This FAQ will be updated from time to time. I didn’t think it would be as involved to write as the other FAQs on Stocks, Bonds and Cash. What I found though is that there is just so much misconception about gold (both pro and con) that it needs a lot more detail. This FAQ is huge. It probably needs to be broken out. But I figured I’d post it all now because it’s been months since I promised it and if I wait until it is “done” then it could be many more months.

So this is a work in progress and will be updated as I get around to it.

Last Updated: November 19th, 2009

The Permanent Portfolio allocation is 25% stocks, 25% bonds, 25% gold and 25% cash. In this series of posts we’re going to talk about how to implement each one of these components to take advantage of the economic cycles of Prosperity, Inflation, Recession and Deflation. This FAQ is divided into two sections: Short Answers and Long Expanded Answers. If you don’t want to know the details then just read the Short section and skip the Long Expanded section. This page will be updated from time to time as more common questions and answers are needed. In this series we talk about the 25% gold allocation and how it protects you from inflation and other currency problems.

Short Answers

Is there a Harry Browne Radio show that discusses some of the topics in this FAQ?

He covers some of the topics in this FAQ in these shows (and several others from time to time):

October 24, 2004 Radio Show

April 17, 2005 Radio Show

Why do I want to own gold in my Permanent Portfolio?

Gold is a powerful asset that protects against inflation or threats of inflation. Gold also offers protection against problems that may threaten a currency or banking system. Finally, gold is an asset that is not someone else’s paper promise to you and can be physically controlled. In this sense it is what you’d call an “asset of last resort.”

What is inflation?

Inflation is the falling in value of your local currency. Although typically portrayed in the popular press as “prices going up” the actuality is that inflation is “the value of the money going down.” Prices can rise for a variety of reasons, but the falling value of the currency is a big contributor. A falling currency makes it more expensive for businesses to acquire raw materials, pay employees and produce their products. These costs are passed onto the consumer in the form of a price increase.

Why is inflation dangerous?

Inflation destroys the purchasing power of money you hold. If inflation is 5% a year that means your money will be worth 5% less each and every year no matter what you do. If your portfolio returns do not beat inflation then you are losing in real terms. In other words, if you portfolio goes up by 3% in a year but inflation is 5% then you are still losing about 2% that year in purchasing power (3% profit – 5% inflation loss = -2% real return). Each dollar you have can buy less each year.

Think of inflation as a hole in your boat. If you don’t bail fast enough, you will soon sink. Here’s a video that goes into the mechanisms behind this process:

Fiat Empire

There is a Google Video version (low resolution) out for free that you can find with a simple search.

I’ll give you a spoiler: It’s the politician’s and Federal Reserve’s fault.

What causes inflation?

The government printing too much money. Each new dollar printed above what the economy requires means each dollar in circulation is worth less. This is the law of supply and demand at work. If you have too much supply the value of that item decreases.

So how does gold protect me from inflation?

The price of gold reacts strongly to inflation. This is because gold is viewed as a form of money (the oldest form of money in constant use in fact). If the market feels that there are too many dollars being printed then the value of gold will go up dramatically as people look to exchange their dollars for gold to protect their purchasing power.

Since there is a much smaller amount of gold in the world compared to the number of dollars in circulation it means that people looking to sell their currency to buy gold will be bidding against many others looking to do the same. This action can cause gold prices to rise rapidly if too many people want to buy it at once (as is usually the case with high inflation). In effect, gold acts like a “leveraged” investment due to the relative scarcity even though no actual leverage is in use. Gold prices can rise rapidly under inflationary environments.

How does gold protect purchasing power?

In short: Gold is a compact form of wealth. It doesn’t change over time and can’t be over-printed by a government. It is impervious to debasement that plagues all paper currencies. Gold does not rack up massive debts and unfunded government liabilities. Gold does not care about political speeches or promises about the “Strength of the US Dollar.” Gold to a politician is like a Holy Cross to a Vampire. Gold stands on its own.

In terms of purchasing power protection Gold has a long track record of preserving wealth that is unmatched. To give you and idea, here’s a short piece I wrote about gold and purchasing power looking back over the past 100 years:

Does Gold Preserve Purchasing Power?

How else does gold help a portfolio?

Serious problems in the banking system or anticipated problems with the US dollar that are affecting markets may make gold go up in price and offset other losses to the portfolio.

Isn’t gold only owned by gold bugs who think the world is coming to an end?

Sadly, this reputation has developed. Anything can be taken to extremes. People who advocate 100% ownership of gold are taking on huge risks just as people who advocate owning 100% stocks are. Gold has risks just as any asset does and you need to be aware of these risks and work with them intelligently.

Gold has performed well in a diversified portfolio in the past yet the world did not end, the dollar did not go into hyper-inflation and Zombies did not roam the streets. In the 1970s gold was able to provide real returns to a stock and bond portfolio that did poorly due to inflation over the entire decade. During the 2000s gold again was the only investment turning in any decent gains in a diversified portfolio with stocks and bonds.

The core lesson here is this: A safe investment portfolio is diversified across many assets because the future is not predictable. Investing 100% in any asset is a very dangerous exercise and that includes gold, stocks, bonds, real estate, etc.

I don’t follow the Permanent Portfolio but found this FAQ on gold. Should I own gold in my portfolio anyway?

All portfolios should hold some type of hard asset. I think gold works the best. If you can’t stomach 25% in gold that the Permanent Portfolio uses then pick a lower number that works for your allocation strategy. But by all means you should hold some gold in your portfolio at all times. Gold is a powerful weapon in the battle against sudden or high inflation. Not holding any gold leaves you exposed to problems that could have serious consequences.

