>The Gold Report

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Atwell: Mideast Mayhem to Drive Gold Higher

Brian Sylvester of The Gold Report
Friday, Feb 25, 2011
As Casimir Capital Managing Director Wayne Atwell sees it, further political unrest in the Middle East could push gold higher, while inflation risk and sovereign debt issues in Europe are longer-term price catalysts. He also shares his insights on small-cap investment in this exclusive interview with The Gold Report.

The Gold Report: In a recent interview with Bloomberg you said, “Gold’s gotten stronger because it’s no longer weak.” Can you explain that concept to our readers?

Wayne Atwell: Commodities and securities tend to trade on momentum. Gold had been exceptionally strong, but a lot of investors became nervous because gold appeared too strong and people started taking profits. Then the dollar strengthened and we received some more good economic news, which drove gold down again. Gold has corrected about 7% from its high late last year. Once it breaks through its support level, it could go meaningfully lower. It was in a negative technical pattern and once there is a certain technical pattern on the charts investors start dumping gold and go short. Some people don’t believe it, but many people invest based on charts and technical patterns. If enough people invest enough money, then it works.
Gold was on the verge of breaking down further when the Middle East uprisings began and investors became a bit anxious. So far, the citizens of two Arab countries have overthrown their governments. It’s been relatively peaceful, which is great, but you can envision a scenario in which it wouldn’t be peaceful. Saudi Arabia is likely to have some difficulties that may or may not result in a change of government, and now we’re hearing about protests in Iran. The probability is high that both those countries are going to have additional issues. They may not, but unrest in the Middle East has turned the gold price around.
TGR: That parallels what you’ve described in the past as an “event-driven market” for gold. Would further unrest in Arab countries push the gold price back above $1,400/oz.?
WA: I tend to think so, I guess it depends on what form that unrest takes. Obviously, the government changes in Egypt and Tunisia were relatively peaceful. But the uprising has already spread to Yemen and Saudi Arabia—and now there’s talk of revolts in Jordan and Iran. Saudi Arabia, as you’re probably aware, is responsible for about 11%–12% of global oil production. God forbid that country has a problem—that could cause a real crisis. Fighting in the Middle East is certainly an event that could push gold meaningfully higher. You will remember what happened in October 1973 when the Arabs cut off oil to the West and the oil price went through the roof. It caused massive anxiety and a very serious recession.
TGR: What are some other events that you anticipate could move the gold price this year?
WA: In terms of events, I’m worried about the sovereign debt situation in Europe. The European Union (EU) has dealt with liquidity issues for both Iceland and Greece into 2013, but it hasn’t solved the underlying problem; it’s just dealt with the short-term issue. Unless these countries start balancing their budgets, which is unlikely—come 2013, the same problem will resurface. A sovereign default in Europe is highly probable. Spain has an unemployment rate of +20%, which is just huge. That’s an issue, too.
In the U.S. a number of municipal governments are very deeply in the red. They haven’t funded their pensions and healthcare for their municipal workers. There’s a reasonably high chance that one or more of these municipalities could fail, which would cause a high degree of anxiety and force investors to dump municipal bonds, which again would result in investors’ flight to gold as a safe haven.
TGR: In an interview with BNN, you talked about the Chinese and American economies “laying the groundwork for inflation.” How are these countries doing that and what do you believe is the timeframe for dramatic inflation increases in both countries?
WA: I’ve been going to China for 30 years and I have seen a phenomenal change. I’ll just throw out a few numbers to put the country in perspective. China consumed about 3%–4% of the world’s commodities in 1985 and now consumes 35%–45% of global commodities, which is astounding. To put that in context, from 2000–2010, global steel consumption grew at a rate of 5% a year. Chinese steel consumption has grown at a compound rate of 17%. So, in 2000, China actually produced 127 million tons (Mt.) of steel; in 2010, it produced 626 Mt. of steel. Basically, the country grew its steel industry by 500 Mt. in 10 years, providing the bulk of global growth.
On average, commodity-consumption growth averages 2.5%, yet here we have steel growing at 5% over a 10-year period and China’s steel consumption growing at 17%. It’s unprecedented. That, in turn, has caused a shortage of metallurgical coal. Met coal is breaking out and will probably reach a new high shortly because China has gone from being an exporter to an importer. Iron ore is now within about $10 of its all-time high. About 10 years ago, China was about 70% self-sufficient in terms of iron ore; now it’s 30% self-sufficient, so China is driving up the iron ore price, as well.
TGR: It’s a similar story with copper.
WA: Yes, copper made a new high last week and China consumes 38% of the world’s copper; it’s only 15% self-sufficient, so 85% of its copper comes from offshore. The rapid growth in China is being driven by the need to move people from the country into the cities, and the country consumes a lot of material when it constructs new buildings, rail lines, power facilities, bridges and ports. China is transforming from an agrarian to an urban society, having moved about 15 million people per year into cities over the last 15 years. It’ll likely have to do that for another 10, maybe 20 years.
China is only 43% urban but it will likely become at least 60%, maybe even 70% urban within 20 years. This is putting a strain on the global supply of industrial materials—prices for many of which are at or close to all-time highs, which is inflationary. The mining industry has a pattern of looking for new mines and developing new properties but when you grow at a rate that’s faster than the historical norm, it puts extra strain on the industry. We’re not going to run out of these materials but we must go look in more remote locations to find the materials.
