Online Interview of Michael J. Kosares
Author: The ABCs of Gold Investing - How to Protect and Build Your Wealth With Gold
Founder: USAGOLD-Centennial Precious Metals
What kind of gold should I buy?
Answer. We probably get that question more than any other -- pretty much on a daily basis. The answer, however, is not as straightforward as you might think. What you buy depends upon your goals. We usually answer the "What should I buy?" question with one of our own: "Why are you interested in buying gold?"
If your goal is simply to hedge financial uncertainty and/or capitalize on price movement, then contemporary bullion coins will serve your purposes. Those concerned with the possibiity of capital controls and confiscation often include pre-1933 gold coins in their planning. Both contemporary bullion coins and pre-1933 gold coins trade at modest permiums over their gold melt value, track the gold price, and enjoy good liquidity internationally.
But that is just an overview. If you would like more detailed information, we recommend our online information packet. (See link to the right.) You can also shortcut the learning curve by contacting our offices and asking to speak with one of our expert client advisors who will be happy to answer your questions and help you get off to a solid start.
Q. When should I buy?
A. The short answer is 'When you need it.' You cannot approach gold the way you approach stock or real estate investments. Timing is not the real issue. The first question you need to ask yourself is whether or not you believe you need to own gold. If you answer that question in the affirmative, there is no point in delaying your actual purchase, or waiting for a more favorable price which may or may not appear. The real goal is to diversify so that your overall wealth is not compromised by economic dangers and uncertainties like the kind generated by the 2008 financial crisis, or those now unfolding in Europe now.
Q. Why not wait for the necessity to arise, then buy gold?
A. Over the past few years, as concern about a financial and economic breakdown spread, there were periods of gold coin bottlenecks and actual shortages. The national mints could not keep up with public demand, and the flow of older gold from Europe was stymied by accelerating demand both there and in the United States. Premiums shot-up and a mad scramble developed for the available gold, even at rapidly escalating prices.
During times when demand for gold is booming, you cannot call the warehouse and order gold coins like you can most other consumer items. Even running at full capacity, the manufacturers (the national mints) cannot keep up with demand surges like the one we had in 2008 - 2009. In the case of the older coins coming from Europe, the supply simply dries up because, to make a long story short, they aren't making them any more.
Q. Can you give us a profile of the typical gold investor?
A. Gold owners are a group of people we have come to know very well in our nearly 40 years in the business. Contrary to the less than flattering picture sometimes painted by the mainstream press, the people we have helped become gold owners are among those we rely upon most in our daily lives -- our physicians and dentists, nurses and teachers, plumbers, carpenters and building contractors, business owners, attorneys, engineers and university professors (to name a few.) In other words, gold ownership is pretty much a Main Street endeavor.
Traditionally, wealthy, aristocratic European and Asian families have kept a strong percentage of their assets in gold as a protective factor. That same philosophy has taken hold in the United States in recent years, particularly among those interested in preserving their wealth both for themselves and for their families from one generation to the next. In a recent years, we have helped a good many family trusts diversify with gold coins and bullion at the advice of their portfolio managers.
Q. You frequently mention gold as insurance. What do you mean by that?
A. Those of you who have read my book, The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold, know that gold's baseline, essential quality is its role as the only primary asset that is not someone else's liability or responsibility. That separates gold from the majority of capital assets which in fact do rely on another's ability to pay, like bonds and bank savings, or the performance of the management, or some other delimiting factor, as is the case with stocks.
The first chapter of that book ends with this:
"No matter what happens in this country, with the dollar, with the stock and bond markets, the gold owner will find a friend in the yellow metal -- something to rely upon when the chips are down. In gold, investors will find a vehicle to protect their wealth. Gold is bedrock."
This is precisely what people learned during recurring economic crisis situations over the centuries as well as in contemporary meltdowns such as Mexico's in 1994, the Pacific Rim's in 1997, and the United States' slow motion crisis from 2001 to the present. If you consider what investors lost in the U.S. stock market over the last decade and what gold investors gained during the same period, the swing in the net wealth effect is astonishing. Diversification is important.
