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Buy Gold But Understand the Alternatives

Gold BullionJune 15, 2014 | by Steve McCurdy

As a visitor to this website, you probably share our concerns about impending financial disaster and you probably view gold and precious metals as essential elements of your portfolio. Many of you likely already own some gold in one or more of its many forms. The information below is intended to help you choose the best from among countless alternatives for buying gold in times of serious economic peril. 

 

Paper or Physical Gold?

 
Technically, any gold you own that is not in your physical possession could be defined as “paper gold.” Whether your ownership is evidenced by a certificate, a storage receipt, a deposit slip, or any other financial instrument, you still hold only a paper claim to your gold. But that is a technical definition. When most investors speak of “paper gold,” they mean unallocated gold held for you by a custodial financial institution operating within the banking system, and that is the definition we prefer. Paper gold ownership exposes you to risks of loss due to bankruptcy, nationalization, or outright fraud on the part of the custodial financial institution, and these are known collectively as “counterparty risks.” In the event of a failure of the banking system or a currency collapse it is unlikely that paper claims on gold assets would be honored, so we caution against this kind of ownership.

1934 Gold Certificate
Paper Gold, a Gold Certificate Outlawed by Presidential Executive Order 6102

Physical gold is a better way of achieving peace of mind, eliminating counterparty risk, and protecting against the inexorable devaluation of paper money. We recommend buying gold in physical form and storing it safely outside the banking system. (See “Gold Storage” below)
 
Gold Bullion or Gold Coins?
 
When buying gold these terms are sometimes used interchangeably, but there are important differences. “Gold Bullion” coins are worth only their “intrinsic” value, meaning the market value of their constituent metal, in this case gold. All gold coins have intrinsic value, but some coins have additional “numismatic” value, which means they have “collector” value in excess of their intrinsic value. Most gold dealers offer both bullion coins and numismatic coins, and use those two terms to differentiate them. Both types of coins have advantages and disadvantages for investors. Buying and selling numismatic coins requires more specialized and technical knowledge than does trading bullion coins, and is thus more complicated and time consuming, but numismatic coins provide better protection against potential capital controls and/or political confiscation. In April, 1933, pursuant to Presidential Executive Order 6102, all privately held gold bullion in the United States was confiscated by the government because of what it deemed “a national emergency.”

St. Gaudens Double Eagle Coin
St. Gaudens Double Eagle Numismatic Coin


However, Section 2b of Executive Order 6102 specifically excluded “…gold coins having recognized special value to collectors of rare and unusual coins…” In other words, numismatic gold coins were exempted from confiscation.
 

Gold Storage

 
 Offshore or Domestic

Ft. Knox Gold DepoistoryCurrently, gold and silver bullion held abroad are not “reportable”** under U.S. law, and likely would not be subject to U.S. capital controls or confiscation should either be instituted. Although no country provides guaranteed protection from political risk, geographical diversification of your holdings makes good sense, and some good alternatives for foreign gold purchases and storage are available. At left is the world's best-known storage vault. 

**Important Note: Reporting requirements for assets held abroad by US citizens will change dramatically on July 1, 2014, effective with implementation of a provision of HR 2847 called “The Foreign Account Tax Compliance Act,” commonly known as “FATCA.” To read a detailed discussion of the new reporting requirements go here.

Gold Money, headquartered in the United Kingdom, provides unique gold purchase and storage opportunities. The Company owns three vaults, located in London, Zurich, and Hong Kong, respectively, and it will sell you gold and store your purchase in allocated accounts in the vault or vaults of your choice. You will receive an audit certificate each quarter verifying your holdings, and you may move your holdings from one vault to another at any time and at your own discretion.

Hard Assets Alliance is another great way to buy precious metals. The Alliance stores your Gold Coinsgold in the non-bank vault of your choice in either New York City, Salt Lake City, Zurich, London, Melbourne, or Singapore, whichever you deem the safest. The vaults are the same ones used by sovereign governments and major hedge funds. To minimize shipping costs, the Alliance buys your gold in the jurisdiction where you choose to store it. Your holdings are allocated, and you will receive an audit report quarterly. Your metals will be delivered to you upon request within two business days. Hard Assets Alliance has great prices and a user-friendly website and is extremely popular with investors.

Sprott Physical Gold Trust, located in Canada, invests exclusively in physical gold bullion. The bullion securing the trust certificates is stored in a non-bank third party vault in Cana da, and you may redeem your trust units for physical bullion at your pleasure on a monthly basis. At your request, Sprott’s non-bank bullion Custodian will deliver your gold to you almost anywhere in the world via Armored Transportation Service Carrier.  

A fourth way to own foreign gold or silver is to buy shares in Switzerland’s Zurcher Kantonalbank (ZBK) ETF. These shares are matched to physical gold stored in the Bank’s vault, and you will pay the exact prevailing spot price of gold – no premium. A prominent financial magazine publishes its list of the 10 safest banks in the world once a year. In its most recent edition the magazine ranks Zurcher Kantonalbank as the world's second safest bank.  

And of course you can always do what most of us do; you can store some physical gold at your home, in your back yard, or at some other well-secured location known only to you, but no one but you can assess the risks attendant to this type of storage. 

Allocated or Unallocated Gold

 
If you buy and store your gold within the banking system you will own either allocated or unallocated gold, and there are important differences between the two.

Allocated gold is owned outright by the investor, and must be physically stored by the custodian. If you own allocated gold, you will pay nominal storage charges for your gold, but your gold will be insured and you can normally go into the custodian institution and withdraw it. The warehouse receipt pictured above evidences ownership of allocated silver. You will note that the holder is required to pay storage and insurance charges.

Warehouse Receipt for Silver
Warehouse Receipt for Allocated Silver Stored in Couer d' Alene, Idaho
 

Unallocated gold, on the other hand, is “paper gold” and is similar to a demand deposit. It is a promise to pay by the custodian institution, and the gold need exist in physical form. Unallocated gold is cheaper to own because there are no storage charges and there is no deposit insurance. Unallocated gold carries a high degree of risk. If the custodian bank or institution closes or becomes insolvent, you will wait in line with all other depositors and will not have a priority claim. We do not recommend owning unallocated gold under any circumstances. 

Gold Mining Shares

 

Another way of buying gold is to invest in shares of publicly traded gold mining companies. Keep in mind that gold mining is a complicated, capital-intensive, and risky business, even in good times, and share prices are even more volatile than those of spot gold. Currently, most gold mining shares are trading at or near three year lows. Notwithstanding the volatility and the current low prices, however, history suggests that great fortunes will be made by those who bet on the right companies, particularly if a financial crisis is indeed imminent.

 Gold Mining companies are generally divided into two groups – “Miners” and “Juniors.” “Miners” are firms that are already producing gold, and “Juniors” are exploration companies that have positive feasibility studies and promising core samples, but have not actually produced any gold. Investing in mining shares is not recommended for the faint hearted, and even the strong hands should rely on advice from analysts with proven track records who devote themselves full-time to this sector. If you decide to take the plunge, we recommend either John Doody at Gold Stock Analyst or Jeff Clark's Big Gold at Casey Research.

Summary

 
Buying gold sounds quite simple on its surface, but like any investment, it requires careful thought, preparation, and planning. We hope this information will be helpful to those of you preparing your portfolios for what almost certainly lies before us, and we hope you will visit our site often as events continue to unfold. We will do our best to provide timely and meaningful commentary. You are welcome to browse some gold coins and bullion in our S & P Store.

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