How to Buy Physical Gold and Why Not to Invest in Gold ETFs!

Gold: the ultimate store of wealth that has been used since time immemorial. A hedge or in troubled times, a ‘safe haven’ in the current crisis. If your wealth is stored in gold, then who really cares if the financial system implodes? Empires, currencies and rulers have come and gone… but gold has always retained value and purchasing power. Of the various precious metals, gold is probably the easiest, most liquid (easily traded) asset you can invest in.

Gold is a traditional hedge against inflation or deflation. Against currency devaluations. Against avaricious or incompetent governments or Central Bankers. Or shall I just say, in a less politically correct manner, that America is bankrupt and Gold is the only real money? If you invest in Gold, you no longer have to rely on the “full faith and credit” of the US government – which is declining sharply.

If you’re reading this article, you probably don’t need me to tell you why you should buy gold. It’s actually an obvious decision in the current economic climate. The question is not so much should you buy gold, as can you afford to hang on to assets denominated in a declining currency like the dollar or the pound sterling or the euro…?

The US dollar typically rises or falls inversely with the value of gold. Recently, although there’s been a slight increase recently, the trend of the US dollar is downwards. My view is that the dollar will continue to decline until the US economic fundamentals look better – till America comes out of bankruptcy, that is – and that could take some years.

In terms of your savings or retirement portfolio, this means that if you invest in things like bank deposits (CDs) the net return is most likely negative. Since the beginning of 2003, US dollars held in 3-month US Treasury Bills have yielded less than 3% per year (Source: Global Financial Data). Considering that the inflation rate over this same period of time has averaged more than 3% annually (Source: US CPI), the cash accumulated had less buying power in October 2008 than it did half a decade before.

The carnage on Wall Street, and the fallout around the world, looks far from over – despite what the Feds or the mainstream media might have you believe. Every time there is a new panic like another bank or insurer collapsing, a flurry of investors with dollars, euro and pounds start a new mini gold rush.

At the same time, demand for the yellow metal continues to significantly outweigh supply. The Chinese, for example, love gold and have plenty of dollars. China is keen to diversify its huge foreign currency reserves (by far the largest in the world) away from the dollar. A small increase in China’s percentage of gold reserves would cause a huge increase in demand and consequently in the gold price. Asia, particularly the Indian subcontinent, and the Middle East (think Dubai) are also seeing large increases in domestic gold demand as disposable income increases. When people think that paper currencies will be worth less in the future, they have historically looked to place their net worth into a more stable vehicle. And gold is typically viewed as a safe form of currency, as its value isn’t as affected by inflation.

Why Buy Gold Offshore?

So far, so good. There’s nothing particularly new or controversial about the information above. But I have always believed in a more offshore, skeptical, pragmatic approach. Like it or not, we tell things as they are.

Can we trust government to manage our finances? I think the overwhelming evidence suggests no. History shows that gold is politically sensitive, and governments (read Central Banks, particularly the Federal Reserve) don’t like to see individuals buying gold. Why? Because they can’t control it. They can certainly try. For example, in an earlier article you will find here, we asked seriously Will the US Government Confiscate Gold?

Then suddenly, as of late September 2008, we saw the US Federal Government beginning to limit the access of ordinary citizens to gold bullion – by withdrawing new bullion coins from circulation. (Suddenly and unexpectedly in mid-crisis the IRS also introduced a new form FBAR for reporting of foreign bank accounts)

What we can see from all this is that the smartest strategy is to keep your gold holdings outside your home jurisdiction — where they will be well protected against all sorts of threats from governments to predatory ex-spouses. So you need to know:

How to Buy Gold Bullion Offshore

Gold bullion is the most liquid form of gold. If you want to buy gold with the idea that you’ll ultimately sell it, then you will want to buy gold bullion. Bullion means either bars or coins. Fortunately, you can easily buy gold this way and just as easily sell it again anywhere in the world. If you need to break it into smaller denominations, you can for example exchange gold easily for silver coins like Panama’s old Silver Balboa or Mexico’s silver coins.

