Saturday, February 24, 2007


Some Questions For The Gold Bugs

Here are some topic suggestions from readers on gold. "I would like to hear a bit from the gold bugs on the blog as I have been considering the purchase of a bit of the yellow stuff over the past month or so."

"Some of the questions I have for the gold bugs include the following:"

1. Physical vs. paper
2. Attractiveness of gold mining companies
3. What kind of physical is the best (which type of coins, wafers, or bars, and sizes)
4. Storage
5. Typical acquistion and liquidation costs
6. Where and how to sell physical
7. Gold strategy for the following allocation amounts:
a. less than $25,000
b. $25,000 to $100,000
c. $100,000 and greater.

"The acquisition of gold is more or less clear however the resale procedure is not clear. Where do you sell gold and how does the buyer get comfortable with the product you are delivering on the secondary market? How does the buyer confirm the gold being sold is not gold plated lead or pirate Maple Leafs? How to keep your gold from being scratched or damaged? Any other useful tid bits from real life experience."

"Since I am in Europe I have considered the use of a safe deposit box in Switzerland for long term storage of any gold I acquire. Is this a practical storage option? It seems to me that the conditions necessary to send gold to the stratosphere are the same conditions under which it is most likely to be confiscated or stolen from the owner."

"Please note that I am not an 'End Timer' and based on my experience in Russia in 1998 I do not believe for a minute the States will collapse into lawlessness however something in between the 1982 recession and the 1930’s depression is a real possibility."

"The guns and ammo option is not a bad one, however I do not see a lone gun in the house contributing much to one’s safety. I suggest that people of modest means invest in practical books of knowledge which may assist them in learning a trade or skill when the 'fry guy' and 'Walmart greeter' positions become obsolete."

One reply, "Physical vs. paper, paper can be created and confiscated with ease. I have both; physical for keeping and paper for trading. Gold miners, research companies individually or buy gold indexes (HUI, etc). I prefer companies with mines in western countries due to less risk of government appropriation."

"Storage; bank vaults if you trust the government not to steal it as FDR did. Otherwise, dig hole and make map, or store overseas through internet dealers/ETFs. Your swiss vault would work."

"Buying/selling, easy and cheap for paper, but subject to capital gains. You can buy physical from internet or coin dealers with varying markups less than 5%. Cash transactions so capital gains are on the honor system. Coin or bars; personal choice. I prefer bars because there is less premium. Resale: sell back to dealer. Authenticity: gold bars come with assay certificates from the big houses. Welcome to the world of gold investing."

Another added. "'Authenticity, gold bars come with assay certificates from the big houses.' So does housing (appraisers certficate) diamonds the same. Fraud is present everywhere. Buyer beware!!!"

One had this on storage. "Switzerland has the best buying/selling opportunities (outside of India) for small individual ownership. The cost of the lock box was ~1% of the value of the gold, but then there were no dings (surcharges) when you wished to sell the gold - tests for purity etc were not required."

"If the gold is something you might take with you, then the $$ value you wish to spend will dictate the investment. e.g. with a $1,000,000 to invest buy 400 oz standard bars , these bars are stamped marked and less expensive to test when you sell. If it is a $1000 then you might choose to buy a marginal gold producer stock."

"A marginal gold producer is one whose cost to produce an oz of gold is the same as the current price of gold. The reason is that a $100 increase in the price of gold is a 100X increase in the marginal producers profits. Marginal producer publicly traded stocks can be found by the handful on the Australian exchanges among others."

One had this suggestion. "Take this from a gold bug on the lunatic fringe of the gold bugs. I think if we are seeing a credit implosion what we will see is the demand for cash become astronomical. So when does gold become very 'dear'? It is when the minority, the creditors and the informed feel they are getting ripped off by being paid back in in dollars. (The old saw about creditors being chased by debtors demanding the abilty to repay)."

"In my mind that happens after a deflationary crash and an inflationary response by the powers that be. How do you know when that is going to happen? According to some it will be when the futures price of gold trade lower than the spot price."

"Essentially meaning people value the real over the paper. What I am doing right now is developing a cash liquidity moat around my precious metal holdings. Some guns and tinfoil aint bad either. Please google Dr Fekete for some more ideas on the future and spot prices."

HBB is seeing more and more interest in gold. That is a sign of the times.
My take on a few of the questions:

1. Physical vs. paper

If I were going to trade it, probably paper. Although I know a full time trader who only uses physical.

Otherwise, I would always physically hold it.

2. Attractiveness of gold mining companies

One big benefit; they will go up more than the physical metal, percentage wise, in a rally. (Assuming they are profitable).

