Tips On Making Money From A Rising Gold Price
Gold is a physical asset that is a store of value which cannot be eroded in the same way currencies can, such as printing of paper currency. As such, gold is a hedge against inflation. The spot price is ultimately driven by supply and demand, including hoarding and dis-hoarding. Of late, gold has been enjoying a 'bull run' and as such, traders are more actively looking to leverage or 'gear' their positions by buying gold equities and trading with other financial instruments.
Here are 5 top tips to make money out of the gold price as it rises over time: -
1) Covered Warrants - Short term you can leverage the profit you can make as the gold price rises by buying covered warrants. This is a risky strategy but you can only lose your initial stake. Remember, the price can also go down ( incidentally you can also buy PUTS which banks on the price going down ). You can also buy 'long dated' covered warrants which gives you until the end of the year to profit from your position.
2) Paper Assets (Producers): Rather than buy physical gold, buy gold stocks already producing ( paper assets ). This will give you leverage as the companies employ gearing. The more gold goes up, the more they make bottom line ( and as such the share price rises too ).
3) Physical Gold: Purists may wish to purchase gold coins such as Kruggerands. There is a large selection available. The first decision is often whether to buy older coins or new bullion coins.
4) Paper Assets (Non-Producers): Some gold companies may not yet be producing but are sitting on potential world class gold resources with a certain amount of proven resource already. One example of this is Centamin Egypt ( CEY ).
5) Gold Futures: This is a professional market, more for a speculator than an investor. If you wish to play this market in gold, you will need to use a commodity broker.
1 comment:
Never ever buy gold coins or gold bullion!! You're a sucker if you do.
Let's say you want to keep it simple and buy gold bullion, a bar of gold, say 10 oz. Where do you buy it? Usually the safest place is a local bank that specializes in precious metals.
The first thing they do is call up their head office and order you the bar. There is a lot of paper work to fill out and they have to get the "current gold price" from their head office. They sell you the gold at a slightly higher price than the current market value. If gold is $700/oz they'll sell it to you at $710/oz and you think, wow, gold went up another $10 today (you're got no way of checking the price while at the bank). That $100 is the broker's commission, sucker bet #1!
Now you have to pay the local bank a processing fee, something like $80 to fill out a bunch of forms. Sucker bet #2.
You decide you want the gold certificate because they claim it's as good as gold itself (some may argue with this). So you decide to get the certificate. Well, the gold has to stay someplace safe, right? Well, guess what? The bank charges storage fees for your bar of gold and they bill you every year whether you know it or not. If you keep the bar for 30 years and you then try and cash your certificate when you retire, your nest egg is pretty much gone because they now tack on the storage fees. Sucker bet #3.
Ok, so you decide to keep the bar yourself and avoid the storage fees. Smart move. But now you have to get the gold and chances are your bank doesn't have it sitting in the vault so they have to ship it from head office. Guess what? The shipping fee is $180! Sucker bet #4.
Ok, now you have the gold in your hot little hands and you put it in your safety deposit box for safe keeping. Well, did you know your safety depsoit box doesn't have any insurance? So if someone breaks in, you're out of luck. Sucker bet #5.
Ok, so you've kept the bar for 30 years and you need it for your retirement and you want to cash it in. You go to your "friendly" neighborhood bank and of course they won't take it. The bank you originally bought it from has closed down but they tell you the local coin dealer will buy it from you. You talks to him on the phone and he's quite eager to buy it from you. The only problem is his price is over $50 less per oz than the current price for gold, so you're out $500. Sucker bet #5.
Ok, so instead of the coin dealer you go to a bank that specializes in gold bullion. You fill out more paper work and of course they charge you $80 for the prividge of accepting your gold. But it's not quite that easy. They call up head office and get the current price of gold and they knock off $10 the current price. The broker gets another $100. Sucker bet #6.
Ok you get your money, right? Not so fast. They look at the gold and it has a hairline blemish on the side of the bar. The bar is still encased in the original plastic blister pack package (never ever take the gold out of the plastic package!-the price will drop like a stone.) and has never been out of the package, but there is a small tear in the plastic and now there is some question to the resell value of the bar of gold. (I'm not making this up-this really happened - to me!)
Ok, now the bank isn't sure they can give you the full value for the bar because of the blemish. They have to send it off to head office on consignment. That will take about 2 weeks. So much for getting your money right away. Sucker bet #6.
Oh yes, I forgot to mention. Shipping to head office has to go buy armored car, that's another $180.
So you're kept the bar for a few decades (because it's too difficult to get rid of), and you don't realize that inflation has eaten away all of your profits. To make matters worse, the banks have taken a sizeable chunk of your investment in service charges, transportation charges, storage fees, and brokerage fees. Sucker bet #7.
Gold coins are going to be much much harder to sell because they are priced much higher than gold bullion (coins never sell at face value). You buy coins at a premium and sell them at a discount. Sucker bet #8. The dealer buying your coins can claim the coins have wear or scratches (in a bid to lower the price) or discoloration, and you lose your profit.
So never ever ever buy gold bullion or gold coins. You lose money the instant you step into the bank or coin shop. You'll labeled a sucker and they'll pick your pockets every time you turn around.
If you want to make money in the long term, my recommendation is to do your research on junior oil or mining companies and buy 10 stocks instead. One of them will likely hit paydirt and 5 will fail, and 4 will give average returns. Use a discount broker to reduce the fees. Never ever ever buy stocks from a result of a "hot tip" or ones that a broker recommends. But that's a whole other story.
Sam The Man
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