My Secret “Gold Strike” Strategy

Keith Fitz-Gerald Nov 14, 2014
43 

Gold has taken a tremendous beating in recent weeks and is now tumbling along at four-year lows of $1,160/ounce.

Things are so bad that you can actually buy the Central Fund of Canada Ltd. (NYSEMKT:CEF) – a popular gold and silver bullion investment vehicle – at a 10%-11% discount to the price of gold, because traders think the price of gold will drop even lower.

Frankly, I think that’s fantastic news.

Today I want to show you my secret “gold strike” strategy that’s perfect for moments like this. You’ll get the two tactics you need as a gold investor, a simple test to determine if you own enough gold, and a quick-and-dirty look at how to buy it.

Here’s Why You Really Need Gold

Love it or hate it, gold is no longer an optional investment. You need gold – in some form – in your portfolio.

It is a critically important risk management tool that can help dampen your portfolio’s overall volatility and also take the sting out of global uncertainty.

But contrary to what you may hear in late-night television commercials, gold has never ever been proven to be an inflation hedge.

That’s not why you want to own it.

You see, while gold is not correlated to inflation, it is more directly correlated to interest rates. And interest rates are, in turn, driven by inflationary pressures and global risk, especially in recent times.

Most people think about this in terms of the stocks, but where gold really shines is in protecting your bonds. You don’t hear Wall Street talk about this very often.

I don’t have to tell you that’s about to become a huge issue for millions of investors when the Fed starts raising rates next year. A lot of people stand to lose a lot of money because they don’t understand what I’m about to share with you.

That’s because bond values will drop as rates rise. Bond prices and yields move in opposite directions.

So you want to protect against that risk, which brings me back to a very important question.

How to Know If You Have Enough Gold

Folks like economist and author Jim Rickards recommend having 10% of your assets in precious metals – and as much as 30% in a crisis.

We’re not far off here at Total Wealth, but I’d take it one step further:

Owning $1 of gold for every $10 you have in bonds is the best way to hedge the principal value of your bond portfolio against today’s volatile global markets.

In practical terms, let’s say you have $10,000 in bonds. Using the 1:10 ratio, that would mean you’d also have approximately $1,000 in gold socked away using ETFs, bullion, or something like the very popular Perth Mint Certificates, which I’ll discuss in a minute.

Most investors could double their gold holdings and still not have enough.

Now let’s talk tactics.

My Two Favorite Tactics for Gold Investing

Gold prices are obviously getting fairly volatile these days so you don’t just want to set it and forget it. “Buy and hope” isn’t a viable investment strategy with precious metals any more than it is with stocks.

First, as with any long-term investment, but especially those that are intended to hedge other investments, consider dollar-cost averaging into your position – meaning you split your capital into chunks and buy equally over time.

That way you’re going to capture the best of today’s volatile gold prices without inadvertently concentrating your risk. And, at the same time, you’ll be positioned ahead of time when gold comes into its own again.

Second, my suggestion is to rebalance your gold and your bonds at least annually. If you’re not familiar with the concept, in a nutshell rebalancing means that you’re going to bring the relationship between your gold and your bonds back to the 1:10 I’ve outlined.

You can do this by selling enough of what’s risen and buying a corresponding amount of what’s fallen. Or you can simply add new money to your holdings and purchase enough of what’s fallen to maintain the ratio.

I suggest you pick a day like your birthday or the start of the New Year and lock it into your calendar so you don’t forget. Rebalancing should take you all of 20 minutes. Usually a lot less.

There are a number of reasons why this is worth your time.

Most people love or hate gold depending on whether or not they “love” the idea that it’s real money or “fear” the demise of the dollar and fiat currency. So they make decisions based on how unsettled they feel. In effect, they’re trying to time the markets which is almost always a bad idea because it reduces performance over time.

What I am talking about with gold is all about maximizing performance and minimizing risk.

