Guidelines to Buy Your First Ounce of Gold

Question. What kind of gold should I buy?

Answer. We probably get that question more than any other -- pretty much on a daily basis. The answer, however, is not as straightforward as you might think. What you buy depends upon your goals. We usually answer the "What should I buy?" question with a question of our own: "Why are you interested in buying gold?"

If your goal is simply to capitalize on price movement, then bullion coins will serve your purposes. If you are interested in long-term asset preservation and you have additional concerns about capital and/or monetary controls -- a more complicated scenario -- then you might want to include the lower premium variety of pre-1933 European and American coins in the mix. These have been treated by the government since the 1930s as historical, collector items and, as a result, afford the privacy-minded investor with a greater degree of safety than gold bullion.




Q. When should I buy?

A. The short answer is 'When you need it.' You cannot approach gold the way you approach equity investments. Timing is not really an issue. The real question is whether or not you feel the need to diversify your present portfolio with gold. If you feel the need, the best time to start is now. With rising competition for the limited gold supply from both nation states -- like China, Russia and South Africa (to name a few) -- and individuals across the globe, there is the chance that small investors can be crowded out of the market at some point down the road. It is better to be a day early than an hour late.




Q. You frequently mention gold as insurance. What do you mean by that?

A. Gold's baseline, essential quality is its role as the only primary asset that is not someone else's liability. No matter what happens in this country, with the dollar, with the stock and bond markets, the gold owner will find a friend in the yellow metal -- something to rely upon when the chips are down. In gold, investors will find a vehicle to protect their wealth. Gold is bedrock.

This is precisely what people have discovered during countless crisis situations over the centuries and in financial meltdowns in recent history like the Pacific Rim in 1997, in Argentina and Brazil in 1998, in Turkey in 2002, and in the MidEast now. When crunch time came, those who owned gold understood what we mean when we say "gold is bedrock."

Over the years, we haven't altered this fundamental philosophy about gold ownership. Needless to say, there are millions of people around the globe, including many Europeans and Americans, who agree with us on gold's utility in this respect.




Q. What percentage of my assets should I invest in gold?

A. Once again the answer is not cut and dried, but a general rule of thumb is 10% to 30%; and how high you go within that range depends upon your analysis of the current economic, financial and political situation.

Obviously, the individual with a low level of concern about the current economic situation will tend toward the 10% level. Those with lagging confidence in the way things are going will gravitate to the higher end of the range. In recent months, we have had a number of investors go substantially over the 30% figure based on their own reading of the economy and the various investment alternatives available.

In the current investment environment, with yields still running below the inflation rate and stocks and bonds still suspect, gold remains a healthy and viable alternative. Many, including even the die-hard stock investors, still see gold as the most undervalued primary asset group in the standard portfolio mix. As a result, gold is getting a lot of attention. Gold is still in the beginning stages of what many financial experts see as a long term bull market. Since 2001 gold has tripled in value.



Q. Can you give us a profile of the typical gold investor?

A. Traditionally, wealthy, aristocratic European and Asian families have kept a strong percentage of their assets in gold as a protective factor. That same philosophy has caught hold in the United States over the years, particularly in the upper middle class, and there are a number of investors who add gold to their portfolio on an on-going basis as part of a regular gold savings program. This has been good for gold.

Most investors, as I alluded to before, acquire gold not so much because they feel that the price is going to go up, but because they want to insure their portfolios from destruction related to currency debasement -- no matter if their currency is the dollar, euro, yen or Renminbi, for that matter.

Our clientele represent an approximate cross-section of America and Europe, but the heavy buying is concentrated in the professions and among people who own their own businesses. Those with family wealth have also moved to diversify into gold in recent years.




Q. Can you briefly describe what you believe to be the biggest mistake investors make when starting out as gold owners?

A. The biggest trap investors fall into is buying a gold investment that bears little or no relationship to his or her objectives. Take safe-haven investors for example. That group makes up 90% of our clientele, and probably a good 75% of the current physical gold market. Most often the safe-haven investor simply wants to add gold coins to his or her portfolio mix, but too often this same investor ends up instead with a leveraged (financed) gold position or a handful of exotic rare coins (often costing five or six figures). These have little to do with safe-haven investing, and most investors would be well served to avoid them -- except as a sideline.




Q. What is your view of gold stocks?

A. Many of our clients own gold stocks and we believe they have a place in the portfolio. However, it should be emphasized that gold stocks are not a substitute for real gold ownership. Instead, stocks should be viewed as an addition to the portfolio after one has truly diversified with gold itself. Gold stocks could actually act opposite the intent of the investor, as some justifiably disgruntled mine company shareholders learned in the recent past. We cover some the differences between gold stock ownership and metal ownership in 'The Differences between Owning Stocks and Owning Metal' (see link below) so I won't go into the details here. Suffice it to say that gold stocks are stocks first and metal second. There is no such ambiguity involved in actual gold ownership.




Q. What about gold futures contracts?

A. Futures contracts are generally considered one of the most speculative arenas in the investment marketplace. The investor's exposure to the market is leveraged and the moves both up and down are greatly exaggerated. Something like 9 out of 10 investors who enter the futures market come away losers. For someone looking to hedge their portfolios against economic and financial risk, this is a poor substitute for owning the metal itself.




Q. What is the best approach for the safe-haven investor?

A. If you want to protect yourself against inflation, deflation, stock market weakness and potential currency problems -- in other words, if you want to hedge financial uncertainties, there is only one portfolio item that will serve you in all seasons and under most circumstances -- gold coins.