TGR: What about inflation in the U.S.?
WA: Here in the U.S., the government is out of control. Our government spending is frightening. Last year, we had a $1.6 trillion deficit. It’s coming down a bit this year, but it’s still going to be very high. The deficit is about 10% of GDP; historically, it peaked at 4%. Government spending is about 25% of GDP. We haven’t seen these numbers since the end World War II. We’re in uncharted territory—the government is spending too large a share of our GDP. The interest on our debt, as forecast by government budget office, is going to go from $350 billion this year to $900 billion within five years. Forget healthcare, social security, Medicare or Medicaid—we’re going to add +$500 billion to the interest expense. This will drive the dollar down and result in serious inflation.
In the case of China, industrial demand is pushing up commodity prices and creating inflation. As far as the U.S. is concerned, you can’t have this pattern of government spending in the reserve currency of the world without causing serious problems. There is every reason for investors to go into the gold market to put a certain percentage of their assets in gold for protection against super inflation.
TGR: Do you think these factors will push gold to an all-time nominal high in 2011?
WA: Gold made a new high late last year. It has made a new high 10 years in a row. We think it will make a new high of $1,600 this year and $2,000 within the next one to three years. We suggest buying on a correction; it probably won’t go much lower. We believe holding 5%–10% of one’s assets in gold makes sense.
TGR: Among other financial services, Casimir Capital puts together financings for companies, many of which are junior miners. Why does Casimir focus on the junior mining segment of the market?
WA: I wrote a piece on the junior gold industry recently, which makes a number of points. One is that the denominator is obviously much smaller for the gold juniors. If both a major and a junior gold exploration company find a 1 million-ounce (Moz.) gold deposit, it’s going to have a much more significant impact on the junior explorer’s share price. Only about 5 out of every 100 exploration discoveries is really of interest to majors because most of the very large gold properties have already been found.
It’s extremely difficult to find an exciting new gold property. So, if you’re spending money on gold exploration, the probability is you’re going to find a small gold deposit. But in many cases, the gold majors are prospecting for new exploration properties in their corporate finance department. They’re looking at and frequently buying intermediate or small gold companies with substantial gold deposits that the majors can develop themselves.
TGR: Yes, the gold majors essentially use the junior explorers as their exploration arm.
WA: Exactly. It’s like their exploration department. Gold deposits will be in production anywhere from 5–20 years. They’re generally small. Majors have to replace their depleting resources, plus people expect growth. It’s very expensive for a major to go out and find, and then develop gold properties. If, however, a junior develops a 0.5 Moz. deposit, it doesn’t have to build as much infrastructure. Developing a property as a junior is just a lot less expensive than it is as a major.
TGR: But they’re selling the gold for the same price.
WA: Exactly. The index we put together last year showed the juniors appreciated about 49% in 2010, whereas the majors were up roughly 27%.
TGR: Before we let you go, could you give us your outlook for gold over the next few months?
WA: Let’s go back to the event-driven motivation for moving the gold price. The events we don’t yet know about will likely determine the direction of the gold price. The underlying momentum is positive when you look at the U.S. budget, government spending and Europe’s sovereign debt problems. And the problems that governments have created will only get worse as populations age and Social Security obligations become greater—that’s certainly a problem. We’re all aware of those slower-moving issues, but I think what drives gold in the short term are events in the Middle East and any sovereign debt default. Unless there’s a major unexpected event, we’ll probably see the gold price break out to a new high in the second quarter. We’re roughly halfway through the first quarter now, so we look for the gold price to be rangebound the next two to six weeks before breaking out in the second quarter. But it’s subject to material impact by unexpected events, which always have a way of happening.
TGR: Thank you for talking with us today, Wayne.
Mr. Atwell has more than 35 years of experience in the field of investment analysis for the metals and mining industries. He currently serves as a managing director of Casimir Capital L.P. From 1991–2006, Mr. Atwell was a managing director at Morgan Stanley where he was the Global Group Team leader in equity research and built and managed a 12-member global metal and mining team of analysts. From 1983–1991, Mr. Atwell was a VP at Goldman Sachs covering the metals and mining industries. He was also a VP and principal in the privately held Davis Skaggs, a regional research firm, from 1977–1983. And from 1969–1977, he worked for Merrill Lynch as a senior metals and mining analyst. Mr. Atwell has toured 200 mines and 300 steel mills on six continents. He was selected as one of the 10 best buy-side stock pickers by Institutional Investor magazine several times and was rated as one of the top analysts in metals and mining by Institutional Investor and Greenwich Associates for more than 20 years. Mr. Atwell graduated from Pennsylvania State University in 1969 with a degree in mineral economics. He earned his MBA from the Stern School of Business at New York University in 1974.

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>Proof Coinage Essentials

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2002 Lincoln cent

Proof coinage means special early samples of a coin issue, historically made for checking the dies and for archival purposes, but nowadays often struck in greater numbers specially for coin collectors (numismatists). Many countries now issue them.

Preparation of a proof striking usually involved polishing of the dies. They can usually be distinguished from normal circulation coins by their sharper rims and design, as well as much smoother fields.

