WHEN BUYING GOLD, AVOID THESE MISTAKES AND MISCONCEPTIONS
B Y R I C H C H E C K A N
Gold is on investors’ minds. After a decade of equity portfolio dominance, gold broke out in May of 2019, and is in the early stages of a bull market. As a result, investors are once again drawn to the yellow metal.
Spurred on by fears triggered by the Covid-19 pandemic, the subsequent worldwide economic shutdowns, and the impact of the same, gold prices continued to rise this past spring. And, recently, silver is beginning to play catch-up to gold.
The bull market in precious metals is solidly established, and analysts are raising their expectations for gold prices in the near to medium term. Savvy investors are buying the dips in this gold bull market, but, unfortunately, many are not familiar enough with gold to avoid common mistakes, pitfalls, and misconceptions.
If that describes you, and, even if you are a veteran gold buyer, the tips below will prove invaluable. To ensure your hard-earned money is safely and efficiently allocated to gold, you should take into consideration the following 10 mistakes and misconceptions I have seen over my 25 years in this industry before you buy…
#1 Always ask this question before buying anything
Before you buy gold or any other precious metals, ask the dealer, “When I am ready to sell, will you buy this back from me?”
If the answer is no, DO NOT buy from them… period. If a dealer does not buy back, it means one of two things.
Either, they do not value the metals, or they are embarrassed by the spreads between the sale and purchase prices.
Although not likely, if they don’t value the merchandise, they should just give it to you. Most likely, they are charging you way too much for the precious metals, and they don’t want you to know how much they are charging you.
No matter what lame excuse they give for not buying back – and they can be quite creative – it all comes down to the fact that they are embarrassed they are overcharging you. Don’t be fooled into thinking otherwise.
#2 No Clear Goal
There are many ways to buy gold and other precious metals. There are many different reasons to do so as well. Some look to gold as wealth insurance. Some are motivated by profit. Still others trade precious metals based on certain indicators in the market.
Knowing why you are buying precious metals should be understood up-front. Your dealer should always ask you what your goal, or objective, in owning precious metals is. Until they know that, they really cannot guide you to the metal (gold, silver, platinum, palladium), the proper form (bullion bars and coins, certificates, rare coins), or the proper storage method (your direct control, domestic or international storage).
Make your purpose in buying precious metals clear to the dealer. If they are worth their weight in gold, they will guide you to the best option to meet your objectives.
#3 Wrong Dealer, Wrong Product, Wrong Storage Option
It follows that once you know your goal, it should be easy to identify the right product and the right storage option… if you are working with the right dealer.
To ensure you are working with a reputable dealer who has your best interests in mind, there are a few things you can do to protect yourself…
“Savvy investors are buying the dips in this gold bull market, but, unfortunately, many are not familiar enough with gold to avoid common mistakes, pitfalls, and misconceptions…”
Work with a dealer that has been referred to you by a trusted source.
Do a little research to make sure the dealer has a positive reputation, over many years of taking care of customers.
Compare different dealers with regard to price AND guidance. Remember, just like any other product, you often get what you pay for.
Avoid high pressure dealers. They should work on your time schedule… not the other way around.
Again, I cannot emphasize Rule #1 enough. If they do not buy back, run, don’t walk away.
#4 Buying gold and buying gold mining stocks are NOT the same thing
It is one of the most common misconceptions I have encountered over the past 25 years. When asked if a new client owns any gold, I often hear, “Yes.” Then, I ask what specifically do they own. More often than I can count, I’m told about a portfolio of mining stocks or gold funds.
Please know, these mining stocks can be wonderful investments, but, by owning them, you own absolutely no gold. These investments should come from an equities allocation… not from your allocation to physical precious metals. While both offer you exposure to gold, the key difference is this…
When you buy gold, you own gold. It is a commodity, and it is yours. If the price goes up or down for gold, the value of your gold is directly and immediately impacted. When you own shares of a gold mining company, you own stock in a company whose business it is to mine gold profitably and pass those profits – to some extent – on to investors. But, just because the gold price is moving up doesn’t mean the company will be profitable.
They may need to raise salaries for management and employees. They may have to deal with environmental permitting issues or mend/build relations with the indigenous population. They needed to expend capital for equipment.
There are so many other variables introduced into the equation when buying a gold mining stock versus an ounce of gold. Both are worthy of inclusion in your portfolio, but they are NOT the same thing… not even close!
#5 Gold ETFs are the same as buying gold
Like physical gold versus a gold mining stock, physical gold versus a gold Exchange Traded Fund (ETF) is not the same thing. But, for the purposes of this article, here are some of the key differences.