What Form of Gold Is Best for You

Now, there’s a lot of debate about which forms of gold are best for investors. That comes down to personal preference. You may like ETFs, coins, bars, or even jewelry. It’s totally up to you.

My point is that you just have to own it – even if it drops further and gets cheaper from where it’s trading today.

Here are a few resources to get you started.

Physical Gold

American Eagles: These coins are the most trusted form of physical gold products on the market. They offer a convenient and cost-effective way to add physical gold to your portfolio in several denominations of your choosing: 1/10th-oz., 1/4-oz., 1/2-oz., or full one-oz. coins.

American Buffalos: These one-oz., 24-karat coins provide a simple way for investors to own gold bullion that’s also a form of legal tender ($50 coins). Investors will pay a small premium to cover coining and distribution costs associated with this newer asset class (since 2006).

Investors can purchase coins directly from the U.S. Mint or privately owned specialty mints, such as the Franklin Mint and the Bradford Exchange, which produce specially designed commemorative and collectible coins. However, these generally have high markups over the “spot” price of gold and silver. What’s more, there’s very little of an aftermarket, and – in many cases – the actual bullion content of the coins isn’t great enough to make them a true investment.

A way around that is to find an established dealer with a strong reputation and shopping around for a low premium over spot. Here are five I suggest you consider:

  • Asset Strategies International Inc. (assetstrategies.com) – Located in Rockville, Md., ASI also offers gold storage options outside U.S. borders through the Perth Mint Certificate Program, so you can store your physical gold (which you have legal title to) in secure facilities in Perth, Australia. They have an excellent reputation and decades of experience.
  • Kitco Inc. (kitco.com) – With offices in New York, Montreal, and Hong Kong, Kitco offers fair premiums, and their selection is usually quite good.
  • David Hall Rare Coins (davidhall.com) – In business since 1977, DHRC deals in gem quality coins including gold rarities. They can help build collections that take you well beyond hedging, too.
  • Camino Coin Con. (caminocompany.com) – Based in Burlingame, Calif., Camino has been in business for more than a century.
  • American Precious Metals Exchange (apmex.com) – Based in Oklahoma City, Okla., APMEX carries a wide range of pre-1933 classic U.S. gold coins.

Gold Funds

Merk Gold Trust ETV (NYSEArca:OUNZ) is one of a small handful of gold exchange-traded funds (ETFs) that allows investors the opportunity to turn in their shares for the delivery of actual physical gold bullion, like bars and coins. Should investors want to take physical delivery of gold tied to the ETF, they can redeem it in the form of London bars. Smaller amounts can be redeemed, too: one-oz. American Gold Eagles or American Gold Buffalos, Australian bars (either one oz. or 10 oz.), Australian Gold Kangaroo coins, or Canadian Gold Maple Leaf coins.

SPDR Gold Shares (NYSEArca:GLD) is an ETF that seeks to replicate the price of gold. I like it because it’s highly liquid. But this is not physical gold, and you cannot take delivery. If you don’t want to own physical gold, this makes perfect sense.

Central Fund of Canada Ltd. (NYSEMKT:CEF): Holding a mix of gold and silver bullion, this fund is traded on the Toronto Stock Exchange in addition to the NYSE. There are no transaction fees other than your broker’s commission.

Market Vectors Gold Miners ETF (NYSEArca:GDX) is an ETF that holds a basket of the largest gold-mining stocks. Many of these companies are phenomenally cheap right now, but owning an individual gold miner is very risky – it’s a cash-intensive operation that relies somewhat on luck. With this ETF, you diversify your risk across all 100 of the holdings. It also pays a small dividend.

Gold and Precious Metals Fund (USERX): Offered by U.S. Global, this little gem is a five-star-rated, no-load gold fund focusing on senior producers with the largest market caps in the precious metals mining sector.

In closing, if this is the first time you’ve seriously thought about gold, I totally get it. It’s never been as necessary a part of the investing process as it is today. It’s clearly controversial, there are many ways to buy it, and there’s a lot of opinions about it – not one of which obviates the need to own it.

