Are you a newcomer to the precious metal?
This article originally appeared in the June issue of Information Line, published by Asset Strategies International.
Don’t own any gold or silver yet? New to the precious metals? Regardless whether you are a novice or seasoned veteran, the following seven points provide essential background information you can use to help determine whether the precious metals are right for you.
1) Gold is not a commodity; it is money. Soybeans, crude oil, copper and other raw materials and agricultural products are consumed and disappear. They are commodities. Their value arises from their usefulness as a consumable item. In contrast, gold is not consumed and therefore does not disappear. Essentially all the gold mined throughout history still exists. This above ground stock of gold has value because gold is useful in economic calculation and preserves purchasing power over long periods of time. For example, the price of crude oil in terms of gold is unchanged from 60 years ago, or in other words, an ounce of gold purchases the same amount of crude oil today as it did in 1951.
2) Gold is not an investment; it is money. Gold does not generate cash-flow. Gold is not a wealth producing franchise, like a company that creates wealth by producing marketable goods and services. When you buy gold, you are not making an investment. You are simply exchanging one form of money – the national currency used in your purchase – for another form of money, namely, gold. Therefore, the decision to buy gold should be based on gold’s attributes compared to those of national currencies. In this regard, gold emerges as the clear winner. Using the example in #1 above to highlight one of gold’s most important attributes and a major weakness of the dollar, a barrel of crude oil today costs more than $100, compared to less than $3 in 1951. The dollar has not preserved purchasing power. The interest income earned on a dollar deposit over this period of time will offset some of that loss, but it is important to remember why interest is paid in the first place. It compensates you for the risk of holding dollars – risks like inflation, a bank default, capital controls and other pernicious events that are harmful to your purchasing power. You do not have these risks with gold.
3) Do not trade gold; accumulate it. It is very easy to get caught up in the emotional aspects of the precious metals, given how frequently and cleverly brokers and others benefiting from trading volumes create artificial excitement simply by fanning the flames of gold’s price fluctuations. Leave trading to the professionals and speculators. It is difficult to "make money" from gold in that way. Given that gold is money, accumulate it, or in other words, "save money". Saving money is a good thing, particularly when you are saving sound money. So plan your household budget to put away some gold every month for your retirement or simply as a matter of prudence for that proverbial rainy day. It is savings, and available until you use it to make an investment or spend on some consumer good. Over time, you will clearly reap the financial benefits from your dollar-cost averaging program.
4) Buy physical gold, not paper-gold. Physical gold is a tangible asset, while paper-gold is a financial asset. With paper-gold, you do not own gold. You only own exposure to the gold price, and the value of your asset is dependent upon someone’s financial capacity and willingness to make good on their promise to you. In other words, you have counter-party risk, which is something you do not have when you own a tangible asset. For several years, the global economy has been working its way through a financial bust, which are always characterised by the breaking of promises. For example, Lehman Brothers could not meet its promises, and more recently, the Greek government has been unable to repay its commitments. Therefore, the rule-of-thumb is to avoid financial assets during a financial bust. Given that today’s monetary and financial problems remain largely unsolved, own physical gold and not any paper-gold substitute.
5) There are only two ways to buy physical gold. Buy it and store it yourself, or buy it and have someone store it for you, which is what my company, GoldMoney, does. Each alternative has advantages and disadvantages, and every individual has to weigh up these pros and cons and decide which alternative, or perhaps both alternatives because diversification does mitigate risk, best suits his or her needs. For example, when you store gold at home, you have it at hand. However, you run the risk of theft, the cost of insurance is expensive (if you can even get it), and your liquidity is impaired because you have to return the coins to a dealer to exchange them for national currency. You may also even incur the time and cost to get your gold refined to determine the gold content before the dealer accepts it. In contrast, when you store your gold, silver, platinum and palladium in GoldMoney, you do not have it at hand, but it is stored for you in a secure bullion vault and insured. What's more, you can sell your metal 24/7 and have the proceeds wired the same day to your bank account anywhere in the world, so you have exceptional liquidity.
6) When you store physical gold with others, ask to see the audits. When storing metal with others, you do not have the storage company’s counterparty risk because you are not exposed to their balance sheet, but you do have performance risk. In other words, you have the risk that your precious metals are not being stored in accordance with the Customer Agreement. Independent third-party audits are the only practical way to gain the assurances of integrity that you metal is safe and secure. Do not store with any company if they do not have independent third-party verification provided by regular audits by one of the Big-4 auditing firms confirming that the weight of metal being stored equals the quantity of metal owned by the storage company’s customers.
7) Silver is both a commodity and money. Some of it gets consumed and disappears, for example, the silver used in photography. But like gold, it has thousands of years history as money and is accumulated (saved) as coins and bars. Silver though is very different from gold in one very important respect. Silver is very volatile, which can be measured by the number of ounces of silver needed to exchange for one ounce of gold. A year ago it was 65 ounces of silver; last month it was 32 ounces, and today it is 40 ounces. This volatility is not for everyone, but if you are prepared to accept this volatility, then own some silver too. Over the next few years, these two metals are likely to move toward their historical exchange rate of 16 ounces of silver to one ounce of gold, meaning that silver will do even better than gold, or in other words, silver has some catching up to do in this ongoing precious metal bull market.
Gold has risen ten years in a row against the US dollar, and while 2011 is far from over, it looks like gold will be higher this year too. So clearly, gold has come a long way. It is therefore natural to ponder whether you should be buying gold now. Is it too late?
Believe it or not, but I have been asked this question dozens of times over the last ten years. My answer has always been the same. No, it is not too late, which is the same answer that I have today. What’s important is not the price of gold, but rather, its value. Don’t let gold’s high price distract you from the important points that gold does not have counter-party risk and preserves purchasing power over long periods of time. Gold is sound money, which everybody should be saving.
(I got this article from this source)
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