Wednesday, August 1, 2007

Investing In Gold Bullion

One way to diversify your portfolio is by purchasing precious metals. I don't recommend putting a ton of your net worth in precious metals, but it can't hurt to buy a few gold coins when the price is right. A few years ago I bought five one-ounce South African Krugerrands with very low expectations. Allthough the five are currently worth somewhere around $3,300, I consider them more a form of "worst-case scenario" insurance, and collector's items than actual investments, which, to borrow from Ben Graham's definition in The Intelligent Investor, I would define as something promising "safety of principal and a satisfactory return."

If there is ever a period of rampant inflation in the United States, or other global market turmoil, the experts generally agree that the value of gold will increase. I can't say I reasonably expect such a thing, but I figured why not, over my lifetime, accumulate some gold coins.

Blanchard, one of the more reputable gold-selling firms, lists six reasons why someone might want to buy gold.

1) As a hedge against inflation
2) As a hedge against a declining dollar
3) As a safe haven in times of geopolitical and financial market instability
4) As a commodity, based on gold's supply and demand fundamentals
5) As a store of value
6) As a portfolio diversifier

Wikipedia also has a decent entry on investing in gold.

There is no shortage of gold discussion on the internet. My advice to you is if you have extra money, why not buy a few coins? At the very least, they would probably make an interesting gift someday.

There are a lot of people on an extreme end of the spectrum who suggest that if doomsday scenarios happen, you'll want to have gold coins because people won't accept worthless US Dollars. This page would be an example of that. I'm not going to say the situations this guy suggest can *never* happen, but I'm not holding my breath until they do.

Anyway, there are many different reasons for owning gold. If you want to buy large quantities, you're going to need to store them somewhere, preferably insured or protected from theft like a bank vault or a safe deposit box. I think this is where you run into a problem because it costs money to rent out a protected vault, so your gold would end up being a cash flow negative investment.

You can also buy shares of gold funds that own physical gold, but I'm not a big fan of buying a piece of paper that says someone else is holding gold for me. just a personal preference.

Just another option for your portfolio. As you can tell, I'm very lukewarm on the subject of gold. I don't think it is a "must-own" for every investor. It probably makes up 1% of my entire invested assets at the moment, and will probably remain at about that percentage. You're fine owning none. Stocks have appreciated much more over time, and some stocks even pay dividends!

If you do decide to buy a few gold coins, remember you are buying a $660 item (at today's prices anyway) that weighs only one oz., a potentially good theft target. I would recommend not telling people that you own gold coins (family and friends). I would also not recommend getting too tricky with your hiding places, because you will lose them, or someone will inadvertently throw them out. You can also (I believe) safely not own any gold coins and save yourself the hassle.


SavingDiva said...

I think having bricks of gold (like you see in the movies) would be neat. And a way to have money in case the US dollar turns out to be totally worthless. However, in all practicality, I have such a small amount of money that I would be foolish to put it into something like gold (also because I don't have a place to store it safely).

MoneyMan said...

Agreed- you would definitely be foolish to put a small amount of money into gold coins. The bid/ask spread, the broker commission, and the shipping cost alone make it not worth your while to buy small amounts of bullion. I probably wouldn't buy less than $2k worth at a time, and wouldnt even think about that unless you have investable assets of somewhere in the neighborhood of $200,000.

Silver is cheaper and a potential alternative if you feel like you want to own a few coins.