# Investing in Precious Metals: Bullion

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Gold Bullion

The least expensive way of investing in gold is in the form of bullion. North Americans are particularly fortunate because wafers and bars in an extraordinary range of sizes are available to the public. You can purchase gold bullion anywhere from one tenth of an ounce up to the well known “standard bare’ of approximately 400 ounces which is used for government and interbank settlements. Moreover, the negotiability of gold bullion is excellent: most dealers can deliver physical gold against cash payment and, much more important, will purchase your bullion back on demand.

• Least expensive way to own gold.
• Instant convertibility into cash.
• Negotiable internationally.
• Direct investment in precious metal.
• Price widely quoted.

• Storage risk.
• Money tie-up

Opportunities and Pitfalls:

• Save on bar charges by buying as large a unit as you can afford.
• Avoid bars made by refiners who are not internationally recognized.

Try to save sales taxes where possible.

• Deal with an established bank or bullion merchant.

Like all gold, wafers and bars are traded in dollars per troy ounce. Each bar has its weight and its exact fineness stamped on it. Most of the smaller wafers are of a fineness of .9999 (“four nines”), which is generally considered fine bullion. For instance, a 100 ounce gold bar with a fineness of .9999 is classified as exactly 100 ounces of weight and will be priced accordingly. With bullion of a lower purity, this procedure varies somewhat. Because finenesses vary right down to .995 (the minimum accepted standard), the values of such bars are calculated as follows:

Example: When you buy a gold bar stamped 10.0000 troy ounces, and showing a fineness of .9981, at a price of \$400, you pay \$3,992.40.

(10.0000 ounces x .9981 = 9.9810 ounces x \$400= \$3,992.40)

Example: When you sell a kilogram gold bar, stamped 32.1500 troy ounces, and its fineness is expressed as .9990, at a price of \$500, you should receive \$16,059.00.

(32.1500 ounces x .9990 = 32.1180 ounces x \$500 \$16,059.00) when you want to resell your gold. If you are not careful, you may have to pay costly assay or melting charges.

Secondly, buying from a leading dealer gives you access to far greater expertise. Most leading institutions have been in the gold business for a long time. But even when you buy from an established bank or precious metals dealer, take a close look at the product you get. Some institutions sell bullion which features their own logo alongside a recognized refiner’s hallmark. Stay away from these products also, because your ability to resell the gold later is often limited to the dealer whose name appears on it. And his buying price may not be the best you can get.

Wafers and bars always carry a “manufacturing charge”. This means that the dealer passes on to you what it costs him to have your gold manufactured into bullion form. The only item which is exempt from this charge is the “standard bar” of approximately 400 ounces, which is beyond the reach of most private investors anyway.

Manufacturing charges increase the smaller the bar you purchase. The guide below illustrates what charges you should expect when you purchase gold bullion. Obviously, you can save on manufacturing charges by buying as large a unit as you can afford.

Make sure you deal with a reputable and long established dealer. The main reason for doing business with leading bullion merchants is that they only deal in the products of internationally recognized refiners. This is very important because a bar or wafer manufactured by a refiner who does not have international recognition exposes you to difficulties One particular advantage to buying gold bullion is that commissions are relatively low. Some leading dealers do not even have a transaction charge on gold purchases or sales. To Canadians, an added advantage is that most provinces do not levy sales tax on physical bullion. U.S. residents are less fortunate: a few states, such as Delaware, Florida, Nevada and New Jersey don’t charge a sales tax, but the great majority of states do.

In 1983, the Internal Revenue Service also introduced sweeping new reporting requirements for gold transactions. Brokers and dealers are now forced to report all sales of bullion and “bullionlike” items directly to the IRS, thus severely limiting the right of individual Americans to keep their gold hoards a private affair.

Canada, on the other hand, is one of the last remaining places where such privacy still exists. Most bullion dealers allow you to settle your purchase against cash, and readily buy gold back from you without the obligation to report transactions.

