What’s More Important: Price Per Ounce or Ounces
Owned?
By Jeff Clark, Casey’s
Gold & Resource Report
In a recent conversation with a fellow gold analyst, he was emphatic
that the price one pays for physical gold should be ignored. “What’s far more
important,” he insisted, “is how many ounces I own in relation to the total
value of my assets.”
Building a core position in gold bullion is a smart goal, to
be sure, and a strategy Casey Research has been advising for years. However,
ignoring the price you pay for gold could be seen as foolhardy; sure, it’s
insurance, but isn’t price part of the consideration when you shop for
insurance?
So, who’s right?
The World Gold Council just released their 2009 annual
report on gold trends. From the densely populated pages of interesting data,
there’s one compelling tidbit I gleaned that may shed some light on the buying
behavior of gold investors.
Overall investment in gold was 7% higher in 2009 than 2008.
This is significant when you consider that demand in the fourth quarter of 2008
– during one of the worst financial meltdowns in history – was so great that
shortages of physical metal abounded everywhere. And yet investors bought more
gold in 2009 when investor fear about global financial uncertainty was subdued.
Further, 2009 total funds invested in all forms of gold
exceeded 2008 by 20%, and the average price was 11.6% higher. In other words,
investors were buying gold even though the price wasn’t necessarily “low.” To
be sure, that’s a broad statement. But the fact remains that year-on-year, more
gold was purchased at higher prices when the markets were less scary, than when
the price was lower and Hank Paulson was on CNBC every 15 minutes pontificating
on how to save America’s financial system.
This isn’t to suggest one shouldn’t pay attention to price.
And the data doesn’t identify how many of those who purchased gold last year
were first-time buyers, as certainly there were newcomers to the sector that
contributed to higher demand. But it begs the question, who would continue to
buy gold when the price is higher?
Whoever doesn’t own enough, that’s who. The gold I bought
last month was certainly higher priced than what I paid in 2008. But I’m trying
to position my assets for protection from eventual dollar debasement and rising
inflation. So perhaps focusing more on acquiring sufficient ounces to withstand
a storm rather than stubbornly buying none, waiting for “cheaper” prices,
however you define that, is a better mindset. Not owning enough gold is
equivalent to holding a million-dollar mortgage and having a $10,000 life
insurance policy. It won’t help much when you really need it.
Of course we should pay attention to price. But the trick is
not letting that distract you from buying what you need. You’re not buying gold
bullion as a speculation (although we expect to make a bundle on our holdings),
but as a sound form of cash in an environment where government has no respect
for a balance sheet and sees inflation as the only way out of its black hole of
debt. During periods of inflation, the government does fine; it’s the citizens
that suffer from the lost purchasing power of their savings. It’s clear our
currency is being debased. What’s your plan of defense?
For those diligently accumulating gold, how do you know when
you have enough? Check your anxiety quotient. If Ben continues printing money
or Obama promises more goodies than he has the money to pay for, and you remain
calm, then you likely have adequate gold. These are the investors who can
afford to be stubborn about price as they build their holdings. In my opinion,
this is where we all want to be.
What form of gold should you buy? It depends on why you’re
buying it. If you understand gold’s role in history, owning a physical form
will come naturally to you. If you see the threat of inflation on the horizon,
or you worry about what is being done to the dollar, you’ll own both coins and
an ETF. If you’re worried about possible exchange controls someday, you’ll
consider a Perth Mint Certificate. And the more gloomy your outlook about the
global economy, the greater the percentage of all forms of gold you’ll buy.
That said, we maintain a bias toward physical ownership. GLD
and other gold ETFs are fine and do offer protection. But the custodian isn’t
going to airmail gold to you when you cash in your shares; having the “hard
money” in your hand gives you the freedom an ETF cannot. In our book, owning
physical gold, in the form of one-ounce coins, is where your first dollar
should go.
I remember when my wife and I decided it was time to get
life insurance. We just had our kids, and it was time to play grown-up. Given
what 5,000 years of history has taught us about the value of gold, and given
what’s happening at this moment in history to our currency, are you playing
grown-up with your investments?
Is the current price of gold a good time to buy? Check out
our four “clues” in the new issue of Casey’s Gold & Resource Report,
risk-free
here...