Modern U.S. proof coins are often treated with chemicals to make certain parts of the design take on a frosted appearance, and the fields taking on a mirror finish. Several other methods have been used in the past to achieve this effect, including sand blasting the dies, and matte proofs. Proof coins of the early 1800s even appear to be scratched, but it was part of the production process.

Most proof coins are double struck. This does not normally result in doubling that is readily observable, but does result in the devices being struck fully.

The U.S. largely stopped striking proof coins in 1916, although a few later specimens exist. Beginning in 1936, the U.S. Mint began producing proof sets. Sets struck from 1936–42 and, when resumed, from 1950–72 include the cent, nickel, dime, quarter, and half dollar. From 1973 through 1981 the dollar was also included, and also from 2000 on. Regular proof sets from 1982 to 1998 contain the cent through the half dollar.

Other sets, called Prestige Proof sets, also contain commemorative coins. These sets were sold from 1983 to 1997 at an additional premium. As Legacy Proof sets the practice was resumed in 2005. Beginning in 1999, proof sets also contain five different statehood quarters. The 2004–05 series also contain the two Lewis and Clark nickels, and since 1999 with the five annual Statehood Quarter coins.

Since 1992 the mint has struck proof sets in both silver and base metal. U.S. commemorative and bullion platinum, silver, and gold coins are also often issued in both uncirculated and proof types, sometimes with different mintmarks.

>Coin Collecting Essentials

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While hoarding coins due to their value goes back to the beginning of coinage, coin collecting as pieces of art was a later development. Known as the “Hobby of Kings”, modern coin collecting is generally believed to have begun in the fourteenth century with Petrarch. Notes of Roman emperors having coin collections are also known, but it remains somewhat unclear whether these coins were studied, considered curiosities or were merely hoarded.

COIN COLLECTING SPECIALTIES
Coin collectors often begin by saving coins they have received in circulation, but found interesting. These may be the remnants of change from an international trip, or an old coin found in circulation. Over time, if their interests increase, chance will not be sufficient to satisfy the demands for new specimens, and a potentially expensive hobby is born. Some become dedicated generalists, looking for a few examples of everything. If they have enough resources, this can result in an astounding collection, as that of King Farouk of Egypt, who collected everything (and not just coins either). Some are completists, wanting an example of everything within a certain set. For example, Louis Eliasberg was the only collector thus far to assemble a complete set of known coins of the United States.

At the very highest levels of coin collecting, it can become a highly competitive sport. Recently, this has exhibited itself in registry sets, where the most complete set of coins with the highest numerical grades assigned by grading services are published by the grading service. This can lead to astronomical prices as dedicated collectors strive for the very best examples of each date and mint mark combination.

Most collectors determine that they must focus their limited financial resources on a narrower interest. Some focus on coins of a certain nation or historic period, some collect coins from various nations, some settle on error coins or exonumia, such as currency, tokens or military challenge coins.

Every collector collects what interests them, and there are as many ways of collecting as there are collectors. However a few themes are common and are often combined to a goal for a collection.

A number of common collection themes include:

Country CollectionsMany collectors attempt to obtain an example from every country which has issued a coin. In contrast to those who collect coins from all countries, many collect coins from only one country, often their own.

Type CollectionsA mint will often keep the design of a coin the same for several years, with the only difference from one year to the next being the date. An example of a coin type is the United States Lincoln cent (pictured). In a Type Set the collector typically does not care what the date or mint mark of a coin is as long as it represents the design of that type of coin.

Year CollectionsRather than collecting one example of a type, some collectors prefer to collect by year, and thus collect one lincoln cent for every year from 1909 to the present.

Mintmark CollectionsMany collectors consider that different mint marks give sufficient differentiation to justify separate representation in their collection. This increases the number of examples needed to complete a collection from one per year to several per year. Some mintmarks are more rare than others and harder to find. This is what makes collecting different mintmarks exciting for collectors.

Variety CollectionsAs the mint issues many thousands or millions of any given coin, there are generally multiple sets of dies used. Occasionally these dies will be slightly different, generally in a very small detail, such as the number of rows of corn on the recent US Wisconsin state quarter. Varieties are more common on older coins, when the dies were hand carved.

Error CollectionsThe automation of coin manufacturing processes during the 19th century has decreased the number of error coins produced, and somewhat perversely, increased their collectability. Collectors of modern coins find errors desirable because modern processes make the likelihood of their production very limited. Examples of coin errors include doubled dies, repunched mint marks, overdates, double strikes, off metal coins, displaced or off center coins, clipped coins, and mules (different denominations on two sides of one coin).

Subject CollectionsCollectors with an interest in, for example, ships or dogs may collect only coins depicting the subject they are interested in.

Composition CollectionsFor some, the composition of the coin itself is interesting, for example there are a number of collectors of only bimetallic coins.

Period CollectionsMany collectors restrict themselves to coins issues after the 18th or 19th century, while others collect ancient and medieval coins. Coins of Roman, Byzantine, Greek, Indian, Celtic, Parthian, Merovingian, Ostrogothic and ancient Israelite origin are amongst the more popular ancient coins collected. Specialties tend to vary greatly, but one approaches include the collection of coins minted during a particular emperor’s reign, or a representative coin from each emperor.

