BEGINNER’S GUIDE TO INVESTING IN GOLD By Jeff Clark, Editor of BIG GOLD
BEGINNER’S GUIDE TO INVESTING IN GOLD WELCOME TO CASEY RESEARCH! We’re glad to send you our brand new Beginner’s Guide to Investing in Gold special report. We’re absolutely confident that if you follow its advice, you’ll be in position to make spectacular gains in gold and gold stocks in the months and years ahead. Now, we don’t recommend investing in gold because we’re gold bugs. We do it because gold is the safest way to protect yourself from failing currencies and out-of-control governments... and because it’s the best way to profit from fundamental factors working in your favor.
THE GOLD PRICE HAS FALLEN—SHOULD YOU STILL INVEST? Have you ever stopped to ask yourself why, if the economy is as strong as the government claims it is, they’re still printing money in such large quantities and piling on the debt in ever-increasing amounts? This is not the sign of a healthy fiscal and monetary system. And it’s not just the US. Consider the following: • Since mid-2007, we’ve seen over 500 interest-rate cuts around the world • 36 countries now have negative real interest rates • Globally over the past two years, 421 stimulus policy initiatives were announced • As of November 2013, not one G20 country had a balanced budget Economic stimulus is, of course, nothing but deceptive code for money printing. And it is not consequence-free. The yen is down 30% against the US dollar in nine months, the result of Prime Minister Abe’s aggressive “whatever it takes” promise to spur inflation. We consider this reckless negligence—yet this kind of policy response is being mimicked by many of the world’s central banks, with the full support of political leaders. While mainstream money types declare that gold is dead and have been selling, the global monetary environment remains tenuous and reinforces the need to buy and hold gold—a rocksolid conclusion. But if you believe that there will be no repercussions for past excesses; that the Fed and other central banks will be able to navigate a clean exit from unprecedented money creation; that skyrocketing government debts will be paid off without diluting currencies; that politicians will implement
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BEGINNER’S GUIDE TO INVESTING IN GOLD real solutions that balance government budgets and force them to live within their means; that the debt ceiling is irrelevant; and that inflation won’t surface whether or not global economies improve—then maybe holding some gold and gold stocks isn’t the right choice. If you don’t believe these things, then the prudent response is to prepare for the inevitable fallout from monetary disorder, by having meaningful exposure to gold. We see very few governments taking the kind of action that will actually fix the world’s underlying economic and fiscal problems. The “free lunch” that mainstream commentators seem to believe in—that inflation, for example, won’t result from money printing—will appear very costly indeed when prices start rising. The Fed is in a tight spot: it cannot exit its bond-buying program quickly or easily, because the ramifications are unacceptable to politicians. So the dilution continues, with the fallout put off to another day. It’s hard to fathom how we’ll escape the dire fiscal and monetary conditions in many of the developed world economies without some serious fallout—and a strong response from gold. Never before has such an enormous monetary experiment taken place on a global scale. If ever there was a need for monetary insurance, it is now. This makes our personal game plan far more important than the carefully crafted machinations of any Fed chief, politician, or government economist. It is thus imperative that investors have meaningful exposure to gold.
THE #1 REASON TO BUY GOLD TODAY Excessive debt is the root cause of the crisis. And yet we continue to pile it on. In spite of massive debt loads shouldered by most G20 countries, the deficit spending continues. Think about that for a moment: not one member of the G20 can balance its budget; all are spending more than they have. This can’t be resolved without some pain. Though some would argue that deficits are necessary to counter periods of slow or negative economic growth, it’s the recent trajectory of debt growth that’s scary—and unsustainable. Here’s a look at the government-debt-to-GDP ratio of the G20 countries.
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BEGINNER’S GUIDE TO INVESTING IN GOLD
Government Debt to GDP Among G20* Nations Japan Italy United States United Kingdom France Canada Germany Brazil India Argentina Mexico South Africa Turkey South Korea Australia Indonesia China Russia Saudi Arabia
0% © Casey Research 2013
50%
100%
150%
*20th member - the European Union - does not have a debt-to-GDP ratio
200%
250% Source: IMF
Throughout history, debt levels over 90% of GDP are historically linked to significantly elevated levels of inflation. Specifically, when the ratio has met or exceeded 90%, inflation rose to around 6%, vs. the 0.5% to 2.5% range when it was below 90%. History also shows that the link is not simultaneous, yet the emergence of higher inflation has always been an eventuality. Here’s a closer picture of the trajectory of US debt in relation to its GDP.
