THE BLOG

How to Buy Real Gold

06/12/2010 05:12 am 05:12:01 | Updated May 25, 2011

If you've been following any of the hair-raising stories about the gold bullion market, you are probably thinking about how to own real gold, instead of "paper gold."

There are a few simple rules when it comes to owning gold:

1) Gold is metal. If you can't hold a block of metal in your hand within 24 hours, you don't own gold.

2) Everyone's a damn crook.

If you observe those two rules, you'll do fine.

First, how to buy real gold? The following suggestions will pertain for individual holdings of $1000 up to about $10 million. If you want institutional size, you should find better advice than a column on the Huffington Post.

The usual caveats apply. This is not a recommendation to buy gold. This is a suggestion on how to buy gold.

For a while, it was possible to take delivery on Comex futures contracts. These days, I'd say don't press your luck. Go to a reputable gold dealer. I would suggest the Tulving Company at tulving.com or Blanchard and Company at blanchardonline.com.

These dealers have been around for years, and do big business with tight margins. All gold is the same. You want to pay as little for it as possible. You should be very aware of the "premium" you are paying to "spot." "Spot" is the price for very large accounts, trading in 400oz. institutional bars. (Ideally - reality can be a bit different.) In small sizes, from a dealer, you have to pay a little more. The dealer has to pay for his business, and that comes from buying low and selling high - the "spread."

Tulving is selling new kilobars (about 33 troy oz.) direct from the smelter for $8.95/oz. over spot. Since gold is about $1150 today, that is about a 0.78% premium. Plus, it includes free shipping. If you ask, either Tulving or Blanchard might have some larger 100oz. and 400oz. bars available.

Tulving says they shipped $285 million dollars of precious metals in 2009, and $5.3 million on February 4, 2010 alone. So, they won't flinch at your $1 million or $2 million order.

For a 1 oz. Krugerrand, the premium is $29.95/coin. There are two additional costs here - one is for the dealer, and one is for the minting of the coin. It comes out to a 2.60% premium. That's not bad.

If you're paying more than this, you're paying too much.

Dealers like Tulving and Blanchard have insurance that covers delivery to and from the dealer. So, if they send something to you, it is insured under their policy until it arrives at your door.

I've sent 100oz. gold bars via Fedex. Insured, of course. Get it in writing if you're nervous.

Now you hold some gold in your hand. Where to store it?

From time immemorial, people have stored gold at their residences. People are still unearthing gold hoards from Roman-era manors. Wealthy French stored gold at their estates during World War II. Bury it, or hide it somehow. Don't tell anyone about it of course.

If you don't like that solution, the only other solution I would suggest (not counting overseas options) is to use an independent depository. I suggest First State Depository, in Wilmington, Delaware. There might be a comparable solution on the West Coast.

Do not use any depository affiliated with a bank or the Comex. This means Scotia Moccatta, HSBC, Brinks, JP Morgan, Goldman Sachs, UBS etc. etc. Don't ask your dealer to "hold it for you." I wouldn't use bank safe deposit boxes.

Apparently, during the S&L crisis in the early 1990s when many Texas banks failed, the contents of bank safe deposit boxes were confiscated. Was that "legal"? Who knows. Who cares. It happened.

With a "real" depository like First State, you can make an appointment to visit ("audit") your gold on 24 hours' notice. Go there and hold it in your hand. Check the serial numbers and specific weights if you like.

See Rule #1. You should be able to hold your gold in your hand within 24 hours.

The "dubious" depositories, such as the Comex depositories, do not allow you to visit your gold. They used to provide information on serial numbers and specific weights, on paper warehouse certificates. However, they have phased out the warehouse certificates as well. Besides, the service stinks. You can wait weeks to get delivery of your gold, compared to hours from a real depository.

How many more red flags do you need? (See Rule #1 and Rule #2.)

The storage fees charged by a "real" depository are the same as those of a "dubious" depository, and also the fees on ETFs. It doesn't cost any more. It's just a lot better.

Want to hear some horror stories? Listen to this interview with someone who personally visited the Scotia Moccatta depository.

If you listen to something like this and don't take delivery on your gold and silver, you are a moron.

The iShares Comex Gold Trust, an ETF with the ticker IAU, claims to be holding 1.4 million ounces of gold apparently in this Toronto vault. However, the eyewitness account only saw 89,000 ounces!

If you like, you can have a dealer like Blanchard send your gold directly to a depository like First State. Of course, the depository is also insured. So, the entire chain of delivery and storage is fully insured.

Since I'm extra-paranoid, I have also had my bullion examined for tungsten counterfeits. You might want to politely inform your dealer that you plan to examine all incoming bullion for fakes. They are less likely to send you anything "suspicious" that way.

Analyst Rob Kirby has released a detailed account of the tungsten counterfeit scam, including names and places.

For the visually inclined, here's a report on German television showing a 500g tungsten fake identified by Heraeus, one of the world's premier gold smelters.

Fortunately, avoiding counterfeit scams is now pretty easy, with the help of a company called Bullion Analysis Inc. (bullionanalysis.com) In the old days, up to about nine months ago, if you wanted to assay your gold, you had to either drill it for samples or send the whole bar out to a lab or smelter. Ugh. Bullion Analysis has a new, non-invasive technique that will detect even the recent high-quality tungsten phonies that have been floating about.

Bullion Analysis Inc. is located in Virginia, just a short drive from First State in Delaware. You can make an appointment for them to travel with their equipment to First State, rather than sending the bullion to Virginia. They can do all the analysis on-site.

For those of you with hundreds or thousands of 400oz. institutional bars, I would put those Bullion Analysis technicians on a plane pronto.

If you own shares of stock, you have to sell on the stock exchange. However, you can sell gold bullion to anyone.

For example, if you have some gold at First State, you might be able to ask around at investment advisers and wealth managers to see if anyone would like to buy your gold, without it leaving the depository. Then you could sell it for the highest possible price, and not have to ship it.

Otherwise, you can sell to a large dealer like Tulving or Blanchard, for close to the spot price. Don't use any advertised "cash for gold" outfits, which normally offer horrible prices.

Lots of people sell 1 oz. coins on eBay.

If this sounds like too much hassle and expense for you, I'd look into "hybrid" systems like Bullionvault (bullionvault.com) and Goldmoney (goldmoney.com). They are much less likely to be crooks - in my opinion - than any bank-affiliated organization. (See Rule #2.)

In any case, stay away from all "paper gold" schemes like ETFs, futures, pooled accounts, and anything offered by a bank or London Bullion Market Association member.

This is all a lot easier than it sounds - as long as you don't try to trade it too much. It's a lot safer than any brokerage account. That has always been one of the main attractions of gold bullion: ultimate safety.