You can buy gold bullion by looking for offshore dealers. If you have a particular kind of coin in mind – like the Canadian Maple Leaf or South African Krugerrand, to name a few of the most popular gold coins – then do a search for that particular coin, or find the official mint websites. For example, check out the South African Mint or the Royal Canadian Mint. An interesting and more private option for Americans is restricted circulation coins. When you want to buy gold, these sites all contain helpful tools for finding local and international dealers of gold coins.

Provided you don’t ‘look suspicious’ and you can prove the origin of your funds with some documents, it is quite easy to buy gold bullion coins anonymously with cash. Some countries, like France, charge sales tax on gold and so should be avoided. Others place burdensome restrictions on export, like major gold producers Brazil and South Africa. Others, like San Marino, are simply too far from major gold markets for purchase there to be economical – you would be saddled with high transport and insurance costs.

So where should or can you go to buy gold offshore? The undisputed capital of the business is Zurich, Switzerland. There you can buy and store your gold in the free trade zone at the airport. Major Swiss banks like Credit Suisse will sell you gold directly from their branches in Zurich Airport.

Most countries in mainland Europe are good for buying gold. Luxembourg, for example, is a friendly little place where privacy is still respected in precious metals transactions.

In the Americas, Mexico is another country where you can simply walk in to a casa de cambio and buy gold ‘centenarios’ over the counter for cash. Mexico has suffered from so many devaluations and is also a major producer of gold and silver, so investing in bullion coins has become popular there. There has been a serious effort in Mexico to introduce silver coins as legal tender. (For info on Mexican gold coins, known as Centenarios, visit here…

Urgent Warning: Here’s why you should absolutely NOT Invest in Gold ETFs

In September 2008, shareholders in ETF securities were left high and dry – unable to trade popular commodity securities, due to concerns over the future of their backer, insurance giant AIG. Overnight, banks and brokerages stopped making markets in the Exchange Traded Commodities (ETCs) backed by the troubled insurer. The price of the stoc

Gold ETFs are vastly different to holding real gold. Turbulence, such as the above in the market, can affect the value of those gold ETFs markedly. When you buy an ETF you are buying electrons on a screen. It is not the same as buying real solid gold. What if the bank or fund manager goes out of business? What if trading in the shares is suspended, as for example short selling was just suddenly banned? What if the whole exchange is suspended as has happened in the past? Shares can be subject to massive manipulation and liquidity problems. I believe we will see dual gold prices from now on – one ‘official’ spot price, and another price dictated by pure supply and demand which will dictate what you can actually buy and sell real gold for in the real world.

If you own stock in an ETF, that means you own a stock that depends on the price of gold, rather than gold itself. No matter that corporations such as ETF Securities own gold. How much gold they own is not clearly discernible by the average “Joe Sixpack” who may own ETF stocks.

Even a downgrading by credit agencies like S&P or Moodies can drastically affect the share price in ETF Securities – as it has done! In September 2008 shares in ETF Securities products, which were backed by AIG, were down as much as 50% in one morning after the US insurer was downgraded by the rating agencies. The cold hard reality is that if the issuer of an exchange traded note goes bankrupt, investors holding exchange traded products backed by these notes will join the ranks of other creditors hoping to get their money back. With any gold ETF one does not own actual gold and cannot automatically or instantly redeem gold from the fund.

Indeed, to buy gold ETFs is adventurous and courageous – one might almost say dangerous – activity, in today’s economic climate, with so many Wall Street firms going under.

The same is true, in my personal opinion, to the Perth Mint Certificate Program (PMCP). This program is run by the government of Western Australia, and is offered by many gold dealers and investment advisers around the world. The problem is, when you do due diligence on the Perth Mint program, you will see that you are not really buying physical gold. You are just buying papers or ‘notes’, and redeeming those notes later could involve substantial bureaucratic hassle. You are also reliant on the Australian government. If, for example, the US tried to confiscate all gold held by its citizens, do you think the Australian government would co-operate? Most likely yes!

Also be aware that if you hold shares in an ETF they are reportable for tax purposes. Physical gold however is not reportable. That’s just another reason to consider real gold bullion bought offshore, rather than exchange traded funds.

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