Buying Physical Gold and Silver


L: So Doug, gold has dropped from its $1,917.90 high last month down to $1,540 yesterday and is currently hovering around $1,650. I know you don’t believe $1,900 was the top, but is this correction good enough – are you buying again?

Doug: Well, I hate to recommend buying anything that’s gone up six or seven times in the last decade, but for all the reasons we’ve discussed in our recent conversations, as we exit the eye of the storm – first and foremost of which being the creation of trillions of new currency units – I am convinced gold is going much higher. So, yes, I do see the current correction as a buying opportunity.

L: In addition to the US roughly tripling its money supply in the last couple of years, the EU just announced taking its bailout fund to $2 trillion, so saying trillions is no exaggeration. But gold dropped about 20% in a month – that’s a pretty impressive correction.

Doug: It’s par for the course. Gold is a volatile commodity for the time being – although that will change when it’s reinstituted as money. If you think about what the word “correction” means, it suggests a price either dropping back when it gets too far ahead of itself or catching up when it gets unreasonably low. If you look at longer-term – multiyear – gold charts, the surge this summer looked like gold was going vertical. Hyperbolic curves are always danger signs. Gold has now reverted to the mean it’s established over the last decade.

That doesn’t mean it can’t go lower before heading higher, of course, but it does make this a much more reasonable time to buy than a month ago. The point to remember is that you don’t want to try to trade gold. You simply want to accumulate it, as an asset. Consistently, and in quantity.

L: But a line on a price chart doesn’t explain anything; it just shows us a result over time. Why do you think gold dropped in the face of exactly the sort of economic fear that should send it higher?

Doug: We saw this in 2008 as well; when the global markets get whacked – and they just got whacked hard – everything tends to dip, as various individuals and institutions are forced to sell whatever they can get a bid on to cover margin calls, redemptions, and such. As gold became more volatile, exchanges naturally raised margin requirements, which forced a lot of weak longs out of the market. Some people say it’s because some “bullion banks” are in a conspiracy to suppress the price of gold, but I find that reasoning ridiculous. No bank – no government even – can fight a decade-long secular bull market… entirely apart from the fact that most US and European banks are dead men walking. They’re bankrupt, and only seem alive because of massive government bailouts with newly printed paper money. Survival is the main thing on their minds now, not trying to suppress the price of some commodity they still believe is nothing more than a barbarous relic. And even if some group of fools was trying to drive down the price of gold, they’d only be giving the Chinese and the Indians a bargain as they buy more.

L: I’ve heard that hedge funds are the big sellers, looking to lock in gains on gold, which is still up for the year.

Doug: Very likely, in that the end of the quarter is coming up. It’s possible some of these types were trying to book some wins, while building cash ahead of a possible wave of redemptions sparked by the now rampant fear in the global marketplace.

L: If that’s right, the weakness in gold should dry up by the end of this week. Also, it seems to me that investors will remember that gold was the first thing to bounce back in 2008 – I suspect we’ll see less correction and a quicker turnaround this time.

Doug: I agree. Plus you have all these developing economies, many of which are – ironically – in better shape than the so-called developed nations. The central banks of countries like China, India, Russia, and Taiwan have relatively little gold, and don’t want to be caught holding the USD “Old Maid card.” I think we’ll see a lot of buying from them, taking advantage of relatively low gold prices, and that will backstop the potential downside on gold in the near term. These countries will be buying gold in ever-larger amounts – even at these prices – just to get rid of their excess hot-potato dollars. They are, in effect, offering gold buyers a free “put” on the price of the metal.

L: Okay; so when you go shopping for gold, what do you buy? Bars? Bullion jewelry? Coins?

Doug: I buy bullion coins, almost exclusively. American Eagles are now probably the most widely recognized and readily accepted bullion coin in the world – they’re becoming mainstay of my stash. But I also have a lot of Canadian maple leafs, Austrian philharmonics, South African krugerrands, Mexican 50-peso coins, and the like.

The Mexican coins usually have the lowest premiums, by the way, and they’re also the largest common coin, in that they contain 37.5 grams of gold, which is, not just coincidentally, equal to a Chinese tael (which is in turn equal to 1.2 troy ounces). In the Orient, people think of gold as much in taels as they do in grams or ounces. The Mexican 50 peso is perhaps the most popular coin in Latin America, especially in Argentina, where I spend a lot of time, because it’s minted in grams. Krugerrands used to be the bullion standard, but they’ve fallen from favor.

The British sovereign is perhaps the most common gold coin, and there are several hundred million out there. It’s also got a low premium, and is worth owning, since it’s only 0.2354 ounces of gold – it’s convenient having something about the size of a nickel that’s worth around $450.

Right now there’s a good opportunity in semi-numismatic gold coins too – not rare collectibles, but pre-1933 US bullion coins, like the Saint-Gaudens and other double eagles.

L: Why? I thought you didn’t like rare coins for investment purposes.

Doug: I don’t. Coin dealers will often try to steer buyers towards rare coins because the premiums are higher – if they sense the buyer is an easy mark, they can and will mark the coins up as much as 100%. Rare coins should only be bought by knowledgeable collectors who enjoy collecting rare coins. They shouldn’t be purchased by amateurs – but the same is true of stocks.

Just to be clear, I have bought certain rare coins, particularly ancient Roman and Greek coins. I used to collect them actively. But I buy them as works of art that I find beautiful and interesting. Each one is unique and full of history. The reason we have so many is that people used to bury them, to keep them safe from government tax collectors, common thieves, and invading barbarians – but fate prevented their retrieval. Even today there are lots of hoards from ancient times discovered every year in Europe. But paying huge sums to buy coins that were massed produced a hundred or two hundred years ago make no sense to me; they have no history, and they’re not usually art.

