Uncertainty Sees Renewed Interest In Gold Bullion
For many of us it may seem a strange way to spend a day; urgently lining up outside a coin store and then parting with over $200 and walking out with half a dozen silver dollars. While we may not all clearly recall this chapter in recent history, it was precisely the scene played out in the late 1970’s, when a sudden interest in gold and silver saw people flooding to coin stores across the nation in a feverish attempt to “get into the metals.”
The 70’s oil crisis, threat of nuclear war and double digit inflation have all been sighted as triggers for the sudden spark of interest in gold and silver, which saw gold ultimately peak at $850 /oz and silver at $50 /oz in 1980.
In the minds of the tens of thousands that will buy precious metals this year, gold and silver have a bright and certain future.
Twenty years later inflation has been at record lows, we’re not queuing outside gas stations and the cold war is long dead, or so we’re told; yet again today coin and bullion dealers are reporting the briskest trade in two decades. Premiums being paid over spot have been increasing and private mintage’s have been entering the market to help satisfy demand. This year buying and holding physical gold and silver coin and bullion, as distinct from gold investments, has become a high priority amongst many.
What makes this sudden shift interesting is that we’ve been told repeatedly that gold is a “barbarous relic” of the past; today it has no financial or monetary value. In-fact, so bad is gold, many central banks have been selling it for years so as not to be stuck with the metal – haven’t they? So why are people, many of whom are sophisticated investors, buying up heavy old-fashioned “commodity money” that is difficult to safely store and that won’t return a dime in interest?
In just about all cases dealers are claiming “concern for the future” as being the prime motivator behind the public’s recent demand for the precious metals. “Inflation, deflation, stock market uncertainty, currency crisis, economic and banking collapse, we are hearing it all” admitted one of Sydney Australia’s oldest coin dealers. “It seems whenever there is uncertainty in the air people start looking to gold and silver.
In a recent e-mail another buyer confessed “I’m not so concerned with its present or even future price, for my family its simple prudence”.
In an uncertain world, in the minds of the tens of thousands that will buy precious metals this year, gold and silver have a bright and certain future.
For the 1st time in two decades the physical gold and silver market is coming alive. A sophisticated market, it is at times difficult to understand and, for the new participant, full of fresh terminology and potential pitfalls. With a record number of people “in the market” for the 1st time, our objective here is to look at the common issues and questions that arise with the purchase and accumulation of precious metals.
The normal questions of “where do I go and what do I buy?” are all quite fair. Remember, in the Western world it’s been 3 to 4 generations since we’ve had any day-to-day contact with gold and silver. For the most part we no-longer understand precious metals or know how they operate.
WHAT ARE “THE PHYSICALS”?
The term “physical” refers to the literal tangible “in your hands” gold and silver, whether in the form of coin or bullion. When you go out to purchase physicals you have the option to literally take delivery of the physical metal. This is not a mining stock or a paper promise-to-pay sometime later.
INSURANCE OR INVESTMENT?
The motivation for purchasing physicals will vary from person to person. One should assess their own motivation and interest in gold and silver and then act accordingly. For example, if your interest is purely speculating that the price of gold (POG) will rise in the future, then physicals may not be your best move. This is where gold certificates from a reliable issuer have an important place with the precious metal investor. If however, you are looking for Disorder or Financial Catastrophe Insurance then physical “in your own hands” bullion should be considered. This article primarily examines the principles that should be considered when purchasing Disorder Insurance.
SOCIAL & ECONOMIC DISORDER INSURANCE
History has clearly demonstrated gold and silver’s ability to stand alone and maintain value, or purchasing power, during any kind of financial or social disorder. The greater the degree of disorder the better they work. While the topic for another discussion, it is interesting to note that this repeating pattern has been played out time and time again throughout all history, including many times this century. Regardless of the constant bad press gold and silver gets in our mainstream financial press, this pattern will continue to repeat.
Just before you say “it can’t happen to us” observe some poignant examples from this century’s history books;
1907 Korea: Koreans prevent imperial Japanese foreclosure by paying loans in gold collected from citizens.
1907 US banking crisis: many loans are called. Those offering gold as security have loans renewed.*
1920’s German hyperinflation: people’s life savings wiped out in 2 years while gold maintains value.*
1930’s US deflationary depression: purchasing power of gold increases nearly 130%*.
1930’s Western Europe: families* use gold to flee Nazis – local bank notes can’t buy safe escape.
1971-80 US: $US collapses through inflation while price of gold increases 2300%.