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BEGINNER’S GUIDE TO INVESTING IN GOLD
Total US government debt recently crossed the proverbial line in the sand and now equals 102% of GDP. This is higher than crisis-stricken Cyprus and Spain! Further, the Fed’s official figures exclude the nation’s swelling yet politically untouchable unfunded liabilities, namely Medicare and Social Security. If these figures are added to the equation, public debt levels skyrocket to astronomical heights. In reality, the level of debt carried by the US is so high that it will never be paid off, at least not in dollars with today’s purchasing power. Instead, the Fed and Washington, and leaders from other countries, are devaluing currencies in order to reduce the burden of debt repayment. This is a central thesis to investing in gold: there is no way out of this level of debt overhang except currency dilution. The #1 catalyst for precious metals for the foreseeable future is indeed currency debasement. It’s staring us right in the face, begging us to protect our assets and hedge our future standard of living by denominating a meaningful portion of our savings in gold and silver.
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BEGINNER’S GUIDE TO INVESTING IN GOLD WHEN WILL GOLD RESUME ITS UPTREND? Because the Fed continues to pour money into the economy, it’s difficult to say for certain when gold will make a dramatic move. The historical record indicates that a surge in money growth doesn’t impact economic activity until 9-18 months later. Add another 12 months or so for it to show up in consumer price inflation. In other words, the Federal Reserve is always driving with a loose steering wheel. Most of the experience behind those numbers is with relatively tame ups and downs in the business cycle—not the kind of financial violence we’ve been seeing over the last several years, which adds another variable. So while pinpointing the exact timing is difficult, what we do know is that there are clear and unavoidable consequences to wildly energetic money creation, including, sooner or later, rampant price inflation. Are there signals? The primary sign won’t be inflows to ETFs (though they are indicators), or jewelry sales (the ‘70s bull market had nothing to do with bracelets), or even dramatic increases in the sale of physical bullion (we had that in ‘08 and gold was up 4.3%—hardly meteoric). No, the payday rise in gold will occur when there is a significant shift in the psychology of the general public. That shift may already be under way, in spite of what the mainstream media claims. Dealers continue to report that demand for physical metal is at runaway levels and that they have a hard time keeping up. Central bankers were net sellers of gold as recently as 2009—and are now heavy net buyers, lending strong support to prices. The US Mint and others have frequently suspended sales of their more popular coins, due to overwhelming demand.
W
e think this recent quote from Zhang Bingnan, secretarygeneral of the China Gold Association, will turn out to be quite prescient: “The dumping recently of holdings in gold exchangetraded products by overseas investors may not prove to be a wise move.”
And don’t forget Chinese demand. Imports through Hong Kong, along with China’s own production—it does not export any metal—exceed the amount of ounces sold in GLD by roughly double, an astonishing fact that is overlooked by most journalists.
Institutional investors are starting to enter the gold market as well. The University of Texas announced that its endowment fund (the second-largest in the country next to Harvard’s) had taken possession of a billion dollars’ worth of physical gold. JPMorgan now accepts physical gold as collateral. Morgan Stanley reports that its preferred metal exposure is gold. And Deutsche Bank
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BEGINNER’S GUIDE TO INVESTING IN GOLD stated in a report, “We see gold as an officially recognized form of money…” We’re convinced these trends are bound to pick up steam. Before the gold rocket takes off, let’s look at the three best ways I know of to invest in gold so that you’re positioned ahead of the crowd.
Best Way #1: PHYSICAL GOLD Given the state of the global economy and the US government continuing to administer large doses of the wrong medicine, we first recommend that all investors place from 10% to 20% of their investments in gold bullion. We don’t mean 10-20% of your gold portfolio; we mean 10-20% of all your liquid assets. This may sound extreme to some. But even if the global economy remains in a deflationary dip and the gold price struggles for a while, it remains the safe harbor during the upheaval. Remember, it’s not simply a question of inflation or deflation; it’s crisis. And that’s exactly what gold ownership is for. Bernanke and Geithner won’t be rewriting history; they’ll be part of it. Nothing replaces having physical gold in your possession and under your control.