What kind of gold should I own in the Permanent Portfolio?

The ideal is to own physical gold bullion stored somewhere secure such as a safe deposit box where it is protected against theft and insured. The other ideal is to have it in segregated storage in a bank overseas for geographic diversification.

Gold is special in the portfolio and you want to have as few pieces of paper and people between you and the asset as possible. Harry Browne would go even further and suggest that the gold portion of the Permanent Portfolio be stored at a bank outside of the country in some place like Switzerland for safe keeping. This would protect you from possible government actions that may seize the wealth of the citizens or protect against man-made or natural disasters that affect the regional finance system.

However this is becoming much more difficult for US Citizens to do. Perhaps a warning in and of itself.

The reality is most people are going to probably have a hybrid approach. That means some physical gold they store themselves combined with the new gold ETFs, gold storage services or perhaps storage in a bank.

What economic conditions will hurt gold?

Prosperity and deflation can both hurt gold.

How does prosperity hurt gold?

When the markets are doing well and inflation is low and stable gold will not be seen as a necessary form of wealth and will fall in price as it goes out of favor with investors. Since gold does not produce interest or dividends, many investors may shun it in search of higher returns in the stock market.

Since in prosperity inflation is low (5% a year or less), and their stocks are going up rapidly, investors may not feel as threatened that their dollars are losing value too quickly and are willing to hold on to dollars instead of gold.

How does deflation hurt gold?

Deflation is a contraction in the money supply. It is the opposite of inflation. Whereas in inflation there is too much money in circulation and it falls in value, under deflation there is too little money in circulation and existing dollars go up in value.

Since a dollar rising in value can purchase more, the price of gold may fall in response as it may take less dollars to buy the same amount of gold as before.

What assets in the Permanent Portfolio protect me from gold losses?

Under prosperity conditions that would hurt gold your stocks and Long Term bonds will be doing well. Stocks may be going up sharply and Long Term bonds would be going up in value as inflation is low and rates are falling making bond prices increase combined with their interest payments.

Under deflation your Long Term Bonds would go up sharply in value as interest rates collapse and the dollar gains purchasing power. Cash will also do well under deflation as it can buy more goods and services. There is an argument that gold may hold up OK under deflation as any form of wealth will gain value, but I’m not as convinced this may happen.

How much has gold gone up in the past?

During times of very bad inflation gold has experienced price increases in excess of 130% in a single year (1979) in the US. Then it has had strings of years where it posted double digit gains (early to late 2000s) going up hundreds of percent over a few years.

How much has gold fallen in the past?

Gold has fallen in price by about -33% in a single year (1981). It has also had other losing years where it has fallen by -20% or more. Then it had strings of years where it lost in the single digits for a period of time (mid to late 1990s). Then there was a 20 year stretch (1981 to 2001) where it was basically flat or slightly declining in value the entire time. This would be a problem only if you were unfortunate enough to buy it at the absolute peak in 1981 and never did any type of rebalancing.

If gold is that volatile why do I want to hold it in the Permanent Portfolio?

It’s important not to look at an asset in isolation. The Permanent Portfolio holds 25% gold. During the boom years for gold under bad inflation or threat of inflation gold can go up dramatically in price and offset the losses in your stocks and bonds. During the bad years for gold the stocks and bonds can offset the losses.

The key though is the rebalancing of the portfolio. When gold is doing well you are selling out of it as it hits your rebalancing threshold. You are using that excess money to buy your losing assets (stocks, bonds and cash). When gold is doing poorly you are using your profits from your stocks, bonds and cash to buy it when it is cheap.

The above is important to understand. The Permanent Portfolio is forcing you to “Sell High and Buy Low” which is how it is able to pull in consistent profits. The volatility in gold works to your advantage as you capture profits when people want to own it and you’re buying it on sale when people feel they no longer need it.

Can you give me some examples of this buying and selling of gold being helpful?

In the 1970s and early 1980s inflation was bad. The prime rate was around 21% in fact by 1981. The dollar was falling fast and there was a panic to move into gold. Gold went from under $100 an ounce in the early 1970s (after breaking the gold standard) to over $800 an ounce by 1981 (that’s over $2000 an ounce in 2009 dollars).

During this boom time in gold you would have been selling down your gold to the 25% rebalancing bands and buying stocks and bonds which nobody wanted to own. Yet, by 1982 gold had crashed in price and the next 17 years were going to be the biggest stock bull market in US history (and horrible for gold!). By selling down your gold when everyone wanted it, and buying stocks and bonds when nobody wanted them, you intelligently used your money and made good profits.

So now the mid-late 1990s roll around. Stocks are booming. You remember it don’t you? One hot new .com IPO after another was sweeping the nation. The book Dow 36,000 was being published. It was 1999 in the “New Economy” where profits didn’t matter as much as how many people saw your sock puppet commercial during the Super Bowl.

Well during this time you would have been selling down your stocks to 25% and using that money to buy gold (and some bonds and cash). Gold was an asset that nobody in their right mind wanted at the time and was at a 20 year low point in price (around $250 an ounce).

Then the 2000-2002 market crash happened and those stock gains vanished. The NASDAQ was off 80% from its high and the S&P was down around 40%. The next 10 years saw sputters of stock performance and then the big crash in 2008 wiping out all gains over the previous decade.

