Guide to Gold
How to buy gold and where to store it
This article has been updated in October 2019 to reflect new economic data.
Why buy Gold?
- The ultimate storage of wealth.
- Non-perishable, accepted worldwide.
- Cannot be created out of thin air.
- The oldest exchange of value.
- The best hedge against the inflation of money.
- Gains value in times of economic volatility.
While fiat currency has an unlimited supply and can be created out of thin air by central banks – gold is limited and scarce. Buying gold is one of the best ways to retain and even grow your wealth, no matter what happens in the world.
The precious metal is almost absurdly valuable – at the time of this publication, just one ounce of gold can be exchanged for:
- 1,220.79 British Pounds
- 1,489.60 US Dollars
- 1,332.23 Euros
- 11,657.57 Hong Kong Dollars
Fiat currency (paper money) is backed by faith in the government. This faith can disappear overnight, as evidenced by the Zimbabwe dollar, the German Mark, and even United States currency: Check out the History of Money and Banking in the United States by Murray Rothbard for more details. Recent runs on banks have happened in the EU countries of Cyprus (2013) and Greece (2015).
Gold is non-perishable, and it is an important financial asset class that most financial advisers agree should fill between 5-20% of any portfolio.
Regardless of your investment standpoint, it is imperative to have some exposure to gold, and studies have shown that over time, it is possibly the best safety net in times of economic turmoil. Gold is trading at bit down at the moment, and now is a great time to enter the marketplace… see further down for one of my top gold mining stock picks.
Ways to Buy gold
More Preferred | Less Preferred
1. Coins or Bars > Bullion
2. Mining Stock > ETF (electronic funds)
3. Allocated Accounts > Unallocated Accounts
4. Gold Backed Debit Cards > Goldmoney.com
5. Storing Gold in Free Trade Zone > Storing Gold in a Bank
Physical Gold Vs. Denominated Gold Coins
Physical gold is preferable to all other options because physical gold can’t disappear at the click of a mouse. Also, you don’t necessarily have to tie your personal name to it. You could buy it and store it in a safe somewhere, or you could keep it in a secure storage facility.
Un-denominated Gold is any gold which isn’t specifically weighed out in an even amount – this is gold in nugget form or jewelry.
Gold necklaces are sold for a greater value at retail, but almost always resold at a lower value. The price above the spot price for jewelry is due to branding and that the item is not seen as a commodity such as a gold bar or coin, or other denominated amount would be.
Denominated gold bars or gold coins are weighed out at a specific amount and oftentimes offered by governments. American Eagles, Chinese Pandas, Canadian Maple Leafs – these can be exchanged at any broker-dealer around the planet for the spot price + a small fee on any given day. Contrast this with a necklace which needs to be weighed and assayed, and will probably fetch a lower price because it has to be melted down. Nonetheless, it’s easier to transport a necklace rather than coins or large bars across a border.
Tip For Travelers: You need to be careful when transporting gold across borders. In many cases, it is a reportable asset (such as in Singapore) but in other cases (most of South America), it may not be. You should always check ahead to see if it is reportable and consider using a professional gold transport company for moving your gold.
Mining Stock > ETF (electronic funds)
There are different ways you can get exposure to gold via the markets. One popular way is through a Gold ETF or mutual fund. I would actually advise against this because there is no guarantee all of the money in the ETF is backed by actual gold. In other words, the managers of the ETF are under no obligation to back the financial instrument with physical gold.
Gold mining stocks are a better way to get gold exposure in an equity marketplace. Junior minor stocks are extremely volatile, but larger more established companies provide more stability. However, with any gold stock – you are not only betting on the price of gold and large economic factors, but also the underlying performance of the company, on a microeconomic scale.
A Gold Mining Stock I am Buying: EGO
I’m a bear when it comes to investing in the American stock market in general. I prefer private companies and investments in public companies. That being said, keeping your money in American dollars is a sure way to lose to inflation. If you get paid in dollars, then your best bet is to put it in some sort of market with a positive return, rather than letting your money get eaten by inflation. One stock I own is Eldorado Gold, which I feel is very undervalued when you look at overall market conditions. Furthermore, the company is attractive from both a fundamental and technical analysis. View their company presentation here: Q1-2012 Report and their Investor Presentation July 2012.
Allocated Accounts > Unallocated Accounts
The difference between an allocated and unallocated gold account.
An allocated gold account means that gold is specifically separated for your use, but in general, it is still controlled by someone else. This can be preferred by some people because they don’t have to manage the gold and many services actually deliver the gold on your behalf.
Unallocated Gold accounts are something I would stay away from. If anyone told you “we have a lot of gold” and they don’t specifically state how much, why should you trust them? Don’t trust anyone who isn’t transparent; chances are they are being opaque for a reason.
Gold Backed Debit Cards > Goldmoney.com
A great example of an allocated account is a gold backed debit card where money is withdrawn from your account each time a purchase is made. This is preferable to a Gold Money account because you actually own a portion of gold in your name, separated from the rest. Whereas you have a share in a lot with gold money – with the bank I can introduce you to, your funds are separate and distinct.
Goldmoney.com is probably the most famous allocated gold account on the internet, with facilities in Hong Kong, Canada and the UK – they are well established and considered the industry leader.
Quick Tip: The difference between gold inside and outside the banking sector is critical. If you are holding gold as a hedge against the monetary system, it makes very little sense to buy gold that is held on a bank balance sheet, because if the bank goes insolvent, your gold might be used to pay off the preferred creditors. Obviously a worse case scenario, but worth noting and avoiding if you consider that important.
The ultimate way to hold gold is through a gold backed debit card. As it stands, I only know of one bank in the world that offers this service and doesn’t count the gold on their balance sheet. They are actually not like a traditional bank at all, because they do not use your funds that you have placed in their reserves. This bank does not accept American clients.
There are other alternatives available to Americans, and for now, the door to the offshore world is still open. Email us and I can connect you directly to an offshore bank that accepts Americans for FATCA compliant, reportable accounts.
Where to store gold
- Outside the banking sector
- In a secure facility where only you hold the key
- In a stable jurisdiction where you spend at least some time
- Preferably in a Free Trade Zone
Some of the best places around the world to hold physical gold in a storage facility include Hong Kong and Singapore. London and Switzerland are preferable in Europe, you can also keep your gold in a free trade zone where depending on your tax situation, it may be possible to avoid capital gains on the sale of the gold.
Coins are preferable to bullion because they can be easily exchanged and can be traded at spot price at any shop around the world. However, if you are looking to invest large amounts of money into gold, buying gold bullion bars will involve lower premiums to the spot price, and will be easier to store and transport.
Some people won’t want to own physical gold, because it is not quite as liquid as other financial instruments. Personally, I don’t see anything as superior to physical gold. It is a great financial asset, evidenced by the dramatic increase in price over the past decade, and indeed since its first use as a store of value 5,000 years ago. The price is now consolidating, and could present buying opportunities in the near future.
Tip for Americans: If you hold physical gold outside the United States, outside the banking sector, and you are the one who holds the key, this is a non-reportable asset. Meaning that for tax reasons, this asset may not be reportable. Check with your accountant/lawyer to see your individual situation. This blog post does not constitute an offer for the sale of any financial instrument or any financial advice. Further Disclaimer: I own stock in EGO.