The market action I’ve been warning you about — a sharp drop in the Dow down to at least 11,000 — has started. There should be no doubt about that now.
We’ve recently seen …
The worst U.S. stock market decline in almost five years. Last week marked the S&P 500’s steepest weekly drop since September 2003, and it was the worst week for the Dow since March 2003. All this just after I warned you repeatedly right here in Money and Markets that the U.S. markets were headed for a sharp contraction.
Record new lows in the U.S. dollar. In terms of the Federal Reserve’s own index of the trade-weighted value of the U.S. dollar, the greenback has made record all-time lows.
And the worst one-day bond market decline in three years. Despite a recent bounce, all of my indicators suggest bond prices have much more downside to them as yields surge due to the widening sub-prime mortgage crisis. In short, credit is getting squeezed, and the price of money is going up due to the risks inherent in the U.S. economy.
Just yesterday, we also saw …
The price of crude oil soar above $78 a barrel, a new record high! Oil isn’t rising because of U.S. demand, which does remain surprisingly robust. It’s mainly jumping because of Asia’s record-shattering growth, which is not likely to slow even as the U.S. economy turns south.
Today, I want to talk about gold, the most precious asset you can own in times like these. Specifically, I want to tell you why …
Now Is a Good Time to Own a
Small Amount of Physical Gold
When turmoil hits the stock, bond and currency markets, there is no substitute for owning some physical gold.
That’s becauseeven in a major gold bull market such as we have now, not all gold mining stocks or gold stock mutual funds will thrive. Some will even get hurt, namely those that hedge or those that can’t deliver gold to their customers fast enough.
Furthermore, even exchange-traded gold funds have one potential negative. If a stampede of gold ETF investors tries to take delivery of gold in exchange for their paper shares, some gold funds may find it difficult to meet that demand.
I don’t expect that to happen, but in an environment like this — where hedge funds are going broke, mortgage bankers are going belly up, banks are facing big earnings shortfalls — anything can happen.
Physical gold is the ultimate insurance policy!
The primary and most obvious advantage to owning physical gold over gold “instruments” is that it’s yours, totally and unequivocally. Plus, gold is universally accepted as money anywhere in the world, regardless of culture, language or local currency. You can convert it to goods and services anywhere in the world.
I Think Everyone Should Put Up to 3%
Of Their Total Net Worth in Physical Gold
I’ll tell you how in a minute. And I’ll give you a list of three recommended dealers. Before I get into the specifics, some basic guidelines apply …
First, watch your portfolio allocation.
Don’t go overboard. As I just noted, I think a maximum of 3% of your total net worth is enough to put into physical gold. This allocation gives you some insurance, but doesn’t expose you to a lot of risk.
Second, you generally should avoid rare coins.
Unless you’re an expert in this field, I recommend staying away from the rare coin market. Rare coins are more like investing in art rather than financial insurance.
Third, you must understand the physical gold market.
It’s especially important that you know the purity of the gold you’re buying. Gold is a soft metal, so it’s alloyed with other metals for strength. That’s why jewelry usually has less pure gold than coins or bars. Naturally, the more gold a piece contains, the more valuable it is.
For jewelry, gold purity is stated in karats (“carats” everywhere outside of the U.S.). Bullion coins, ingots and bars state their purity in decimals representing the percentage of gold content, with .9999 pure (99.99%) being the highest.
To get the true price of the gold content of a bullion coin or bar, multiply the selling price per ounce by the decimal purity.
Example: A Hungarian 100 Korona contains 0.9802 ounces of pure gold — just under an ounce. Let’s say the coin’s selling price is $670.
The actual price for its gold content would be $656.74 ($670 multiplied by 0.9802).
The difference between the selling price and the actual value of the gold content — in this case $13.36 — is attributable to fabrication, processing and marketing costs, including the dealer’s commission.
Collectively, this difference is known as the “premium.” The premium is usually expressed as a percentage to make it easier to compare different forms of gold and different bullion coins and bars.
Fourth, you also need to understand storage issues.
I advise against dealer storage programs. Millions of dollars in investor funds have been lost in these programs.
Instead, despite the hassles, I recommend you take possession of your gold and store it in your secure safe, or better yet, a safety deposit box at your bank. Larger amounts can be stored at an independent storage facility that’s licensed by one of the exchanges, such as the Delaware Depository Company.
Now, Here Are My Favorite
Physical Gold Investments
In the past I’ve shied away from recommending gold bullion coins because they carried larger premiums than gold ingots and bars. But today’s premiums have narrowed, as the gold dealer market has become more competitive.
That said, here are my favorite physical gold investments, in order of preference …
Kilo Gold Bars: For the larger investor, the kilo — or 32.15 ounce — gold bar is still the best way to go.
1-, 5-, 10-gram and 1-ounce ingots: These are the best all-around physical gold investments, in my opinion. They carry very little premium over the spot price of gold … are easily stored in your safe or safety deposit box at your bank … and are very easy to buy and sell.
My favorite ingot bars are refined by Pamp Suisse, and are available through most dealers. They come in sizes from one gram to one ounce.
Gold bullion coins: Most bullion coins are available in sizes starting as small as 1/20 of an ounce. However, small fractional sizes mean you’ll end up paying higher premiums overall, getting much less gold for your money. So I do not recommend fractional bullion coins, except perhaps as gifts.
Rather, here are my favorite gold bullion coins …
1. Mexican 50 Pesos and Austrian 100 Coronas. Although they’re not as well known, these two gold bullion coins often can be bought at much smaller premiums over the spot price of gold than any of the other coins below. That’s why I’ve rated them #1.
The 50 Pesos contains 37.5 grams (1.2057 ounces) and the 100 Corona is made up of .9802 ounces of gold.
Gold bullion investors seeking the best value should always inquire about Mexican 50 Pesos and Austrian 100 Coronas. They’re premiums over spot typically run between 1% and 1.5%.
2. South African Krugerrands, although they’re no longer imported into the U.S., Krugerrands are very popular, with thousands trading daily in the States. Krugerrands sell at a higher premium than Mexican 50 Pesos or Austrian 100 Coronas, but typically less than …
3. American Gold Eagles. Although these are the best-selling gold bullion coins in the world, Gold Eagles sell for as much as 6% over spot!
4. Canadian Maple Leafs are almost as popular as Gold Eagles and carry about the same 5% or 6% premium over spot prices. However, I find them less desirable than Gold Eagles because the coin’s design lends itself to easy scratching and damage.
So, where can you buy physical gold? Well, if you already know and trust a local dealer, by all means use them.
Otherwise, here are three long-standing dealers that I know of …
Dillon Gage, Inc.
15301 Dallas Parkway, Suite 200
Addison, TX 75001
1-800-375-4653
www.dillongage.com
Rare Coins Of New Hampshire
28 Jones Road, Suite #1
P.O. Box 720
Milford, NH 03055
1-800-225-7264
www.rare-coins.com
FideliTrade
3601 N. Market Street
Wilmington, DE 19802
1-800-223-1080
www.fidelitrade.com
Best wishes,
Larry
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