Coins are often a reflection of the events of the time in which they are produced, so coins issued during historically important periods are especially interesting to collectors.

While many of these themes appear simple at first glance, the more serious the collector becomes, more problems surface. Where someone collects coins from every country, eventually the issue of what is a country will arise, especially in areas beset by civil war. When a collectors aim is every year and mintmark of a particular type, then there will often be one coin which is significantly more rare and expensive than the others.

COIN COLLECTING DETAILS
In coin collecting the condition of a coin is paramount to its value; a high-quality example is often worth many times as much as a poor example—although there are always exceptions to this general rule. Collectors have created systems to describe the overall condition of coins. One older system describes a coin as falling within a range from “poor” to “uncirculated”. The newer Sheldon system, used primarily in the US, has been adopted by the American Numismatic Association. It uses a 1–70 numbering scale, where 70 represents a perfect specimen and 1 represents a coin barely identifiable as to its type.

Several coin grading services will grade and encapsulate coins in a labeled, air-tight plastic holder. This process is commonly known as “slabbing”, and is most prevalent in the US market. Two highly respected grading services are the Numismatic Guaranty Corporation (NGC) and Professional Coin Grading Service (PCGS). However, professional grading services are the subject of controversy because grading is subjective—a coin may receive a different grade by a different service, or even upon resubmission to the same service. Due to potentially large differences in value over slight differences in a coin’s condition, some commercial coin dealers will repeatedly resubmit a coin to a grading service in the hopes of a higher grade.

Buyers are encouraged to look into the quality and features of the various grading services before deciding to purchase a coin based solely on the grade given by a service. The grading services came into being (PCGS being first) in an effort to bring more safety to investors in rare coins. While they have reduced the number of counterfeits foisted upon unsuspecting investors, and have improved matters substantially, because of the differences in market grading (which determines the price) and technical grading, the goal of creating a sight-unseen market for coins remains somewhat elusive.

Damage of any sort, such as holes, edge dents, repairs, cleaning, re-engraving or gouges, can substantially reduce the value of a coin. Specimens are occasionally “whizzed”–cleaned or polished in an attempt to pass them off as being higher grades or as proof strikes. In general, the buyer is cautioned to be careful of any unknown seller’s claims. Because of the substantially lower prices for cleaned or damaged coins, some specialize in their collection. There is a market for almost any rare or obsolete coin.

COINS AS AN INVESTMENT
A common reason given for purchasing coins is as an investment. As with any investment, careful research is required. As discussed in the numismatics entry, prices cycle and can drop, particular for coins that are not in great long-term collector demand. Condition, surviving population and demand determine price. Surviving population can be initially estimated from mintage figures. Specialists learn the exceptions due to melting and other circumstances with experience and study. Age, as such, is not a relevant factor. Claims made by advertisers using popular media outlets should be treated with great skepticism.
In contrast to investments in the classical financial sense (such as stocks and bonds), a coin collection does not produce income until it is sold, and may even incur costs (storage costs etc) until then.

>NEW Five-ounce Silver Bullion Coin Release Details

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by Darrin Lee Unser 

The first five-ounce 2011 America the Beautiful Silver Bullion Coin is on the horizon, according to new release details from the United States Mint.

The five-ounce 2011 America the Beautiful Silver Bullion Coins share the same designs as the 2011 America the Beautiful Quarters.

The US Mint also indicated that the stipulations for their distribution will be substantially different than last year. Specially imposed resell terms and conditions that were put in place for the 2010 America the Beautiful Silver Bullion Coins will be lifted, owing to the fact that mintage quantities will be “substantially higher” for the 2011 coins.
The US Mint on Thursday offered the highly anticipated information in a short memo sent to its network of Authorized Purchasers (AP’s), which also gave a release date of late April for the 2011 Gettysburg National Military Park Silver Bullion Coin.
The news of this release, while of interest to many, is especially important to the AP’s. They are responsible for distributing all United States Mint bullion products, including the American Eagle, American Buffalo Gold and the new five-ounce silver strikes. The network purchases the bullion coins from the Mint for a slight premium above the cost of the metals contained within them, then resells them to secondary retailers in smaller lots. The process has helped keep the price of bullion coins low as they make their way into the secondary market.
In clearing the way to resell the 2011 five ounce strikes, each AP must first state that it has sold all its 2010 America the Beautiful Silver Bullion Coins and in compliance with the terms and conditions set forth by the Mint.
Many will recall that last year’s bullion coins were re-launched following a short delay when the Mint investigated reports of excessive pre-order premiums that some described as “price gouging.” After the Mint added several new restrictions for their resell, the complete line-up of all five 2010 America the Beautiful Silver Bullion Coins was offered to Authorized Purchasers on December 10, 2010.
One requirement placed on AP’s was that they had to offer their America the Beautiful Silver Bullion Coin inventory directly to the public, with a maximum of one set per household. Most AP’s did not have systems in place for retail operations, as their business model focused on selling directly to other companies. The limited numbers of coins minted (33,000 for each of the five designs) and the delay in setting up retail driven processes resulted in significant delays in getting the five-ounce bullion coins sold, causing even higher secondary market premiums.
When an AP has certified that it has been in compliance and it has sold all of its 2010 coins, the US Mint will allow it to participate in reselling the 2011 series under the standard Authorized Purchaser Agreement used for American Silver Eagles.
In addition to the first Gettysburg Coin, the four other five-ounce 2011 America the Beautiful Silver Bullion Coin issues include the:

