Much research on this subject has shown a variety of information on the web about buying Gold. Unfortunately all of these articles seem to have an underlying agenda and tended to miss vital information out of their articles. This article attempts to give you all the relevant information necessary to make an educated decision.
First things first, why buy Gold? Gold has always been considered a hedge against inflation, meaning it retains its value whatever the economy does. In these troubled times of high inflation and a volatile economy Gold is rising sharply in value consistently month on month.
So if Gold retains its value, how can it be rising in value? This is due to the fact that you are measuring Gold in a currency that is moving. When an economy is on the verge of collapse Gold will proportionally go up in value as EVERYONE wants it, pushing up prices. On the flip side of the coin though the currency you measure it in is steadily plummeting making it look like its rising much faster than it really is.
Inflation is really a misnomer, we use this word to express a rise in costs, when in actual fact this is a devaluation of the money currently in the system. To express this in another way, if you buy a loaf of bread for £1 and a year later it costs £2, it is not because you get two loaves of bread for your money, it is because the currency you are using to pay for it has halved in value.
Another reason expressed for holding physical Gold is that it is often used as a medium of exchange in times of monetary collapse. Fiat money (pounds, dollars, euros, etc) inevitably collapse as inflationary pressures becomes too much. This is explained in more detail in further articles. As paper money has no intrinsic value but Gold is a valued and physical commodity, people always switch to this as a means of exchange in troubled times. This happened as recently as 2004 in Zimbabwe.
What Gold? Coins, Bars or Paper
With so many options available to you, choosing what Gold to buy can be a minefield. There are basically 2 types, physical Gold and paper Gold. I’ll deal with the pros and cons of these 2 separately.
Firstly, paper Gold. Paper Gold is unallocated meaning you never take delivery of it. Paper Gold can be Exchange Traded Funds, (ETFs), or Gold stocks. Effectively pieces of paper representing Gold held somewhere. Or alternatively a related asset to Gold that will rise in price along with Gold, for instance Gold mining stocks.
The advantage of Paper Gold is that with the use of leverage you can make a much greater profit on a movement in the market price, as well as being able to profit from increases and decreases in price (as long as you have predicted correctly). Therefore making a continuous income from Gold rather than just a rise in the value.
The disadvantages of Paper Gold is that it is a bit of paper representing Gold. It is not ownership of Gold and therefore it can go to zero (or near enough) if markets collapse, as they have done quite a few times in the recent past. It is estimated that there are 24 times more ETF’s out there than physical Gold, so though they are supposedly redeemable in Gold it is clearly not possible. This is due to Gold ‘loaning’, whereby the holder of physical Gold Bullion can loan it out for others to trade with. Unfortunately with no restrictions on the amount of times the same piece of Gold can be loaned out.
Physical Gold can be sub divided into allocated and unallocated. Physical Gold is actual bars, bullion and coins of Gold. If they are sent to you to keep yourself then it is allocated. If the supplier / service provider retains the Gold in their own vaults it is unallocated as you never actually get to hold your Gold.
The advantages of physical Gold are that your asset is a physical commodity and can therefore never be worth zero. Gold has held value for 6000 years and has been used as a form of money for over 3500 years. The Gold and Silver standards have lasted in many countries for 100s and sometimes up to 1000 years. Also if you take allocated Gold, you are in full control of your asset. Your asset is also increasing in value whilst you hold it.
Disadvantage are that you will lose some of the value during buying and selling as there will be production and shipping costs.
If you do choose physical Gold, you now have the option of bars (bullion) or coins. As an investor this is a simple choice. Coins hold a ‘numismatic’ value which is a value based on their collectability and they also cost more to produce due to their more intricate construction. Gold bullion bars give you more Gold by weight for your money, therefore from an investment point of view they are an obvious choice. Also the bigger the bar, the more Gold you get for your money due to the reduced production costs.
What price should I be paying for Gold?
How do I work out if I’m getting a good deal?
All Gold is measured using the market price or spot price. This can be found all over the web and is also listed on the screen. The market price fluctuates all the time and is based upon the supply and demand worldwide in the markets. The London Fixing is also often used as a basis but this is exactly the same as the spot price but is fixed twice daily based on the spot price at that time.
Gold is measured in dollars and in troy ounces. Most websites will list it in a local currency, but they are just converting it for convenience. A troy ounce is 31.1035 grams as opposed to the standard 28g for an imperial ounce. So if you see a price of $1500 then this represents the spot price of $1500 per troy ounce. Spot prices are the price for bullion bars traded between governments, physical Gold cannot be bought at this value.
The cheapest Gold is of course paper Gold, mining stocks generally start around 30% of the spot price at the inception of a mine where prices are based upon the geologists predictions of the amount of Gold in the mining area. Of course the risk is that you can get zero if the geologist is wrong or more if he underestimates the deposits. ETF’s and others are generally sold at spot price with bids just over or under depending on prevailing market conditions.
Physical Gold Bullion will ALWAYS be over spot. If you find it for less its a scam, trust me, I get offered it all the time. Read the Fake Gold page for more information. Unallocated Gold where you own a tiny percentage of a very large bar will be the closest to spot as you do not have production, shipping or insurance costs to be added. This is generally less than 1% over spot price with small margins on the buying and selling as the Gold never actually moves from the safety of the vault.
Physical Allocated Gold will be provided by a Gold dealer. This can be in sizes from 1 gram up to 1 kilogram, the price will be based on the spot price but will include costs for production, shipping, insurance and a profit margin. Depending on the size of the order margins can vary from 50% for a single gram down to less than 2% for a larger order.
How to buy Gold
Paper Gold, mining stocks and ETF’s can be bought through a broker or trader and there are literally 1000’s to choose from. To reduce margins you can trade yourself, though I would recommend that you get sufficient training before undertaking this venture. Again there are 100’s of courses out there on options, stocks and puts, all with their own patented money making methods.
Physical Unallocated Gold can be bought online, there are a few companies out there doing this. Consideration should be given to the margins for both buying and selling and if there are any joining or subscription fees. Unallocated Gold Bullion companies only deal in 400 oz bars so if you wish to take delivery of your bar you will need around hundreds of thousands for one bar.
Physical Allocated Gold can be purchased from a Gold dealer, as mentioned before the pricing will be based upon the order size. Ensure you buy from a reputable dealer with a proven history. Ring around to get the best price, its easy to compare if you’re trying to buy the same amount of Gold from each dealer. Do remember prices fluctuates each minute so you’ll need to be quick!
Though it is possible to buy online from auction sites and private individuals I would suggest that you avoid these methods due to the prevalence of fakes in the market. Its just too easy to fake one small coin that you can sell for £1000.