But that’s not what I’m talking about. The Saint-Gaudens is a collectible – and that can be very important, if and when the government starts confiscating bullion. That’s because such historic artifacts are not considered the same way modern bullion coins are – at least, last time around, they were not confiscated. Plus, because of their semi-numismatic value, they do attract a premium over the price of the gold they contain. Historically that’s been between 50% and 100%. I was talking with my friend Van Simmons at David Hall Rare Coins, and as it happens, those premiums are currently down to about 12%… historic lows. Now, normally I’d rather pay a 4-5% premium – which is the current level for popular modern bullion coins – than a 12% premium. But in this case, you get both a measure of protection from confiscation, and the additional speculative upside from the potential for higher premiums in the future.

L: There’s actually a rather good guide on buying rare coins in the September 2010 issue of BIG GOLD. We should also point out that Van’s outfit is not the only coin dealer we recommend, and some offer special deals to Casey subscribers. There’s a list of recommended bullion dealers in the July 2010 issue of BIG GOLD. For nonsubscribers, the list of recommended coin dealers includes: Miles Franklin, 800-822-8080; The Coin Agent, 888-494-8889; Border Gold, 888-312-2288, ext. 7 and Asset Strategies, 800-831-0007 .

So, once you buy your coins, what do you do with them? You can’t stuff them all in your mattress…

Doug: I usually try to dodge that question, in part because I don’t want to publish the details of my own arrangements, and in part because the answer is different for different people in different circumstances. But first and foremost, I have to warn people not to use bank safe-deposit boxes. They are typically not insured, and they put your valuables on record – the last time the US government stole private citizens’ gold, the first thing they did was seal all the bank vaults.

L: I somehow doubt that other governments would be any better.

Doug: Certainly not in places like Argentina; Argentina is great for land and living, but it’s a very bad choice for anything to do with banks. Uruguay is much better in that regard, but idiotically, you have to declare your gold when you take it into the country – which you don’t have to do in Argentina. In the UK, they impounded thousands of vault boxes a couple years ago, so I wouldn’t go there. The UK is on the slippery slope in many ways – it was prescient to have used it as the locale for V for Vendetta. Switzerland is still good, but it’s tough for Americans to get in the door there. Austria is okay. But for larger amounts, the respected, private, insured bullion storage companies are the way to go.

It’s a sign of the bad times we’re going into that almost nothing is safe – anywhere – from governments. Your ownership is increasingly uncertain whether you have someone store things for you, or you store things yourself. It gives you an understanding of how the Romans might have felt from the third century on.

L: And for smaller amounts? The average safe in the closet is an obvious target and won’t stand up long to a determined thief with power tools and sledgehammers.

Doug Casey: That’s right. And in the future, home invasions are likely to become more common in the US as well. In addition, houses can burn down – gold and silver have relatively low melting points. As paranoid as it may sound, I’d generally say that “midnight gardening” may be the best way for the average individual to store highly portable wealth securely on his or her own property. Gold is nonreactive, but remember that silver tarnishes and corrodes easily, so you want good, durable, water-tight containers to plant in your garden.

L: And… what constitutes a “smaller” amount?

Doug: I might stash a handful of coins in really good hiding places around the house for quick access in case of need – a handful of gold coins can take you almost anywhere in the world these days and pay for months of frugal living, if necessary. At present prices, gold is actually easier to transport than its value in $100 bills. As for midnight gardening, your mileage will vary, but I’d say anything on the order of $100,000 is a reasonable amount to keep under your own physical control. It’s enough to do almost anything you might need to do in various scenarios, but not so much that your exposure to local risk is too high.

L: Speaking of confiscation risk, did you hear that Odyssey lost its appeal on the “Black Swan” case?

Doug: Yes, it’s shameful. It’s beyond me why the Spanish government should have any right to a treasure trove of coins lost hundreds of years ago and found by private entrepreneurs who put all the time, effort, and money into finding it. I’m especially sympathetic in that I spent about three months in the early ‘70s on a treasure hunt for sunken treasure – blockade runners off Charleston, and then in the Caribbean. I did a lot of wonderful diving, but it was a financial disaster. On the bright side, even though I didn’t get the gold, I did get some great experiences.

Also on the bright side, I read that Odyssey found another sunken treasure ship off the coast of Ireland, sunk by a German U-boat in 1941. In that case they’ve apparently arrived at a deal to keep 80% of the proceeds.

L: Talk about international speculators – I’ve got to admire Odyssey. So, back to buying physical precious metals, I think we’ve covered the basics. Any additional thoughts?

Doug: Just remember that you buy physical gold and silver for prudence. For speculative upside, you buy gold and silver stocks. And while the precious metals have corrected, the stocks have overcorrected. There are some bargains out there, and that’s excellent news given the still-high prices of the underlying commodities. Gold and silver could correct another 20%, and the kind of profitable producers Jeff Clark tracks in BIG GOLD would still make a lot of money.

But let me emphasize this as strongly as possible: We’re headed into perhaps the most tumultuous time in modern history. It’s critical to own a good amount of physical gold. If you, out there reading this, don’t have a sufficient stash, your very next action should be to get on the phone and order some.

L: Roger that. Thanks for your thoughts.

Doug: My pleasure. And I’ll see you soon, I guess.

L: That’s right – our summit in Phoenix is this weekend. I wonder how many of our readers will be there…

Doug: Quite a few; we had to turn away about half of those who tried to sign up, I’m told. May they – and you – travel safely.

L: Gracias, Doug. You too.