1975 Vietnam: People flee fall of Saigon using gold coin* – US dollar becomes worthless overnight.
1991 Gulf War: British troops sent into war zone wearing gold sovereigns to insure safe passage out of region.
1990’s IRAQ: defies UN sanctions and successfully imports wheat purchased with gold.
1997 Korea Asian crisis: repeats 1907 & collects 100 ton of gold from citizens to protect currency.
* for the few individuals fortunate to be holding the precious metal.
Purchasing and holding physical bullion is the ONLY universally proven hedge or protection against all forms of financial/economic/social strife, collapse, war, famine and upheaval. While many may differ on the timing and extent to which this disorder will visit Western nations, of this we can be certain; physical gold and silver in the hands of the few has always been the ULTIMATE INSURANCE. When deliberating on the “insurance or investment gold” question, then remember the old adage; an oz of gold in the hand is better than 2 oz’s in the bank.
A SMALL SMALL MARKET
People don’t realize the very small size of the physical gold and silver market. We have been saying for so long, these markets are very small. It will only take a few people to rush in at one time and the market simply will not clear at any price. Across the board, physical reserves of bullion are very thin, while of course the same is true of minted coin. Your average coin merchant holds little or no stock and mints carry no minted coin stock or little bullion reserves. Bullion banks today are many times oversubscribed; where their total claims far exceed the underlying bullion.
In recent years as the POG has dropped, less new supply has entered the market. Gold producers have hedged against falling gold prices by forward selling their future production. Further, an estimated 10,000-ton of Phantom Supply has entered the market by bullion dealers selling gold they have borrowed from others (Central Bank’s) stockpiles (what happens when the CB’s want their physical gold back?).
Increased activity in this very small market quickly pushes up the premiums (the % people will pay above the spot price). Both silver and gold have suffered major supply deficits for more than a decade. Scrap supply drops off during an advancing market. Add to this the fact that scrap reserves have been lowered in recent years to help fund this growing supply/demand gap
If you are not convinced of the small size of this market consider;
1) In the United States alone – every day several trillion dollars trades in the paper equities and derivatives markets: i.e. several trillion a day x 5 days a week x 52 weeks a year = estimate $600 trillion a year. Mutual Funds = over $6 trillion + bank deposits = $3-4 trillion + bonds + derivatives etc = total equities estimates $20-40 trillion (in JUST the US). How much gold WORLDWIDE? – Only around $1.3 trillion ! – getting the picture
2) There are 5.5 billion people in the world today. There is only about 4.5 billion oz of gold above the ground – less than 1 oz per person. Around of those 4.5 billion oz are locked up in Central Bank (CB) vaults and not available to anyone at any price.
Franklin Sanders puts it perfectly “it’s a real small door into a real small room and the whole crowd just can’t fit in there at once.” My point is: don’t leave it till people are lining up, that may well prove to be too late – enough said.
WHAT DO I BUY?
I am often asked Gold is Gold is-it-not? Its true that in a time of extreme disorder or collapse, physical gold in any form is better than none at all. Once again people are faced with many questions and choices – do I buy coins or ingots, large or small, government coin or private issue, 2nd hand or new? Your 1st consideration should be “how well will my Disorder Insurance perform in a return to a barter of exchange economy?”
These are principals you should think on when purchasing physicals or holding bullion certificates (bulllion certificates should be convertable according to the following);
1) SIZE: consider bullion in small tradable denominations. You will pay an added premium for smaller coins (or ingots) and less premium for larger. In a barter of exchange economy, a 400oz gold bar will be far harder to exchange or trade than a 1oz gold coin, and a 1/10thoz coin will be more effective as a tradable commodity than a 1 oz coin. Given the trading inefficiencies of larger coins in barter of exchange environment, the added premium paid now may well be justified in the longer term. Bear in mind, the purchasing power of gold and silver increases dramatically in deflationary depressions (e.g. 1930’s). The purchasing power of a 1 oz gold coin (in 1999 worth around US$290) is likely to be worth many many times this is that kind of environment.
2) RECOGNIZABLE: You need to hold bullion in forms where weight and purity (therefore value) can be easily determined. A coin or ingot, from a recognized and reliable mint or refiner, will carry markings (hallmark) as to it’s weight and purity (e.g. 1oz – 999 fine gold). A lump or nugget of gold or a piece of jewelry is poor crisis money as it’s weight and purity must be determined before it can be traded.
The reputation of the mint (refiner in the case of ingots or bars) is important. Are they recognized internationally?
