The Wrong and Right Way to Buy Gold, Part II

Nearly 21 months ago, one of the world’s leading analysts and proponents of gold shocked the investment community with the announcement that the yellow metal was headed south.

Most of his colleagues in the industry scoffed. But his loyal followers took action according to his explicit instructions: They bought gold hedges for protection against the decline. They liquidated their mining shares. And then they waited — sometimes patiently, sometimes anxiously — for his next major “buy” signal.

That gold analyst is Weiss Research’s Larry Edelson, and last week, I began this three-part series of fascinating interviews with him. Here’s Part II …

Martin Weiss: Larry, for the sake of those who missed Part I of this interview, please lay out the full dimensions of the opportunity.

Larry Edelson: My analysis tells me the next leg of the gold bull market will not end for three full years. It will not peak until the yellow metal is at $5,000 per ounce or more. And it will spin off a long series of trading opportunities in virtually every investment that’s tied to gold and other precious metals — bullion, shares, ETFs, plus unique trades that most investors are unfamiliar with.

Martin: Starting immediately?

Larry: Too soon to say, but we are getting very close to it, yes.

But I must repeat: Do not jump in prematurely or all the way as so many gold investors have continually done in the past 21 months or so. And certainly not with all of your money.

Martin: OK. Meanwhile, last week, you gave us very practical guidance on the wrong and right ways to buy bullion coins. Can you expand on that now?

Larry: Sure. In addition to the coins I talked about last week, there’s also a variety of gold coins available in much smaller sizes, enabling you to buy gold in relatively small increments of less than 1 ounce. The drawback has always been price: The smaller the coin, the greater the premium.

Thus, as you buy smaller and smaller denominations, you get progressively less and less gold for your money, because the premium is higher. However, some folks in the industry who favor these smaller-denomination coins set forth two counter arguments:

First, they say the premium can be recovered when you resell the coins.

Martin: Is that true?

Larry: Half true, and not always. On average, right now, you’ll probably lose half and recover half.

Look. We’re talking about “fractional coins.” And the market for the full ounce gold coins is far broader, deeper and more liquid than for these fractional gold coins. When you go to sell three years from now, you may even have to accept an additional discount with the smaller coins rather than recover part of the premium lost on the purchase.

The second argument they make is that in an economic catastrophe, the smaller gold coins would be easier to spend or swap for groceries, gas, etc.

Martin: True or not?

Larry: Perhaps. But it’s also possible that in an economic catastrophe, the full ounce coins — because of their wider distribution — would be equally easy (or easier) to spend. But who can know for sure?

Martin: Can we switch from small things to big things? If you’re a large investor and you want to invest in gold bullion in substantial amounts, where do you go?

Larry: Let’s talk about 1,000-ounce bars. Even at the best-priced dealers, you can expect to pay anywhere from 30¢ to about $1 an ounce over spot when you buy them from a good delivery brand, like Engelhard or Johnson Matthey.

However, if you’re prepared to invest substantial sums at one time, you can save almost that entire fee. You can buy gold at just pennies more than the actual spot price: Buying a “spot month” gold futures contract from your regular commodities broker and take delivery of it.

Be sure to keep your confirmation slip in a different area from where you store your bars.

Martin: Can you give us an example?

Larry: The contract will be for 100 ounces of gold and the commissions run between $40 and $100 — which works out to less than $1 an ounce.

The problem is that 100 ounces of gold can cost more than most investors want to lay out at one time. For instance, at $1,400 gold, to take delivery of one futures contract would involve $140,000 (100 ounces times $1,400 an ounce). It also involves buying and taking delivery of a futures contract. Not something I recommend except for the largest of investors.

A better alternative may be to buy directly from a wholesaler. Just be aware of some of the restrictions.

First, most wholesalers require minimum purchases of the precious metals.

Second, most are not set up to service small retail accounts. They are not going to give you advice, nor will they try to help you make a decision or give any other brokerage-type services. If you have a question about what to buy, how much, when and so forth, don’t go to them.

Third, most require payment in advance, before they can even lock in a price. The advance can be sent in the form of a bank wire, cashier’s check or a certified check.

Note that ingots and bars are available in sizes ranging from as small as 1 gram of gold to 10- and 100-ounce bars. Naturally, the smaller the ingot or bar, the higher the premium you’ll usually pay.

Martin: What about the kilo gold bar?

Larry: It’s the unit of choice in almost all international gold transactions. But there are pros and cons.

First, the positive side. Each of the bars carries a serial number. Have your dealer record the serial number and hallmark on your confirmation slip. Don’t keep it where you store the bar. If the bar is stolen, you are in a much better position to deal with the insurance company by having a readily identifiable number to cite, as opposed to reporting that “X” number of unidentifiable coins were stolen.

Also, you’re in a much better position to claim your property should the police ever recover it. So the serial number is a desirable feature of buying kilo bars.

On the negative side, they’re a relatively unattractive way to hold gold. There’s nothing beautiful about a kilo bar, compared with the artistic engravings available by buying coins. In addition, bars aren’t divisible.

Martin: Larry, I have a lot more to ask you, especially when it comes to security and storage. Plus, I want to ask you about other platforms and vehicles that can open up this tremendous opportunity to average investors who don’t want to have to worry about all the pitfalls, premium intricacies, paperwork, legal protections and whatnot. Can we do that next week?

Larry: Absolutely! See you then.

 

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EDITOR’S PICKS I’ve Never Been More Outraged at Washington by Larry Edelson The National Security Agency’s order for Verizon to turn over all customer records is an abomination on the rights and liberties of every American. I am outraged. I’m sure you are too. These Five Sectors May Lead the Next Leg of the Rally by Mike Burnick As Treasury yields topped 2 percent late last month, something curious happened in the equity market. Will Your Bank Do a Better Job Gauging Investment Risk? by P Skoran We won’t easily forget the residential real estate market collapse that precipitated the financial crisis, or the bank failures that followed.  And we hope banks won’t forget either. Many of those failures were caused, at least in part, by the fixed income securities tied to real estate known as Mortgage-Backed Securities (MBS) that banks held in their investment portfolios.

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