Have a great weekend.

Best regards for great investing,

Keith

43 Responses to My Secret “Gold Strike” Strategy

  1. Jerry Ehlers says:

    Thank you for your down to earth explanations and upfront and honest opinions!

  2. OLIVER BERLINER says:

    Hello Keith,

    In your excellent discourse on today’s increased need to own gold you mentioned David Hall Rare Coins, saying that the firm was launched in 1977. I believe DHRC was operating in the 1960s when I met Dave and partner Van Simmons who now runs DHRC while David heads PCGS, which they founded, and which now has shares listed on the market (under a different corp name and pays dividends).
    Speaking of PCGS, you should caution readers that if they buy collector coins they should buy only coins graded by PCGS or NGC…never ungraded collector coins.

    • Keith says:

      Thanks for being part of the family Oliver and for taking the time to comment.

      That’s a great upgrade on buying only graded coins by the way and valuable advice that obviously comes from the voice of experience.

      Best regards, Keith πŸ™‚

  3. H. Craig Bradley says:

    BEGINNER’S LUCK ?

    Its easy to see why Gollum ( Lord of the Rings) obsessed about his golden ring. I purchased my first two gold Maple Leafs ( .9999) investment grade gold coins. It complements GLD ( paper ETF) and never hurts to control some gold yourself with no associated counter-party or systemic risk. Its beguiling when you see it. Purchased the coins from goldline.com in Santa Monica, CA. They charge 13% over spot, but allow purchase by credit card vs. the industry norm of personal check with 5 day hold or wire transfer ( 24 hour hold). Since I don’t send cash that way, it worked but cost more in mark-up. Certainly not for a quantity buyer. Your omission of goldline.com from your recommended list speaks louder than the silence. Its a T.O. Shop ( High employee turn-over business).

    Bought $18,000 in GLD in Mid-August. This is my bond fund hedge out of the way. Unfortunately, the very next month the Dollar index increased 10%, sending gold into the cellar. Downtrend is strong and I think gold will break $1,000/ounce next year as the dollar further strengthens. I suspect the dollar is being manipulated- or the other currencies in the index are being manipulated which affects the DAX. Either way, high volatility. Never owned any gold before this past August. Beginner’s Luck ?

    • Keith says:

      Hello Craig and thanks for sharing.

      Personal experience is a valuable teacher and I’m thrilled that so many members are going to have the opportunity to learn from each other as the Total Wealth Family grows.

      Here’s something to consider. It’s easy to focus on gold now that it’s making a bold move down. But the counter to that is that everything else is making a move in the opposite direction…and that’s a good thing because Pyrrhic victories are not necessarily a good thing.

      Best regards, Keith πŸ™‚

  4. Marino S. Morelli says:

    Thank’s Keith, for the thoughtful insight, and rational advice! Marino

  5. mike says:

    You read my mind with this timely advice. Thanks. I was just thinking about gold and what to do with it at these seemingly discount prices.

  6. Barry says:

    Morning Kieth

    Good overall article, Never read the gold /bond 1:10 before,

    Justa note Sprott offers 3 physical ETFs of precious metals , a Gold, A silver, & A 50%/ 50% plat & palladium ETF physicaal triuusts thaat are redeemable if one holds well to me quite large aamounts I cant possibly evcer hope to own

    Barry

    • Keith says:

      Marino, Mike & Barry,

      Thanks so much for the kind words and for chiming in today. I’m thrilled that you find my work helpful and valuable. And, humbled, too.

      Best regards for a great day, Keith πŸ™‚

  7. Doug Sanders says:

    I started buying gold several years ago for my mother who was in an Alzheimer facility, and I was her trustee. I considered it a last ditch resource if she outlived the rest of her mutual funds etc. I also began acquiring what I could afford for a long term hedge following similar advice that Keith just gave. I have no ties other than as a customer, but I was living in Arizona and used Gene Miller at Desert Gold Exchange. He is very good about advising when he has inventory, and what the cost is over spot. After researching many gold companies advertising on the radio and in magazines, I found them to be the lowest cost and most reliable to do business.