3) PREMIUM: Minimize the premium (margin) you pay above the spot price of the metal. Your goal should be to accumulate the maximum oz’s of gold and silver for your money as possible. Part with extra premium for a premium product that will offer added insurance. As an example you may consider paying extra margin for a smaller denomination or non-legal tender private mintage.
Buy before the rush! When everybody is rushing into the bullion market at one time, premiums soar very quickly.
4) NUMISMATICS: Collectable coins command a large premium over spot. In recent years many collectable coins have qualified as excellent investments having shown good capitol growth, but remember Insurance and Investment Gold are 2 different things.
Many sell expensive numismatic coins on the premise that they will be exempt from future government confiscation as they were in 1933 in the United States. In my opinion non-legal tender private mintage’s offer the best protection from government confiscation at a considerably lower premium. Your greatest guard against government confiscation is maintaining your privacy. Expensive numismatics may be an investment (debatable in a deflationary depression) but they are not Disorder Insurance.
5) PRIVATE MINTAGE: In my opinion private issued coin is superior to any government issued coin as it can substantially lower the chance of unfair government confiscation. In most countries the issuing government perpetually owns government coin in circulation. At any point a government can choose to recall their circulating coinage (a sudden change in monetary policy) – you are only the bearer of their coin NEVER THE OWNER. When you buy private mintage you OWN the coin not an issuing government.
6) SILVER: Always include silver in you bullion holdings. People, becoming preoccupied with gold, often underestimate the importance of silver. Throughout all history, silver has been the workhorse money, the backbone of circulating money, the money of day-to-day transactions for the majority of the populace. Alternatively gold has been typically the money of kings and/or reserved for larger transactions or payment of taxes. Before the Classic Gold Standard of the 1800’s most civilizations and economies evolved and adapted bimetallic standards where gold and silver worked together. A return to a barter of exchange economy would again see silver featuring in day-to-day commerce.
When measured against gold, silver has never been as cheap as it is today and has a much higher upside potential.
My philosophy with silver is; buy as much as you can as often as you can for the lowest premium you can. Silver has a much lower chance of government regulation or confiscation than gold; there is more of it and it is more difficult to manage and control. Unlike gold, privately minted silver coin can be relatively expensive (compared to the underlying metal cost) and, while good to have, may not warrant the extra margins.
WHERE DO WE STORE OUR GOLD?
A wise and wealthy King once gave us the key to this commonly asked question when he said “give a portion to 7 and to 8 for you know not what evil shall be upon the land(1).” King Solomon was well qualified to comment as he sat on ancient Israel’s throne at the height if it’s wealth and influence.
Everyone must plan and execute their own personal storage strategies based on their own circumstances. Don’t put your faith in institutions where you have no control. Consider 7 to 8 different locations where you maintain control e.g. home, office, country retreat, NON BANK safety deposit. Remember metal detectors exist today.
The NO. 1 RULE for safe storage of any of your assets is maintain your privacy i.e. DON’T TELL ANYONE what you own or where it is stored.
A further consideration; insuring your bullion reserves with an insurance company will violate your No. 1 rule of privacy.
Gold and silver investments have not been considered above. Many precious metals investments can be exceedingly risky. Gold and silver investments SHOULD NOT make up all of ones investment portfolio (remember King Solomon’s advise).
People considering investing in this market should consult with a professional investment advisor. When considering an advisor or broker ask these questions;
Do they understand the market you are interested in? With respect, the common stockbroker doesn’t understand the gold and silver market. It makes it hard to for you to discuss this part of your portfolio if your broker is on another page trying to sell you internet stocks.
Does he an established successful track record in this sector of the securities industry?
Having said that, many good opportunities exist for the investor to leverage their returns in an upward move in gold and silver prices.
Gold Certificates from a reliable issuer, can offer excellent investment potential. They can be bought and sold at better margins than buying the underlining commodity itself. While the investor actually owns and controls the underlining commodity, he usually only takes delivery of the paper certificate, there is convenience without the consideration of transport, insurance and storage.
A person’s gold and silver investment portfolio can include shares in smaller producers (mining and exploration companies). It is important to look for companies with low or no hedge book exposure. The lower the company’s edging, the greater it (and it’s shareholders) will benefit from any upward move in the POG. Alternatively, companies with high hedging will be exposed and perform badly in a rising POG.
Options and futures contracts also exist, and, while the riskiest forms of investment, they offer the greatest degree of leverage or return in a rising gold and silver market.
At some point in the future those that are well positioned in gold and silver investments should do VERY VERY well. Never forget; many of these investments are part of one huge paper pyramid. So we end were we began: Insurance and Investments are 2 different things.
(1) Ecclesiastes 11:2
by Philip Judge