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I am going to finish our
discussion about How Banks Work, but I'm ready for a little break. Thus, in
celebration of new all-time highs in gold (celebration for investors, it's a
big problem for everyone else), here's a little primer on how to invest in
gold.
By the way, the Director
of Research of CalPERS, the California Public
Employees Retirement System, one of the biggest ($240 billion apparently)
institutional investors in the world, has just published a book.
The title is -- this is
sweet -- BUY GOLD NOW
Also, I just gave an
interview with Monocle magazine (UK) about investing in gold. The interest
level is rising.
NOTE: This is not
investment advice. This is my informal opinion, for educational purposes.
For now, let's forget
about gold mining stocks. We'll just focus on gold bullion, and silver
bullion.
First, before we answer how,
we have to answer why. Gold isn't really an investment. There's no return on
capital. It's a form of money. It's primary characteristic is that it is
stable in value. Thus, owning gold is like putting a stack of $20 bills in a
sock, except that instead of some government's paper nonsense, we're owning
Universal Money instead.
Considered as a currency,
gold has one obvious flaw: there's no interest income. Actually, there's no
interest income in any other currency either. To earn interest, you have to
have some counterparty that pays interest. Then, you have all the issues of
lending, including credit risk and all the issues of the chain of ownership
between you and your brokerage and a money market fund, etc. Usually this is
no big problem, but these are not "usual" times today. Between the
ABCP and the auction-rate securities and the various "enhanced"
money market funds that have blown up, not to mention regular money market
funds that have stumbled, many forms of "cash" are showing rather
dramatic divergences from the ideal. Any other currency has all of these
credit risk issues, plus of course the risk of devaluation. For this you get
paid -- well, what do you get paid? About 2% in the US (for T-bills), about
3% in Europe, and about 1% in Japan.
And if this makes you
start to think about why you would own anything but gold,
in these times, you are starting to get the picture.
OK, now how do you go
about owning some gold?
I put a high importance
on owning physical gold. This means direct ownership. The most basic way is
to buy some coins, and keep them somewhere secure. You can try a safe deposit
box. There are different kinds of coins, each with a premium to gold bullion.
Kruggerands tend to have the smallest premium.
However, US Gold Eagles apparently have some legal advantages in the US, as
they can be used as legal tender. After all, they come
from the US mint, which also makes all the other coins. In general, you pay
about a 3% premium to buy a coin, and sell at market.
Buy from a reputable
dealer, one that has been around for decades. I wouldn't buy coins on eBay,
although I'd consider selling some there. I like Jules Karp Coins and Bullion
(212) 943-5770 in New York City. On the West coast, try Camino Coin (www.caminocompany.com).
Silver is usually traded
in 1000oz bars, 100oz bars, and bags of silver coins. I personally like the
bags. Old US silver coins were 90% silver. $1 face value of silver coins (for
example four quarters or ten dimes) contains about 0.715 oz of silver. The
bags are typically $1000 face value, so you're looking at about 715 oz of silver.The old silver coins are legal tender, and come in
convenient teeny sizes. They are also about the same price or cheaper than
the bars.
I'm hearing that small
investors are having difficulty obtaining even a half-dozen 100oz bars of
silver these days. Which tells you about all you need to know, eh? It is not
well understood that there is actually quite a bit less silver in the world
than gold. All of the tradeable silver in the world
might come to about 1 billion ounces, while there are about 4 billion ounces
of gold. Thus, if anyone gets the idea of holding silver as an investment --
as money, rather than as an industrial commodity -- there won't be much to go
around. Historically, silver traded at a 15:1 ratio with gold for literally
thousands of years. You can buy about 50oz of silver for the price of 1 oz of
gold today. Yes, I do think that silver will go to 15:1 sometime in the next
few years, and yes, I think you should then sell it and hold gold instead.
For larger amounts, I
would look into some kind of segregated, allocated, direct holding.
"Segregated" means not pooled. You don't own a percent of some
legal entity, like a limited partnership, which then owns some gold. Nobody
owns it but you. "Allocated" means that there isn't a big pile of
gold somewhere, but the part that you own is not distiguished
from other parts. You want to be able to say: "This is my bar. There are
many like it, but this one is mine." In practice, this means you get the
serial number and specific weights from the bar. (This is advice for holdings
of $1m or more.) You might even visit it once a year or so, and make sure the
bar in the vault with your name on it matches the serial number.