WHERE TO BUY PHYSICAL GOLD If you know an honest, reputable coin dealer in your area, that’s a good place to start for smaller purchases. Our editors buy their gold either with a local dealer or online, but either way it’s important to find a reputable dealer... as in every line of business, there’s no shortage of crooks. In our experience, the best places to buy physical gold are: 1. M ilesFranklin.com (1-800-822-8080). Miles Franklin has some of the deepest contacts in the industry and as a result has been able to source metal when many other dealers can’t. And with some of the best prices in the industry, they’re one of our top picks. Be sure to tell them you’re calling from Casey Research to get the best deal.
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BEGINNER’S GUIDE TO INVESTING IN GOLD 2. T heCoinAgent.com (1-888-494-8889, or email
[email protected]). Proprietor Wayne Lemonier has some of the lowest costs we’ve seen in the industry. 3. B orderGold.com (888-312-2288). Border Gold in Vancouver, BC is where we go for the Canadian Maple Leaf. Costs are so low that you will likely get a better total price with shipping included than you would at your local coin shop. 4. H ardAssetsAlliance.com* (877-727-7387; 877-7-assets). This program is ideal for those who have $5,000 or more to invest, as your order is bid out to a network of dealers who compete for your business, ensuring that you get the best possible price. You can take immediate delivery or use one of a number of US or international storage locations. And it can all be done online. 5. DavidHall.com (1-800-759-7575). We go to one place for rare or numismatic coins: Van Simmons at David Hall Rare Coins, who actually helped create the Professional Coin Grading Service. We don’t recommend entering the numismatic world as an investor unless you are or are willing to become a knowledgeable coin collector. Keep in mind that premiums and delivery times will fluctuate according to market conditions. There are other online dealers out there, and some may have good prices, too. The things to watch for are total costs (including product, shipping, and insurance) and availability; if a dealer claims it will be several weeks to “locate” the product, we would look elsewhere. It’s also not uncommon to find salespeople who try to talk you into other products, such as proof sets or rare coins (this is especially true with the dealers that advertise on TV), so beware of the hard sell. We haven’t had that experience with our recommended dealers. Where do you store your gold? There isn’t a magic bullet for safekeeping, as each form has its own risks. Physical gold is subject to theft and fire; paper gold is subject to fraud and mismanagement. The most prudent approach is to own more than one form of gold, in more than one location, with an edge toward physical ownership.
*F or full disclosure, Casey Research is a founding member of and receives affiliate fees from the Hard Assets Alliance. Some but not all of the recommended companies have affiliate agreements with Casey Research. Casey Research’s recommendations are based on the value and competitiveness of the products and services offered by these affiliates, and its recommendations will not be influenced by the presence or absence of affiliate fees. 8
BEGINNER’S GUIDE TO INVESTING IN GOLD BEST GOLD ACCUMULATION PLANS You can get started owning physical gold with as little as $50 a month, thanks to new savings programs that can automatically withdraw the money from your bank account. So, instead of shelling out $1,400 or more for an ounce of gold, you can start buying that ounce and more in monthly installments. These programs store your gold and silver as well, and you can take delivery any time. We’ve vetted these programs and have found MetalStream and SilverSaver to be the most convenient for automatically accumulating metal. Both will deduct funds from your bank account and buy gold and/or silver for you automatically. The former requires a $250/month minimum but offers international storage in Singapore, while the latter will accept $50/month but only offers domestic storage. BullionVault and GoldMoney are also good programs, though they aren’t designed for delivery. If you intend to eventually take possession and want a no-hassle way of automatically buying metal, MetalStream and SilverSaver are your best bets.
