By: Allan Schieman

Friday, September 10, 2011

I just got off the telephone with a client who asked me several questions about investing in gold. While I’ve been preaching the importance of including gold in your investment plan for a few years now, I’ve received more question about gold in the last few weeks than I ever have – likely because the price of gold recently broke $1,900/oz. The higher prices go, the more attention gold seems to get.

If you’ve ever heard me speak publicly or read my book, you know I’ve been urging people to add some gold to their nest-egg since March 2008. Hopefully you’re already defending your wealth with a position in gold. If you still need to take a position or even add to an existing one, you’ll learn a lot from this post.

Is buying gold today a smart move?
In our opinion: YES. The reason to own gold isn’t to make a lot of money – but unfortunately you probably will. The reason to own gold is to defend your wealth from inflation, a government debt crisis and economic uncertainty. The price of gold is rising because economic conditions are deteriorating. Let’s look at where we’re at today.

Inflation: Ask yourself: ‘are prices higher today than they were a year ago?’ You better believe they are … and they’re going higher. As governments continue to weaken their currencies, the purchasing power will continue to fall. As long as governments have printing presses, you’re going to see inflation.

Debt Crisis: Government debts have (and are continuing) to skyrocket in North America and Europe. The US national debt is above $14.5 trillion and counting. It is being increased by about $1.5 trillion annually. The United States government has no hope of paying back its obligations, short of printing the money – which I believe they will do. If you think inflation is bad now, just wait until then. The US debt crisis is already here.

Economic Uncertainty: The economy is extremely weak and many analysts including me, think we are already back in recession. Clearly, the economy has been on life support with the incredible stimulus spending over the last 2 years. The trouble is that stimulus spending is unsustainable and is now drying up as governments are being forced to cut back. The real problems have been covered up for a while and now the economic indicators are beginning to show how bad things really are.

For all these reasons, gold is essential to protect yourself.

How do I buy gold?

There are two types of gold: Paper gold and Physical gold.

Paper Gold
Paper gold is any paper investment that tracks the price of gold or any other document that promises you gold in the future. Paper gold comes in many forms. Here’s a quick explanation of each of them:

Gold Bullion Exchange Traded Funds (ETF) – A gold bullion ETF is a pool of money that buys large amounts of gold and then sells units of the fund to investors. The price of each unit of the fund will track the price of the gold closely.

Gold Mining Stocks – buying shares of gold miners isn’t actually investing in gold, rather it is buying equity in a company that produces gold. Typically, mining stocks lag the price of gold and carry much more risk.

Gold Stock ETFs & Gold Stock Mutual Funds – with both of these investments, investors own units of a fund of mining stocks rather than a store of gold. Like with individual mining stocks, gold mutual funds and gold stock ETFs carry more risk and typically lower returns than the underlying metal does.

Gold Certificates -  A gold certificate is a certificate of ownership of gold. It is simply a promise, usually made by a bank, to deliver gold to you when you redeem the certificate and request the gold. The certificates aren’t actually backed by any gold, rather they are backed by other assets of the bank. Like any promise, they are only as strong as the entity making the promise.

Physical Gold
There are two ways to own physical gold. You can either buy gold bullion or coins and hold the metal directly in your home safe or your bank safety deposit box, or buy the physical gold and pay a third party to physically store your gold for you – in exchange for a fee of course. Typically, when an institution sells you gold and then charges you a fee for storage and safekeeping, it is called an ‘allocated gold account’.

What’s the difference between buying gold coins & gold bullion?

While both bullion and coins are the same gold (99.9999% pure gold), coins are fancier, often with beautiful artwork and involve higher costs to manufacture. Bullion is typically a bar of gold with minimal or no polish and costs less to make. While the cost of both depends on the spot price of gold, there can be a considerable premium to pay when buying coins. Typically, bullion is what investors are after and collectors want the fancy coins.

Who has gold for sale?

Physical gold is available from major banks and several gold dealers. Paper gold and allocated gold accounts are available through brokerage firms and investment dealers.

When the time is right, how do I sell gold?

Paper gold can be sold through your investment dealer or your broker with a phone call, similar to selling any other investment.

Physical gold can easily be sold back to the gold dealer or bank that originally sold it to you.

I prefer owning physical gold over paper gold because of the additional security it has. I don’t need to worry about the institution that sold me paper gold not making good on their promise. However, owning gold today in whatever form, is critically important to defending your wealth from the economic chaos we’re living through.