Q. What percentage of my assets should I invest in gold?
Answer. Once again the answer is not cut and dried, but a general rule of thumb is 10% to 30%, and once again your broker at USAGOLD-Centennial Precious Metals can help you make the decision. How high you go between 10% and 30% depends upon how concerned you are about the current economic, financial and political situation.
Q. In your book, you state: "Who you do business with is one of the most important aspects of gold investing." Why is that?
A. A solid, professional gold firm can go a long way in helping the investor shortcut the learning curve. A good gold firm can help you avoid some the problems and pitfalls encountered along the way, and provide some direction.
Check the Better Business Bureau's profile on a company before you do business with them. Check not only the rating but the number of complaints and how those complaints were handled. A consistent record of complaints can be a warning sign even if the company has an A+ rating.
Choose a gold firm that has a solid track record. Ten years in business is good; fifteen years or more is even better. Also, choose a firm with a commitment to keeping you informed, i.e., one that is interested in answering your questions now and keeping you informed in the future.
Q. Can you briefly describe what you believe to be the biggest mistake investors make when starting out as gold owners?
Answer. The biggest trap investors fall into is buying a gold investment that bears little or no relationship to his or her objectives. Take safe-haven investors for example. That group makes up 90% of our clientele, and probably a good 75% of the current physical gold market. Most often the safe-haven investor simply wants to add gold coins to his or her portfolio mix, but too often this same investor ends up instead with a leveraged (financed) gold position, or a handful of exotic rare coins, or a position in an ETF that amounts to little more than a bet on the gold price. These have little to do with safe-haven investing, and most investors would be well served to avoid them.
Another common mistake investors make is believing that the gold firm that sponsors their favorite political commentator on television or radio is also the best place to make their gold purchases. National media campaigns are expensive and those costs are usually covered in the prices paid by investors for their gold coins. In some instances that mark-up can be twice the gold value. Take care that you are not paying too much for your gold and that you are buying the gold items best suited to meeting your goals.
Q. What is your view of gold stocks?
Answer. Many of our clients own gold stocks and we believe they have a place in the portfolio. However, it should be emphasized that gold stocks are not a substitute for real gold ownership, that is, in its physical form as coins and bars. Instead, stocks should be viewed as an addition to the portfolio after one has truly diversified with gold coins and bullion. Gold stocks can actually act opposite the intent of the investor, as some justifiably disgruntled mine company shareholders learned in the recent past when their stocks failed to perform as the price rose. There is no such ambiguity involved in actual gold ownership.
Q. What about gold futures contracts?
Answer. Futures contracts are generally considered one of the most speculative arenas in the investment marketplace. The investor's exposure to the market is leveraged and the moves both up and down are greatly exaggerated. Something like 9 out of 10 investors who enter the futures market come away losers. For someone looking to hedge his or her portfolio against economic and financial risk, this is a poor substitute for owning the metal itself.
Q. Please summarize: What is the best approach for the safe-haven investor?
Answer. If you want to protect yourself against inflation, deflation, stock market weakness and potential currency problems -- in other words, if you want to hedge financial uncertainties, there is only one portfolio item that will serve you in all seasons and under most circumstances -- gold coins and bullion. Make sure you do your homework on the company with which you choose to do business, and make sure that the gold ownership vehicle you choose truly reflects your goals and aspirations.
"The rich old speculator Bernard M. Baruch forehandedly bought gold and gold shares after the 1929 Crash. Years later a suspicious Treasury Secretary asked him why. Because, Baruch replied, he was 'commencing to have doubts about the currency.' Many are beginning to doubt the the strength of the dollar as they well might. Following Baruch's example, they should lay in some gold as a hedge."
- James Grant, Grant's Interest Rate Observer –
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