    • Keith says:

      Thanks for sharing Doug. That’s valuable first hand perspective and sounds like a great resource, too.

      Best regards and thanks for being part of the family, Keith πŸ™‚

  8. Dennis Pollack says:

    Hey, Keith,
    Nice review of the gold strategy. It’s fine as a hedge, but
    don’t go crazy putting the “pedal to the metal”!

    • Keith says:

      Excellent point Dennis!

      That’s why prudent risk management is a core Total Wealth principle. I’ve seen too many investors load up on stuff only to have it go against them with terrible results. I don’t ever want to see Total Wealth members in that position.

      Best regards and thanks for being part of the Family, Keith πŸ™‚

  9. Matt says:

    Keith, this is one of the best articles I have ever come across on why EVERYONE should have some gold, and silver, in their portfolio. MY HAT IS OFF TO YOU. And I like your mention of Central Fund of Canada, CEF. Clearly, as you point out, IT IS ON SALE. This “sale” may likely not last long. And CEF really has the physical gold and silver in their vaults, and it is audited to assure this is the case. I am no sure about some of the ETFs.

    I own lots of physical gold and silver also, and have been accumulating since the late 90s and early 2000s, when I purchased almost all that I hold. I bought CEF for $4.00 per share. So maybe I am just lucky here, but I have no intent to sell any of it for a long time……or when I see everybody jumping in with both feet. That is some time off, in my opinion.

    For folks that are not believers, they should go to this website: “pricedingold.com/us-dollar”. What is demonstrated is that “since 1999, the dollar has fallen in value from about 123 mg. of gold to less than 21 mg. today, a drop of more than 80%”. This is a really good eye-opener. The graphs are very good, and very revealing, in my opinion.

    Keep up your great work, and once again, CONGRATULATIONS on your article.

    • Keith says:

      Hello Matt and thanks both for the kind words and for sharing your experience. It sounds like you’ve been following another key Total Wealth principle for years – planning ahead.

      The charts you mention really are eye-opening and a super perspective. Great upgrade!

      Best regards and thanks for being a member of the Family, Keith πŸ™‚

  10. erich kellner says:

    You gave us the how to own gold, but skimped on the reason why a bit. You say it is not correlated to inflation but to interest rates and you should own 10/1 to protect bond principal. How does it protect my bond principal?
    When held to maturity my bonds pay out its nominal value. Its purchasing power may be reduced by inflation, but how does gold hold up under that scenario to protect me? Inflation and interest rates are up, gold?
    When you say gold is correlated to interest rates, do you mean it goes in tandem with interest rates or counter as other analysts claim, i.e. low interest rates means higher gold prices. Even that claim seems debunked by the action in the last two years. So, call me a skeptic when it comes to gold predictions.

    • Keith says:

      Hello Erich and thanks for such a thoughtful series of observations and questions. People like you are making Total Wealth a great place to be!

      Answering your questions is little beyond the space of a comment form, so I’ll get cracking on a full length column and have that ready to go down the line. The data is really interesting and I think you’ll find it compelling.

      By the way, I love the fact that you’re skeptical…that’s the hallmark of many great investors.

      Best regards, Keith πŸ™‚

  11. Michael Upper says:

    Keith:

    I have invested in both gold and silver through Monex for several years. I don’t think investing in coins, either gold or silver, is worth the extra cost because if the Federal Government bozos decide to confiscate either they will take both the coins and the bullion. So save the money and buy the bullion. Also, I have been reading for several years that many of the dealers will not deliver when an investor, even the very small ones, request physical delivery. At one time in the past (I am no longer in the same set of circumstances) I requested that Monex send me the bullion, both gold and silver, and to my pleasant surprise the Account Executive responded with a “not a problem”. During the next couple of weeks I received the deliveries at my door.

