Structuring Your Physical Gold Portfolio

As I’m writing this article the price of gold surpassed the $1,800 per ounce benchmark. Mainstream media claims that gold is in a bubble due to burst but how can that be? The fundamentals tell us otherwise. The answer lies in the strength or weakness of fiat currency. Do we have a sound currency to rely on, one based on a healthy economy and honest politicians? If you can’t answer “yes” to these questions then you may recognize that it’s still not too late to get on the train to protect your hard earned savings and maintain your purchasing power.

Why is gold today a reliable asset to own? I, for one, pay attention to what the central banks worldwide are doing. If you happen to wonder, these entities are quietly and without fanfare buying gold. China is not selling its mined gold anymore. Obviously, they keep it. Then, we may all have seen the gold commercials running at night – screaming about buying gold – but in reality most people don’t own it or if they do, they own the paper gold. While it’s always good to be cautious just observe what most people do. They’re still invested in Wall Street assets because their financial adviser had been educated in the Wall Street spirit. For example, it’s a common misconception among Americans that the only IRA investments allowed in a retirement account are stocks, CDs, and mutual funds. Most folks still lack the knowledge they could invest their IRA’s in broader investments such as precious metals or real estate. Why the confusion? Because the retirement industry has been dominated by large transaction-driven custodians who have focused on a narrow universe of investment alternatives.

Central banks and governments have set a long-term trend of currency debasement. How likely is it that this trend will be reversed anytime soon? Not that likely. Historically, gold has been an excellent way of preserving purchasing power over long periods of time. And did you know that today it takes almost the same amount of gold to buy a barrel of crude oil as it did 50 years ago? Can we say the same about fiat currency? Let’s see what the facts are. Today’s crude oil price is at $83 per barrel while in the summer of 1960 its value in dollars was at $3 per gallon. Sure, there have been events that contributed to the rise in price (OPEC, wars, increased demand, etc) but it’s not outrageous to say that inflation had also a major impact during the past fifty years (which was the direct result of fiat currency debasement.)

If you’re one of the few ready and willing to take action to preserve your standard of living you may be encouraged by the chart below. A $10,000 investment on January 1st 2000 in 3-Month US Treasury bills would have slightly decreased your purchasing power on 1 January 2011. A $10,000 conversion in gold or silver, however would have more than tripled your purchasing power.

During hard economic times liquidity is of primary concern. If you’re considering gold as part of your financial security plan keep in mind that age is an important factor. The older you are the more gold you should own for liquidity purposes. Start by deciding how much to allocate for gold through a dollar cost averaging program. If, for example, you’d like to buy $10,000 worth of gold divide that sum by the number of months you wish and have the ability to contribute. Say you’re able to contribute $1,000 per month determine the day of each month and stick with it. In this case in ten month you would have accomplished your goal.

Owning physical gold satisfies the need for liquidity. The most common form is the bullion gold such as the minted coins (American Gold Eagle, Canadian Maple Leaf, Australian Kangaroo, South African Krugerrand) and the bars (ingots). And don’t assume all gold is the same, as there is a difference between bullion and numismatics. The numismatics are un-circulated coins (collectibles) the value of which is determined by condition and scarcity. The price is higher and it may not represent a good buy especially during a crises.

There are advantages and disadvantages when owning physical gold and you may have to weigh them to determine what’s best for you. There are two ways to own physical gold. One is to store it yourself. Holding your gold in your own home gives you peace of mind that it’s in your possession. But there are certain risks that should be considered. The risk of theft can never be overemphasized. If you are to insure it, find out how high is the premium going to be or can you even get it? Next you may consider having it stored in a safe deposit box. If that is what you have in mind do remember that it also comes with a risk, the risk of confiscation. Back in 1933 the government decided it would be best that Americans don’t own any gold so on April 5 president Franklin Roosevelt signed Executive Order 6102 forbidding the hoarding of Gold Coins, Gold Bullion, and Gold Certificates within the United States. The order criminalized the possession of monetary gold by any individual or corporation.

Another way to own physical gold is to buy it and have the bullion dealer store it for you. The disadvantage is that you don’t have the gold in hand. When determining which program to select be sure you go with the allocated gold option. You may hear that unallocated gold is physical gold but that cannot be proven so why take a chance? I am no fan of the unallocated program since you don’t own a particular coin or bar separately stored on your behalf. Your unallocated gold shows up in the company’s balance sheet as an asset, and your claim to the metal as the corresponding liability. If the bullion dealer were to go bust, any of its creditors would have the first claim to those assets, leaving you with no access to the metal (liabilities) promised to you. Therefore a certificate stating you have a claim to gold is no assurance that your ounces of gold can be redeemed if you so desire. Unlike allocated gold there is no storage fee but the risk is much higher.

When it comes to allocated gold you actually own the physical metal. It is stored for you in a secure vault with insurance, thus a storage fee does apply. Unlike with unallocated gold, should the company face bankruptcy or other financial difficulties your metal ownership would not be in jeopardy because its creditors would have no claim to it. When choosing the provider be sure to verify its vault is insured and regularly audited by a reputable independent auditor. You may also consider a vault – outside the U.S. – in a country that has a stable political system and no history of prior confiscation.

Another advantage with allocated gold is that you can sell the gold you own at any time – at whatever the exchange rate will be between gold and your desired currency at the time – and have the money wired to your bank account. Thus you may sell a portion or all of your gold in the future to invest in undervalued better investments. Through one company (that I am familiar with) you will even have the ability to make online payments in goldgrams (gg) and mils (instead of dollars and cents) to merchants that accept gold as a form of payment and have holdings with the company. With the advent of Internet and the world’s desire (or need) to return to sound money this form of gold ownership may indeed be the Twenty First Century gold.

If placing all your precious metals eggs in one basket is not your thing then by all means, go ahead and add some silver to it. You can buy the “junk” silver in a bag (dimes, quarters, half dollars, silver dollars minted before 1968). They are 90% silver, could be used as legal tender and safer from confiscation than the bullion without nominal currency value. And just as with gold you can buy allocated silver and have the bullion dealer store it for you. Be sure to choose a bullion manager that allows you to exchange metals directly without having to sell them first.

In a future article I will discuss other ways to acquire vesting in gold and/or other precious metals. Remember that conversion of fiat currency into gold is not an investment like buying mining stocks, ETF’s or precious metals mutual funds. It’s an accumulation of hard assets that are liquid and will most likely help you maintain your purchasing power during the times when fiat currency had lost its reign.

GoldMoney. The best way to buy gold & silver


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