Investors seeking a tangible sense of security like to own gold. Gold remains the most popular precious metal for investment purposes. Many investors buy gold to hedge against a variety of financial and social crisis states, including inflation and currency collapse. According to author Michael J. Kosares, “The ABCs of Gold Investing,” (2012)

To purchase gold, investors should understand some of the basics. For example, buying gold bars differs from buying gold coins. Because investors cannot trade gold on a large stock exchange (like the New York Stock Exchange for buying and selling equity shares), purchasing gold from a large, reputable dealer affords the best means to liquidate if desired at a fair price.

Reasons to own gold now. According to author Michael J. Kosares, “The ABCs of Gold Investing,” (2012) investors should continue to buy gold as a hedge against the impact of national and international debt levels. He writes that the U.S. budget deficit rose to USD 1.3 trillion in 2011 vs. a mere USD 2.8 billion in 1970 (an increase of 8,219 percent during the approximate 40 year period). Outstanding federal debt rose from USD 436 billion in 1970 to approximately USD 15 trillion (a rise of 3,896 percent). Outstanding federal debt doesn’t include ‘off-balance sheet’ indebtedness from social programs such as Medicare or Social Security. During the same 40 year period, the U.S. lost its position as the world’s largest creditor to become the world’s largest debtor: the U.S. owes an approximate USD 5 trillion to trading partners today.

Inflation, as measured by CPI, rose about 500 percent from 1970 to 2011. Many experts believe this figure is an under-estimation of the prices of consumables purchased by Americans during the period. Kosares says that the USD dollar of 1970 was worth about USD 5.54 in 2011. In comparison, most U.S. salaries have not kept pace with the level of recorded inflation: USD 50,000 in 1970 is about USD 277,000!

Supply-demand price factors. The price of gold moves with available supply and demand.When investors sell gold to buy liquid assets, like stocks and bonds, the price of gold may decline. The price of gold peaked in 2011 at $1,921.15. According to experts, most of the gold available today is already extracted from mines. For that reason, gold bars and jewelry of high carat gold could re-enter the gold markets as prices rise.

Gold prices rose approximately 463 percent from 2002 through 2012, or approximately 46.3 percent per year during the period. According to New York’s World Gold Council, gold price declined in 2013 as exchange traded funds (ETFs) were net sellers of gold and shares. The Dow Jones Industrial Average reached new highs during the same period.

Gold price research shows that gold, like other financial assets, does not move consistently upwards. There are periods of price declines. However, the supply of gold is considered a finite supply. When investors want to buy gold, demand moves prices steadily higher.

Impact of central banks on gold price. Rising interest rates can affect the price of gold. With global interest rates at historically low levels, governments around the world have borrowed extensively in the debt markets. As interest rates rise, prices of government and corporate bonds tend to decline in value.

India’s central bank purchased more than 200 tons of gold in 2011, slightly before peak prices occurred. Importantly, India’s interest rates rose to their highest levels in two years.

Buying and selling gold. According to author Kosares, private investors prefer coins to gold bars. For example, South Africa’s Kruggerand remains perennially popular with individual investors. That is because the purity of the gold in coin form is a known quantity: the investor doesn’t have to worry about testing the gold. Coins also offer a known standard of weight. For these reasons, investors can trade gold coins (e.g. the Kruggerand; Maple Leaf of Canada; the Philharmonic of Austria; or the American Buffalo and U.S. Eagle) with relative ease.

Buying and selling gold, like trading other collectible or hard assets, involves payment of a commission to the dealer. Unlike frequently discounted commissions offered in the liquid financial markets, some gold dealers charge high commissions. Spreads, or the difference between buy and sell charges, may be lower with actively traded gold coins.

Rare gold coins. Investors may choose to invest in so-called rare gold coins. These assets may appreciate for two reasons: inherent scarcity and gold price. The spread, or difference between buy and sell prices, may be wider. Trading rare gold coins requires greater patience for this reason.

Long-term investment in gold. Many investors believe in the long-term potential of gold to rise from current prices. Gold bullion is approved for use in some retirement accounts, including Individual Retirement Accounts (IRAs) and pension plans. Gold in this type of account may not require physical delivery to the customer. In this instance, an investor may decide to keep gold bullion rather than more liquid gold coins in the account.

Selecting a gold dealer firm. Investors must consider the gold dealer’s ability to liquidate gold assets on demand. A firm with the ability to enhance investors’ needs for safety and portability of gold must also be considered.

New gold investors should maintain a cautious stance in selecting a gold dealer. Using prudence to determine how much one can afford to invest in gold, over an indefinite and potentially long-term period, is important, too. Then, interview several established gold dealers. Investors should choose a gold dealer with a minimum of ten years’ experience. They should inquire about the company’s annual sales and the firm’s ability to maintain a long-term, stable presence. According to Dun & Bradstreet, Monex Depository Company (monex.com) meets these criteria. Monex, founded in 1987, has stable financials and is considered ‘Low Risk’ by D&B.

They should anticipate suitability questions from the gold dealer, e.g. “Why would you like to purchase gold?” and “What reasons support your decision to buy gold now?”

Investors may benefit from the gold dealer’s research or newsletters but should never experience sales pressure to buy or sell any gold asset. The gold firm’s broker should encourage a long-term investment perspective.

Sources:
Supply-demand factors. http://www.gold.org/investment/why_and_how/why_invest/demand_and_supply/
http://www.gold.org/investment/research/regular_reports/gold_demand_trends/

Impact of central banks on gold price.
http://ibnlive.in.com/news/gold-hits-record-high-on-global-cues/173254-7.html