Well the answer is….it depends! Today’s market has many factors that affect the popular gold products available to modern investors. Many people are confused these days and as a result, apprehensive about diverging their investment portfolio with gold. Let’s quickly run through the three main ways you can invest.
First, you have the easiest and most straight forward way. Come down to Doylestown Gold Exchange & Jewelers, buy some gold coins or ingots, and take them home. Simple enough. This is the most common option for the small investor. It is private, secure, and convenient. We give full consultations to anyone who is interested in starting to purchase physical gold and silver.
The next form is typically for more wealthy investors and that is to purchase gold but pay a company to vault it for you. These companies are known as custodians. Most of the time, the investor does not physically move the gold into the vault. It is usually already there to be bought or a Currier delivers it. Some custodians set your gold aside and tag it with your name. This means no one else can buy, sell or do anything with it without your consent. It is registered to you and will remain that way until you sell or withdrawal. Some custodians will pool large quantities of investors. This means that there is a large amount of gold in a particular vault and the investor owns a portion of it without any one bar registered to any one person. It is similar to a bank where if you deposit cash, you do not expect to get those exact bills back when you later make a withdrawal. All of the dollar bills are pooled together in one large stack. By doing this, the cost of storage and processing is usually less. This option is attractive to those who never intend to physically remove their gold. The pooled gold is never touched, rather shares of it are bought and sold. Please give us a call to speak to one of the owners to go over all the options for you as you begin your investment in the physical gold market.
The last common way to invest in gold is to buy a futures contract. Futures contracts were originally created to help businesses manage costs of raw materials. Examples would be feed for farmers or fuel for airline companies. An airline company could lock in the price for 1 million gallons of jet fuel today, but not pay for or take delivery of that fuel until the contract date. No matter what happens to the price of fuel, they are locked in and can charge their fares partially based on the known price of the fuel. This option is available for most commodities including gold. Jewelry companies prefer this since it is akin to the fuel for the airlines. However the futures markets have become plagued with speculators gambling to make money from either the price going up or coming down. In addition to the gambling, the speculators borrow money (margin) to multiply(leverage) their bets. If 5-10 times the actual investment is borrowed, put into the market, and wins a profit, the speculative investor will get paid a handsome profit. The same effect would happen if they lose since the loss would also be multiplied out. The large influxes of the leverage bets can inaccurately skew the price of commodities. This can carry over and affect the physical investors both on the upside and downside. Important to note that the speculators never intend to take physical delivery of the gold and usually are settled in cash at a profit or loss.
So why would the prices be different? Well, like most investments, it comes down to risk. The “risk” of losing money is one of the pillars to a natural market’s price discovery mechanism. Interest rates are the most common way we see risk price. The rates for loans that have a higher probability of being delinquent or defaulted have higher interest rates than those with lower probability.
The higher rates help offset losses to the inevitable bad loans that will be written off. Investments that are more risky tend to be lower in price since if they are lost, the impact on the portfolio is less due to the lower purchase price. If they are successful the reward is usually much higher than safer investments due to that lower purchase price. The different ways to invest in gold all come with different levels and forms of risk – therefore different prices.
The speculators are the most risky. They do however bring the least money to the table (usually 20% of actual gold purchased). The rest is borrowed. In essence, buy an ounce of gold at 80% off, hope it goes up and keep almost all the profit! Since they are using borrowed money and will have to pay that back, every $1 of decline is actually $5 in loss since they lost the borrowed money too. The speculators never intend to take delivery so they rake in the profits or write off the losses and move on. The Jewelry manufacturers and institutional investors have to stomach the bumpy ride and have deep pockets to endure.
The unallocated pooled vaults are the next cheapest (and riskiest) option. These types of accounts are run similar to a bank in that they have a lot more deposits on the books than in the vault. The same one ounce bar of gold may have up to 10 claims on it. As long as everyone doesn’t want their gold at once, then the system works. That is the risk of these custodial accounts but as stated above, most depositors never take the physical gold out so that paper IOU game continues. This works until mass psychology starts to doubt the viability of the IOU’s and a bullion bank run may ensue. The allocated accounts – usually under the same roof of the pooled accounts – are in theory less risky but one could have trouble getting to their gold if the pooled accounts start to default.
This is where the most conservative and therefore expensive option comes into play. Buying a gold coin and taking immediate delivery is the most secure and absolute way to control the destiny of your investment. This option’s cost may be 10-15% above the market price. This is known as the premium. The return for the higher price is that unlike the options above, the gold is yours – owned by you and no one else. You do not have to worry about collapsing leverage accounts, a run on the fractional bullion banks, or a settlement in cash because there isn’t enough gold to fulfill your contract due to a recent panic. That gold coin or bar in your hand has tremendous intrinsic value in every corner of the planet and has had that value for thousands of years. As the financial system becomes more precarious and unstable, more investors are waking up to the importance of owning physical gold (and silver). Not only the importance of owning it, but taking immediate delivery so that it is out of the banking/financial system. If that whole system goes belly up, you still have your gold and you are in complete control of it. A lot of investors feel the premiums are well worth that security in these uncertain times. The bottom line is if you do not have it, then you do not own it. This in my opinion is the “real price of gold” – the physical market.
If you’re interested in learning more about buying and selling gold in different regions of the USA, click here for more information.