How to Buy Gold: Don’t Miss the Yellow Metal’s Next Move Up

Bullion bars are produced primarily by private mints, most notably Engelhard, Johnson Matthey PLC (LON: JMAT) and Credit Suisse Group AG (ADR-NYSE: CS). They come in a variety of sizes to suit the needs and resources of every investor. The smallest bars weigh just one gram, recently priced at about $56.48, while the largest are 400 ounces and were going early this week for around $692,500 each.

Gold rounds are offered by the same private refiners, as well as some government mints, and are also available in a variety of sizes, typically ranging from one-tenth of an ounce to five ounces. Prices range from as little as $15 per round over the spot price of gold at the time of the order for smaller pieces to $40 over spot for larger specialty pieces.

Volume pricing discounts ranging from $5 to $25 per ounce are offered on larger orders for both bars and rounds.

Jewelry-type pieces, such as pendants, are also available, but generally carry slightly higher premiums.

Minted bullion coins come in a far greater variety, being produced by most of the private refiners and many of the world’s leading government mints. Examples of the latter include the American Gold Eagle, American Gold Buffalo, the Canadian Gold Maple Leaf, the South African Krugerrand, the Chinese Gold Panda and the Mexican Gold Libertad.

Unlike simple gold rounds, government-minted coins typically carry a listed face value – e.g., a $20 gold piece – though the face values typically have scant relationship to today’s actual metal value.

Sizes range from one-tenth of an ounce to two ounces, with the one-ounce size being most popular and readily available. Bullion coin prices typically track the spot price of gold, plus a premium of 5% to 6% for the one-ounce issues to cover the cost of refining, minting and marketing. Premiums on smaller coins can run as high as 15%.

Be aware, however, that the premiums for all sizes will be considerably higher if you buy in small quantities or want to pay by credit card rather than with a bank draft or funds transfer.

For example, on Monday one leading U.S. dealer quoted one-tenth-ounce American Gold Eagles at $202.68 each when purchased in quantities of 100 or more using a bank transfer, a premium of 7.4% over the tenth-ounce spot price of $188.72 at the time. However, the same coin, bought in lots of 49 or less using a credit card, was quoted at $212.29, a premium of 12.5%.

Where to Buy Gold
The most important rule, whether you’re buying gold bars, rounds or minted bullion coins, is to deal only with reputable dealers having proven experience and clearly stated policies and warranties. This is especially crucial if you’re buying by phone or online. Some well-regarded dealers in the U.S. include:

• American Precious Metals Exchange (apmex.com) – This Oklahoma City-based firm offers both bullion and collectible metals products, as well as storage facilities. Quotes are updated every 15 minutes during trading hours. Purchase online or call 1-800-375-9006.
• Asset Strategies International (ASI) (assetstrategies.com) – This Rockville, MD, firm has a large inventory of gold coins, bars and other bullion products, and also offers regular metals markets commentary and analysis on its website. Sales representatives are available at 1-800-831-0007.
• Goldline International Inc. (goldline.com) – Based in Santa Monica, CA, this company has been in business more than 50 years and offers a full range of gold coins and bars from mints around the globe. You can purchase online or through a sales rep by calling 1-800-963-9798.
• Kitco (kitco.com) – One of the world’s largest metals dealers with offices in New York, Montreal, Hong Kong and elsewhere, Kitco provides a wide range of gold products and services, including real-time quotes and news updates. Purchases can be made online or by calling 1-877-775-4826.
• The Tulving Co. (tulving.com) – Based in Newport Beach, CA, Tulving provides 24-hour sales and service, tracking trading and price quotes in markets around the globe. U.S. and Canadian investors can call 1-800-995-1708.

Physical gold provides a long-term store of value, but does carry one added risk – the potential for confiscation, much like what happened in 1933. That possibility is quite real, as discussed in Bill Patalon’s Private Briefing earlier this week. As such, if you’re seriously considering gold as a hedge against future U.S. political or economic uncertainty, you might consider a storage site for your coins or bars in Canada or elsewhere offshore.

