Sunday, August 12, 2012

Gold - It's shiny!

If you think the government is printing money at an alarming rate, or the financial system is on the brink of collapse how on earth will you be able to exchange/barter/pay for goods and services?

Historically the first currencies on earth started with coins of gold.  Why gold?  It's shiny.  That's about it.  So you might speculate that we as a species are attracted to shiny things.  Foolish speculation aside, gold has been the global standard for money ever since money was created.  It has only been a very recent development that currencies are no longer backed by gold held in a federal treasury.

Skipping all the "useless" historical stuff, there is value in gold since it's quite laborious to dig it out of the ground.  (Gold companies harvest tonnes of rocks and unit of measure they use is grams/tonne...  Grams of gold per TONNE of rock they dig up, crush, and process.)  So once this gold is melted and pressed into pretty bars, or blended with other metals and worked into rings or other jewellery, it has and has had significant value ever since the dawn of recorded history.

So why buy gold?  It's value will be somewhat proportionate to the INVERSE of the rate at which the world governments are printing money.  (Devaluing their currencies)  Why do they do this?  They have to pay their bills some how and they just happen to be the owner of the printing presses!  Additionally, deflating the currency reduces the significance of any sovereign debt sold off by the government.  So, the faster governments print money, the more the value of gold goes up.

How do you buy gold?  You can easily buy gold from any of the big banks in Canada, but there are awful premiums on the purchase price because of the associated tasks of safe storage and transportation to you.  Most brokerages will let you buy gold certificates which may or may not be redeemable for the physical gold, but these certificates trade at the current gold market prices (+/- the bid/ask spread).  Since the bank already has the gold in their vault you're simply buying the "deed" to a certain amount.  There is a storage fee associated with the gold ownership that they pass along to you, but it's not nearly as stiff as the fees on the physical product if you have it delivered to you.   You can buy physical gold in VERY small amounts but the fees are huge relative to the purchase price.  And then you have to store the stuff.  I do NOT keep mine in my sock drawer.  If you go with the certificates, then your bank/brokerage will generally insist on a minimum order which in my case just so happens to be 10oz of gold which is about $17,0000 at today's price.

I don't have a large enough portfolio to even consider that.

So what's left?  Gold backed ETFs.  There are many companies that do this and the fees are generally quite low.  MUCH much lower than the previously mentioned methods.  AND much safer/cheaper because you don't have to deal with the security and transit or storage of either the physical gold or the certificates.

So until your holdings justify $25k or more of bullion, then stick to the ETFs unless you really want to buy some shiny bars or coins, and bury them in a strong box out in the back yard.

Full disclosure: I own 100 units of CGL.TO - ishares gold bullion ETF.  But I have an order on the board to sell at a price only a couple percent higher than today's price.  I'll be buying it back later.  Who knows when.  Probably when I'm older, more bitter, and much much more miserly than I currently am today.

Stay hungry my friends!

Standard disclaimer: I didn't tell you to do it...  It's not my fault if you lose everything.  If you don't do your own research and take responsibility for your actions why do you think I should take responsible for your actions?  Grow up already.


  1. LOL. Love the disclaimer. I'm not into buying gold but I think it can fit into a person's portfolio as a hedge against other risks. I'm not a believer that it will do what it has done over the last 5 years tho.

  2. I think gold has a place in nearly every portfolio in some way or another. Unless your portfolio consists of the forlorn coins in your chesterfield.

    It's something that young people can buy now and forget about for 40 years and it will make them money.

  3. Actually, gold doesn't pay dividends like stocks and is at long time highs in price, I'd avoid gold at present. But, I guess if you're broadly diversified, it's certainly negatively correlated with other asset classes and may offer some risk reduction in your overall portfolio.

    1. No argument there Barb! But on a long term perspective NOW is always the right time to buy.

      A small investor won't be hurt buy buying a 1oz bar now and losing it in the sock drawer for 40 years.

      The price may pull back 20-50% (based on historical moves) in the next 3-11 years. My grandkids are going to be VERY happy when grandpa shows up for xmas! (My first child is not even 2 just yet)