A drawback; the hedge positions. (See yesterdays post to this blog). Essentially, if hedged enough, a mining stock can be a short position on the metal. Read the 10-Q's, etc.

3. What kind of physical is the best (which type of coins, wafers, or bars, and sizes).

I prefer bullion, coins or bars. Also, don't overlook the fraction of an ounce gold coins. They are handy for minor gifts, purchases, etc, although there will be a larger premium when buying in percentage terms.

For silver, I like Englehard 100 OZ. bars. Leave the plastic on.

4. Storage

Safe deposits if you aren't sure of your home turf.

5. Typical acquistion and liquidation costs

Used to be very high. It is much more competitive now. You shouldn't have to pay much more than $25 for an ounce gold coin. You should be able to sell for at least spot.

6. Where and how to sell physical

This is where it is good to have set up a relationship with a local dealer. That is probably the one you will turn to if you need to liquidate in a hurry. I always call around and check on buy and sell prices, and compare. It's not hard to discover who is shooting straight and who is flaky.

Also, call on days that there is big volatility and ask about buying and selling. The dealer attitudes can change quite a bit when that happens and it's good to know who does what.
Damn, Ben, you typed the words right out of my fingers!

IMHO, the *first* thing anyone interested in PMs should do is get and hold physical in small sizes. Best to get easily recognizable forms (Eagles, Kruggerands, etc.). An emergency stash come hell or highwater, so to speak.

Once that small base is established, go for the generic rounds or bars. More PM bang for the buck.
If anyone uses I'd love to hear their take on it.

I'm hesitant to reply under an article labeled "gold bug". Are people who own life insurance "doom and gloomers" or just realistic?

I don't plan on smashing up my 30K car, but I have insurance for collision just in case. Why would someone not want insurance for your entire financial future? That I don't understand. IMO, a CD or TBill is safer, but not the safest. That is or course debateable, so to each his own.

Bottom line on goldmoney, I use it and have no problem so far. For gold storage, it works out to about $1.50 a month. Far less than any insurance premium for life insurance that I've ever seen. You can sell at any time for the current spot price.

You can also have it delivered to you at your cost for shipping. The only downside is that now most others will not give you spot when you try to sell later (that I know of).

Silver is the same, but storage costs are higher due to more weight and volume per same amount of money.

Those with an interest in gold have been called a lot worse. When I was in business school in the early 80's, if one mentioned gold to a professor or in class, this person was immediately suspected of belonging to a militia group, or a subversive right-wing political organization.
Mr. Jones,
I didn't mean any offense to you as the writer of the title.

If a person feels that debt has reached unsustainable levels and wants to seek protection, where are you going to turn? Keeping assets in the same bank's notes that you feel are laden with unsustainable debt?

Yes, gold traded in this country is still excanged in Fed Reserve notes. However, taking physical possession is the best way to provide insurance, and the premiums are relatively cheap.

The folks who feel cash is king are missing a key point. It will be king due to a contraction in the stock of money. How does this happen? Same way it was created. Credit created the increase in stock, and default will wipe out the credit. Heck, total coins and currency in circulation are roughly 900 billion according to the treasury. What constitutes all these trillions being thrown around? Credit is the answer.

Cash will be king, but only if you can actually get access to it. If things remain somewhat free of crises, you can exchange gold for Fed Reserve Notes. If there is a crisis, the only thing that states can make tender for payment of debts is gold and silver coin, per the constitution. What the Federal Gov't does, or more importantly, what the people decide we want, is the overriding question to be answered.

In the time that I've realized something is amiss with the financial system, it seems like more people are realizing the consequences of fiat money and fractional reserve lending with reserve ratios ranging between zero and ten percent, per the Fed Reserve's requirements.
None taken. I try to use the readers own words on these topic suggestions.

Your right, everyone knows and talks about serious imbalances in the global system, especially regarding the US dollar and economy. The only reasoning that most come to is a major US$ devaluation; just a question of when.
BTW, Kerk, "TIA" means "thanks in advance". :-)

Beyond insurance, PMs are simply smart diversification.

Regardless, most still consider gold only as jewelry, and until that changes we've not reached phase III. The fact that we're nearing $700 & $15 again in phase II shows the tremendous upside left in this bull.

We all agree that the bull market in PMs is attributable to global currency debasement, and that train's going to keep picking up steam until it runs completely off the tracks.
OK question for the gold experts.

I want to buy each of my kids a $50 US gold coin. Actually I have wanted to do this for some time but have not for various reasons.

How should I go about doing this? I've seen what I want on eBay for about $690 ea (I want one 1998 and one 1999) but wonder if that is the best place?

I live in SoCal. Would a coin dealer be better?
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