What's More Important: Price Per Ounce or Ounces Owned?

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by Jeff Clark: How
To Know When To Buy MoreGold

 

 
 

In a recent
conversation with a fellow gold analyst, he was emphatic that the
price one pays for physical gold should be ignored. "What's
far more important," he insisted, "is how many ounces
I own in relation to the total value of my assets."

Building a
core position in gold bullion is a smart goal, to be sure, and a
strategy Casey Research has been advising for years. However, ignoring
the price you pay for gold could be seen as foolhardy; sure, it's
insurance, but isn't price part of the consideration when you shop
for insurance?

So, who's right?

The World Gold
Council just released their 2009 annual report on gold trends. From
the densely populated pages of interesting data, there's one compelling
tidbit I gleaned that may shed some light on the buying behavior
of gold investors.

Overall investment
in gold was 7% higher in 2009 than 2008. This is significant when
you consider that demand in the fourth quarter of 2008 — during
one of the worst financial meltdowns in history — was so great that
shortages of physical metal abounded everywhere. And yet investors
bought more gold in 2009 when investor fear about global financial
uncertainty was subdued.

Further, 2009
total funds invested in all forms of gold exceeded 2008 by 20%,
and the average price was 11.6% higher. In other words, investors
were buying gold even though the price wasn't necessarily "low."
To be sure, that's a broad statement. But the fact remains that
year-on-year, more gold was purchased at higher prices when the
markets were less scary, than when the price was lower and Hank
Paulson was on CNBC every 15 minutes pontificating on how to save
America's financial system.

This isn't
to suggest one shouldn't pay attention to price. And the data doesn't
identify how many of those who purchased gold last year were first-time
buyers, as certainly there were newcomers to the sector that contributed
to higher demand. But it begs the question, who would continue to
buy gold when the price is higher?

Whoever doesn't
own enough, that's who. The gold I bought last month was certainly
higher priced than what I paid in 2008. But I'm trying to position
my assets for protection from eventual dollar debasement and rising
inflation. So perhaps focusing more on acquiring sufficient ounces
to withstand a storm rather than stubbornly buying none, waiting
for "cheaper" prices, however you define that, is a better
mindset. Not owning enough gold is equivalent to holding a million-dollar
mortgage and having a $10,000 life insurance policy. It won't help
much when you really need it.

Of course we
should pay attention to price. But the trick is not letting that
distract you from buying what you need. You're not buying gold bullion
as a speculation (although we expect to make a bundle on our holdings),
but as a sound form of cash in an environment where government has
no respect for a balance sheet and sees inflation as the only way
out of its black hole of debt. During periods of inflation, the
government does fine; it's the citizens that suffer from the lost
purchasing power of their savings. It's clear our currency is being
debased. What's your plan of defense?

For those diligently
accumulating gold, how do you know when you have enough? Check your
anxiety quotient. If Ben continues printing money or Obama promises
more goodies than he has the money to pay for, and you remain calm,
then you likely have adequate gold. These are the investors who
can afford to be stubborn about price as they build their holdings.
In my opinion, this is where we all want to be.

What form of
gold should you buy? It depends on why you're buying it. If you
understand gold's role in history, owning a physical form will come
naturally to you. If you see the threat of inflation on the horizon,
or you worry about what is being done to the dollar, you'll own
both coins and an ETF. If you're worried about possible exchange
controls someday, you'll consider a Perth Mint Certificate. And
the more gloomy your outlook about the global economy, the greater
the percentage of all forms of gold you'll buy.

That said,
we maintain a bias toward physical ownership. GLD and other gold
ETFs are fine and do offer protection. But the custodian isn't going
to airmail gold to you when you cash in your shares; having the
"hard money" in your hand gives you the freedom an ETF
cannot. In our book, owning physical gold, in the form of one-ounce
coins, is where your first dollar should go.

I remember
when my wife and I decided it was time to get life insurance. We
just had our kids, and it was time to play grown-up. Given what
5,000 years of history has taught us about the value of gold, and
given what's happening at this moment in history to our currency,
are you playing grown-up with your investments?

March
10, 2010

Jeff
Clark is editor of Casey's
Gold & Resource Report
in Casey’s Daily Dispatch.

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