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Gold Vehicles, Part II (Not the Chariot Type)

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Gold Vehicles, Part II (Not the Chariot Type)

At the incomplete conclusion of last week's gold vehicle article, we promised a follow-up to include the purchase of gold in the form of coins, bars, and the closet thing to gold certificates we can own - AMEX:CEF.

However, if you are looking for the hottest issue of Doubloons, a gold Spanish coin from the 17th century usually relegated to buried pirates' loot, or the bottom of the ocean in old, shipwrecks, you won't find it here. But if you are unable to resist the curiosity, if you've romanticized the pirate's life, or possess the inklings of a Parrot Head (Jimmy Buffet fan), then the following link is for you.

http://webster.directhit.com/webster/search.aspx?qry=doubloon

For the rest, including the traders and investors among us, let's start with CEF before we get to the actual metal. I can't tell you how many times up until a few months ago that I wondered how to actually get the metal into my IRA. While there are companies - actually trustees - out there that provide this service for a handsome fee, most of us won't want to afford it. Strike one.

So what is the solution? The trick would be to find a currency backed by gold, but there isn't one on the face of the Earth today that I'm aware of. Strike two.

The next best thing then would be to own an interest in a reserve of precious metals. That comes in the form of a certificate - a sort of "gold certificate" - that is actually a share of stock in a publicly traded company designed for the purpose of holding gold in a vault for the benefit of its investors. While the stock certificate isn't spendable cash, it can be bought, sold, and held in a brokerage account, including an IRA! That stock is traded on the AMEX under the symbol, CEF, which stands for Central Fund of Canada. It was formed in 1961 in Calgary, Canada, and is still run by its founders.

Straight from Yahoo! Finance: "Central Fund of Canada Limited is a specialized investment holding company whose investment objective is to hold the vast majority of its net assets in gold and silver bullions, primarily in bar form. Its policy is to invest primarily in long-term holdings of gold and silver bullion and not to actively speculate with regard to short-term changes in gold and silver prices. Central Fund's investment policies require it to hold at least 90% of its net assets in gold and silver bullions, primarily in bar form. On a physical basis, 50 ounces of silver are held for each ounce of gold held."

For the truly, and, in my opinion, unduly paranoid, this may not be sufficient since while the holdings are insured against theft, loss, or destruction, there is also a standard war risk exclusion. Translation: holdings are safe from financial loss unless vaporized in an act of war. But I think it's pretty safe.

Disclosure: I own some.

But since I'm building an ark, gold coins are really the bulk of my investment in gold.

By the way, when I've referred to "gold" in either this or my previous article, I am also tacitly inviting silver along for the ride. I like silver too, as it is also a store of value, like gold. However, it is also an industrial metal and can fluctuate in price more like a commodity in the cost of production than a precious metal. So if industry one day finds a cheaper substitute for silver in the normal course of producing widgets, then supply and demand would suggest that silver prices would fall while gold could be in a speculative frenzy. Silver does not necessarily track in the same financial footsteps as gold. However, they will likely remain closely related, so you can apply the same trading or investment techniques to silver as you would to gold.

Except for the Hunt Brothers in the late 1970's when they tried to corner the silver market, nobody ever went broke having a bit of silver in the portfolio in addition to gold. Silver is readily available in coin form too at your local coin dealer and can be had in the simple form of pre-1964 U.S quarters. Yes, quarters used to be silver and dealers keep a bunch around for people like us who may not want or be able to afford gold.

OK, back to gold coins. There are many to choose from, but the most common in the U.S. are U.S. Gold Eagles, Canadian Maple Leafs, or South African Krugerrands (most of which come in various denominations of 1, 1/2, 1/4th, 1/10th, or 1/20th of a troy ounce.

Why coins in the first place rather than the bars commonly seen in gangster movies? Simple - bars are not as liquid. They need to be assayed, which is a fancy word for weighed and assessed, to insure that the bars are, in fact, real, and not a freshly minted piece of lead with gold spray paint. Anyone trading or investing in gold has to be sure that they are getting what they pay for, and with bars, that is harder to ascertain without having a certified professional look at them first. It adds an extra step, causes undue extra time, and thus makes the bars less liquid and harder to trade. I stay away from these, as do most investors and traders. But bars are available in size if you should want them.