Yet, gold went from $250 an ounce to $1000 an ounce as of this writing (Fall 2009). So again the intelligent move to sell down your stocks and buy gold was built into the portfolio for you. This strategy meant you managed to miss all those terrible stock market losses and turn in a nice profit over the next 10 years when stocks were languishing.

Today you may even find yourself selling down your gold profits and buying stocks at lower prices. This is not a prediction on the gold or stock market. It’s just an acknowledgement that simple rebalancing can help control risks in a portfolio and force you to make profitable decisions (even if at the time they seem like a bad thing to do).

Some say that gold is useless because it doesn’t generate interest or dividends. Why should I own it?

Gold moves in the market much differently than stocks and bonds which generate interest or dividends. Yet, history has shown time and time again that when currency problems come around gold can rapidly escalate in price and is sometimes the only asset that is showing a gain. While not having the same attributes of interest and dividends as stocks and bonds have, gold also doesn’t have the same risks that can hurt performance in stocks and bonds either.

It is also true that sometimes investments that have interest and dividends actually are losing to inflation. In the 1970s for instance inflation was very bad at times (in the low to mid teens). During the period from the late 1960s to the early 1980s a portfolio of stocks returned 0% after inflation. That’s more than an entire decade of zero growth in dividend producing stocks (it actually covers the period from about 1968-1982 – 14 years to be exact).

Bonds were even worse. Although you were getting interest payments from your bonds in the 1970s, the money being paid was able to buy less and less. During the 1970s the dollar lost half of its value. So if you purchased a bond in 1970 hoping to live off the interest until it matures in 1980 you’d have found that you could purchase much less with the interest payments. Even worse, the final payout value of the bond could only buy you 1/2 as much in 1980 as it did in 1970 when you purchased it.

History also repeats itself. As of the end of 2008, stocks have returned about -1.3% CAGR after inflation returns (from 1998-2008). The total bond market index has returned 2.87% CAGR after inflation over this same time. Gold however has returned 6.95% CAGR after inflation over this time period. In fact, from 1998 to 2008 the dollar has fallen over 30% in value due to inflation.

So even though gold doesn’t generate interest or dividends, it can produce capital appreciation (price goes up) and those profits can be harvested and used in a balanced and diversified portfolio to produce real returns.

What about owning Treasury Inflation Protected Securities (TIPS) instead of gold for the Permanent Portfolio?

Don’t do this. TIPS have a lot of problems that are too numerous to go into in this FAQ. The big ones are these:

1) There is a conflict of interest as the entity causing the inflation (the government) is the same one calculating the inflation adjustment. There is tremendous pressure for a bureaucrat to not make their boss look bad for re-election. Gold does not care about elections or party politics and doesn’t owe anyone any favors. Gold is not going to make inflation look lower so it can keep its cushy government job at the Bureau of Labor and Statistics.

2) TIPS will never go up enough in value to offset high inflation losses in the rest of your portfolio. Let’s assume that TIPS can match inflation plus a few percent. Now let’s assume high inflation comes and your stocks and bonds are doing very badly and losing real purchasing power. It may be that TIPS are matching inflation, but unless your portfolio is 100% TIPS then the other parts of your portfolio are still losing in real terms. TIPS are not able to offset these losses. Gold has the track record of performance to offset other losses in the portfolio being eroded by inflation.

3) TIPS pay you in dollars. Under high inflation the dollar is losing value rapidly. Why would you want your inflation adjustment paying you in the same currency that is quickly going down in price? Wouldn’t you want to own less of it? Gold is currency neutral and will not be eroded in price due to inflation. It only becomes more valuable.

4) TIPS are horrible for taxable investors. Not only are TIPS adjustments taxed, but under high inflation the adjustments get taxed even more as they are larger and you will certainly end up losing money if you hold them in anything but a tax-deferred account. Gold does not produce any gains until you are ready to sell it so you are only taxed when you want to take those profits.

5) TIPS have only been in the US since 1997 and have not been through a period of high inflation. Therefore, anyone stating how they’d do during a period of high inflation of the US dollar is speculating. Do you want to be the crash test dummy for them when the chips are down? Or do you want to use something that has proven to be effective at defending against high inflation (gold)?

As I’m fond of saying about TIPS:

Don’t buy arson insurance from arsonists and don’t buy inflation insurance from inflationists.

What kind of gold should I buy?

American Eagle Gold Coin

If you are looking to have physical possession stored somewhere secure then you should use bullion coins. These are things like American Eagles, Canadian Maple Leafs or South African Krugerrands in the one ounce size. The sizes less than one ounce have a high premium attached to them vs. the gold content and should be avoided unless you have no other options due to budget reasons.

Other options include Austrian Philharmonics, Chinese Pandas, Australian coins, British Sovereigns, etc. But these are less popular and less recognized as the Eagles, Maple Leafs and Krugerrand.

I recommend you buy American Eagles, Krugerrands or Canadian Maple Leafs with American Eagles being slightly more preferred if you live in the US.

What kind of coins should I avoid?

Any type of numismatic (collectible), rare or antique coins. Also avoid all coins that are not from a recognized source as stated above such as privately minted “commemorative” coins.

Why avoid numismatic coins?

Numismatic coins derive much of their value not from the metal content, but from their collector value. So they are not as reliable store of wealth as they have a huge subjective value attached to them by collectors.

What about one ounce gold bullion bars?

These are less recognized by most people and come in tamper proof packaging that makes verifying them harder. It is best to just use the one ounce bullion coins as they are easily recognized and are a familiar form.

What about silver?