• Glacier National Park Silver Bullion Coin,
• Olympic National Park Silver Bullion Coin,
• Vicksburg National Military Park Silver Bullion Coin and
• Chickasaw National Recreation Area Silver Bullion Coin

Check out the series program information for later year issues.
The Mint will also release the 2010 and 2011 America the Beautiful Silver Uncirculated Coins which will serve as collector grade versions. Release details and dates for those are still “To Be Determined.”
Related Coin News:

• America the Beautiful 5 Ounce Silver Bullion Coins Release Details
• America the Beautiful Silver Bullion Coins, Program Information & Release Dates
• 75,000 America the Beautiful Silver Bullion Coins Sold

>THINKING ABOUT INVESTING INN GOLD? >> ASSESS YOUR OPTIONS CAREFULLY !

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A beginner’s guide to investing in gold

Gold has been sought after for its unique blend of near indestructibility, beauty, rarity and because of its status as a means of exchange and universal currency par excellence for centuries.
Empires and nations have sought to possess gold as a medium of international exchange, as a store of wealth and in order to increase and preserve power. Individuals have used gold as a store of wealth and as insurance against the fluctuations and depreciation of paper money and to protect against other macroeconomic and geopolitical risks.

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Throughout history, perhaps no other asset in the world has had the universal appeal of gold and this appeal has increased in recent times due to the very significant macroeconomic, geopolitical, monetary and systemic risk facing our modern global financial system and economy.
Successful investing is about the diversification and management of risk. In layman’s terms this means not having all your eggs in one basket. We know from history that markets can and do crash and if you are not properly diversified your nest egg can be severely affected.  

So a healthy portfolio will include a wide range of assets including a variety of equities with exposures to different market sectors and regions; a variety of different countries’ bonds of different durations; a diversified property portfolio; a cash component and a 5-15% allocation to gold related investments and gold bullion. In these uncertain times, caution and risk consciousness is crucially important and counterparty and systemic risk should be considered.
The key is to determine what amount of each asset class to have and to own assets that will whether the onslaught of inflation, deflation, stagflation and even hyperinflation.
Some exposure to gold should be included in all diversified portfolios. A good rule of thumb would be a minimum allocation of around 10% to gold and related gold-investments.
One’s motivation for buying gold is fundamental to deciding in which form you should buy it. Are you a speculator, investor or saver? Do you wish to take a short term speculative position in gold? Are you investing for the short, medium or long term? Or are you diversifying, saving or using gold as a form of financial insurance?

Investing in physical gold

Physical gold should form a part of a properly diversified portfolio. Gold remains a universal finite currency, held by every central bank of note in the world. And central banks are set to become net buyers of gold in 2009 for the first time since 1988. The Indian Central Bank’s purchase of 200 tonnes of gold from the IMF in October 2009 ( and a further 200 tonnes is being acquired) is the biggest single central bank purchase in such a short period of time (at least known to the markets) for at least 30 years.
In the same way that the family home should not be regarded as an investment, gold bullion is not an investment per se, rather a form of ‘saving for a rainy day’ or of financial insurance. It is to be taken possession of or stored with a secure third party and should not be traded. One does not trade an insurance policy and thus as a form of financial insurance, physical gold should not be traded.
Gold is money and is the ultimate safe haven asset and a great way, if not the best way, of ensuring wealth preservation and for passing wealth from one generation to the next. Once the solid base or core holding of gold bullion is achieved in a portfolio then other investments in gold such as mining stocks and mutual funds and other more speculative gold investments can be considered.

Modern bullion coins and bars

Modern bullion coins allow investors to own investment grade gold (between 0.90 and 0.9999 fineness) legal tender coins at a small premium to the spot price of gold as quoted on the markets. The value of bullion coins and bars is determined almost solely by the price of gold and thus follows the bullion price. Larger bars are not generally taken delivery of due to the cost of insured delivery and the security implications of having very large amounts of bullion outside the chain of integrity (say in a private residence). A London Good Delivery Bar weighs 400 troy ounces and costs over $400,000, £270,000 and €300,000 (prices as of 20/11/09) and is prohibitive in terms of cost and thus big bars are normally the preserve of large companies, institutions and central banks.
Gold, silver, and platinum are all available in the form of bullion coins, minted in the UK, the US, in Canada, South Africa, Austria, Australia, China and other countries. Most bullion coins are minted in 1/10oz, 1/4oz, 1/2oz & 1oz form (and some can be bought in 2oz, 10oz & 1 kilo). However, one ounce gold bullion coins such as Krugerrands or Britannias are by far the most popular for both small investors and high net worth individuals who see the advantages of owning legal tender bullion coins, either in their possession or in depositories, and recognise the advantages of the divisibility afforded by them.
Buying investment grade gold bullion for investment is stamp duty free and tax free (VAT exempt) in the UK and EU due to the EU Gold Directive of 2000.
Providers: Goldcore, Gold Investments Ltd, Baird, Chard, ATS Bullion