I would STAY AWAY from
pooled accounts like those offered by Kitco or the
Perth Mint.
http://news.silverseek.com/TedButler/1204056208.php
Some big full-service
brokerages, like Morgan Stanley for example, offer custody services for
bullion investing. Morgan Stanley will buy the bullion for you, and put it in
insured storage. There is a small charge for this, typically about 30-50 bps
per year.
The problem is, the big
brokerages lie. Morgan Stanley just got busted in a class-action
lawsuit in which 22,000 investors had ordered Morgan Stanley to buy and
warehouse precious metals for them. Morgan Stanley even charged them a
custody fee. But Morgan Stanley never actually bought the metal.
You see, the big banks
are terrified of people owning bullion. And what does that make you want to
do? It makes me want to own bullion.
You might have better
luck with HSBC, which offers custody services. Make sure you get the serial
numbers and specific weights, and visit your bullion sometimes. Do not ask
your coin and bullion dealer (ie a coin store) to
custody the metal.
I hear there is also a
custody service within the Zurich airport. I would also look into Singapore.
People have mixed
opinions of safe deposit boxes. In 1933, the Federal government ordered all
safe deposit boxes opened in the presence of a Federal marshal, and gold
bullion was seized. It was illegal to own gold in the US from 1933 to 1974.
There are some stories of FBI types quietly going though safe deposit boxes
today and making gold coins disappear. (Terrorists, you know.) I have heard
that banks specifically state in their safe deposit box agreements that you
are not allowed to hold precious metals in them. With that said, it seems
that people are reasonably content to use safe deposit boxes for quantities
too large to store somewhere but too small for insured custody storage.
(Let's say $100K-$500K worth.) Maybe a couple safe deposit boxes, at
different banks.
Given the difficulties of
owning bullion, two companies have emerged to offer direct held, allocated,
segregated bullion custoday and trading with
Internet convenience. One is Bullionvault
(www.bullionvault.com). This has a convenient, low cost trading system which
allows purchases in very small increments (one gram for example). I have used
Bullionvault in the past. However, at this point I
am more inclined to use goldmoney
(www.goldmoney.com) which charges more for purchases (as they must) but
doesn't have the odd "fractional bar" system. Both of these are run
by "outsiders" from the traditional banking cartel.
One big advantage of
gold's inconvenience is that it tends to make people sit tight. There's
something about a gold bull that makes it tough to ride. For most holdings,
it is probably best to simply buy your position, and sit and wait until the
bull finally reaches its last stages. There will eventually be a time to
trade your gold for something else, like bonds, equities, property or
whatever. Real investments that produce a return on capital, not just the
return of capital. That time will probably be pretty obvious, but
it will be difficult to act when it comes.
There are a number of
trading vehicles that are effectively derivatives of gold. They aren't really
gold itself, but provide a return that is linked to bullion. One of these is
the various ETFs popping up. GLD is the biggest. These ETFs are offerings of
the Big Banks. One of their purposes is to prevent the purchase of actual
bullion. Do you really think that a bank that is going to lie about a direct,
allocated, segregated, custody holding -- as Morgan Stanley did
-- is going to play fair regarding the holdings of ETFs? I doubt it. Already,
there have been suspicions -- based on repeated serial numbers for example -- that there really isn't
as much gold there as is promised. Or, maybe there is, but it could be used
in the future for some nefarious purpose. The GLD ETF provides a very
convenient way to confiscate everyone's gold, as it is all in one convenient
place, as opposed to various coins and bars all over the world. For now, GLD
is a fine trading tool. Use it as you wish. But remember it is paper, not
gold. Actually, it's not even paper. Do you have paper certificates for your
GLD holding? It's in "street name," which means that you also have
the agency risk of your custodian broker.
The new silver ETF (SLV)
seems particularly compromised.
James Turk: Can We Trust the
Silver ETF?
Of course, if SLV is
pretty obviously just a paper trading device, what does that mean about GLD?
Then, there are gold and
silver futures, which are obviously derivatives. Actually, these have more of
a link with real bullion than SLV and GLD perhaps, as you can take delivery
on the contract if you desire.
So, to sum it up:
1)
If you want gold and silver, get gold and silver, not paper. This
means coins and bars, in segregated, allocated custody with serial numbers
and specific weights for large holdings.
2)
GLD, SLV and the futures contracts are handy paper trading devices.
Use them as you see fit. They are not gold, however.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset management.
Lewis has written for the Financial Times, the Wall Street Journal Asia, the
Japan Times, Pravda, and other publications. He has appeared on financial
television in the United States,
Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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