Silver is more of an industrial metal rather than a monetary metal. It is not as reliable as gold for protection against currency problems. Keeping some junk silver coins around for emergencies may not be a bad idea, but it shouldn’t be your primary hard asset in the portfolio over gold.

What about owning a commodity index instead of gold?

Commodities are not as directly tied to the US Dollar and inflation threats and will not react like gold to the same problems. In 2008 for instance some commodity funds lost more than 50% of their value compared to the 4-5% gain that gold had. When the financial system was teetering on collapse, people wanted gold and not pork bellies.

Can I hold gold mining and metal mining stocks instead of gold?

No you can’t. Stocks are not the same as owning the actual gold bullion asset. Mining stocks are subjected to the same market pressures that affect all other companies. High inflation can impact mining stock company prices as it does other parts of the economy.

When the markets are doing poorly due to bad inflation or financial crises you want to own hard assets like gold directly.  You cannot substitute mining companies for gold bullion.

In 2008 when the banking sector was on the brink of total implosion, and we experienced a record market decline, the price of gold showed a slight gain of 4-5% for the year (in Blue). The precious metals and mining index however posted a devastating loss of -62% (in Red)!

Above chart courtesy of www.stockcharts.com

It is clear from the above that gold and metal mining companies did not provide the diversification against catastrophic loss that gold bullion itself did.

How do I buy Gold?

1. From a gold dealer.
2. From a bank.
3. From an Exchange Traded Fund (ETF)
4. From a company that specializes in gold storage.

How do I buy gold from a dealer?

If you have a local coin shop, they probably sell gold coins. You can simply call them up and visit and make the purchase directly. Gold dealers have a commission charge that can range around 5% or higher as a handling fee. The lower the fee is obviously better for you. I’d have a hard time paying more than 5% commission. Anything above 10% is highway robbery and you should go somewhere else.

There are also some gold dealers on the Internet who have been in business for many years and have a good reputation. They will sell gold for a lower commission and ship directly to your door. Here are some dealers with reasonable prices that are reliable and professional:

http://www.ajpm.com (They’re all business. Don’t call them up to chit-chat because they don’t have the time)

http://www.amark.com/ (Requires an account with them to buy – A major seller that is used by gold dealers to buy gold)

http://www.coloradogold.com (Don Stott’s columns are unabashedly gold and free-market focused)

If you have a local dealer who has prices reasonably close to the above you may want to do business with them directly.

How do I know I’m getting a fair price on a gold coin?

Look up the spot gold price per ounce:

Gold Price

Take that price and add about 5% to it for a markup on the coin. That would be a fair price. For example if gold spot price is $800 an ounce then a fair price on a gold bullion one ounce coin is about $840 or thereabouts. I don’t know if I’d throw a fit if a dealer was charging 7% but I’d have a hard time paying 10% or more and would go somewhere else to make the purchase.

How about buying from a private seller or on E-Bay?

I wouldn’t buy any coins on E-Bay. There is too much risk of fraud. Private sellers may be OK, but look in the section below on detecting counterfeit coins.

Why is the gold coin price higher than the one ounce of gold it contains?

A few factors. One is called seigniorage. This is the cost of minting the coin. The second factor is the gold dealer is taking a profit to run their business and provide you a way to buy and sell gold. The third factor is how rare the coin is. But since you are not buying collector coins (remember??) you don’t need to worry about this.

Here’s something to consider. You don’t lose the entire markup price when you sell the coin. The dealer will quote you a price above spot price for gold if the coin is in reasonably good condition. In effect, you are getting spot gold price + a small amount returned on the seigniorage value you already paid. Think of it like a deposit refund on a soda bottle you return to the recycler.

My state charges sales tax on gold coin purchases. What should I do?

I think you should vote with your feet if you live in a high tax state and move somewhere else.

Assuming you can’t do this (yet), what you should do is drive over the state line if you can and buy where they don’t charge sales tax on such purchases (many states do not impose sales tax on gold bullion). Since this may be illegal to then bring the coins back into your state without paying a tax, you may just consider opening a safe deposit box in a bank in the state where purchased to store your coins. This gives you some geographic diversification as well and you are no longer bringing the coins back into the state so sales tax obligations shouldn’t apply.

By the way, it’s outrageous you’re being charged a sales tax on what is effectively money – US Gold Eagles are legal tender coins, so are Canadian Maple Leafs, so are others. Should you be charged sales tax when you take $100 out of the ATM?

How do I sell a gold coin?

Go to a local coin dealer and get a bid. They will usually quote a price slightly above the spot price of gold (or close to it). You can also sell coins to the mail order dealers above. They will need to receive the coin to verify it and then issue you a payment.

How do I buy gold from a bank?

These options are much more limited today as most banks no longer offer gold custody accounts in the US and non-US banks don’t want to the hassle of US domiciled customers.

This US bank advertises they use pooled and segregated storage. However they say these accounts are also not FDIC insured. Do your own due diligence:

Everbank Metal Account

Likewise, your local bank may offer safe deposit boxes where you can store your gold coins. Keep in mind that the bank will not be aware of what you have in your box and you therefore will have to carry your own insurance on it. Many times a safe deposit box comes free or deeply discounted with a checking account so this can be a very good deal to store valuables safely.

Swiss banks offer gold metal accounts to non-US citizens not living in the US. So if you live outside of the US then by all means lookup some banks in Switzerland and see what they can do for you. If you are a US citizen you may be out of luck in this area.

How do I buy gold from an Exchange Traded Fund?

