Investing in Gold
Posted: Feb. 4, 2003
So you think of gold as just a wartime investment.
Think again. Because it's negatively
correlated -- meaning it rises when stocks, bonds, real estate and Treasury
bills fall -- gold is a solid investment any time government debt translates to
inflation. And it's the perfect antidote to Wall Street chaos.
"I would not buy gold as a means of
investing due to temporary calamities," says Leonard Kaplan, president of
Prospector Asset Management in Evanston, Ill. "Those tend to be a
temporary rally, which soon quits. When we invaded Iraq in the early '90s, the
gold market dropped almost $30 the minute the first bomb fell.
"But right now, if all goes well in the
world -- Iraq and North Korea go away, there are no sensationalistic terrorist
events -- we'll still see gold's price rise in 2003," he adds.
Americans think gold during rough patches
because it's the only true money source recognized through the centuries and
around the world. It holds its value: studies show one ounce of gold has bought
about 400 loaves of bread for the last 3,000 years. Unlike other money sources,
it's liquid, portable and, along with silver, the only asset in the world that
isn't someone else's liability.
And silver has less monetary trading clout.
Its appeal today lies in the huge industrial demands. Because it's worth so
much less per ounce than gold, it takes up more space to own a comparable
amount. Platinum falls in the "very speculative" category, financial
advisers say, and it doesn't convert to currency in doomsday scenarios.
"When we talk about precious metals, the
question is should you own real money, and if so, how much," says Robert
Prechter, author of Conquer the Crash.
Which way do I go?
Gold investors, such as Jackson Ferry, a 56-year-old communications consultant
in New York City, face two paths at the outset: Do you want to own actual gold
or stocks? Stocks appeal to the aggressive risk-takers.
"I am a conservative investor by
nature," he says. "My motivation was to conserve our resources but be
in a position to take advantage of the gold bull market."
Bullion
Prechter defines "conservative" as an investor who says no to stocks
and heads straight for the real things.
"Often gold stocks go down over the life
of a bear market like the one we're in now, just like most other common
stocks," he explains.
Nor does he think much of owning gold
certificates or gold storage accounts, which tempt investors with cheaper
prices than if they chose to have the metal slapped into their hands. These
pieces of paper promise to deliver the physical gold should you call in your
claim. In a catastrophe, that guarantee may not be worth the paper it's written
on.
"When people discuss buying gold, it usually means they've become worried about the social situation on the outside world, and they want some protection," Prechter says
Most investors who hit Certified Mint offices expect to pocket the real thing. Bullion coins come in one-twentieth, one-tenth, one-quarter, one-half and 1 ounce weights. Most citizens are familiar with the American Eagle (it currently stakes 90 percent of the bullion market).
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Old-wealth
families typically keep 5 percent of their portfolios in hard assets such as
gold at all times, upping that to 20 percent in bad times, he adds. Bullion's
biggest headache lies in storage. Never keep it in your house, lest thieves
someday stumble onto a bonanza. High rollers rent space in major depositories
in Switzerland and Australia. “Doofuses” bury it in their backyards. Some
recommend that most people put their gold in a safe deposit box at the bank.
Just be aware that when the feds confiscated citizens' gold during the Great
Depression, politicians put a law on the books that said an IRS officer must
be present when you opened your safe deposit box. In another government grab,
Congress could try to resuscitate this oddity. These days,
gold tempts from a tax standpoint. Dealers who buy your bullion aren't
required to issue a 1099 on American Eagles or Austrian Philharmonics. (Sell
more than 10 Canadian Maple Leafs, however, and expect the paperwork next
January.) "It's a
private transaction, and as a dealer I have no record of it," one dealer
notes. "But by law as a citizen of the United States, you do have a
capital gain. It's the honor system." And you'll
pay for being honorable. The capital gains tax on metals is 28 percent, well
above the standard 20 percent capital gain tax for most investments. Of
course, if you take a loss, you can claim that too, although that doesn't
apply to jewelry. The true
difference between a good deal and rip-off lies in the upfront transaction
fees. If you plan to purchase more than $2,500, experts say, walk away from
any dealer charging more than 5 percent over spot, the technical term for
where the market is trading. Smaller amounts should not incur more than a 10
percent markup. Haynes tells his clients to pay no more than $20 an ounce
over spot for coins. Since 1997,
it's possible to put gold coins at least 995 fine (99.5 percent pure), Silver
Eagle and Silver Maple Leaf coins into individual retirement accounts, but
you must store the physical metal at HSBC Depository in New York City or
Delaware Depository in Bloomington, Del. You must
also find an IRA fund such as American Church Trust in Houston that accepts
precious metals, says Haynes. And this offer is open only to new coins you
purchase -- you can't take the bullion from your safe deposit box and send it
to your fund manager. Bull markets
bring out scams, myths and lies in the metal markets. Heed these experts'
advice:
So what, says Haynes. "That doesn't mean any future
call-in would do the same," he points out. "I wish I had saved more when I was young so I could have committed
more to gold when I did," says Ferry. "I'd be that much further
along." |
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