Gold, one of civilization’s oldest investments, still deserves attention in current portfolios, say investment professionals.
Wealth managers like a little gold as part of a diversified portfolio to hedge against inflationary pressure on the value of the dollar due the enormous federal deficit and national debt.
And if a buyer takes physical possession of gold, it can offer peace of mind to an investor worried about the potential collapse of the financial markets.
“Investing in gold is very conservative. It is more than conservative; it is a bit more of a bunker mentality,” said Joe Milam, president of Legacy Capital Management in Roseville.
But at current prices, buying gold is something to be considered carefully.
Gold had a bullish run going from $278 per ounce at the end of 2001 to as high as $1,900 per ounce this summer. It has since dropped a bit to $1,603, where it was Tuesday.
“We see a place for precious metals in a broad basket of commodities,” said David Schauer, chief investment officer with Hanson McClain Inc. in Sacramento.
Generally, the commodity piece of the portfolio would be around 5 percent of total value, but last year Hanson McClain reduced that exposure to less than 3 percent because of the historically high prices for a variety of commodities.
Precious metals would be just one of several commodities in the “basket,” which also should include oil, natural gas and agricultural commodities, Schauer said.
He recommends that investors buy gold only in exchange-traded funds or through mutual funds and not by taking physical possession of the metal.
“When you talk about taking possession, then you are talking about storage and shipping costs, and you generally pay at a premium and sell at a discount,” he said.
One doesn’t have to buy gold bars to invest in gold, said Larry Hansen, president of Capital Planning Advisors Inc. in Sacramento.
“If you are talking about taking delivery of gold, that is more of a doom-and-gloom scenario,” Hansen said. “Gold is a piece of diversification one uses for its characteristics in an inflationary environment.”
However, gold is where you would want to invest if you were concerned about the devaluation of the paper currency, said Milam.
“We’re serious enough about gold that we had discussions recently about the process of taking physical delivery,” Milam said.
There are several ways to take delivery of gold. One way is in a bonded warehouse, where your gold is assigned to you. You pay for its storage, and the gold does not leave the warehouse. That gold can be sold at nearly the prevailing gold price.
But if someone takes physical possession of gold, things change dramatically. If selling, the gold must be appraised and re-assayed to find its content, karat and purity, which all comes at a cost to the seller, Milam said.
Pluses and minuses
If a person’s lifestyle is defined by their income statement, and they are earning around $100,000 a year, then it is not worth looking at gold.
But for a very wealthy person, gold should be considered as a mix of assets.
“It is a way to get peace of mind to have 5 percent of full net worth in gold,” Milam said, dismissing other precious metals and even commodities such as aluminum or copper.
“Stick with gold,” Milam said.
If a physical gold purchase is going to be under $50,000, it would likely be in the form of certified coins. Larger purchases would be in the form of bars or ingots held at a warehouse, he said.
Merrill Lynch ’s Metals Strategist report from Dec. 1 gives a gleaming outlook for gold, estimating the value of gold at $1,850 an ounce in 2012 and $1,750 in 2013. The research report puts a 12-month price target of gold at $2,000 an ounce. The report cites many potential downsides to the value of gold, including that high prices make gold jewelry too expensive for consumers. Another downside is the potential that the global economy could grow in the next couple of years, which tends to lower the value of gold.
It is different to invest in physical gold versus gold shares or a gold mining company stocks, said Michael Miller, chief executive of the Original Sixteen to One Mine Inc. in the Sierra County community of Alleghany.
“But all of them are things that should be investigated and considered very carefully,” Miller said.
Miller, who has been mining for gold since the 1970s, admits to being a gold bug. He likes owning some gold just to know it is there.
“It is a confidence builder, and you just don’t worry about it,” he said.
Miller has no interest in exchange-traded gold stocks, and he’s highly skeptical of most mining company stocks.
“When you look at some of the junior mining companies, they are in some pretty scary parts of the world. You need to know where the mines are and what risks there are,” he said. Investing in mining companies requires diligent investigation of upside potential versus downside risk.
Not only does one need to know whether there is gold in the mine, one needs to know about the stability of the government and utilities in whatever country the company operates.
As far as actually owning gold, Miller suggests getting certified coins with nearly no numismatic value.
“And you have to be careful because there is an awful lot of counterfeit,” Miller said.
The measure of gold is different from most measurements. In the U.S., the avoirdupois ounce — 16 ounces to the pound — is standard, except in the weighing of precious metals, which are weighed in troy ounces, or 12 ounces to the pound.
One of the most common gold coins is the Krugerrand, which was first minted in South Africa in 1967 and is still minted today. It is a minted alloy coin of 91.7 percent pure gold and 8.3 percent copper. That combination gives the Krugerrand a rich orange color compared to gold minted with silver or even the yellow of pure gold. The copper alloy makes the coin durable and resistant to scratches and dings.
The Krugerrand is minted to have a total weight in excess of its named weight. So, for example, the one-ounce Krugerrand has one troy ounce of gold in it, but it actually weighs 1.1 troy ounces.
Krugerrands come in 1 ounce, half-ounce, quarter-ounce and tenth-ounce coins.
Unfortunately, there is also a giant business in Krugerrand reproduction coins. Such coins can be plated in 24-karat gold, but the majority of the coin is nearly pure copper. A 1-ounce reproduction Krugerrand can be had for around $6. A real 1-ounce Krugerrand is worth more than the current price of a troy-ounce of gold because, in addition to its gold and copper value, the coin sometimes carries a numismatic value.
A common weight of gold is a “kilobar,” which is 1,000 grams of gold. That is 35.3 avoirdupois ounces or 32.15 troy ounces. At $1,600 per ounce, a kilobar is worth $51,440.
The international standard of gold held by governments is called a Good Delivery gold bar. It is 99.9999 percent pure gold and weighs 400 troy ounces. This is the gold bar you would find stacked up to the ceiling in the Fort Knox gold bullion depository or at the Federal Reserve Bank of New York’s underground vault.
At $1,600 per ounce, a Good Delivery bar is valued at $640,000.
Mark Anderson covers banking, finance, accounting, technology, telecom, venture capital, hospitality, tourism and restaurants for the Sacramento Business Journal.