Gold Basics : Understand Basic Gold Investing, Gold Bullion

From the desk of: Alex Stanczyk

Re: Understanding Gold’s Basics

So why all the interest in gold these days?

The main reason is one of awareness. The interesting thing about human nature is that pain causes us to act and investigate. The current pain is skyrocketing prices of gasoline, food, electricity, oil, and anything that has to do with a high oil price, which is virtually every item on store shelves today since modern logistics networks are heavily reliant on trucking and that is impacted by the oil price.

So, noticing this pain on a daily basis at the pump and the grocery store, while at the same time watching portfolio values plunge, the common American is simply looking around for some relief, and a safe harbor from the storm that is raging through the current economy.

All through history, is times of economic trouble, humans beings have gravitated towards gold and silver. The primary reason for this is that it is very difficult to manipulate gold and silver, while it is very easy to manipulate paper currency and electronic markets. Because of this, gold and silver are shunned by Wall Street and Government alike, because it cannot be easily controlled.

What I would say is, don’t buy into the propaganda. You are very above average today, as you are actively educating yourself on how to protect yourself under todays conditions. Continue to do so, and you will find the foundations of why gold and silver is one of the safest, and only, places to protect wealth in todays economic environment.

Isn’t gold highly over-valued right now?

First of all, anytime you hear some talking head from the main stream media say something like this, remember that for the most part their paychecks and their incentives are coming from being good buddies with Wall Street. If you haven’t figured it out yet, Wall Street is not interested in making you rich, they are interested in making themselves rich. So take anything you hear there with a grain of salt.

Anyone who tells you gold is overvalued, and is not speaking specifically from a short term trading perspective, does not know what they are talking about. What I mean by that is, yes gold goes up and down in the short term, but the long term trend overall is up, and will continue to be up for years to come. So its possible for a trader to call a top in gold, but over time it is still going to surpass that top in the normal long trend of a commodities bull market.

The question we have to ask then is: Is this it?? How far does this thing have to go?

I have heard many a caution against owning gold, citing how it has gone over its last high price in 1980, and now must correct to the downside.

First of all, if you adjust the price of gold for inflation, that is price it in 1980 dollars, the gold price would actually have to pass well over $1200 in order to pass the last high in 1980.

In addition, what these well-wishers do not know (not to mention financial analysts all over Wall Street who only study short term market moves and not 50 year cycles), is that gold usually follows a 20 to 25 year ‘cycle’ that is almost as predictable as the tides.

From 1980 to the year 2000, gold was in a 20 year bear market. The current bull market started in 2000. As we are in the year 2008, it is obvious this should well run for another 7 to 17 years.

The 3 phases of a bull market in gold and silver:

Phase one. History has shown us that generationally wealthy investors are usually into a market well before the institutions and the common man. We know this from practical experience with clients and not conjecture. In this case, we started to see generationally wealthy clients entering the gold and silver markets in 1995. In the year 2000 it started taking off.

The second phase of a secular bull market in commodities is when institutional investors start to enter the markets. Todays run-ups in oil price and food as well as base and precious metals the world over is evidence that this is now occurring.

The third and final phase in this process, is when mom and pop catch on and enter. This is sometimes referred to as the “mania phase”. In historic secular bull markets in gold in the past, we have seen gains of up to 2500% once the third phase sets in and takes hold.

A few simple rules:

1. My number one rule for the new gold and silver investor is, do not try and trade these markets. Understand, that there are forces in play that will destroy everything you put into gold and silver if you try and trade these markets without generational knowledge of how they work.

   If you are going to put money into gold and silver, do it in physical, and then be prepared to ride the short term ups and downs. You will get gut checked in gold and silver. When you see a 20%-50% change in market volatility over a period of months, it will shake many out. Yet history has shown us that as long as you do not exit until the true top of the bull run, you should do quite well.

2. Do not buy gold on margin. I’ll repeat that, do not buy gold on margin. (In layman terms this means do not borrow against your house or max out your credit card to buy gold.) If you find yourself on the wrong side of a declining gold price it will end in more than tears.

3. Understand what it is you are buying, and why you are buying it. Gold may go up substantially over the next ten years in dollar terms, but you are not making an investment. The word investment implies a return, and expecting a return also implies you are taking risk. With gold, what you are really doing is preserving your wealth and buying power. As the dollar and other currencies lose buying power, gold retains it, and is simply a place to park wealth so that it does not lose its value during this cycle in fiat currency.

4. Buy physical only. The primary reason to own gold and silver is that it is a way to store and protect your wealth that does not have any counter-party risk. If you buy an ETF for example, you do not actually own the gold, you own shares in a fund that is the legal owner of the gold. If the fund goes insolvent due to exposure to the markets, you will be standing in line with your hand out just like all of the other creditors.

5. Buy small and keep buying incrementally on dips if you want to smooth out the ups and downs of the market.

A few ways to enter the gold and silver market

1. Paper and electronic gold: Essentially paper or electronic representations of the gold price. These include futures contracts, exchange-traded funds, pool accounts, certificates, or funds owned by someone else other than yourself. NOT RECOMMENDED. Because you do not truly own the gold and silver, I would not recommend getting involved in these vehicles unless you already have a substantial foundation in actual physical metal. To do otherwise negates the primary reason to own gold in the first place: A way to store wealth that is no one elses liability.

2. Gold Mining Stocks: More risky than owning bullion itself but they do provide leverage against the price of gold. Gold mining stocks are clearly a stock component of your portfolio and are affected not only by the gold price but also by the price of the stock market. The HUI and XAU are the main indices for the gold miners. Again, this is not recommended unless you already have a foundation in physical.

3. Commercial Bullion Banks: These are commercial institutions that will acquire and vault gold for you. Increasingly, research and analysis now in the public domain, indicate large short positions and highly fractionalised bullion holdings on the books of large bullion banks. Many market analysts and commentators fear future systemic failure in the bullion industry, putting at risk bullion holdings of bullion service providers utilizing the bullion banking industry for the storage of their clients bullion holdings.

4. Physical Gold: Physical gold is sold in the form of bars, bullion coins and medallions. You have to provide your own security for this, and if you are serious about owning a large quantity this can be cumbersome. In addition, governments have been known to confiscate gold holdings of citizens during periods of economic crisis, so keep this in mind as well. If travel is necessary, special consideration must be taken for securing your wealth while in transit. Finally, liquidating your position will depend largely on an available market and your skills of negotiation. A good place to start, but once you reach a certain amount using an international private bullion custodian is a great next step.

5. Private Bullion Custodian Outside The Jurisdiction You Reside In: A private organization that does not participate in lease/lending, fractional reserve banking, or engage in investing activity that creates substantial risk to the organization by exposure to credit derivative markets or other high risk exotic financial instruments.

One of the best structures to look for, is described by legendary gold investor Jim Sinclair here, and is exactly how some of these firms operate.

These organizations maintain a high level of compliance and corporate governance, provide world class insurance and third party auditing, and earn revenue on transactional management only, and not interest or leasing.

It is possible to find a bullion custodian that provides true allocated storage and individual serialized bar numbers, with private numbered accounts.

Depending on the level of sophistication of such a firm, it can be highest form of privacy and security available in the world when it comes to own larger amounts of gold and silver bullion.

An example of such a firm is Anglo Far East Bullion Company.

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