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The Layman's Guide to Buying Gold -- What to Buy, How to Buy It, and What to Avoid...

Aug 18, 2007
Not since the late 1970s has gold been so popular. For many years, gold was an afterthought. No one wanted to deal with it. It's heavy, hard to store safely (especially in any kind of volume), and it's expensive to ship. It lacks convenience, liquidity, and the market can be confusing. And isn't it only for Depression Era folks? Well, not anymore.

Not only is gold popular with Baby Boomers and even younger investors, the new popularity makes it a more liquid and convenient investment tool. And if you follow a couple of simple rules, it's really not all that confusing.

My first rule of investing in gold is don't focus on profit. Gold is a cyclical investment. It goes up, it comes down, and then it goes up again. Sometimes it takes a long time to move. Sometimes it moves quickly. If you focus on profit, you'll be tempted to use these ups and downs to trade in and out. This is easy to do if you're dealing with sheets of paper or blips on a computer screen. But moving in and out of actual gold isn't easy.

Instead, buy gold as insurance. Gold is a hard asset that will never be worth nothing. Some people call it liquid real estate because, in effect, you own a piece of the ground. The yellow metal is a great protection against calamity. Think of it that way and you won't go wrong.

The second rule for owning gold is that ounces are king. The more ounces you own, the better off you'll be. If you buy gold to protect you in times of calamity, just remember this: When times go bad, people won't care how pretty your coins are -- all they will care about is the actual weight of their gold content.

This rule will force you to look at some other factors when buying gold. There are basically four types of gold -- bars, bullion, semi-numismatic, and numismatic. Numismatics are rare coins that carry a large premium (a premium is the amount of a coin's cost that exceeds the value of its gold content). I typically advise people to stay away from numismatics unless they intend to become serious coin collectors. It's far too easy for the average investor to get scammed in the numismatics market. Also, because of the large premium, you can't buy as many ounces for your money -- and ounces are king.

Next, are semi-numismatics. These are older and nicer coins than bullion, but they're not as rare as the numismatics. There's a bigger, more liquid market for them. So it's easier to buy and sell them. Also, the current bull market has lowered the premium on semis, so you can get them for just slightly more than bullion. Right now, semi-numismatics are a great way to go. You get the ounces for a good price, plus you get the possibility that the premium will go up (and very little downside risk on the premium).

Bullion is the most common form of gold. It's also called "junk" because there's so much of it available. It essentially sells for the cost of gold, plus a very small premium and a very small commission. Since ounces are king and bullion is the cheapest way to buy ounces, this is the easiest way to accumulate a lot of ounces. Yes, bars can get you more ounces for a slightly better price, but the lack of liquidity is a huge problem. Stick with the coins.

The third rule for buying gold is to buy it regularly. Set up a plan for buying gold on a schedule. Whether it's monthly, quarterly, or annually doesn't really matter. Buying it on a budget with a plan will help you cost-average the purchases, which helps you weather the ups and downs of price movement. I typically recommend that you put 5-10% of your investment capital into gold. Some people recommend up to 35%. The more money you have, the higher the percentage you can afford to stick into gold.

And finally, buy gold from a reputable dealer. There is a ton of scam artists in the gold business. Selling gold is completely unregulated. Anyone can sell it. And they can sell it however they want to with almost no repercussions. So before you buy from someone, check references if you can. And make sure you check with the Better Business Bureau (www.bbb.org). Find a company with an AA rating.

My favorite dealership is International Collectors Associates in Durango, Colorado (800-525-9556). They are a Christian company that's been in business for 30+ years. They have an AA rating at the BBB. And they will take care of you with the utmost integrity. There are other good dealerships out there, just make sure you do your due diligence before buying.
About the Author
Steve Kroening writes for Success magazine and also publishes Wisdom's Edge. You can get Biblical tips on health, finance, relationships, parenting, and success, delivered to your email inbox every week. Simply visit http://www.wisdomsedge.com and sign up for this free e-zine.
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