Guide to Buying Gold and Silver

Gold and silver prices.

Gold has fallen to the price it was five years ago. Is this good news or bad news for the buyer?

Well, it all depends how much money you have put into gold so far – and when exactly you invested.

Timing is essential with any investment but most people I talk to are just playing with gold. They buy a few ounces of gold here and a few ounces there. When the gold price falls they moan. When it goes up they moan they didn’t buy more. That’s why you need a plan.

The bottom line is this: when you’re in the buy gold “buying phase” you naturally want the price to be as cheap as possible. Only when you are “all in” do you want the gold price to rocket. Very few people I know are ‘all in’ right now. That’s why I believe the current dip to prices last seen in 2010 are good for the average investor.

It’s impossible to call the top and the bottom, but provided the price of our chosen investment is higher when we come to sell compared with when we bought we’re all happy little bears. Back in 2001 I predicted that it was time for gold to re-assert itself as a store of value. “Sell the dollar – buy gold” I shouted to anyone who would listen. At that time an ounce of gold would have cost you just £200.

Gold is priced in dollars, so for UK investors they have to watch both the price of gold AND the exchange rate. This is how it has affected UK investors:

As you can see my timing wasn’t perfect, but one could reasonably claim that a low price during the “acquisition phase” is a good thing, not a bad one.

But here we are in 2015 and gold has taken a dive once more.

If you started to buy gold when I did you are still massively in profit but if you’ve bought gold in the last few years you’re probably very unhappy. My view is that you should only be unhappy if you were “all in” before the price fall. If you have not committed as much money to gold as you intended then this should be seen as a great chance to buy more.

No one has a crystal ball but if you believe that fiat currencies could blow up at any minute, then gold is a great insurance policy.

Whilst many moan it pays no dividend it also has no ongoing fees. If you take physical possession there are no storage costs and no “advisor” ripping out their little bit every year.

Is 2015 a good year to buy gold?

For me, the fundamentals behind gold have not only remained in place but have improved as the price has fallen and quantitative easing (QE) by the central banks has got completely out of control. Remember it takes around $1,100 to get an ounce of finished gold on the table whereas it costs ZERO to print another £20 or $20 note.

Which would you rather hold? Gold or paper money? Consider the following:

1. Governments around the world continue to print paper money at unprecedented levels. America leads the way with a programme that prints 85 billion new dollars every month but since all other currencies are competing with the dollar, the money supply around the world is running at an unbelievable level. Here in the UK it is currently around 13% a year.
2. Every paper currency that has ever existed has been devalued to the point of being virtually worthless. Gold is the obvious choice as a means to protect your wealth. I used to argue that gold was a way of making sure you never became poor, rather than a way of making you rich – but times have changed.
3. There may be a credit squeeze over here in the West, but not so in the East where the true effects of globalisation and capitalism are creating a new order. In China and India a new wealthy middle class is emerging. The Chinese cherish gold and see it, as they have always seen it, as a great store of wealth. A similar view is held in India where gold is the de-facto wedding present. No toasters and fondue sets over there thank you very much – it’s gold every time.
4. If retail demand is on the increase in these two countries what about the governments themselves who find they are sitting on trillion dollar assets which they watch with anguish as they devalue by the minute. If China’s central bank were to move even a fraction of its dollar reserves into gold the impact on this extremely small market would be massive. The Chinese have only 1% of their total reserves in gold whereas the Americans (if we can believe the figures) have 70%. Officially, the Chinese gold reserves stand at just over 1,000 tonnes in 2013. As I have explained many times in my newsletter, I am sure that is pure fantasy and that their gold reserves are in reality many times that figure.
5. In the West, the average guy in the street is not yet aware of the importance of gold. Gold, despite the increases over the last 12 years, still remains off the radar for most people unless it is sending it off in a brown envelope for pennies on the pound to some “We buy your gold” company. Gold is ignored by the press and television simply because for the last 20 years it has been positioned as a “barbarous relic”. Something that does not fit comfortably in a world of fiat currencies and credit cards. Gold does not buy advertising space so why would the media take an interest.  Once gold gets into the common domain the price will rocket and if you do not have a substantial position it will already be too late. Drip feeding any spare cash into gold on a monthly basis is far better suited to the average investor and it also means you get more gold when the price dips.
6. Most important of all, we must differentiate between “paper gold” and physical gold. Although the spot price of gold is falling (the spot price is set by the banks), demand for physical gold is increasing not decreasing. As a result the dealer margin is going up. In my opinion it is only a matter of time before physical gold disconnects itself from the spot price and leaves the paper gold market to destroy itself. There are 100 paper promises for every piece of physical gold in existence. That’s why I believe physical gold is always a safer bet than a paper gold promise. If you aren’t holding the gold in your hand it isn’t physical.

So, how far will gold go down and when will it go back up?

The World Gold Council has confirmed that the all-in production costs to produce one ounce of gold is around $1,200 an ounce. Any drop below that level for any period of time would have a significant effect on miners’ production, World Gold Council Director of Investment Research Juan Carlos Artigas claims.

If gold dips below $1,200 per ounce for a “sustained” period, serious production cutbacks are likely. The Gold Council estimates that about 30% of the gold mining industry becomes unprofitable if prices fall below that level

Of course, it’s always possible that any falling price will overshoot despite the economics but I see that putting a limit to how far the price can fall but no limit to how far gold can rise in price. That makes gold a relatively safe bet at current prices.

If you’re interested in physical gold, your challenge is to guess the turning point and to make sure you are all in BEFORE the turning point.

So gold has made me double digit profits but the big increases will come when the general public finally wake up to the fact that gold (and silver) are their only means of escaping the devaluation of paper currencies. When they finally start to swap their dollars, pounds and Euros for gold, the price will shoot up 5% in a single week. That’s why you have to make sure you are well stocked up before this happens.

Should I buy gold now or wait?

For those of you who worry about the timing of buying gold, read this from Richard Russell, editor and publisher of the Dow Theory letters:

“Quotes are great if you own stock in a public company in a big bull market. But the great majority of amateur investors make more money holding their homes over the years than they ever make in the stock market. And the reason is that if they own a home over the years, and that home is sensibly financed, they aren’t scared out their home by those damnable quotes during bear markets.

Holders of gold might mull over the same concept. Sure gold is quoted every hour of the day around the world. Long-term holders of gold might do well to ignore the quotes. If gold doubles in price, so what? – are you going to swap your gold for paper? If gold drops by a third, so what? – are you going to dump your gold for paper?

Why not just relax and hold your gold?

Hold your gold – why?

The reason is that gold is the only true money. Gold is the only money that remains wealth no matter what happens in the world. Gold is wealth during the biggest boom and gold remains wealth during the worst depression. So why dwell on the daily dollar price, even though gold is quoted everywhere every hour of the day? Forget the quotes, just accumulate gold.

That’s why it’s important to buy gold in today’s unstable world.”