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« Agnico-Eagle Mines Limited Call Options in Positive Territory | Main | March 3, 2010 Bloomberg article - indirectly values HRG »
Friday
Mar052010

What’s More Important: Price Per Ounce or Ounces Owned?

Mining  06 March 2010.JPG


By Jeff Clark, Casey’s Gold & Resource Report

In a recent conversation with a fellow gold analyst, he was emphatic that the price one pays for physical gold should be ignored. “What’s far more important,” he insisted, “is how many ounces I own in relation to the total value of my assets.”

Building a core position in gold bullion is a smart goal, to be sure, and a strategy Casey Research has been advising for years. However, ignoring the price you pay for gold could be seen as foolhardy; sure, it’s insurance, but isn’t price part of the consideration when you shop for insurance?

So, who’s right?

The World Gold Council just released their 2009 annual report on gold trends. From the densely populated pages of interesting data, there’s one compelling tidbit I gleaned that may shed some light on the buying behavior of gold investors.

Overall investment in gold was 7% higher in 2009 than 2008. This is significant when you consider that demand in the fourth quarter of 2008 – during one of the worst financial meltdowns in history – was so great that shortages of physical metal abounded everywhere. And yet investors bought more gold in 2009 when investor fear about global financial uncertainty was subdued.

Further, 2009 total funds invested in all forms of gold exceeded 2008 by 20%, and the average price was 11.6% higher. In other words, investors were buying gold even though the price wasn’t necessarily “low.” To be sure, that’s a broad statement. But the fact remains that year-on-year, more gold was purchased at higher prices when the markets were less scary, than when the price was lower and Hank Paulson was on CNBC every 15 minutes pontificating on how to save America’s financial system.

This isn’t to suggest one shouldn’t pay attention to price. And the data doesn’t identify how many of those who purchased gold last year were first-time buyers, as certainly there were newcomers to the sector that contributed to higher demand. But it begs the question, who would continue to buy gold when the price is higher?

Whoever doesn’t own enough, that’s who. The gold I bought last month was certainly higher priced than what I paid in 2008. But I’m trying to position my assets for protection from eventual dollar debasement and rising inflation. So perhaps focusing more on acquiring sufficient ounces to withstand a storm rather than stubbornly buying none, waiting for “cheaper” prices, however you define that, is a better mindset. Not owning enough gold is equivalent to holding a million-dollar mortgage and having a $10,000 life insurance policy. It won’t help much when you really need it.

Of course we should pay attention to price. But the trick is not letting that distract you from buying what you need. You’re not buying gold bullion as a speculation (although we expect to make a bundle on our holdings), but as a sound form of cash in an environment where government has no respect for a balance sheet and sees inflation as the only way out of its black hole of debt. During periods of inflation, the government does fine; it’s the citizens that suffer from the lost purchasing power of their savings. It’s clear our currency is being debased. What’s your plan of defense?

For those diligently accumulating gold, how do you know when you have enough? Check your anxiety quotient. If Ben continues printing money or Obama promises more goodies than he has the money to pay for, and you remain calm, then you likely have adequate gold. These are the investors who can afford to be stubborn about price as they build their holdings. In my opinion, this is where we all want to be.

What form of gold should you buy? It depends on why you’re buying it. If you understand gold’s role in history, owning a physical form will come naturally to you. If you see the threat of inflation on the horizon, or you worry about what is being done to the dollar, you’ll own both coins and an ETF. If you’re worried about possible exchange controls someday, you’ll consider a Perth Mint Certificate. And the more gloomy your outlook about the global economy, the greater the percentage of all forms of gold you’ll buy.

That said, we maintain a bias toward physical ownership. GLD and other gold ETFs are fine and do offer protection. But the custodian isn’t going to airmail gold to you when you cash in your shares; having the “hard money” in your hand gives you the freedom an ETF cannot. In our book, owning physical gold, in the form of one-ounce coins, is where your first dollar should go.
I remember when my wife and I decided it was time to get life insurance. We just had our kids, and it was time to play grown-up. Given what 5,000 years of history has taught us about the value of gold, and given what’s happening at this moment in history to our currency, are you playing grown-up with your investments?

Is the current price of gold a good time to buy? Check out our four “clues” in the new issue of Casey’s Gold & Resource Report, risk-free here...

All the best.

Got a comment then please add it to this article, all opinions are welcome and appreciated.

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Reader Comments (5)

Where is the best place to purchase gold and silver coins and bullion. I have about $8,000 in gold coins now and lots of ETF and mining stocks. I am very unhappy with Durango based McValeny who sold me the gold. Would appreciate another option.

March 6, 2010 | Unregistered CommenterTom Schadt

If paper gold is the only alternative for some investors, perhaps a look at the offerings of ScotiaMocatta.com and the Sprott Physical Gold Trust (PHYS-NYSE),(PHY.U-TSE)would be a viable alternative. Both offer the option of converting the certificate to physical bullion and all holdings are on a fully allocated basis.

March 6, 2010 | Unregistered CommenterWayne

Do they sell coins?

March 7, 2010 | Unregistered CommenterTom Schadt

Quote from the above article. 'You are not buying gold as a speculation [Though we expect to make a bundle]' A bundle of what. Paper dollars???. When are gold acquirers going to realise that gold is real money and that paper dollars or other paper currencies are not? If you want to see the world as it really is and not some make believe fantasy then you have no alternative but to consider gold as your money and measure your assets and profits against gold. This translates into how much gold does you grocery basket cost, how much gold do you have to spend to buy a new car or house, or how much gold do you earn. Consider how much in real profit in gold value did you make on your last speculative investment. Did you relly do well in the stock market or elsewhere when compared to gold value?, Are the gold mining companies such as Yamana and Kinross such good investments? If you are invested in the DOW or the NASDDAK during the last few years you have lost out heavily against real money in spite of the recent rediculous rise in the indices. Even persons who avidly consider gold as money have difficulty in dispensing with their ingrained belief that paper currencies can by used and considered a stable unit of value. [ Prices rise but the dollar etc remains the same syndrome] but if you do not dispense with this belief then you are living in a fantasy. It is the paper currencies that rise and fall against gold, not the other way round and anyone who wants a touch of reality will have to adjust to this mindset. What will be the real value of your assets when measured against gold when an ounce will buy 2000 paper dollars or 5000 paper dollars or even more? Oh yes anyone investing in gold will make a bundle of paper currency, no doubt about that but that paper currency, whatever it is will not buy much when you 'cash in' and 'make' that bundle. Roger Levinson.

March 8, 2010 | Unregistered CommenterRoger Levinson

Ok, guess you do not recommend Gold Coin Dealers!!! Right????

March 8, 2010 | Unregistered CommenterTom Schadt

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