Semi-numismatic and numismatic gold coins

Numismatic or older and rare coins are bought not solely for their precious metal content but also for their rarity and their historical, aesthetic appeal. They are leveraged to the gold price which means that the price of these coins will generally surpass and increase faster than the gold price in a bull market (due to their historical and aesthetic value and to their rarity) and will decrease by more when gold is in a bear market.
The British Gold Sovereign (originally the one pound coin) is the most widely traded and owned semi-numismatic gold coin in the world. Important is the fact that, unlike the other forms of gold investment, British gold sovereigns are not subject to capital gains tax (CGT). Thus all post-1837 British gold sovereigns – because they are legal tender and have a legal tender face value – are capital gains tax free, which is obviously a significant benefit to investors vis-à-vis other gold investments.
Also highly owned are high-quality pre-1933 gold coins graded MS-65 or better by either the Professional Coin Grading Service or the Numismatic Guaranty Corporation. They are bought by both collectors and investors and most opt to take possession of these older coins unless they have invested in significant quantities.
Insured delivery of bullion and numismatics is usually some 1%-2% of the total value.  Insured storage of bullion and numismatic coins in an allocated account will cost some 1% per annum. Investors should choose their storage provider carefully, making sure of a high credit rating and high net worth. This leads some to prefer an offshore bank or specialist depository.
Providers: Goldcore, Gold Investments Ltd, Baird, Chard, ATS Bullion

Gold certificates

The Perth Mint Certificate Programme is the only government backed precious metal certificate programme in the world. It allows investors to own bullion in unallocated or allocated accounts. The Perth Mint retains its AAA credit rating from Standard and Poor’s and Moody’s and is one of the safest and securest ways to own investment grade gold bullion. There are no initial or ongoing shipping, insurance, holding or custodial fees and thus it is one of the most cost effective ways for investors to own bullion over the long term.
Gold certificates are liquid and can be sold easily (soon investors will be able to buy and sell in real time online). Most investors opt to own their bullion in unallocated accounts as there are no insurance or holding fees on them and there is the flexibility of being able to transfer to an allocated account simply by paying small fabrication fees should the investor deem it necessary. Every gold bar is audited and accounted for and it is thus considered a safe way to own bullion. Bullion in a format of your choosing (coins or bars) can be shipped internationally from an allocated account or from an unallocated account once it has been converted to allocated.
Providers: GoldCore

Allocated accounts

Allocated gold accounts allow an investor to buy gold coins and bars from a bullion brokerage which will transfer or ship the bullion to an individual’s account in a depository or bank. Allocated accounts involve ownership of specific gold and the owner has title to the individual coins or bars. Due diligence should be done on allocated gold account providers and the history, security, credit rating and net worth of the provider is of vital importance.
Providers: GoldCore, specialist depositories

Digital gold currency or e-gold

Digital Gold Currency, goldgrammes or e-gold are also increasingly popular. There are no specific financial regulations governing DGC providers, so they operate under self-regulation. DGC providers are not banks and therefore do not need to comply with bank regulations and there are concerns that there are unscrupulous operators operating in this emerging sector.
However, two of the more respected providers who have rightly garnered trust are Bullion Vault and Gold Money. They offer allocated accounts where gold can be instantly bought or sold just like any foreign currency. Every gold bar is audited and accounted for and it is thus considered a safe way to own bullion. Digital gold is primarily used by clients to buy gold for saving or as an investment and/ or as electronic money amongst users.
Providers: Gold Money, Bullion Vault

Gold bullion in SIPPs

UK citizens can as of April 2006 invest in gold bullion through their Self-Invested Personal Pensions (Sipps). US citizens could already do so in their Individual Retirement Accounts (IRA’s). Sipps are new types of personal pension scheme that hold investments until you retire and start to draw a pension income. They are designed for people who want to manage their own fund by investing in asset classes of their choice. Investments made in gold bullion are topped up in the form of tax relief, meaning individuals can claim up to 40% back depending on the income tax band they fall in to.
Gold bullion is allowed in a Sipp providing it is investment grade gold which is gold of a purity not less than 995 thousandths or 99.5% pure and which is in the form of a bar, or of a wafer, of a weight accepted by the bullion markets. The bullion must be immoveable and stored with a secure third party. It cannot be taken possession of and used as a “pride in possession” article. Thus ETFs, some digital gold providers, allocated gold accounts and gold certificates are all allowed in the new SIPP.
Providers: GoldCore, Bullion Vault

Investing in paper gold

Mineral exploration, mining and the processes used to mine and produce metals are highly technical. Investors in gold production and exploration company stocks need to equip themselves with a basic understanding of the industry, in order to identify possible pitfalls and the risk-reward relationships of entering this investment sector. Investors should generally not buy just one or two stocks, but rather a basket of unhedged stocks or a mutual fund.
Derivatives, such as ETFs, forwards, futures, options and spread betting are normally short term speculations on the future price of gold and other markets such as commodities, shares or bonds, interest rates, exchange rates, or indices. They are financial instruments which derive their value from or whose price is dependent on the underlying asset. One does not directly own the underlying asset and one does not have a right to take possession of the underlying asset. Leverage or borrowing substantially may increase investment gains but also increases risk as if the price goes against the purchaser they may be subject to a margin call. There is significant leverage involved with derivatives and they are thus considered risky for non professionals as the potential positive or negative outcome is greatly magnified.
pyramid

