Gold futures tumbled 4% Friday, sustaining their first major loss in a run that began early in November, as the U.S. dollar rose sharply after an upbeat U.S. jobs report. -Marketwatch The long November rally which pushed gold to a record $1218.25 and inspired our first blog post to boldly proclaim our bullishness on the metal, came to an end today on the news of a favorable US job report. Such timing, in a previous era might drive an analyst to retreat to the nearest watering hole to drown sorrows in several pints of lager and spend the weekend nursing a bruised ego. As I've stated before, (and is rapidly becoming my mantra), "We are in extraordinary times". Had I begun my blog a few days earlier, I likely would have warned of the over-heated market, and warned of a steep temporary decline driven largely by a profit taking sell off going into the weekend. As you will note from the daily trading chart, the sell off occurred during New York trading hours, as buyers tested the low throughout the day and were poised for a late rally leading to the close. Although the late $10 recovery was stifled. it suggests $1150 gold is viewed as a bargain. Look for Asian markets to take advantage of the buying opportunity when trading resumes Monday.
As a side note, I no longer base any action on Labor Department data, ever since they decided to classify hamburger flipping as a manufacturing job.
Today's price decline creates a perfect segue into the subject of investing in precious metals, particularly the purchase of physical gold as a store of wealth versus trading gold on market fluctuations. The later obviously bearing higher risk levels, but also creates the opportunity to lock-in profits from rising gold and purchasing on the dips.
Purchasing Physical Gold
Once the investor decides to make a play in precious metals, the glaring questions are what to buy?, How to buy it? and what to do with it once I own it? Gold can be purchased in a variety of forms, Bullion (bars and coins) being the preferred format for simplicity and universal acceptance in the marketplace. Bullion is usually issued by a government mint, or can be produced by a gold production company. Government issued bullion (bars and coin) is the safest bet for purity and quality and comes in one ounce (coin/bars) and ten ounce bars. Numismatic, or rare collectible coins are also popular among coin collectors, but value added premiums based on rarity, historical significance and other factors can increase cost considerably. Although I appreciate the historical aspect, I tend to shy away from the collectible market, due to the complexity of the learning curve associated with collectible coins. When it comes to investing in metal, with its inherent complexity, I prefer to simplify wherever possible. Jewelry also falls into this category, although the gold market is often driven by demand for jewelry in many cultures. India, being the world's largest consumer market of gold for this purpose, is known to affect the spot price during traditional custom gift-giving holidays.
Gold Bullion can be purchased, depending on supplies, directly from the government mint, a private brokerage firm, a coin trader or a private party. Personally, I have experience purchasing from a large reputable brokerage firm and mom and pop coin dealers without issue. I recommend due diligence when choosing a vendor. A quick search on-line will provide ample advice. Purchases over the Internet should be approached with caution. Don't fear taking delivery through the Mail or major shipping companies, the content is likely insured, but double check for good measure.
A word about brokerage firms - The novice gold purchaser may tend to view the gold broker as super-knowledgeable and/or a source of strategic advisory. Keep in mind the broker makes his/her living on the trading commissions and often has self-interest in mind. Don't be talked into setting up a trading account and sold on the idea of leveraging your purchases. This should only be attempted by the most astute and experienced market timers. Many a would be gold-trading millionaire lost everything in margin calls prompted by severe sell-offs. These brutal events are referred to as bloodbaths, by veteran traders.
Storage
Any purchase of physical gold should be regarded a long-term store of wealth, a hedge against inflation and an alternative savings plan. The purchaser should consider this an illiquid asset that can become liquid and (highly mobile) in an emergency situation. Historically, many have fled politically instability or natural disasters with merely the clothes on their backs and their cache of gold in tow. Hopefully, you and I will never find ourselves in such extreme circumstances. That said, Gold should be stored in a safe (private) location. The safe-deposit box at your local bank is an excellent option, but remember...we live in extraordinary times, so use your best judgement. Once the investor has timed purchases, buying on the dips, and has acquired a comfortable percentage of his/her portfolio in physically possessed gold bullion, the lure of the market fluctuations may attract the investor to try his/her hand at timing trades in order to profit from the market ebbs and flows. Obviously, this practice must also be approached with caution.
Next: Examining the cycles, rhythms and trends in the gold market, and how to time trades to profit from volatility.
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