Here’s a question for you.

Would you rather have $100 USD or $100 CDN?

If you are trying to think of the exchange rate today, you’re on the right track. At the time of this writing, the exchange rate is 1 CAD = .9345 USD. That means that one U.S. dollar will buy $1.07 Canadian dollars.

So today, U.S. dollars are worth a little more.

Here are a couple more questions for you.

Which currency is stronger, and which one will provide you more safety?

If a country has adopted a gold standard, it means that its currency is freely convertible to a fixed amount of gold. Anyone who holds the currency can exchange it for a set amount in gold. If the country has a full gold standard, the government holds enough gold to redeem every dollar printed.

The benefit of a gold standard is that it protects the value of the currency. Politicians can’t just print new money unless there is a deposit into the gold reserve of an equal amount of gold. This prevents politicians from expanding the money supply and debasing the value of the dollar. With a gold standard, there is no inflation.

If there is no gold backing up the currency, it becomes fiat currency. Fiat currency is money that is declared to be legal tender by the government, but it has no intrinsic value because there is no gold backing it up. Fiat currency can be printed at any time. With a fiat currency system, the citizens must trust the government not to print more money and, therefore, cause inflation.

Another question:

Which currency uses the gold standard – Canadian or United States?

Answer:

Neither, both are fiat currencies. In fact, every major currency in the world is now fiat money. We have to trust our governments to avoid the temptation and not print more of it. We have to trust our governments not to reduce the value of our money. So far, they haven’t been very trustworthy. The supply of every major currency has expanded in the past two decades – and every country has experienced inflation. Some have even experienced hyperinflation.

Why own gold (and silver)?

In periods of high government deficits and inflation, commodities tend to perform very well. Monetary assets like gold and silver are the best example. You can think of it as retirement insurance. If there is a crisis of the dollar, it becomes the only way to prevent a collapse of your retirement plan. Gold is a hedge against inflation; they aren’t printing more of it.

Gold is also a safe haven for stock market declines, real estate collapses, wars, and political turmoil.

Gold stocks.

Owning gold company stock is no different from owning stock of any company and should be evaluated the same way. Don’t buy gold stocks hoping to get the benefit that gold gives you.

Several gold stocks trade on the TSX. Barrick and Goldcorp Inc. are among the biggest and form part of the S&P/TSX 60 Index.

The value of these shares is influenced by the spot price of gold, but it isn’t the only influence. Gold companies are subject to the same risks as every business. Many gold companies hedge their production to reduce their own risks by selling futures contracts. This reduces the effect changing gold prices has on their own share price.

It should also be noted that there have been several investment scams involving gold stocks, including the largest scam in Canadian history: Bre-X Minerals Ltd.

Gold certificates.

A gold certificate is a document that represents ownership of physical gold. These are issued by Canadian banks and are typically sold through brokerage firms. The advantage of certificates is that they are easy to buy and easy to sell; you don’t have to take possession and store the gold.

The problem with gold certificates is that they are too easy to print. They are just a promise of gold. They are paper gold. A gold certificate is like a bank account statement. Your statement says that you have money; a gold certificate says that you have gold. The fact that own a certificate stating that you are the proud owner of 1 ounce, doesn’t mean there is actually an ounce set aside somewhere for you.

Look at it this way.

What happens if all the depositors show up at the bank on the same day to withdraw their money? Answer: a run on the bank. The bank closes its doors and goes broke. There are several examples of this in history.

So, what happens if there is a severe financial crisis, a really big one – the reason you bought gold in the first place – and all the certificate holders show up to get their gold? Answer: see above paragraph.

Gold in any form other than the actual metal, such as gold certificates, gold trusts, and ETFs, is just paper gold.

Physical gold.

You can buy actual gold in either coins or bars. Both are better than every form of paper gold. Yes, buying physical gold is more of a hassle than calling your advisor and buying a gold certificate, but the extra effort is well worth the time.

I’ve bought gold at Scotiabank and the Royal Bank. While there are other vendors, Scotiabank is in the business of precious metals full time and, in my opinion, they are better equipped and stocked than their competitors.

With any piece of physical gold, there is a cost above the value of the gold (the melt value). When buying gold bars, you pay a bar charge. The charge is generally about $10 per ounce. The larger the gold bar, the smaller the per ounce charge.

The biggest premium is on gold coins. There is an extra cost to have nicely minted gold coins. Generally, the prettier the piece of gold, the higher the premium you pay to own it. The most cost-effective way to buy gold is to buy gold bars – the larger the better.

What about silver?

Silver is a monetary asset just like gold and acts as a hedge the same way that gold does. It does this job at least as well as gold, and it can be bought in bars, coins, and certificates, just as gold can. Silver just takes up more space.

Both silver and gold are used in the manufacture of jewelry, but silver is used in the manufacturing of all sorts of other goods. Electronic equipment, medicines, and batteries are all products and services through which we consume silver. Unlike gold, silver has significant demand as an industrial metal, and some believe that because of this, silver is actually a better way than gold to hedge your money.

If you are buying silver, buy silver bullion, bars, or coins. Avoid paper silver.

Gold for Canadian investors.

There is something very important to remember about gold: it’s priced in U.S. dollars. When Canadians buy gold, there’s an extra layer of complexity because we must deal with the currency conversion. The price of gold is important, but the price of gold in Canadian dollars is more important.

Typically, the price of gold and the U.S. dollar move in opposite directions. When the U.S. dollar drops, the price of gold often increases. The past six months are a good example. The price of gold has increased from $900 USD per ounce to $1045 USD per ounce. However, in terms of Canadian dollars, it is about the same price today as it was six months ago. If you own gold and it soars at the same time the U.S. dollar declines, you might win with the gold and lose on the exchange.

If you want to remove this currency risk, you should hedge the U.S. dollar. Currency hedging can be very complicated and is best left to the pros, but there is a simple way by which anyone can hedge the dollar. It involves using exchange-traded funds (ETF) that move in the direction opposite to a particular market, index, or currency. You can buy an ETF that moves opposite to the U.S. dollar. It seeks daily investment results equal to 200% of the daily inverse performance of the U.S. dollar. That means it’s structured to provide twice the movement of the greenback against the Canadian dollar.

If the U.S. dollar drops by 5%, you would expect this ETF to increase by 10%. This makes it an effective way to hedge your gold against the decline in the U.S. dollar. If you own $10,000 in gold, you can hedge the dollar with a $5,000 investment into the ETF (see “Inverse ETFs”).