Gold exchange traded funds (ETFs)

The recently launched ETFs are derivatives that track the price of gold and silver. Two of the more popular are the Streettracks Gold Shares (NYSE:GLD) and in London the Lyxor Gold Bullion Securities (LSE:GBS). They can be bought through stockbrokers.
There is an annual administration fee of between 0.4% and 0.5% per annum. Thus every year the amount of gold or silver backing an ETF share shrinks by that amount. This makes them unattractive as a medium or long term way to invest in gold. They are akin to derivative contracts that track the gold price and one does not own or have title to the underlying asset. Thus they are primarily used by day traders, hedge funds and institutional players going long and short and speculating on short term movements in the gold price.
Providers: Stock Brokers, Online Brokers

Gold stocks

Gold stocks are not gold – rather they are shares in gold mining companies. If the gold price rises, profits of a gold mining company should rise and as a result the share price should rise. There are many factors to take into account and it is not always the case that a share price will rise when the gold price increases. It is important to consider the performance and abilities of the management, auditors and geologists; the conduct of trade unions; a company’s gold hedging position; whether it is producing or exploring; its cost basis; how much reserves it has in the ground and whether it is subject to political, economic, nationalisation or environmental risk.
Individual gold shares would be regarded as very volatile and high risk. Gold shares are regarded as more speculative as there is a higher risk-reward scenario. However, the added risk can be compensated for by the leverage which can result in higher returns. Such higher returns would be expected from mid and large-capitalisation un-hedged senior gold mining companies with proven reserves and strong earnings which have strong balance sheets and growth in resources and production and effective company management.
Providers: Stock Brokers, Online Brokers

Gold stock options

Stock options are a contract between two parties that expires at an agreed-upon time in the future. The contract purchaser is buying the right, but not the obligation, to buy a gold mining stock (a ‘call’ option) or sell (a ‘put’ option) a gold mining stock (the ‘underlying’) at a specific price, on or before the agreed-upon date, the date of expiration.
Stock options allow for a lot of leverage as a trader can control a large stock position with only a small outlay. However due to the very short term of the option contracts, they can expire worthless with the entire outlay being lost. Stock options allow speculators to make bets on market movement without having to pick an up or down direction. Because of this, stock options traders are often said to be trading volatility rather than price.
Providers: Online option brokers such as Options Express and E-Trade and certain stockbrokers

Precious metal unit trusts or mutual funds

Instead of personally selecting individual shares, some investors spread their risk by investing in collective investment vehicles specialising in investing in the shares of gold mining companies. These include mutual funds, open-ended investment companies (OEICs), closed-end funds, unit trusts. Two of these funds are the UK-based Blackrock Gold & General Fund and the Canadian Sprott Gold & Precious Minerals Fund by Sprott Asset Management. There are many precious metal funds in the US but investors assume US dollar currency risk when buying them.
Collective investment vehicles are a good way to invest in the precious metal mining sector as an investor’s risk is reduced; mutual funds are not dependent on the performance and profits of one or two  individual gold mining company and specialists in the field choose a portfolio of gold mining companies.
Providers: Blackrock Gold and General Fund, Sprott Gold & Precious Minerals Fund

Gold futures

Gold futures are traded on exchanges in London, Tokyo, Sydney, Singapore, at the New York Mercantile Comex Exchange (COMEX), the New York Mercantile Exchange (NYMEX) and at the precious metals department of the Chicago Board of Trade (CBOT).
Gold futures contracts are firm commitments to make or take delivery of a specified quantity and quality of gold on a prescribed date at an agreed price. Investors may take or make delivery of the gold underlying the contract on its maturity although, in practice, that is unusual. A benefit for some is that such contracts are traded on margin, so that only a fraction of the value of the contract has to be paid up front. As a result an investment in a futures contract, whether from the long or the short side, tends to be highly geared to the price of bullion and consequently more volatile.
They are normally the preserve of some mining companies, speculators, hedge funds and institutions. The leverage makes them a high risk/high reward investment. Participants are either hedging the gold price or attempting to predict whether the value of gold will rise or fall in the short term. Gold futures contracts are valuable trading tools for commercial producers and users of the metal to hedge their price risk.
Success depends on the price movement of gold during the contract term. Traders in these markets without protective stop-losses can quickly find themselves on the wrong side of a fast moving trade, losing large sums of money. Part of the risk is due to the leverage involved which can result in a speculator losing more than their initial capital outlay. Therefore, futures markets are not for amateurs or novice investors.
Providers: Commodity Brokerages, Online Brokerages such as Internaxx

Gold futures options

All the bullion banks trade in gold options and a list of bullion banks is available from the London Bullion Market Association (LBMA). Another way of trading options is through the COMEX Division of the New York Mercantile Exchange. The third route would be to contact a futures broker. They are often used to contain risk in the trading of futures.
Providers: Commodity Brokerages, Online Brokerages

Spread-betting

An alternative is to use spread betting to gain leveraged exposure to precious metals. Firms such as Cantor Index, CMC Markets and IG Index offer the ability to take a bet on the price of gold through what is known as a spread bet.
No commissions or taxes are levied in the UK on spread betting. The advantages are that any gains are CGT free and one can also take a view on movements in either direction. The downside is that in a spread bet the spread can be high, your exposure is geared up and short term bets are risky as it is extremely difficult to forecast any markets short term movement. One can lose more than the initial capital thus they are for speculators with very short term horizons rather than investors.