    I believe that if the investor wants to sell the bullion later after taking delivery they just have to contact Monex and send the bullion back without going through an assay. Monex is able to examine the bullion and determine right away that it is valid/legitimate. Investors reading this should confirm this with Monex.

    I invest in gold and silver because I am a doomsdayer. The Grimm Reaper is going to catch up with America and the Global economies and when that happens all hell is going to break loose.

    Thanks,

    Michael Upper

  12. Keith says:

    Hello Michael.

    Thanks for sharing both your experience and your perspective. As you note, proper storage and verification is critical if you’re taking delivery. Which reminds me of a story…

    I was giving a talk a few years back at a conference in Florida on the practical requirements associated with hard asset delivery and safe storage. Suddenly, a hand shot up in the back of the room…at which point a gentleman stood up and noted to others in the audience to take my advice seriously.

    I was pleasantly surprised to have such great participation since I did not know this individual beforehand – then shocked when he told the audience why he wanted them to listen. Turns out he had buried tens of thousands of dollars in gold coins under a fence-post…and his entire stash was now somewhere in the Gulf of Mexico following Hurricane Katrina.

    Wow…talk about perspective!

    Best regards, Keith πŸ™‚

  13. H. Craig Bradley says:

    INVESTOR ALERT: PRECIOUS METALS MARKET SIGNALS CRISIS PENDING

    KEITH,
    Just found out that no coin ( precious metals) dealers have any “junk” silver left in stock for the past two months, as they are sold out at today’s prices ( Silver Spot Price of $16.31 currently). The U.S. Mint is sold out of 1oz. Silver American Eagles, as well until the 2015 issues in late January next year. Another words, as SLV goes down ( paper silver), domestic demand for silver coins is going-up and exceeds the supply !!!! There is a 19% premium over spot for those dealers who do have junk silver. That is the real price: +19% higher than I paid last August !!!

    This market imbalances rarely happens with gold, but according to one dealer, did happen in 2010 when we had the “Debt Ceiling Impasse” between the Republican Congress and President Obama. Premiums for gold coins went up fast. History repeats. Look at the current set-up with President Obama’s pending Executive Order (EXO) to immediately and unilaterally grant permanent residence to 4 million non-citizen aliens ( amnesty) in the next few days.

    Circumventing Congress will provoke retaliatory actions such as delaying funding approvals for parts of the Federal Government in 2015, esp. late in Sept. prior to the start of the new 2016 fiscal year next Oct. 1. Physical Gold could spike and be hard to obtain at ANY price. Its a possibility.

    What does that tell you about confidence in the U.S. Dollar, our financial and banking system with the “smart money”? We are not informed is what it tells me because in the end, physical markets don’t lie. We are possibly going to have some kind of financial crisis ( government crisis ?) soon, maybe next year. Are you ready for that possibility. Something seems wrong.

    – H. Craig Bradley

  14. mary turnbull says:

    Tell us more about Perth Mint Certificates

  15. Daryl Marples says:

    Keith,

    Thank you for this information. once again you have told it like it is and given credible advise to assist people in these trying financial times.
    In listing options for purchasing gold you don’t mention Karatbars. I have followed this company for some time and they are attracting hundreds of well-informed customers with their marketing system.

    Please review and share your thoughts: http://www.goldmoneyintro.com

    Best regards,
    Daryl Marples

  16. Lennart Johansson says:

    Dear Sir: I started to read investment research letters allmost two years ago. I found out that i should have som physical gold as protecktion so i bought some and also directed some of my money to an goldstocks mutual fund. I am living in Sweden and the Swedish krona have become worth less against the USD. So i still must pay att least the amount of money, if i buy more gold,
    that i Payed in august- september 2013. I still have difficulties in how much i will allocate in gold regards to my total wealth. The biggest amount of my futere weath is that coming from our gowerment as pension. Should i take my goverment future pension in consideration when i count on how much gould i should have. I donΒ΄t know how the Gowerment has allocated the money (or have they only made a future promice that they canΒ΄t hold). Every year i get information of the amount that ihave at my acount. If i die, the money goes to the collectiver, not to my family.

