Aug 162009

How to... SR03_Gold_title

Ref: 0908-030A of 16.08.2008

In this part, we will discuss how to buy physical gold – form, buying source, timing, management and ultimate sale. It also depends on the physical location of the buyer. Some currency issues are also involved.

Having already discussed “why to buy gold” in Series-2, we focus on the subsequent subjects:


  1. For Long Term Savings & Investment
    1. I expect tremendous price rise in gold and silver (of late, silver is fast riser than gold). The reason as mentioned by me in Series-2, that United States has virtually lost gold up to minimum 6297 tons of gold. Although it holds the gold physically, the true ownership lies elsewhere (most possibly in Europe and Switzerland)
    2. When any investment rises 100% to 200%, there is no need to invest on longer terms. When the gold rises, as I expect, one must sell it in the rally. When world economy recovers, and gold prices begin to consolidate at upper level, it will be time to sale and use the proceeds for property and other assets.
  2. Price increase in USD an other currencies
    1. Gold will rise most in USD. That is, other world currencies such as Japanese Yen, Swiss Francs, will rise more than others. The investment gain in terms of local currency such as above and also Euro, GBP, Rupee will be less to the extent the currency has risen. That is, if the gold rises by 200% and currency rises by 20%, then the gain in those currencies will be adjusted downward due to currency gain. For example:
    2. Gold Price Yen/USD INR/USD
      Now $950 95 48
      Say, 2010 $2,450 81 45
      Gain in % in local currency 158% 120% 142%
    3. If you are living in country with pegged currency, like Hong Kong, the gain will almost same as USD. Or may be 0.5% t 1% smaller up to the movement allowed within the bandwidth for currency mechanism. (In Hong Kong, they allow 0.5% to 1% maximum)
  3. Buying Physical Gold in USA: There are many counters, but the best is APMEX and MONEX. They have no hidden commission, the mark up is smaller and delivery is fast. APMEX delivers only within United States. They do not store it.  MONEX does.
  4. Buying Physical Gold in Hong Kong: Bank of China, Hong Kong sells gold (0.9999) with bank’s marking in 1 to 5 tael bars (1 Tael = 37.5 gms appx). Mark up is about 1%. They also sell Paper Gold (called gold by pass book). One can also buy Gold from reputed gold dealers in tael form from say such as Wing On paying just 1% to 2% mark up. The licensed gold shops are generally safe in Hong Kong. However, be careful of the shops who sell imitation jewellery along with gold. Check out their licenses. Gold usually bear 0.9999 stampHong Kong is also unique in selling 24K gold jewellary which is cheaper than centers like India. The making charge is fixed (not per gram as in India) per article. I once paid only HK$ 150 for gold chain for myself weighing 50 grams or just HK$ 3 or Rs 18 per gram compared to what you pay @ Rs 100 to Rs 120 per gram in India.Yes, in Hong Kong, they do quote ornamental gold prices separately which is usually higher by 3% to 4%. They may also charge 2% commission which, if one negotiates, will not be charged.I once tried to sell HK made 24K ornament in India. The Ghatkopar dealer paid me full value instantly in cash. The gold dealer also need 24K gold from reliable source.
  5. Buying Physical Gold in UK/Europe: through GoldMoney. They buy for you and also deliver in many countries in Europe and others. Check out their list. Mark up is 1.25% to 2% at the most. Further, there is no charge when selling; so the cost of buying and selling is halved. If required, they provide storage facility at London and Europe at little cost. The gold is physically held on your behalf at the storage centers.BondSr_MainPict
    1. Buying Gold in India: There are two issues here. Buying gold bars and gold ornaments:
  1. i.      Private and Nationalized Banks: They make only one way market, and charge almost 10% higher than the international market. This is acceptable, because the price also include 2% import duty and 2% sales tax. This is 0.999 fine gold, not 0.9999. Not much difference (price difference just 1%)
  2. ii.      Buying from MMTC: One can buy from their own or franchised retail shops. They sell medallions with 0.999 fineness. (see the picture on the title). They also make only one way market. The mark up is nearly 11%. They will not buy back from you. You end up losing 8% in real terms, but when your gain could be 150% (as I expect, but that is only opinion), who cares for 8%?
  3. iii.      Buying from large Gold/bullion dealers: One may buy gold bars or lagdis from gold dealers at cheaper than bank prices. However, do take the invoice even if one has to pay 2% sales tax. The reason is Tax department usually equate the raw gold investment as evidence of “black money” though they do not bother about investment up to Rs 5 to 10 Lakhs now. If it is “ornamental” gold, it is known as “Stree dhan” or “Woman’s Wealth” which is usually untouchable.
    1. Buying Gold Ornaments: There are 2 or 3 constraints. Indian women do not allow their family members to sell gold, especially when they are in ornament forms. The reason is, the moment they buy ornaments; they show up to friends or other family members. If they are sold, their friends and relative may presume financial difficulty for their families.22K and 24K The gold ornaments sold in shops are mostly 22K (in reality they are 20K). The price is also lower than 24K. The reason being that the gold being soft material, and Indian women usually work physically more in kitchen, the ornaments if made of 24K will deformed. When such ornaments are sold, the gold dealer reduces the price by “kasar” being the loss of gold on melt if the ornaments are of 22K or 90% fineness.
    2. Buying into Gold Pool: Some online dealers like KITCO offer facility of buying into Gold Pool. It means that they do not segregate your purchase from common pool, although Gold is physically bought by them. It is not derivative or options. It is straight forward spot sales or purchase. If one needs physical delivery of purchased gold, then only they separate it from the pool and deliver it to you. The charges are usually heavy. Please check from the dealer KITCO before buying, so that you have no troubles later.
    3. Buying on Imprest system basis: Many people try to time the purchase of gold. This is not an asset where an Investor can follow price movements. Gold price movement depend on multiple factors, such as exchange rates, oil prices, political stability, violence, bomb blasts, social tension and present days of economic crisis.Whey one knows nothing, he should not bother to use his brain for timing. Instead, he should adopt the system to buy the gold on “Imprest system” basis, that is, buying little by little every month, and buying when the gold has corrected. Such Imprest buying averages his cost gold purchase, and more often than not, he is always below the market price, that is he is always in gain.
      The Imprest System of Buying is the best method of investment. It is similar to Recurring Deposit account with the bank.