There are three main options for US investors:

1) iShares Gold ETF (Ticker: IAU)

2) StreetTracks Gold ETF (Ticker: GLD)

3) Physical Swiss Gold ETF (Ticker: SGOL)

These ETFs all have low expense ratios and should work about the same. The SGOL ETF is new as of 2009 and has a unique selling point because they have their gold stored in Switzerland. How much practical difference this makes for an investor is debatable. However if you need to use an ETF but want some modicum of geographic diversification (say against natural or manmade disasters against gold warehouses in the US) it is something to consider.

Investors may want to consider an interesting option from the Bank of Zurich, Switzerland which runs their own ETF and is required by Swiss law to have 100% gold on hand for each share issued. The (translated) prospectus also indicates they will honor pro-rata physical gold withdrawal for shareholders that show up to the bank in Zurich. Their fees are higher than other ETFs, but I put this option out there for completeness:

Zuercher Kantonal Bank Gold ETF (Ticker: ZGLD) – Non-US Investors only can purchase according to the prospectus. However, this ETF also trades under the ticker in the US as ZGLDUS.SW. So it may be possible to buy it through a broker but I do not know any more than this as I’ve not tried it yet. Each share translates to one ounce of gold in the ETF.

How do I buy gold from a company that specialize in gold storage?

There are two companies that do this now but I have no experience with them. Others who have used them have reported to me good results. Be aware that there could be risks involved with these companies so it may pay to open accounts at both of them to split the allocation if you feel like you want to do this:

Gold Money

Bullionvault

I have no experience with these organizations. I also don’t know what protections are in place to prevent problems. I also don’t know if you have any legal recourse vs. creditors if things go south (like you do with a bank). So while it is something to consider, I’d also advise that you do more due diligence.

What about the Perth Mint?

The Perth Mint is run by the Western Government of Australia and offers many different gold buying programs guaranteed by the government. What little I know about their service I’ve heard from others that say you need to work with only select US brokers and there are markups involved. A blog reader adds that you can open an account directly if you have enough money and bypass the US brokers. Check their website for details.

The Perth Mint deals with gold certificates for claims on gold that they are holding. You can also request physical delivery of your purchases.

I will do more research into this option and update this section with more information in the future.

What are the risks of owning gold directly?

You could get robbed and have it stolen. You should make sure your insurance carrier covers gold coins or coin collections. Some plans may not cover this and you’ll need to purchase an additional rider for valuables.

What are the risks of having a bank hold my gold?

There is a chance the bank could turn your safe deposit box over to the state for auction if  they think it is “inactive” for too long (varies by state). You can still claim this money, but if you have sentimental valuables in your safe deposit box it may not mean much to get cash back instead. This is not a fictional scenario and is happening more and more as tax-hungry state vampires legislatures scramble for any new necks to feed on for revenue. To prevent this I advise visiting your safe deposit box at least once a  year. Just having an account in good standing at the bank is not enough. Physically visit the box so they have a record of it.

Safe deposit boxes also are not covered by the banks insurance policy (they don’t know what’s in them to know how to insure). So you should make sure your own insurance policy covers safe deposit problems such as fire, theft, flood, etc.

For metal account holders only (like the Everbank link above): A bank could go bust and you could have a hard time recovering assets they were holding for you. Although banking laws do not allow the mixing of assets in this way, if you are using a metal account you should check with the bank to ensure that these assets are not promised to creditors in any way. Make sure it is in writing or clearly stated on your account contract.

Finally, a Government could seal all safe deposit boxes as they did in 1933 to confiscate stored gold. Although I think this is a very unlikely situation. Keep your ears open and you’d probably have some time based on what you heard in the news to anticipate such a maneuver ahead of time and move the gold somewhere else.

What are the risks of holding a gold certificate?

The issuer may not have the gold to honor the certificate when you ask for your gold. Imagine a situation where they sold certificates for more gold than they actually have thinking they could just buy the gold at a later time if needed. Now imagine a situation shows up where they aren’t able to make good on this promise. Again a small risk, but very real.

What are the risks of having an ETF hold my gold?

ETFs store their gold at one of several approved warehouses/vaults that specialize in such things. If there were a national gold confiscation again (unlikely, but not impossible) the first place the authorities will go is to the commodity warehouses. These facilities hold so much gold in one location that it would be easy pickings.

There is also counter-party risk. This is the risk that the issuer of the Gold ETF won’t have the gold on hand to handle redemptions by shareholders. Also, the fund managers may do things like lease out their gold holdings (banks have been known to do this) and the gold may not be all present. Etc.

This is not an indictment that the current crop of gold ETFs are engaging in these practices (which would likely be illegal). Just that many funds in history have had names on them that did not reflect what was going on underneath the covers. So therefore it makes sense to read about any fund or ETF before you purchase it to make sure it really does what you think it does. In 2008, many investors were severely burned by bond funds with conservative sounding names that were loaded to the hilt with garbage that took severe losses. So don’t buy any investment fund or ETF just by the name of it. Make sure you investigate it closely.

You should read the prospectuses of each ETF before you purchase it to understand the risks involved and how they hold their gold. Also be sure to review the annual prospectus reports for any changes that were made that introduce new risks in how they are investing and holding their gold.

If you are nervous about holding a gold ETF but like the convenience and low expense, then perhaps it may make sense for you to split the allocation among several of them to help diversify these risks.

What are the risks of having a gold dealer hold my gold?