My personal favorite though is the Krugerrand, which I like better than the U.S. or Canadian coins. Keep in mind that these coins - the Eagle, Maple Leaf and Krugerrand - all have a different total weight. However, their common characteristic is that they all possess a troy ounce of gold. That never varies, except in the obvious case of a smaller denomination of any of the above. They all contain the same ounce of gold despite their slight size difference. My interest is in buying the cheapest ounce of gold available while still maintaining liquidity among dealers, and "spendability" should the Dollar vaporize overnight. That distinction belongs to the Krugerrand.

That's not to say that Maple Leafs and Eagles are a bad deal. Frankly, both are a better-looking coin than the Krugerrand and are, at the margin, minutely more liquid (not a concern of mine since, if the worst happens, they'll all be equally spendable with an equal ounce of gold). And therein lies the reason they cost slightly more than the Krugerrand. So if beauty counts as a part of your investment strategy, by all means, go for the Eagles or Maple Leafs.

How much of a premium do these command? Hard to say for sure, as each dealer is different. But within reason, we'll probably end up paying 1%-2% more for those over the Krugerrand. With that in mind, let's stick to Krugerrands for the buying process.

First we have to find a dealer. This is harder than it seems. A dealer is just like a market maker. Some are better than others. Some do more volume than others. All of them live and die by the spread between bid and ask. Most coin prices fluctuate around the spot market price of gold. Find this at www.kitco.com, along with everything else you wanted to know about currency and gold. Just like a stock, there is going to be a bid and ask price that fluctuates closely with the spot price. Say that the spot price is $350 per ounce. A coin dealer may be willing to buy our Krugerrands at spot prices or slightly lower, say at $345 per ounce. However, if we wish to buy Krugerrands, our charge may be $360.

The point is that we are going to be looking at two things in tandem when we buy or sell. We want as narrow a spread as possible and we want to buy at the least price possible or sell at the greatest price possible. The narrower the spread, the better the deal for us in either the buying or selling case. For that reason, we will want to shop around.

What makes a good dealer? I don't have a definitive answer. But I know what makes a hazardous dealer! Personally, I won't buy coins on e-Bay though I trust it for about anything else - too easy for the seller to take my money and run. It isn't practical to chase down a criminal half way across the country, or worse, in another continent if we don't ultimately get what we pay for.

The second issue is that even if we find a reputable dealer on the Internet, we are going to incur shipping and insurance costs if we are not able to take physical delivery from the purchaser, which adds significantly to the total price. If we find a $10 spread from a dealer on the Net, and a $12 spread at the neighborhood coin dealer, adding shipping costs of roughly $5 per coin will make the neighborhood store the better deal.

For both of the above reasons, I shop for the best deal in my own hometown, or at a location in which I will cheerfully drive if they have the deal. I will not have coins shipped or buy them sight unseen - ever. Just prudent business practice, I think.

So what constitutes a reasonable price? I buy my Krugerrands from one store because he always seems to have the tightest spread. In the $350 spot price example, he may be buying at $348 and selling at $359. $11 is pretty tight. Probably we would see elsewhere at that moment a bid of $340 and ask of $360 - $20 spread. Sometimes even more. Again, we look for the tightest spread by calling around our own locality.

Keep in mind that sometimes great deals can be had on accident by swerving into a busy dealer who has just bought say, $100,000 worth of coins from a seller. The seller likely had to come down on his price in order to induce the dealer to come up with that huge amount of cash. The dealer may have made a great deal. But he's also carrying big inventory that he may want to move quickly in order to get back to cash again. In such an instance, he may drop his ask to within a Dollar or two of bid, effectively giving us the opportunity to buy at the spot price and make a great deal for ourselves. Lucky, yes, but it happens. And if we develop a relationship with a dealer who knows our objectives (and knows we have a stash of cash, in the case of the big buyer), just like a floor trader of stock, we'll get that phone call from him offering us "the deal" two minutes after he's made his big score. He buys in bulk at $345, and we buy his bulk at $347 - less than spot - as long as we've got that relationship.

Anyway, once we decide where to buy, we take cash in our pocket, briefcase, whatever and "do the deal". Sounds clandestine, but it's the most effective way to transact business. Yes, checks and credit cards will work, but make prior arrangements, as failure to do so may cost us more on the purchase.

There, now we all know the basics and can simply go buy the stuff or buy shares of ownership interest in a reserve. We can take our pick or do both.

I must admit, I had fun doing this series on gold, but there's a lot more to it than what I've written here. Questions on specifics are always welcome and I will do my best to answer them completely. With enough interest, I'll be glad to do another article.

Until next time, make a great weekend for yourselves!

Buzz



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