Best Way #2: PAPER GOLD While there is no substitute for having physical gold under your immediate control, holding paper proxies for the metal can be a useful portfolio supplement. In recent years, the market has responded to burgeoning demand for convenient ways to trade commodities by creating a galaxy of exchange-traded funds (ETFs). These are designed to mirror the ups and downs of the underlying commodity and can be bought and sold like a stock. They do not provide delivery of metal to the average investor. 1. T he largest and most popular gold ETF, SPDR Gold Shares (GLD), buys and holds gold bullion in a secure London vault, with each share trading at approximately 1/10 the price of an ounce of gold on the spot market. GLD has done a very good job of following gold’s lead, posting gains that have been only slightly below that of the metal itself (due to costs). GLD represents a simple, effective way of extracting some paper profits from gold’s bull run. We like the ETF Physical Swiss Gold Shares (SGOL) even better, since the gold is stored in Switzerland and the custodial structure is less complicated. 2. W ant a fund with both gold and silver? Central Fund of Canada (CEF) is a closed-end fund that’s made up of roughly 55% gold and 42% silver. The major difference between it and an
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BEGINNER’S GUIDE TO INVESTING IN GOLD ETF is that ETFs are structured to keep the share price very close to net asset value (NAV). Not so with a closed-end fund, which responds much more strongly to market sentiment about the fund itself. This means that shares in a gold-based, closed-end fund can trade at a steep discount to NAV—or at a premium. Over time, while CEF rises and falls in tandem with gold, those who buy at a discount and sell at a premium will get an added kicker… and those who do the opposite will get kicked. To watch for the best entry point, visit the CEF website from time to time and click on “Net Asset Value.” The figure is updated daily. 3. P erth Mint Certificates (PMCs) are a form of paper gold. The additional advantage a PMC provides over ETFs is that it gives you instant international diversification. The disadvantage is that it doesn’t trade like a stock, as it’s designed for more long-term holdings. It’s also the only government-backed bullion storage program vaulted and insured by the state of Western Australia. There is a US$10,000 minimum initial purchase and a US$5,000 minimum for subsequent purchases. If you live outside Australia, you must use an approved dealer; we recommend AssetStrategiesInternational.com (1-800-831-0007 in North America).
Best Way #3: THE RIGHT GOLD STOCKS Gold stocks are a leveraged way to play a rising gold price. You might look at gold as your defense and gold stocks as your offense. When the gold price really heats up, gold stocks will rise exponentially more. It is this volatility that will bring us what we believe will be life-changing profits. One bit of caution, though: with this added leverage comes added risk. Gold stocks exhibit greater volatility than gold in both directions. This has two implications: • Our company recommendations should not be viewed as family heirlooms you can hold into old age or leave to your children. At some point we will be selling our stock positions to lock in big gains. • We recommend that you avoid trading. You may read others who recommend doing this, but trading in our opinion is not a prudent way to capture the big gains. Keep in mind that you must be right twice to make one profitable trade; you must correctly time the bottom and correctly time the top to capture a gain. A wrong call on one of those can keep you from profiting. And worse—what if you get caught on the sidelines, and the stock takes off without you? Our best advice on how to buy a gold stock can be summed up in three words.
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BEGINNER’S GUIDE TO INVESTING IN GOLD BUY. HOLD. REPEAT. Buy when prices drop and give you attractive entry points. There are always corrections, and when those inevitable pullbacks come, you have the opportunity to initiate or add to positions at attractive prices. That’s what the BIG GOLD editors do. Hold—meaning don’t trade it, time it, or run the risk of getting caught on the sidelines with stocks taking off. Plus, you’ll get to sleep better at night than those who try their hand at timing. And repeat until the rest of civilization joins us and pushes our prices much higher. Until the Mania kicks in, we do recommend taking profits when you’re up by, say, 50% or more. This is how we come up with the cash to buy more stocks and bullion. By following this simple strategy, one can accumulate substantial positions over time at good prices. In fact, Doug Casey has often said that his success as an investor has come down to one key factor: being able to recognize the difference between something’s price and its value. Whenever there’s a large discrepancy between these two in any form of investment, it’s an opportunity to profit. And that’s especially true with gold stocks right now.
MR. CONSERVATIVE’S APPROACH The easiest, simplest, and most conservative way to profit with gold stocks is to buy into a goldstock mutual fund that has a low expense ratio. While there are thousands of mutual funds, there are only a couple dozen gold-stock funds, and not all make a good investment, in our opinion. There is a second conservative way to buy gold stocks that most of the investing public is not yet aware of: gold (and silver) royalty companies. These are the least-risky precious-metal stocks because they buy a fixed percentage interest in a mine’s gross production and let the mining company do the dirty work. In other words, they profit as gold is mined and the price rises, but they have no exposure to production troubles or rising costs. They’re conservative—but don’t mistake this to mean that they won’t be profitable: our royalty companies have been our top performer every year since 2008!
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BEGINNER’S GUIDE TO INVESTING IN GOLD Even when gold stocks as a group were down in 2011 and 2012, our royalty company recommendations were up for the year. When gold (and silver) take off again, profit margins of these companies will soar, as will their share prices.
