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Just in the last few days, gold bullion has skyrocketed $12 … erasing most of its recent correction … and pointing the way to a far more virulent form of inflation in the months ahead. Today, I’ll show you why. I’ll give you a primer on five different ways to invest in gold. And I’ll point out some of the pitfalls to avoid. Ben Bernanke Lights The primary cause of gold’s surge is fundamental and long-lasting: Fears of rampant inflation and worries of a collapse in the U.S. dollar. But the primary trigger is equally relevant: The nomination of Ben Bernanke to succeed Alan Greenspan at the Fed. Indeed, if you’re like me, and you’ve been expecting inflation to pick up speed, then your outlook is now pretty much carved in stone with the phenomenon that could soon be dubbed “Bernanke Bullion.†Bernanke believes in the ability — and duty — of an omnipotent Fed to print money whenever it feels it needs to. He’s from the camp that’s dreadfully afraid of deflation and prefers inflation at virtually any cost. To some degree, you could say the same about almost any central banker today. And ultimately, it’s also why the gold standard has been banished from the world. But Bernanke’s hawkish aversion to deflation — and dovish tolerance of inflation — is far more severe than Wall Street seems to recognize. How do we know? A couple of years ago Bernanke made it abundantly clear to the American public that, to maintain a minimum level of inflation, the Fed could just buy bonds in virtually limitless quantities, “dropping … money from a helicopter.†Hence his nickname “Helicopter Ben.†To investors, this sends the message: “Never mind a collapse in the dollar! Never mind the trillions held by foreign investors that would flee the U.S. currency and rush into euros, Swiss francs, Japanese yen, gold, and other commodities! If that’s what it takes to create inflation and avoid deflation, so be it!†Today, we may be among the few that are talking about the dire implications of this message. But we’re certainly not the only ones who are getting it: A growing minority of smart investors see exactly what we see. And they are taking deliberate steps to protect themselves from the inevitable fallout.
I’m reminded of the words penned by George Bernard Shaw: “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you to vote for gold.†I agree. And in my Real Wealth Report, I have been recommending investors keep up to 5% of their total portfolio invested in gold bullion or equivalent, with additional allocations to other alternatives to bullion. Here are the details … How to Buy Gold There are numerous ways. But let’s start with the most basic form: Physical gold bullion. The two most popular vehicles & Gold bullion coins Best examples: The American Eagle, Canadian Maple Leaf, and South African Krugerrand. Gold ingots and bars Ingots are generally 1 ounce, but can be found in 2- or 3-ounce slabs as well. Bars generally come in sizes of 5 to 10 ounces, with the 10-ounce form more readily available. Either way, you can get significantly more gold for your money every time you buy simply by buying smart! For example, at today’s price of $473 per ounce, 100 ounces of gold are worth $47,300. But if you buy 100 of the 1-ounce gold Canadian Maple Leafs, you’ll pay $49,676 for the same 100 ounces of gold content. The additional $2,376 you pay for the Maple Leafs is the premium over the gold content. It’s the extra you pay essentially for the design and minting of the coin. And in this example, the premium is a hefty 5% ($2,376 in premium vs. $47,300 in gold content). That’s actually not as bad as it seems, especially when compared to some other gold bullion investments. But you CAN do better. Here’s how: Instead of buying 100 of the 1-ounce Maple Leafs, buy TEN 10-ounce gold BARS (total 100 ounces) for $48,510. Then, with the money you’ve saved on the bars plus a few extra bucks, you can buy three 1-ounce gold bars for $1,455. The extra gold you get by buying smart is a significant addition to your portfolio — like a free bonus. That’s why I am one of the few who does not recommend buying gold bullion coins. They certainly can be beautiful to look at, but you pay a stiff price for the privilege. The premiums are even worse for fractional gold bullion coins of less than 1 ounce, selling for a premium of as much as 35% over the price of gold. In general, the smaller the coin, the greater the premium. Bottom line: For physical gold holdings, I recommend 1-ounce ingots and 10-ounce bars. And for even larger purchases, consider the internationally-traded 1-kilogram bars. They’re all relatively easy to buy, and easy to store. Just make sure you are buying what is called “four nines fine†gold — the metal that’s .9999 (99.99%) pure gold. The most common hallmarks are Johnson Matthey, Engelhard, Credit Suisse and Pamp. Most reputable dealers carry these ingots and bars in these hallmarks, or can readily acquire them for you. How to Store Your Gold For small purchases, say up to 20 or 30 ounces, I prefer the safety deposit box at my bank. It’s simple, safe and worry free. Even if the bank were to encounter financial difficulties, access to the safety deposit would not be affected. I do not recommend storing any gold in your home or office. For purchases beyond 20 or 30 ounces, use your dealer’s storage facility. But there are a few things you need to know& Non-fungible storage is the best form of dealer storage — if you choose to leave your metal with a dealer. Your bullion or bag of coins is labeled with your name as your specific property and stored separately from dealer assets. With non-fungible storage, your gold is not commingled with the bullion of others. And I feel it’s the only type of dealer storage you can be fully comfortable with. If your dealer doesn’t offer non-fungible storage, find one who does. Alternatives to Physical Gold Always keep some physical gold handy. But for larger quantities, where storage is impractical, there are a number of ways to invest in gold while avoiding some of the hassles of storage and delivery: Gold ETFs (exchange-traded gold funds) Late last year, the long-awaited StreetTracks Gold Shares (GLD) was finally introduced in United States. This NYSE exchange-traded fund effectively offers investors physical gold in the format of an electronically-traded security, with each share representing one tenth of an ounce of gold. A second option is the iShares Comex Gold Trust (IAU). And yet a third is the Central Fund of Canada, Ltd (CEF). However, among the three, I prefer the StreetTracks Gold Shares because of its greater liquidity. Perth Mint Certificates (PMCs) These are issued by Western Australia’s government-owned mint showing ownership of a certain amount of specified ounces of gold. Some advantages:
Gold Mining Shares Provided you pick the right ones, gold mining shares not only give you an indirect vehicle for investing in gold, they can also provide additional leverage and profit potential that goes far beyond what you can achieve with gold alone. For example, let’s say it costs a mining company an average of $250 to produce each ounce of gold. And let’s say we’re back in 2001 when an ounce of gold was selling for $260. At that point, the company’s profit margin is just $10 per ounce. Now, watch what happens when the price of bullion rises just 4%, to $270 per ounce: The company’s profit margin jumps from $10 to $20, or by 100%. This in, turn, can drive up its share prices by many times more than the price of bullion. Therein lies the leverage you can achieve by buying the right shares. Two words of warning: First, timing is critical, and if you buy while gold shares are near a temporary peak, you may initially be disappointed. Indeed, even right now, a further correction in major gold shares like Newmont Mining is still possible. Second, if you own the wrong mining companies, you could be left behind when gold bullion surges. Some will be unable to meet the gold demand, failing to capture a large portion of the profit opportunity. Others, mistakenly fearing a decline in gold prices, will run substantial hedging operations, seeking to protect themselves from the decline by selling gold in the forward market or selling short gold futures. This could greatly reduce, or even wipe out, their profits for the year. So to avoid disappointment, refer to my top six criteria for selecting what I believe to be the best gold mining shares. None are hard-and-fast rules. But all are critical factors to consider. 1. Low debt. I generally like mining companies that have less than 50 cents in long-term debt per dollar of stockholders’ equity. 2. Moderate hedging. Stick with those that do not hedge more than 20% of their annual production. After all, what’s the point of buying into a company’s bullion to ride the bull market in gold when that same company has already sold most of its gold or production at today’s low prices, or worse, at yesterday’s even lower prices. 3. Low cost. Try to stick with mining companies with total production costs no higher than $200 per ounce. The lower the better. If it’s a bit higher, it’s not a deal killer. But this is a good benchmark to work from. 4. Healthy expansion. Companies that are expanding reserves via property acquisitions. Since new exploration can be expensive, I favor companies that are actively engaged in buying proven gold properties and smaller mines. 5. Experienced management. I want to see management that demonstrates not only a solid track record of experience, but also talent for thinking outside the box, especially when it comes to the acquisition of hot properties. 6. Value: Don’t go strictly by P/E ratios. Mining shares should also be valued on the basis of their proven reserves. Generally, the lower the ratio of the company’s market cap compared to the value of its reserves, the better. For instance, a company with a market cap of, say, $10 billion with gold reserves worth $2 billion at the current gold price ($5 per share for each dollar of gold reserves) is much more expensive than a company with $4 billion in market cap and $2 billion in reserves ($2 per share for each dollar of reserves). My 17 Favorite Mining Companies Based on these and other considerations, here are 17 mining companies that I first recommended over two years ago … along with their 3-year price performance.
Four have produced very high double-digit gains. And only three are disappointments (two with big declines and one with a minor gain). Average 3-year appreciation, including the losers: 96%. I don’t recommend you rush out and buy them all. But these are the companies that are currently on my “radar screen†— either stocks that are already recommended in my Real Wealth Report … or that I am monitoring closely for an imminent or future recommendation. For specific buy, sell and hold recommendations — along with more details on each of the stocks — be sure to stay current with my latest issue. (Click here if you’d like to subscribe.) Important: Gold is now headed for $540, just on the next leg up. So if you’ve ever thought about investing more seriously, the time to start is now. Indeed, based on what I’m seeing now — the market’s reaction to the Bernanke news, the rally in gold, the stalled rally in the U.S. dollar, and more — I believe we’re very close to what I call … Phase II of the Great Natural This new phase is being driven by three primary forces… Force #1. The folly of central bankers. Without exception, they want to keep their economies running — by inflating away the threats of massive debts and by essentially printing fiat money. Force #2. Exploding demand. Half the world’s population — in Russia, India and China — is rapidly emerging from various forms of socialism, leaping into the 21st century at an accelerating pace and creating one of the greatest demand explosions in history. Plus, unfortunately, we now are witnessing … Force #3. The widening war on terror. Right now, deep in the Pentagon, plans are being updated for possible U.S. military action in Syria and Iran. Both of these new potential fronts in the war on terror are now nearer possibilities than you think. The UN sanctions against Syria are a sign. So were President Bush’s words just yesterday. In his strongest warnings yet, he labeled Syria and Iran “helpers and enablers†of terrorists, “sharing the goal of hurting America.†The war rhetoric is escalating again. So beware … and be safe! Best wishes, Larry Edelson P.S. Important reminder: There are only five days to go before the Fed jacks up rates. So if you want to take advantage of Martins strategy to build $4,500 into as much as $50,000, you need to jump in right away. Click here for details. About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
Bernanke Bullion
That’s why, in the wake of Bernanke’s nomination on Monday, U.S. bond prices tumbled and their yields surged, as Martin explained yesterday. And that’s why, at the very same time, gold immediately skyrocketed.
For quotes and info, consider Kitco Bullion Dealers. You can get the latest on PMCs by 
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