Never do this. There are many cases of gold dealers vanishing with customer’s “stored” gold. If you buy from a dealer you should take physical possession of the bullion and store it somewhere like a safe deposit box or other secure location.

Should I purchase the gold directly or use one of these other vehicles if given the choice?

It’s a question of degrees. A smaller portfolio may want to purchase the gold directly and store it securely. Larger portfolios simply can’t do this for logistical reasons (you may need to buy so much gold that you simply can’t reasonably transport and store it safely). These larger portfolios will need a combination most likely of physical gold they store in small amounts and some type of bank or other gold investment product to handle the remaining bulk.

Can I put gold in my retirement savings account?

The IRS says that American Eagle gold coins can be put into an IRA. Although this is probably not a good idea for two reasons:

1) Gold has no interest or dividends to shelter so you’re consuming valuable tax-deferred space that is probably better used for bonds, cash and stocks.

2) You can’t get to your gold quickly if you should find you need it. It will be stored by the IRA custodian with all the inherent risks in doing so.

Gold would be the last asset I’d put into a retirement account if given the choice. Fill these accounts first with stocks, bonds and cash.

Can I use a mix of physical gold and the ETFs for rebalancing ease?

More and more people are doing this now. If you are aware of the risks of the ETF gold and have no other options due to your situation (such as most money being in your tax-deferred savings) then this is a possible strategy.

What’s the deal with the gold seizure of 1933?

It was a stupid plan cooked up by Franklin Roosevelt and his agriculture secretary Henry Wallace. Roosevelt was full of stupid plans and this was one of his dumbest. In a nutshell, the idea was by seizing gold and breaking the gold standard they could cause inflation which would bring prices back up and save the economy. Like virtually all New Deal ideas, it was a complete failure and made things worse.

Gold was in fact illegal for Americans to own (except for jewelry form) until 1974 when these restrictions were ended.

Can the government seize gold as they did in 1933?

Although I consider this remote, anything is possible if the government became desperate enough.

Where did Harry Browne recommend keeping gold stored?

Ideally Harry Browne wanted to see gold stored overseas in someplace like Switzerland with strong bank privacy protections for geographic diversification. This is becoming almost impossible now for Americans to do unless you are quite wealthy and even then the overseas banks may not talk to you because of onerous IRS and SEC rules.

I don’t have any good advice to offer on this subject any more as the past few years have made just about everything written on the topic obsolete. Yes, it’s that bad.

If you are aware of a Swiss bank that is still accepting American clients (who aren’t worth billions) to handle gold transactions please write to me.

Can I hide my gold in an overseas bank account like I see on TV and the Movies?

No. It is illegal to hide financial accounts for US Citizens. If you have an overseas account over a certain amount you MUST disclose it to the IRS in the 1040 and Treasury using the Foreign Banks and Foreign Accounts (FBAR) form.

Not doing this is a serious offense with very stiff penalties and threat of prison time. You should consult a CPA or tax attorney to find out specifics.

Why would I want to keep gold outside of my own country?

Because sometimes things happen that nobody can predict. Terrorist attacks. Natural disasters. Government problems. Civil Unrest. Etc. By having geographic diversification you have an ability to assess a situation and protect at least some of your assets if something extraordinary should happen in the country where you live. Gold is the best asset to accomplish this because it is currency neutral and easily stored elsewhere.

Do you have any advice on opening a Swiss Bank Account to store gold as a US domiciled person?

Here’s the bad news: I don’t. US regulations and pressure over the last few years have made this difficult for all but the most wealthy persons (and even then it may not work any more as some Swiss banks are asking all US clients to leave). That perhaps is a warning in and of itself to store some money outside the US if you are able to do so. Governments don’t put up capital barriers like this unless they think they may need to use them in the future.

Gold storage services (such as Gold Money and Buillion Vault) offer services where your gold is stored in Swiss Vaults. This is probably the easiest way to go about this if you are comfortable with the company reputations and protections in place. The other options include the SGOL or ZGLD ETFs mentioned above. This is not as good as having gold stored in a Swiss vault under your own account. But it may be the only realistic option for many people.

What are the tax rates on gold?

The IRS considers gold a “collectible” and charges a flat 28% tax rate on any gains. Yet, why can’t I write off the depreciation of my dollars as a loss? Anyway…

Since gold is not throwing off interest or dividends you are able to prevent paying any taxes on the gains until you are ready to sell the gold. In other words, you can hold gold for many years and pay nothing until it goes up enough in value that you are forced to sell it down. This is different than stocks and bonds that are forcing you to pay taxes through receipt of interest or dividends whether you want them or not.

I can’t store gold in an ideal way. Should I just not buy it?

No. The ideals presented here are just that: Ideals. The reality is that many of the ideals Harry Browne presented about storing gold outside the country are simply difficult to do now. This doesn’t mean you should stop exploring options to do so or take advantage of services that can do this. It just means that you’ll have to compromise a little because owning no gold in the portfolio is far worse than owning it in a less than ideal manner.

What’s the recap?