      In families in India, Imprest system is automatically and unconsciously followed by the women folks. Most families have more than 3 children or adult members. The elders start buying gold, when an adult is about to attain the marrying age in 5 or 6 years time. He buys some gold every year.  This is nothing but the Imprest system I mentioned above.

    1. Gold does not require much storage space. Further, women folks do not take care of their nails, but will take good care of gold. If house is secure, and has safe, one can store there. Alternatively, one may keep it in Safe Deposit Locker with any bank. It is better than any other place. Insurance not necessary, if it is in bank locker.
  2. MANAGING PHYSICAL GOLD ASSETS: You have bought gold as an investment. You must be prepared to sell it if the rise is sudden and gain is very large. If you have ornamental gold, the selling will not generate profits unless the gold has advanced by 50% (because you pay about 15% higher due to ornamental gold price differentials and making charges, and losing of “kasar” , another 10% at the time of selling. (This is applicable only in India, do not bother if you are in some other country)If you are holding gold bars, biscuits, lagdis, or even 24K gold ornaments, it is easy to sell them without losing much on selling commission side. The women folks (in India, Middle East) at home also do not object to selling of such gold. Your purpose of investment is better served. This is why buying proper form is more important at the start of investing process.In centers like Hong Kong, the dealer pays immediately on spot when one sells the gold. Most trades in Hong Kong are in 24K quality or 0.9999 fineness. In a country like India, the practices vary. Large dealers pay immediately, but small dealers who sold your gold to some one, will pay only when he receives the payment from his buyer. There is a trading risk involved for 2 or 3 days.If one has bought gold from US or UK from the dealers mentioned above, there is not much trading risk. The traders like APMEX, MONEX or KITCO release the payment as soon as they receive the delivery of gold sold. If they have gold in account, they pay immediately on 3rd day.
  3. BUYING BOOK ENTRY GOLD (via Gold passbook): Some banks in Hong Kong and Singapore do allow their customers to buy gold through accounts known as “Paper Gold” or “Paper Silver”. The extent of gold purchased is credited to customer’s GOLD PASSBOOK account and his normal account is debited. The gold need not be taken physical delivery. When one sells the gold, the gold account is debited and normal account is credited. Since the customer is not dealing with third party, but deals with his own bank, the trading, storage and other risk is reduced. This is what they call “Paper Gold”.If one does not want to hold “physical gold” he may opt for “Paper Gold”. In spite of advantages, I never like “Paper Gold”. This is already explained in detail in Series 2 on my article dated 11th August, 2009 (ref: 0908-029A). I therefore avoid repetition.
  4. BUYING GOLD ETF: This is relatively new phenomenon. ETF stands for Exchange Traded Funds. Such ETF usually have mandate to invest into physical gold. However, there is no guarantee that they will not misuse the mandate to buy into gold derivatives like futures, options or even short selling. We have to rely more on the integrity of the managers and their level of competence.Such ETF trade in Units. Each unit usually represents certain fraction of physical gold. Each ETF may have different charter. It is beyond the means of the investor to study such charters.The Paper Gold is otherwise a better investment because the investor is in total command. In GOLD ETF, an investor has to consider the managers smarter than he is. He has to trust him. Such ETF do not pay dividend in cash. It is more like Mutual Fund investing into gold assets.Many investors make mistake in believing that each Gold ETF is same in character. It may not be so. An individual investor should always invest into very simple products. Such simple investments traditionally make more money than complex instruments, Looks at today’s economic crisis – most so called professional banks lost in products they never understood at first place, and the investors used to trust them as “professionals”