As mentioned above, owning gold as a physical commodity is direct, and price movements are directly translated into your bottom line. However, this is not the same with ETFs.
Consider that each share of GLD is supposed to be one- tenth of an ounce of gold. But, did you also notice that a share of GLD is virtually never one-tenth of the price of an ounce of gold? Similarly, a share of SLV is supposed to be ten times the price of an ounce of silver. Why is it virtually never that price? Exchange Traded Funds are just that… funds. There is a fund manager, because there is something to manage. The managers need to marry investor demand with the product the fund holds. And, they are constrained by physical restrictions and logistical concerns as they attempt to meet investor demand. Further, they can use leverage in making their precious metals purchases, so not every ounce of gold represented in the shares of the ETF actually have gold backing them.
As with anything, there’s a place for precious metals ETFs in a portfolio, but, when I want to buy gold, silver, platinum, or palladium, I believe direct ownership is the purest and safest form of ownership.
#6 Buying Out of Fear of Confiscation
In 1933, President Franklin Delano Roosevelt made it illegal to own gold. By Executive Order, the government confiscated gold from U.S. citizens, and it remained illegal to own it until 1975.
One loophole in the Executive Order allowed citizens to keep limited numismatic or collectible coins. As a result, for many years since gold was once again legal for citizens to own, many numismatic coin dealers (not all) have tried to sell collectible coins based on the fear of gold being confiscated again. After all, it happened once… why can’t it happen again?
Don’t fall for this. In most cases, it is an attempt by coin dealers to extract much higher premiums from you based upon a fear of something happening that most assuredly never will. Gold was confiscated back in 1933 so the U.S. government could devalue the dollar.
Back then, gold and the U.S. dollar were convertible. You could hand a $20 note to a banker and receive a $20 gold piece – nearly an ounce of gold – on demand. And, gold traded at an official price.
So, the government confiscated gold and subsequently revalued gold’s official price higher. Thus, they devalued the U.S. dollar.Today, gold and dollars are no longer convertible. That “gold window” was closed in 1971. So, there is no longer a reason for the government to confiscate, and you should not be scared into buying high premium coins to protect against that possibility.
Numismatic coins have a place in a portfolio, but NOT to protect against confiscation.
#7 Letting Emotions Dictate When to Buy or Sell
This is an easy one. Don’t ever do it. Buy or sell because allocations change. Buy or sell because your goals change. Buy or sell because you need the money for a financial crisis. Do not buy or sell because you are scared or overly confident. That’s not investing. That’s gambling. Emotion loses untold sums of money for investors. Don’t fall victim to fear or greed based on investment decisions.
#8 Falling for Scams
Here’s another easy one to understand and avoid. Scams exist because greedy people exist. Rather than providing valuable services and high-quality products to meet legitimate investor needs, they would rather cheat or trick you out of your hard-earned money.
Follow this simple rule, and you should be safe from these scammers… If it seems too good to be true… it is. Avoid it.
#9 Don’t store where you buy
Never was it clearer that storing precious metals with the dealer you bought from is dangerous and should be avoided as with the case of International Bullion Exchange…
In 1979, four years after gold ownership was legal again in the United States, the Alderice brothers formed this company in Florida. It grew quickly to become the largest retail precious metals dealer in the country.
Unfortunately, they were crooks…
They bilked their customers out of hundreds of millions of dollars by selling precious metals and by promising to store the precious metals for them. The only problem is they never bought the metal to cover their customer trades.
Instead, they used client funds to live the high-life. Some people are greedy and unethical. For them, the lure of easy money when holding client funds and precious metals is too great for their weak character to withstand. Suffice it to say, when buying from a retail precious metals dealer, either take delivery directly, or have the precious metals stored with a third-party depository with a strong reputation and all the proper safeguards in place.
#10 Don’t buy something you don’t understand
I solemnly believe, if you buy gold for the right reasons, there is no such thing as the wrong price or the wrong time. But, you should always understand what you are doing and why you are doing it, before you do it.
Not every precious metals dealer will take the time to help you identify your goals and objectives or how gold and other precious metals can help you accomplish them. But, in my opinion, they absolutely should.
This is your money. These are your goals. This is your investment. Take the time to understand your investment. Align yourself with professionals that care enough to make sure you are comfortable with the steps you are taking. DO NOT move forward if you have questions or doubts.
Take Advantage of Gold’s Bull Market
Gold has a proven history of providing unique value to portfolios. It is an asset that is 100% worthwhile to own, and it is once again on the rise. By keeping these 10 points in mind, gold (and other precious metals) can have a positive impact on your portfolio as well.
Be careful, but, by all means, take advantage of precious metals to make sure you Keep What’s Yours!