This is probably not yet a good time to buy gold as an investment. But for people who consider it as insurance, there is no bad time to start or continue building a position step by step. Before coming to the point of this article, I would like to debunk four myths.
Myth #1: "Gold cannot fall and stay below production price."
Production prices are very heterogeneous, and the average is a moving reference. In the period used to calculate its current value, mining companies were still spending money in the expectation of higher prices. Most of them can probably produce for less.
Myth #2: "Fundamentals are bullish for gold."
Most analyses rely on the hypothesis of a free market. The concentration of future contracts by a few banks makes this hypothesis doubtful. Moreover, the first fundamental argument is inflation, and it does not work as most analysts expected. Creating money may not create inflation when velocity falls.
Myth #3: "It is better to own mining companies."
Mining companies will probably cut their dividends or even stop paying them. Iamgold (NYSE:IAG) already did it. The junior miners ETF GDXJ shows a very high yield (9.3% according to Yahoo Finance, 9.68% according to finviz.com). If junior miners cut their yields, long-term shareholders interested in income or dividend-growth investing might throw in the towel, driving the prices even lower. Some small companies might even file for bankruptcy.
Myth #4: "Bury all of it in your backyard."
In history (especially in very long European history) rich families who have overcome major historical turmoil did it thanks to their assets in foreign countries. Nowadays, there is no need to be rich, anyone can buy shares of a bullion fund in Switzerland or Canada in a couple of clicks. Switzerland offers probably the best political and social environment to store gold and silver (this article gives information about Swiss funds), but Canada currently offers compelling discounts on Net Asset Value. The following table shows a list of funds that investors should consider instead of GLD, SLV, PPLT and PALL.
Data: 12/20/2013 on close
% NAV in bullion*
Central Fund of Canada
99.1% (gold 57.1%, silver 42%)
Central Gold Trust
Sprott Physical Gold Trust
Sprott Physical Silver Trust
Sprott Physical Platinum & Palladium Trust
*complement is in certificates and cash assets.
For long-term buyers, CEF and GTU discounts provide a safety margin in case metal prices fall lower. An arbitrage, for example buying GTU and shorting GLD, is a low-risk trade, but don't expect a sure profit after carry costs: discounts in CEF and GTU move randomly between 4% and 8% for two years. If you don't want to miss future updates, click on "Follow."
Disclosure: I am long CEF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Data provided by the funds.