The Right — and Wrong — Ways to Buy Gold

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I realized that I didn’t have the whole gold thing worked out when I found myself riding the New York City subway system with $12,000 worth of gold coins in my shoulder bag. The load was not only heavy; it was making me paranoid about thieves.

Turns out there are lots of places eager to sell you gold coins, but few willing to buy them back at a fair price. After several coin dealers in Midtown Manhattan tried to rip me off, I was heading down to Wall Street, where I did end up finding a dealer who would buy my coins at a reasonably good rate.

(Read about China’s ‘black gold’ rush)

In fact, my investment actually worked out fairly well. I’d bought the coins — Double Eagles — for $500 to $600 apiece and sold them for $1,050 each eight years later. My compound return worked out to a bit more than 8% annually. (I would have earned even more if I had held on a few more years; today they’d be worth about $1,500.)

Of course, there are other investments that with good timing can pay you 8% or even 10% a year, without the risk and extreme inconvenience of gold coins. So if all the ongoing economic and market turmoil has you tempted to jump aboard the gold bandwagon, first consider these factors:

Gold is a very long-term investment. Gold is the ultimate contrarian investment. You make a good return on it only if you buy when prices are really, really low and hold on until there’s a big run-up. You should pick it up when investors are completely unworried about future inflation — or anything else — and be prepared to wait until the next inflation scare, however long that takes.

In other words, this is a lousy time to buy gold. Washington economists may say that there’s little inflation right now. But gold is already priced for a big inflation wave. (And make no mistake: That wave is coming. You can’t pump money into the economy the way the Fed has been doing without suffering the consequences sooner or later.)

Gold coins are very inconvenient. Coins are fun. You can look at them and jingle them and put them in little stacks and then move them around. But there’s really no rational reason to own gold coins when gold mining stocks are a more efficient way to diversify a stock portfolio. Had I owned gold-mining shares instead of coins, I could have sold simply by picking up the phone and calling my broker.

And there’s generally a good case for including gold-mining shares in a conventional long-term portfolio. Namely, lots of investments suffer when inflation rises, and only a few commodity-based investments benefit. Gold-mining stocks – like Barrick Gold (ABX) or Newmont Mining (NEM), or a gold-mining index fund – offer tremendous inflation protection. Unfortunately, now isn’t the time to be adding them.

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So if gold is not the answer, how should you manage your portfolio if you believe (as I do) that serious inflation is approaching? That’s a challenge I’ll return to in future columns.

Michael Sivy is a Chartered Financial Analyst and a former investing columnist for Money Magazine.