociologists give to the practice of women, mostly single moms, trading sex for getting a broken car fixed, plumbing patched up, etc. We ’ll probably see a lot more of it in a collapsed society. Pros: Just using medicinal herbs as an example, you’ll be able to grow your own money. Cons: Getting arrested. Also, it’s easy to get scammed by a bum passing himself off as a carpenter or electrician. Note: The police will probably stop arresting people for growing weed about the time they stop answering 911 calls. As with everything else, there are trade-offs in a collapse. Even more alternative currencies: Copper wire, salt, sugar, chocolate, tobacco, alcohol, bread, and bullets could all become currencies in a real hyperinflation/currency collapse. Just keep this in mind: As of this writing, we are in a deflationary environment. Inflation is probably a ways down the road, and hyperinflation, if it comes, probably won’t be soon. You have other things to worry about, because your next big disaster could be around the corner. Could we see hyperinflation? It’s always possible. Widespread hyperinflation would eliminate current debts but it would probably also end future borrowing. And trading with other countries becomes problematic when the currency you use loses its value every day. This is a real problem for the United States, because we are a consumer- oriented society and we import so many of our consumer goods. But this also represents opportunity for a savvy survivalist. Inflation takes place, causes, and is caused by credit expansion. A virtuous cycle causes GDP to expand. This is what the government and the Fed are trying to revive. Hyperinflation takes place when money velocity increases and GDP declines. In a hyperinflationary environment, trading with other countries probably will not work very well either.
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