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 person is simply looking around for some relief, and a safe harbor from the storm that is raging through the current economy.
All through history, in 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 current 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?
When 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 often 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. These are also the same people who ridiculed anyone who said we were heading for a bear market. 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.
Gold, when adjusted for inflation using the governments own figures would have to be in excess of $2358 per ounce to meet the last high in 1980, so when you hear “gold is higher than it ever has been” – perhaps thats true in nominal terms, but in real value or purchasing power it does in fact have to go much higher to be an all time high.
Some like to make the argument that gold has no return. In reality, gold when measured in dollars has had some of the best returns of any asset class over the last 10 years:
Perhaps even more telling is looking at golds value when measured against the DOW during the same period, in the following chart you can see the value of the DOW dropping precipitously when valued in gold:
Gold has in fact performed very well, with an average gain over the last 5 years of 17.7%, with some years showing gains of over 30% year over year in USD.
So the question we must now ask is, where does it go, and how do we know when to sell?
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. When you see George Soros, John Paulson, and other managers of the worlds largest funds buying gold, you know this phase has arrived.
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 guidelines
My number one rule for the new gold and silver investor is, do not try and out-trade the commodities trading professionals. The access to liquidity to force markets in a desired direction that they have at their disposal makes this a no-win scenario for most people.
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.
Do not buy gold on margin or leverage. I’ll repeat that, do not buy gold on margin. Large trading houses like JP Morgan Chase have used massive concentrated short positions to force small traders to be stopped out on a regular and consistent basis for years. If you find yourself on the wrong side of a declining gold price it will end in more than tears.
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.
Buy physical as your foundation, if you are going to do stocks or ETF’s great, but you should own some physical first. 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.
A few ways to enter the gold and silver market
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. THIS IS NOT RECOMMENDED AS YOUR INITIAL EXPOSURE TO GOLD AND SILVER. 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.
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.
Commercial Bullion Banks:
These are banks 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.The biggest risk with these firms is their exposure to OTC Derivatives.
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. “Taking delivery” of physical gold is highly encouraged as this method has the highest degree of safety and the minimum amount of counter-party risk, however one must always keep in mind convenience or lack there-of when it comes to liquidation. A good place to start, but once you reach a certain amount in a home safe, using an international private bullion custodian is a great next step.
Private Bullion Custodians:
A Private Bullion Custodian is private firm that acquires, vaults, and liquidates precious metals on the behalf of its clients. Methods of acquisition and liquidation may vary, but a common thread amongst all Private Custodians is that the gold is vaulted outside of the large commercial “Bullion Banking” industry, thus separated their clients from the risk that may be associated with the short positions of the bullion banks, should there be a demand for physical delivery that exceeds the ability of these banks to deliver.
Clients who are patrons of Private Bullion Custodians are typically more risk adverse, and want to minimize the degree of potential counter-party risk they are exposed to, while retaining privacy, security, and the ability to liquidate all or some of their positions without a great deal of inconvenience.
Reputable Private Custodians do not participate in “paper gold” in any way, as this places a client into a risk category that the client is trying to avoid by buying gold in the first place. Platforms that encourage leverage, 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 are typically avoided by responsible Private Custodians.
These organizations maintain a high level of corporate governance and overall privacy, provide world class insurance and third party auditing, and earn revenue on transactional management only, not interest or leasing.
The method of choice for holding bullion in quantity for the generationally wealthy is the use of Private Bullion Custodians. Key attributes to look for is a bullion custodian that provides true allocated storage and individual serialized bar numbers, with private numbered accounts. As important as the acquisition is also redemption, so be sure to confirm that whatever firm you choose has the ability to liquidate positions regardless of systemic risk in the financial sector, and finally you should have the option to take delivery of your metal.
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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