1. The Permanent Portfolio holds gold to protect against threats of high inflation and other adverse events.
2. Gold is a powerful asset that reacts strongly to high inflation and can offset losses in the other assets in a portfolio to provide real returns.
3. Gold does not pay interest or dividends like stocks and bonds, but it can have capital appreciation in certain markets which provides an opportunity to take profits.
4. Gold should be held ideally in a way that has as few pieces of paper between you and the asset as possible.
5. If you can have a bank outside of your country where you live store the gold that is ideal, but this is becoming almost impossible for American citizens to do now.
6. Gold ETFs can be a convenient way to hold gold in a portfolio, but they do introduce new risks that you should be aware of before making the purchase.
7. Buy gold bullion coins like American Eagles, Canadian Maple Leafs or South African Krugerrands for your gold allocation.
8. Don’t buy collectible or antique gold coins for the portfolio.
9. If you buy gold from a gold dealer, don’t pay too high a commission and always take delivery of the metal.
10. There are some other services that will buy and hold gold for you, but you should do your own due diligence to make sure they are safe.
11. You are far better off holding gold of some type, even if it is not “ideal’, then holding none at all. If you can only do an ETF then do an ETF. If you can only do gold in your IRA, then do it in the IRA. Don’t fail to act due to analysis paralysis.

Long Expanded Answers

How does inflation lower the value of my money?

Let’s assume inflation is 5% for ease in our example. If you took a dollar out of your pocket this year and buried it under a rock to return a year later you’d find only 95 cents there (5% less). If you took that 95 cents and moved it to a new secret location to prevent the theft from occurring again and returned a year later it would be worth about 90 cents (another 5% loss). Etc.

You cannot stop this process no matter where on this planet you put your money. When you go to retrieve it each year you would have less there than the year before. Eventually if you held the dollar long enough it would be worth a fraction of what it was worth when you earned it. In fact a dollar in 1913 (when the Federal Reserve took over the dollar) is worth only about four cents today. That’s what inflation does to money.

Now of course there isn’t someone going around and stealing your money directly. But the process of inflation decreases the purchasing power of each dollar you hold and effectively accomplishes the exact same thing. For instance, if you go back to your rock a year later and retrieve your dollar and go purchase a soda that a year prior costs $1.00 you may find that it now costs $1.05 instead. It’s the same exact soda as you bought last year, but the dollar itself has gone down in value and cannot purchase it now.

Why would the government print too much money?

Because it’s easier than raising taxes on everyone. Think of it this way: Let’s say I have a government project I want to spend $1 Billion dollars on. I don’t have the money so what can I do?

1) Raise taxes to cover the new $1 Billion in expenses.

2) Just print the money out of thin air.

Now option (1) is very unpopular and won’t help get someone re-elected. But option (2) is intriguing because I can still pay for the project, but the new money put into circulation will devalue the dollars in everyone’s pocket without them knowing what happened. A politician can simply blame the greedy business owners for “gouging” prices when what really is happening is the dollars are able to buy less and less. So in essence the government is able to pay for many such projects with printing press money but not have to raise a dime of taxes. Yet, the effect is the same as if they did raise your taxes because you now need to earn more money just to keep even.

Sneaky eh?

What’s the difference between Bullion Coins?

These coins come in many sizes but the 1 oz. size is the most common and what I recommend you buy. The American Eagle, South African Krugerrand and some others are 22K gold. That means they have 1 oz. of gold but also some alloy metal added (maybe copper or silver) to harden them.

Canadian Maple Leafs, American Buffalos and a couple other coins are 24K gold. Although they are nice looking coins, the gold is very soft and easily damaged through handling. Even a fingernail can put a scratch on them. This may affect resale value to a small degree. If you own these coins you should keep them in their protective containers and try not to handle them too much.

What about other coins from Austria, China, Britain and Australia?

They are all fine but again I wouldn’t pay a premium for them. I’d also try to stick to American Eagles, Maple Leafs or Krugerrands first. They are the most common and tend to have the lowest markups.

What about pre-1933 coins and confiscation?

Some dealers tell people that if you own pre-1933 coins they will be exempted from government gold confiscation if it should happen again. This is a bogus argument. For one, the possibility of another gold confiscation in the US is remote as we are no longer on a gold standard. Secondly, there is no telling what the politicians may do if they feel like they want to make a play to seize gold of US Citizens again. The government could decide to pass a law to seize all Teddy Bears and the courts would rule it valid (who do you think pays judge’s salaries?). So don’t think that just because some gold dealer claims that this or that coin “can’t be seized” that it actually means anything.

What you should know is that pre-1933 coins fall into that “numismatic” category and have higher markups due to the rarity over and above the gold content. What you are really doing is lining the gold dealer’s pocket by paying more for these coins. Now if you’ve bought them based on this argument I wouldn’t go out and sell them. But I would advise you not to buy any more of them over the standard bullion coins.

In fact, I wouldn’t do business with a gold dealer who was pushing this dubious theory because they are probably ripping you off in other ways, too.

What about pre-1933 coins being sold at melt value?

If you can find some pre-1933 coins that are being sold at “melt” value of the metal (basically the same price as modern American Eagles, Krugerrands or Canadian Maple Leafs) then go ahead and buy them if you feel like it. But don’t spend extra money buying these rarer coins based on some theory about gold confiscation. Coins being sold at melt value are probably heavily used circulated coins (heavily scratched or worn) and have negligible collector interest. The term “melt value” is because the dealer may actually wholesale them off at spot gold price to be melted down and the gold recovered.

What about counterfeit coins?

If you buy from a reputable dealer this is unlikely to happen as they probably checked the coins before purchasing. However if you are buying privately you should be careful about counterfeits. There is a device called a Fisch instrument which is a very simple way to quickly tell if a coin is a fake. It takes three measurements in seconds:

1) It checks the thickness of the coin.

2) It checks for the correct diameter.

3) It checks for the correct weight.

