Tuesday, September 20, 2005

 

The True Price Of Gold: Part One

Over the next few days this blog will have a series of posts aimed at exploring what prices gold and other metals actually exchange for. This isn't intended to encourage or discourage owning precious metals; rather to educate myself and readers in the nuts and bolts of how the system works. This will be a learning experience for me as I haven't purchased physical gold or silver for years and I realize many changes have occurred since.

Almost twenty years ago I bought my first gold coins. Actually they were bullion coins; in my case Krugerrands. I also purchased some 100 ounce silver bars. I chose Krugerrands because they were cheaper and therefore closer to the spot price. The reason for the lower price was the problems with the South African state. The price levels then were not that different from today; around $400/oz. for the gold and over $7/oz. for the silver.

Over a short period of time, silver had moved up in price and being the naive speculator that I was, I walked into the retail outlet that I had purchased from with the intention of selling some portion back. I was informed that this firm 'sells metals, and doesn't buy.' Thus began an journey of learning a hard fact; what do the reports of 'spot' prices mean if the average Joe can't find a buyer?

I had paid a premium for the gold of about $50 over spot. (I am confident that the internet has shaved that down today.) Over the next months and years, many of the dealers I approached would only pay $50 less than spot! And if prices had recently jumped higher, they wouldn't neccesarily move with it. Of course when prices fell they were quick to adjust in that direction.

Then there were the distance issues. When I was able to find the best price, it usually involved many hours of driving. Plus it was typical for the buy offer to only be valid for a day or so. You're get the picture; there were plenty of folks that will sell me gold or silver, but unloading it was time consuming and the discounts ate most of the appreciation.

In the next part of this series, I will contact actual buyers and sellers of gold and relate what the prices are today for both. Please check back for what should be an interesting exercise!

Comments:
Hey Ben,
I posted some questions about gold type equties on the housing blog and two folks gave me these.

IAU
CEF

Also looked into buying bullion. Found the same problem you did. I would have to drive to San Francisco to Monex to sell at anywhere near spot prices.

I have done quite well on gold stocks GG BVN, but they seem very pricey now. I sold em after about a 15% run up in a month. Now I cry to see that they are up about 45-50% from where I sold them. I would kill for foresight. If only I had...... =)

Was pulling my hair out on why gold hadn't moved higher than it is. Mad me feel very dumb when I figured out that it is the Central banks dumping their reserves, hell I knew that and just couldn't add 2 and 2.

I know gold demand is higher than supply. How long can the banks depress gold by selling?? There has to be a limit. From Gov records Fort Know holds about 80-90 billion in bullion. That is if you do not buy the conspiracy guys contention that we allready sold it.

80 billion for the US does not sound like very much (world economy speaking). Wonder how much the other banks have?

Wasn't it a rule of joining the EU and going EURO that you abondon metal currancy standards? I don't think their are anymore banks on metal standards.

Would be interesting if the Chinese embraced gold backed currancy and dumped all our dollars for gold. That would cook our frickin goose!!!! They could then go on a worldwide shopping spree with Chinese currancy at deep discounts. Anything denominated in dollars would take a pounding, as I believe will happen regardless.
 
Hey Rich,
With this series I want to show folks some downside to physical metals other than govt. manipulation, which is real.

I view gold as something like self-protection firearms or life insurance. I'm not disappointed that I own it but didn't use it. Gold stocks are more liquid, but you have to watch out for forward selling by the firm. Some mines have sold so much forward that they are actually plays against gold!

The Swiss used to hold gold but they sold a bunch this year AND cut interest rates. This is obvious as the Swiss Franc falls against the dollar even as gold makes new highs.

Thanks for stopping by; I intend to get back to blogging here everyday again.
 
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