    Best regards

    Lennart J

  17. Corey says:

    Excellent thoughts Keith, thanks.

    Earlier in your article you indicated that you would mention a bit about Perth Mint certificates but I didn’t catch anything further about it.

    Thanks!

  18. Loren Roseth says:

    Hi Keith-

    Great article and great advice.

    Question- If I use the Merck Gold Trust ETV, how do I take physical possession of the gold if I purchase shares in an IRA? I don’t want to move my existing IRA to a different broker just to hold gold bullion in a broker that purchases physical gold for you.

    Thanks, Loren

  19. Riffat says:

    Great article. Any idea as to how the upcoming Swiss referendum may play out? You would think gold price volatility will increase as we approach the day. Is it worth waiting till after this event to start building up ones 1:10 ratio?

  20. Paul says:

    Keith, you did not include Monex or Mocotta Metals in your list of dealers. I think they’ve been around a long time. Any reason(s) for not including them?

  21. Emmanuel Eyssautier says:

    Hello Keith, great article. Thank you.
    Please let us know which inverse ETF we can buy with confidence while Gold is going down to hedge our GLD that are getting crushed…!
    Take care

    Emmanuel

  22. Ken Jackson says:

    I’m surprised you are advocating GLD. I’ve read and heard that much of GLD’s physical gold has been leased to others that sold it. So the gold is still on their balance sheet, but it’s actually gone. If enough people try to sell their shares, the fund will default.

    Is this not true? How can we be sure?

    -Ken Jackson

  23. allan hamblin says:

    My fiance in China is selling her home intending to move to Aust. BofC has advised she cannot remit more than $50k per year. Any suggestions to circumvent this would be appreciated, like buying bullion and shipping it here. I wonder – bullion banned also – RMB cost v/s AUD value?
    Al

  24. Larry Costa says:

    Keith–Helpful, usable and practical info that makes diversification into less familiar investment areas easier.–LMC

  25. Phil Chang says:

    You mentioned the Perth Mint Certificates but they weren’t in the list at the bottom. Will you talk about this soon?

  26. Nancy says:

    I am so new to this and exploring places to buy gold. Can one buy directly from the US Mint? If so, what is the website?

  27. Howard Berry says:

    Great article, read your articles every day. It’s important to keep abreast of what is happening. Another gold option I have been looking at is http://www.goldsecurity.ca Karatbars a LBMA accredited company from Germany. For small investors buy gold in 1gm 2 1/2 gm & 5gram cards . Like coins you have the gold bullion in hand. They also let investors become affiliates and make commissions on introducing gold to others. It seeming that most people who have gold like the metal, and talk about it. Might as well get gold for free with this company. Keep up the informed good work.

  28. Alastair Macdonald says:

    Yes, good judgement. Dr Sjuggerud at Stansberrys’ is in aggrement. CEF, GDX,GLD: comparatively reliable. Highest probability of good returns. Yes, there is a collapse in the US dollar arriving soon
    AWM ( NZ)

  29. Fred Weber says:

    Caveat: Some advisers have been recommending against GLD and also the Perth Mint , saying they’ don’t have the amount of bullion claimed. And V, the Guerilla Economist has advised that only physical metals will protect you from a currency collapse.

  30. Louie Miotti says:

    I agree when rates move up bond values go down, but so does gold, so how does gold protect our portfolio

  31. RJ says:

    Interesting that Jim Rickards, mentioned in this article, does not recommend ETFs or investment-grade coins. And by the way, dear readers, we all make mistakes. But, can we write a proper sentence with correct spelling?

  32. Dan Daniel says:

    Good question !! When interest rates go up, bonds go down, and so does gold. With rates so low why buy gold, unless there is a currency problem?

  33. Dale Proulx says:

    Keith will you please give your opinion on royalty companies as an precious metal investment vehicle?

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