One added note for coin buyers: If what you want is a true hedge against turmoil, inflation and a weakening dollar, stay away from “collectible” gold pieces. While such coins are beautiful and their value will no doubt increase along with gold bullion, those values are subjective, they carry far higher premiums than bullion coins, and they’re much harder to sell on short notice.

Bullion coins and bars, by contrast, are easy to both buy and sell through the above dealers (and many others), but actually using them for trading purposes is cumbersome given the price premiums, storage, shipping and insurance costs.

How to Buy Gold for Trading Purposes
If trading is more your style, the ultimate vehicles are gold futures – the most popular being the 100-ounce contract listed on the COMEX Division of the Chicago’s CME Group.

However, that’s a fairly high-dollar/high-risk instrument, since a single contract is worth $171,800 or more at current prices. Thus, a move like the $35.80-an-ounce intraday swing we saw in the February 2013 contract on Nov. 28 could cost you $3,580 in a single day. And that wasn’t even the month’s only big decline – prices also dropped $35.00 an ounce on Nov. 2.

Plus, you have to put up a margin deposit of $7,425 or so just to buy (or sell) one in the first place. (Note: There’s a smaller, 10-ounce gold future, but it still carries a high risk, amplified by limited liquidity.)

As such, a better vehicle for smaller investors wishing to play gold’s next rally – or merely hold as a longer-term proxy for the metal itself – might be one of the exchange-traded funds (ETFs) or notes (ETNs) with shares backed by actual bullion.

• The largest and most popular of these is the SPDR Gold Trust ETF (NYSEArca: GLD), recent price $164.92. The price of GLD shares, which are backed by physical gold and issued in blocks of 100,000, generally tracks the price of one-tenth of an ounce of gold, usually trading at a slight discount. As of late August, the Trust held about 1,695 tonnes of gold bullion – the sixth-largest cache in the world – and the fund’s market capitalization at the end of October was about $74 billion. It’s also highly liquid, with an average daily trading volume approaching 2 million shares.
• Another option for those with smaller budgets would be the iShares Gold Trust ETF (NYSEArca: IAU), recent price $16.56. Its shares are also backed by physical gold, but they’re priced at just 1/100th the price of an ounce of bullion, also typically trading at a small discount. The fund has a market cap of about $9.42 billion and a daily trading value of around 300,000 shares.
• Super gold bulls can also try leveraged funds designed to produce price moves double or even triple the percentage moves in gold itself. An example is the Deutsche Bank AG Gold Double Long ETN (NYSEArca: DGP), recent price $53.94. It holds some physical gold but primarily employs futures and options in a bid to produce percentage gains double that of gold itself on any upmove. Of course, losses on pullbacks are also magnified.

The Gold-Mining Stocks Alternative
The final alternative for investing in the yellow metal is with gold mining stocks, but the individual miners have been far less responsive to changing prices in recent years than the metal itself. However, funds are also available in this arena, two of the leading ones being:

• Market Vectors Gold Miners ETF (NYSEArca: GDX), recent price $45.86, which tracks the New York Stock Exchange’s Gold Miners Index of U.S.-listed companies with a market cap of at least $100 million. This fund gives you a piece of such top miners as Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM) without having to worry about the specific characteristics of the individual companies.
• Van Eck International Investors Gold Fund (MUTF: INIVX), recent price $17.13, a classic load-waived mutual fund that focuses on global miners with an emphasis on companies with substantial in-ground reserves. Current valuation is about $1.4 billion; the fund also provides a 1.58% dividend yield.

However you choose to play it, the outlook for gold prices in 2013 would seem to make it one of the best investment options available right now. As Peter Krauth noted in his recent article, “Signs the yellow metal’s bull market will soon end are scarce indeed.”

That’s why you can use this as your “how to buy gold” guide for 2013.

Related Articles and News:

• Money Morning:
  2013 Gold Price Forecast: Expect Gold to Deliver Another Record-Setting Year
• Money Morning:
  By the 2016 Election, Gold Could Be $3,700 an Ounce
• Money Morning:
  How to Trade Gold With ETFs and Options
• CME Group (CME):
  Metals Products – Gold Futures and Options
• Wikipedia:
  Encyclopedia Entry: Gold as an Investment