OUR SECRET TO PICKING GOLD STOCKS When it comes to picking gold stocks, BIG GOLD seeks out the most undervalued and makes them long-term holdings. We start by analyzing the standard metrics: P/E ratios, revenue growth, market capitalization (or market cap), and debt/equity. That last one is particularly important; if a company is carrying too much debt and has to refinance to fund operations, it’s not likely to raise the cash on very favorable terms. But there are other factors unique to our sector that must be considered. We know demand is raging and supply dwindling, so we look closely at what proven reserves a company has in the ground, how quickly it’ll be able to get them out, and at what cost. Once we know this, we can calculate a net asset value for each miner that enables us to compare it to its peers. This net asset value, put through our proprietary mathematical model, allows us to assign each company a number we call the Valuation Ratio (VR). A VR of 1.0 denotes a company that is fairly valued, so the further a stock’s VR falls below 1.0, the more undervalued it is. Conversely, companies over 1.0 would be overvalued. Our valuation ratio is updated every 30 minutes during trading hours. After taking into consideration a gold (or silver) miner’s VR, along with the standard metrics, we then plug in the intangibles, asking questions like: Are the company’s mines in politically stable areas? How strong is management’s experience? Are the local governments supportive? And so on. The answer to some of these questions explains why we don’t recommend some of the largest gold mining companies, despite having low VRs. In the end, we arrive at a list of what we believe are the best of the best.
SIZE MATTERS There are different sizes of gold producers, each with its own level of risk and reward. Here’s the breakdown:
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BEGINNER’S GUIDE TO INVESTING IN GOLD Major Producers. These companies have multiple deposits, usually in multiple countries, and are considered “majors” because of the size of their reserves and market cap. Generally, a major produces over one million ounces of gold per year. They tend to carry less risk than smaller companies, and their stock prices are less volatile. Mid-Tier (or Intermediate) Producers. A mid-tier company produces 100,000 to 1 million ounces of gold per year. Risk varies from company to company. Perhaps more so than the majors, their profitability is closely tied to the price of gold; as gold rises, these companies will show exponentially greater profits. Small Producers. These companies are either just starting to produce, have smaller operations, or have just one mine. They tend to have higher risk because they may lack diversification and are thus vulnerable if they experience a problem with their primary project. Yet they tend to see the highest growth profile, and as they add reserves or grow production, the market will typically revalue the business and reprice its stock upward. More risk, but more upside potential.
OPPORTUNITY FROM CRISIS Crisis and opportunity are as tightly bound as gold and money. The current challenging market brings with it tremendous opportunities for investors in precious metals. Many of these opportunities are presented every month in BIG GOLD from Casey Research. Today’s prices represent the precise opportunity that every investor strives for: to buy low. I’d like to invite you to give it a try for just $99 for a full-year, 12-issue subscription. It’s completely risk-free—you may cancel any time within 90 days for a 100% refund. As soon as you subscribe, you’ll have access to our portfolio recommendations and all back issues.
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BEGINNER’S GUIDE TO INVESTING IN GOLD
The Casey Research web site, Casey Investment Alert, Casey International Speculator, BIG GOLD, Casey Energy Confidential, Casey Energy Report, Casey Energy Dividends, The Casey Report, Casey Extraordinary Technology, BIG TECH, Miller’s Money Forever, Conversations With Casey, Casey Daily Dispatch, Ed Steer’s Gold & Silver Daily, and Miller’s Money Weekly are published by Casey Research, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. Doug Casey, Casey Research, LLC, Casey Early Opportunity Resource Fund, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion. Any Casey publication or web site and its content and images, as well as all copyright, trademark and other rights therein, are owned by Casey Research, LLC. No portion of any Casey publication or web site may be extracted or reproduced without permission of Casey Research, LLC. Nothing contained herein shall be construed as conferring any license or right under any copyright, trademark or other right of Casey Research, LLC. Unauthorized use, reproduction or rebroadcast of any content of any Casey publication or web site, including communicating investment recommendations in such publication or web site to non-subscribers in any manner, is prohibited and shall be considered an infringement and/or misappropriation of the proprietary rights of Casey Research, LLC. Casey Research, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Casey publication or website, any infringement or misappropriation of Casey Research, LLC’s proprietary rights, or any other reason determined in the sole discretion of Casey Research, LLC. Affiliate Notice: Casey Research has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Casey Research affiliate program, please contact us. Likewise, from time to time Casey Research may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service. ©1998-2013 Casey Research, LLC.
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