You can compare leading spread betting accounts here

The World Gold Council is a good resource for investors looking for established and reputable providers of gold related investments in the UK and internationally. 

Assessing your options

One’s motivation for investing in gold is fundamental to deciding how to invest. Are you a speculator, investor or saver? Do you wish to take a short term speculative position in gold? Are you investing for the short, medium or long term? Or are you diversifying; saving or using gold as a form of financial insurance (gold’s primary role)?
When assessing one’s gold investment options one must decide what one’s motivation is. Once this is done, the primary considerations which should be looked at are the costs (both upfront and possibly recurring annual fees), proximity to your asset and perhaps most importantly today counter party risk.
In the table below we have looked at the various vehicles for accessing the gold market and graded them with regard to cost, ability to take delivery and, most importantly, proximity to your gold and counter party risk.

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Type	Costs		Risks			Delivery	Considerations
	Initial	Recurring	Counter party risks	Proximity	Investor suitability	Physical delivery?
Gold certificates	Med	V good(none)	Low	Good	Diversifier	Yes	Consider solvency & credit rating. A sovereign AAA credit rating and govt. guarantee is best.
Bullion bars/coins delivered	Med	V good (none)	Low	V good	Diversifier	Yes	Use safety deposit boxes, home or office safes, and insurance.
Bullion bars/coins stored	Med	Med	Low	Good	Diversifier	Yes	Consider the solvency and credit rating of the depository. Safety and security are key.
Gold bullion in SIPPS	Low	Low	Low	Good	Diversifier	No	Make sure you get impartial fee-based asset allocation advice.
Semi numis matics	High	Low	Low	Good	Diversifier/ Speculator	Yes	Premiums can vary. Get reputable and professional advice before purchasing.
Digital gold	Low	Low	Med	Med	Diversifier/ Speculator	Some do	Concerns over dependence on technology (internet, website, servers, etc) which is attendant risks.
Exchange traded funds	Low	High	Med	Poor	Speculator	Large minimum	Suitable for speculators, own shares in a trust and not gold. Annual costs quite high at 0.5% per year.
Precious metal unit trusts	Med	High	Med	Poor	Diversifier/ Speculator	No	High annual charges (funds can have hidden charges). Analyse the prospectus fully.
Gold stocks	Low	Low	High	Poor	Speculator	No	Very volatile. Management, geologist, auditor, trade union, environmental and nationalisation risk. Seek advice.
Gold futures	Low	Med	High	Poor	Speculator	Yes	Only suitable for speculators. High risk, involving leverage. Seek advice.
Spread betting	Med	Med	High	Poor	Speculator	No	Only suitable for speculators. High risk, involving leverage. Need to monitor trading constantly. Seek advice.

In an age of significant systemic risk, proximity to the underlying asset is increasingly important. Investors are increasingly wary of having too many counter parties (brokerages, banks, trustees, custodians, sub-custodians, delegates of sub-custodians etc.) between them and their asset. If storing gold with a third party, it is important that you have a direct relationship with that counterparty and there is not significant intermediation and thus increased risk. Another consideration is the ability to take delivery of gold in the event of a systemic crisis.

Investing in gold: conclusion

As we have seen, there are major differences in the various motivations for buying gold and ways to buy gold – from trading and speculating to investing and saving.
Holding precious metals in a portfolio can provide distinct benefits in the form of speculative gains, investment gains, hedging against macroeconomic and geopolitical risk and / or wealth preservation. Traditional asset allocation theory, as represented by the investment pyramid, advocates higher risk speculations at the top, with lower risk assets at the bottom. Commodity futures contracts, options and exploration junior mining companies should be placed at the top of the pyramid, while cash equivalents and fully allocated or taken delivery of physical bullion should form the foundation or base.
Experienced and knowledgeable investors have long known that gold and gold related investments can be solid investment choices. Gold is stable in times of global geopolitical instability and when there is economic uncertainty, recessions and depressions. It is important that investors look at their portfolios holistically. Used correctly, gold and gold related investments can be highly effective components of a properly diversified investment portfolio.

• This article was written by Mark O’Byrne, executive director of international bullion dealer GoldCore. GoldCore has an international media profile (CNBC, Bloomberg, CNN, BBC, FT, Wall Street Journal, Bloomberg, Dow Jones, Associated Press, Reuters etc.) and takes part in the Reuters Precious Metals Poll and the Bloomberg Gold Survey.
Disclaimer: The information in this document has been obtained from sources which we believe to be reliable. We do not endorse any of the investment providers mentioned in this article. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: Past experience is not necessarily a guide to future performance. The value of investments may fall or rise against investors’ interests. Income levels from investments may fluctuate. GoldCore Limited ( www.goldcore.com ), trading as GoldCore is regulated by the Financial Regulator of Ireland.