My Secret Gold Investing Strategy

November 24th, 2014
in gold

Special Report from Money Morning

by Keith Fitz-Gerald, Money Morning

Gold has taken a tremendous beating in recent weeks and is now tumbling along at four-year lows of $1,160/ounce.

Things are so bad that you can actually buy the Central Fund of Canada Ltd. (NYSEMKT: CEF) - a popular gold and silver bullion investment vehicle - at a 10% to 11% discount to the price of gold, because traders think the price of gold will drop even lower.

Follow up:

Frankly, I think that's fantastic news.

Today I want to show you my secret "gold strike" strategy that's perfect for moments like this. You'll get the two tactics you need as a gold investor, a simple test to determine if you own enough gold, and a quick-and-dirty look at how to buy it.

Here's Why You Really Need Gold

Love it or hate it, gold is no longer an optional investment. You need gold - in some form - in your portfolio.

gold investing

It is a critically important risk management tool that can help dampen your portfolio's overall volatility and also take the sting out of global uncertainty.

But contrary to what you may hear in late-night television commercials, gold has never, ever been proven to be an inflation hedge.

That's not why you want to own it.

You see, while gold is not correlated to inflation, it is more directly correlated to interest rates. And interest rates are, in turn, driven by inflationary pressures and global risk, especially in recent times.

Most people think about this in terms of the stocks, but where gold really shines is in protecting your bonds. You don't hear Wall Street talk about this very often.

I don't have to tell you that's about to become a huge issue for millions of investors when the Fed starts raising rates next year. A lot of people stand to lose a lot of money because they don't understand what I'm about to share with you.

That's because bond values will drop as rates rise. Bond prices and yields move in opposite directions.

So you want to protect against that risk, which brings me back to a very important question.

How to Know If You Have Enough Gold

Folks like economist and author Jim Rickards recommend having 10% of your assets in precious metals - and as much as 30% in a crisis.

We're not far off at Total Wealth, but I'd take it one step further:

Owning $1 of gold for every $10 you have in bonds is the best way to hedge the principal value of your bond portfolio against today's volatile global markets.

In practical terms, let's say you have $10,000 in bonds. Using the 1:10 ratio, that would mean you'd also have approximately $1,000 in gold socked away using ETFs, bullion, or something like the very popular Perth Mint Certificates, which I'll discuss in a minute.

Most investors could double their gold holdings and still not have enough.

Now let's talk tactics.

My Two Favorite Tactics for Gold Investing

Gold prices are obviously getting fairly volatile these days so you don't just want to set it and forget it. "Buy and hope" isn't a viable investment strategy with precious metals any more than it is with stocks.

First, as with any long-term investment, but especially those that are intended to hedge other investments, consider dollar-cost averaging into your position - meaning you split your capital into chunks and buy equally over time.

That way you're going to capture the best of today's volatile gold prices without inadvertently concentrating your risk. And, at the same time, you'll be positioned ahead of time when gold comes into its own again.

Second, my suggestion is to rebalance your gold and your bonds at least annually. If you're not familiar with the concept, in a nutshell rebalancing means that you're going to bring the relationship between your gold and your bonds back to the 1:10 I've outlined.

You can do this by selling enough of what's risen and buying a corresponding amount of what's fallen. Or you can simply add new money to your holdings and purchase enough of what's fallen to maintain the ratio.

I suggest you pick a day like your birthday or the start of the New Year and lock it into your calendar so you don't forget. Rebalancing should take you all of 20 minutes. Usually a lot less.

There are a number of reasons why this is worth your time.

Most people love or hate gold depending on whether or not they "love" the idea that it's real money or "fear" the demise of the dollar and fiat currency. So they make decisions based on how unsettled they feel. In effect, they're trying to time the markets, which is almost always a bad idea because it reduces performance over time.

What I am talking about with gold is all about maximizing performance and minimizing risk.

What Form of Gold Is Best for You

Now, there's a lot of debate about which forms of gold are best for investors. That comes down to personal preference. You may like ETFs, coins, bars, or even jewelry. It's totally up to you.

My point is that you just have to own it - even if it drops further and gets cheaper from where it's trading today.

Here are a few resources to get you started.

Physical Gold

American Eagles: These coins are the most trusted form of physical gold products on the market. They offer a convenient and cost-effective way to add physical gold to your portfolio in several denominations of your choosing: 1/10th-oz., 1/4-oz., 1/2-oz., or full one-oz. coins.

American Buffalos: These one-oz., 24-karat coins provide a simple way for investors to own gold bullion that's also a form of legal tender ($50 coins). Investors will pay a small premium to cover coining and distribution costs associated with this newer asset class (since 2006).

Investors can purchase coins directly from the U.S. Mint or privately owned specialty mints, such as the Franklin Mint and the Bradford Exchange, which produce specially designed commemorative and collectible coins. However, these generally have high markups over the "spot" price of gold and silver. What's more, there's very little of an aftermarket, and - in many cases - the actual bullion content of the coins isn't great enough to make them a true investment.

A way around that is to find an established dealer with a strong reputation and shop around for a low premium over spot. Here are five I suggest you consider:

  • Asset Strategies International Inc.(com) - Located in Rockville, Md., ASI also offers gold storage options outside U.S. borders. They have an excellent reputation and decades of experience.
  • Kitco Inc.(com) - With offices in New York, Montreal, and Hong Kong, Kitco offers fair premiums, and their selection is usually quite good.
  • David Hall Rare Coins(com) - In business since 1977, DHRC deals in gem-quality coins including gold rarities. They can help build collections that take you well beyond hedging, too.
  • Camino Coin Co.(com) - Based in Burlingame, Calif., Camino has been in business for more than a century.
  • American Precious Metals Exchange(com) - Based in Oklahoma City, Okla., APMEX carries a wide range of pre-1933 classic U.S. gold coins.

Gold Funds

Merk Gold Trust ETV (NYSE Arca: OUNZ) is one of a small handful of gold exchange-traded funds (ETFs) that allows investors the opportunity to turn in their shares for the delivery of actual physical gold bullion, like bars and coins. Should investors want to take physical delivery of gold tied to the ETF, they can redeem it in the form of London bars. Smaller amounts can be redeemed, too: one-oz. American Gold Eagles or American Gold Buffalos, Australian bars (either one oz. or 10 oz.), Australian Gold Kangaroo coins, or Canadian Gold Maple Leaf coins.

SPDR Gold Shares (NYSE Arca: GLD) is an ETF that seeks to replicate the price of gold. I like it because it's highly liquid. But this is not physical gold, and you cannot take delivery. If you don't want to own physical gold, this makes perfect sense.

Central Fund of Canada Ltd. (NYSEMKT: CEF) holds a mix of gold and silver bullion and is traded on the Toronto Stock Exchange in addition to the NYSE. There are no transaction fees other than your broker's commission.

Market Vectors Gold Miners ETF (NYSE Arca: GDX) is an ETF that holds a basket of the largest gold-mining stocks. Many of these companies are phenomenally cheap right now, but owning an individual gold miner is very risky - it's a cash-intensive operation that relies somewhat on luck. With this ETF, you diversify your risk across all 100 of the holdings. It also pays a small dividend.

Gold and Precious Metals Fund (MUTF: USERX): Offered by U.S. Global Investors, this little gem is a five-star-rated, no-load gold fund focusing on senior producers with the largest market caps in the precious metals mining sector.

In closing, if this is the first time you've seriously thought about gold, I totally get it. It's never been as necessary a part of the investing process as it is today. It's clearly controversial, there are many ways to buy it, and there are a lot of opinions about it - not one of which obviates the need to own it.

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