  5. BUYING INTO GOLD FUTURES AND OPTIONS: These are high end derivative products demanding your constant attention. This is not part time job – but almost full time job. It requires lot of reading of various items affecting gold prices, such as financial crisis, government policies, interest rates, oil prices, exchange rates etc. Yes, if one is on right side of the trade, it will make money several times. But 99 out of 100 people lose in this game.Yes, if one wants to take risk and also make or lose large money, he may buy options. If long term options are bought, it may be manageable. Since I am not in favor of this product, I do not want to suggest them to the Individual Investors. Mutual Funds and ETF deal with OPM or Other People’s Money, whereas as an individual, you deal with your own money. If they lose money, they can raise more money in new IPO but you can not.Losing no money is another way of making money. Money saved is also money made. My simple principle is that focus on single simple product. When you have to buy gold, why go for ETF, Futures or Options. Just buy gold and store it. That’s it.
  6. BUYING GOLD STOCKS: This is yet another fashion to invest into gold assets. We go backwards. If gold is to go higher, the companies producing it must be making more money. This is where many make serious mistakes.Almost all producers sell their gold 2 to 7 year’s forwards at premium.Even gold producers do not understand how the gold price moves. They know only how to extract the gold, not the markets surrounding it.Many large producers like American Barracks, Ashanti Gold lost heavily in such forward trades what they called “hedging”. They sold 4 to 7 years of gold production forwards when the gold was trading at $ 250 to $350. They used to take the cue from sale of gold by IMF, Australia, Belgium and Britain as indicator of future. They were proved to be terribly wrong. Ashanti Gold from Ghana came into serious problems due to such untidy hedging.When the oil prices rose, dollar fell, the gold prices trebled in less than 5 years. These gold miners could not capitalize on higher spot prices. They had sold millions of ounces of gold, almost entire production, in 5 to 7 years forward market say at US$ 350 to US$ 450. When the gold prices rose to $ 800 to $ 1000, they had no more gold to sell. They even did not buyback the future contracts on seeing the trend, because whatever money realized by them were used to buy more mines.Since I am taking a view that gold prices may double or treble in less than 1 to 2 years, due to my belief that United States does not have gold as projected – they lost over 6200 tons of gold – in hedging or shorting operations surreptitiously, (Read my new book SUB PRIME RESOLVED – Chapter 14 – Where is Mackenna’s Gold?) If major gold funds or hedge funds take a clue from this Chapter, hell may break lose in the gold market. This kind of rise is not yet anticipated by the market, and as such, the gold stocks do not reflect such trend.
  7. However, the major factor is whether the concerned Gold Mining companies have enough un hedged or free gold stocks from their production, so that in the event of major rise in gold prices, they could sell in the spot market? Such information is known only to the management of those companies, and usually not disclosed even in balance sheets. However, major gold stocks like American Barrack, Newmont Mining and Newmont Gold, and some other names in Australia, Canada, South Africa and USA may offer good opportunities.Whether these companies have hedged or un-hedged position or not, no one bothers, because they put 1+1 together, and buy the stocks without any investigation or study. So they will make money. One may buy large cap gold mining stocks in correction because the major run on gold is few months away.Further, most of South African gold mining companies trade as GDR or ADR on London Stock Exchange or on American exchanges such as NYSE, NASDAQ or ASE. If the gold rises as anticipated by me, the currencies of those countries will also rise. I therefore feel that the currencies of Australian Dollars, Canadian Dollars, and South African Rand will rise against USD. Indian Rupee may also rise.

Let us not get into sophisticated (complicated) gold related stocks, derivatives etc. Make it simple. If Gold is likely to go higher, just invest into Gold only – no futures, no options, no gold stocks, and no derivatives. Invest into something you understand, and if you don’t understand the exotic issues relating to gold, don’t break your head into it. Just make it simple like a Bread and Butter. Just buy physical gold, that’s it.

Next article will be on other core Savings products – Bank, CDs, RDs, and Corporate Deposits. You will learn many things in such simple instruments that you will often wonder why did not you know that before? Wait until 21st August, 2009

Anil Selarka,
Hong Kong, 16th August, 2009

Ref: 0908-030A

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