If you are going to do a lot of gold buying from private individuals it may be worth getting. Alternatively, you can learn the dimensions and weight of the popular gold coins and simply measure them yourself with calipers and a scale:

Gold Coin Specifications

Gold has a certain density that a common counterfeit using lead, etc. wouldn’t have (but tungsten does – see below). Lead is not as dense as gold and therefore can’t weigh as much as a gold coin of the same dimensions.

There have been cases of bullion bars using a Tungsten core. Since tungsten has nearly identical density to gold and is also non magnetic, these could be quite convincing and fakes have been reportedly seen coming out of Hong Kong/China (big surprise). Coins could also be done in this way in a sophisticated counterfeiting outfit.

There are fake gold coins that are real gold but minted to look like antique coins. These fakes are supposedly quite good, but since you aren’t buying antique coins you don’t need to worry about this. In this case it makes sense for the counterfeiter to use real gold as the value of the coin is not only in the gold, but by fooling the buyer into thinking it is rare and worth a premium. Again, don’t buy numismatic coins and this not a concern to you.

Finally, you should remember that if you see a deal that is too good to be true, it probably is. Someone trying to sell you gold bullion far below market price is probably a crook. If you limit yourself to buying from reputable dealers it is unlikely you’re going to run across a fake bullion gold coin. Once you handle a few gold coins and get the feel of them you won’t be fooled by a bad counterfeit. Gold has a weight and feel that isn’t easily copied.

One more thing, don’t buy gold out of Hong Kong or mainland China, ok?

Is my gold going to be safe if it is outside the country?

Keep in mind that just because you have gold or other assets outside of the country in some manner that there couldn’t be an order passed to repatriate all outside funds back. This is not a situation I anticipate, but it has happened in other places after the governments have royally screwed things up as they usually do. Not only this, but the country where your assets are stored could have a problem that causes the funds to become unavailable. There are no guarantees.

I’d also point out that any government that is keeping its citizens from moving money out of the country is either tyrannical, about to become tyrannical or is about to steal your life savings through some currency games. So if you have money already outside the country you have an advantage in that you can drag your feet on any such order for quite some time and see how things work out. Or, if necessary, you’d at least have funds outside of where you live if you need to get out quickly.

What is segregated storage vs. pooled allocations?

Segregated storage is where the bank buys and stores the gold for you under your name in your own location within the bank vault. Your gold is not mixed with other’s gold holdings. They are stored separately and titled to you directly. This is usually the most expensive gold storage option a bank offers.

Pooled allocations are convenient for banks because it allows them to buy X amount of gold and split it among Y amount of customers. When you sell your gold they simply go the pool of gold they have and sell off what you are entitled to. The bank though does not store gold for you, but you are just a claimant on the gold they do have.

The risk with a pooled account is the same potentially as a certificate. The bank may in fact not have 100% backing of gold for each gold depositor. So there is a chance that if you want to sell your gold the bank could have leased it out to someone else, etc. and it may not be there when you need it.

Swiss banks commonly offer pooled “secure custody” accounts where your gold is co-mingled with others but the banks are required to always hold 100% of gold assets for all customers and the customer maintains a titled claim to the gold. This may be a reasonable compromise between the expense and inconvenience of segregated storage and the risks of more generic pooled gold accounts.

Unfortunately for US investors many of these banks that handle segregated gold and secure custody accounts are no longer taking US clients. Many are even asking US clients to leave so you’re out of luck there, too.

What about opening an account in the Carribean or similar offshore banking center?

I’ve heard more stories of people losing money from messing around with offshore banking schemes than they ever would lose if they had just kept the money in the US and not worried about all these extreme situations.

Don’t let your fears of one risk walk you right into the jaws of another. People running many offshore scams know just how to prey on the worries of investors.

I just read this article that says gold is just a useless shiny metal with no intrinsic value, etc…

Gold has no less intrinsic value than a piece of paper with green ink stamped all over it and presented as money as the dollars in your wallet do.

Perhaps in excess of 99% of the inhabitants on this planet think gold is valuable. Every major religious text refers to it as valuable. Most books that discuss the history of finance consider it valuable. And, every major government central bank on this planet stores tons of it so they think it’s valuable, too.

To people who say gold is worthless I simply state: You are a very small minority and the rest of humanity has overwhelmingly decided that your opinion means nothing. Case closed. Can we move on now?

I just read this article that says gold is going to go to $5,000 an ounce!

You better hope that doesn’t happen. That will mean inflation is quite bad. You could easily have $20 a gallon gas and $10 a loaf for bread. Every price will go up. It will be bad news all around.

Also, what makes this person so gifted that they can predict the future?

I just read this article that says gold is going to go to $50 an ounce!!

Ok. Well that just means you’ll be rebalancing to buy more of it I guess with your bonds and cash which have skyrocketed in value.

Also, what makes this person so gifted that they can predict the future?

I just read this article that says gold is going to fall by 50% in value!!!

Yeah. Well it’s happened before. That’s why you own other assets in the portfolio to offset these losses if it should happen again.

Also, what makes this person so gifted that they can predict the future?

I just read this article that says gold is going to….

As you can guess, I really don’t care what people have to say about gold prices (or stock prices or bond prices). You own it for very specific reasons in the portfolio. Since nobody knows what the future is going to do you own gold at all times. Just as you own stocks, bonds and cash.

Gold bugs and gold bashers love talking about gold. I suggest you stay unemotional about the entire thing and stick to your rebalancing bands which are:

Buy an asset when it is 15% or less.

Sell an asset when it is 35% or more.

Where can I read more about this topic?

From the book Fail-Safe investing:

Fail-Safe Investing