Silver Bullion

Silver bullion is today fabricated in more sizes than ever before, ranging from one gram (approximately I / 30 of an ounce) to “standard bars” of approximately 1,000 ounces. This aspect, and excellent liquidity, make silver bullion an investor favorite. Many of the points which apply to gold bullion are also valid for silver, although there are some slight differences.

In today’s market, all silver is of a fineness of .999 (“three nines”). Wafers and bars of this purity can be resold without assay as long as they have been manufactured by an internationally recognized refiner.

Something else to consider when purchasing silver bullion is the manufacturing charge. Although it costs a refiner roughly the same to make a one ounce silver bar as it does to make a one ounce bar of gold, the same charge impacts on the end price quite differently when expressed as a percentage. Let’s assume that gold is selling at \$400, while silver is trading at \$7. Based on these prices, a \$5.00 per ounce surcharge will translate into a premium of only 1.25% on your gold purchase, while it would raise the cost of your silver by over 70%!

As we saw in the case of gold bullion, silver bars and wafers should only be purchased through a reputable bullion dealer. In most cases, state and provincial tax legislation for silver is identical with that for gold bullion. The obligation of dealers to report your transaction to federal tax authorities is also the same. American brokers have to complete IRS Form 1099 when you purchase silver bullion from them; in Canada, no such requirement exists.

Until recently, platinum and palladium were only traded in North America in the form of industrial units such as sponge or plate. Obviously, this translated into a tremendous loss of negotiability. In Europe, on the other hand, platinum and palladium have been available in the form of wafers and bars for decades.

This difference is easy to explain. In the United States, investors simply did not know much about precious metals until a few years ago when the ban on private gold ownership was finally lifted. And, in Canada, there was no investor market because banking legislation does not allow chartered banks to purchase and sell platinum and palladium.

However, Johnson Matthey Limited has recently started to produce platinum and palladium in investor sizes ranging from one- tenth of an ounce to 100 ounces. Guardian Trust Company has established itself as the leading Canadian dealer in these metals; U.S. residents can buy them at most Deak-Perera offices. Platinum and palladium bars, by the way, have a fineness of .999 and can be purchased and sold in the same way as gold and silver bullion.

Unfortunately, several disadvantages to physical delivery remain. In Canada, both the provincial and federal governments tax these metals very heavily, leaving investors with the problem that a significant price advance has to occur before a profit can be generated. Provincial sales taxes range from five percent to eleven percent. The federal sales tax is nine percent. In the U.S., state sales taxes are levied as they are on gold and silver, but no federal tax is charged.

Manufacturing charges on platinum and palladium are quite reasonable. Again, they impact more heavily on lower priced palladium when measured in percentage terms.

BULLION COINS

Gold Bullion Coins

In global terms, gold bullion coins are easily the most popular vehicle for private investors. Best known are the South African Krugerrand, the Canadian Maple Leaf and the Mexican Onza. These three coins are particularly attractive because they each contain exactly one fine troy ounce, which makes it easy to negotiate and evaluate them.

What is a bullion coin and how is its price determined? Governments of gold producing nations make bullion coins in virtually unlimited quantities. The purpose is not to provide circulating money, but simply to create profits. The value of these coins is determined solely by their gold content but there is usually also a small “premium” which represents the manufacturer’s cost of production and distribution as well as the dealer’s cost of financing his inventory. For all three major bullion coins, the premium is normally between two and six percent.

Let’s assume the gold price is \$400. The price for a Krugerrand, a Maple Leaf or a Mexican Onza coin should then be between \$408 (2% of \$400 \$8) and \$424 (6% of \$400 \$24).

You should know that when you resell a bullion coin you seldom get back the same premium you paid when you purchased. A dealer’s buy-back premium is generally far below his selling premium and sometimes there is no premium at all. Thus, your turn-around cost on one of these major bullion coins can be anywhere from zero to six percent.

Unfortunately, that’s not where the buck stops. In addition to premiums, there are sales taxes on bullion coins in most U.S. states and Canadian provinces. Because regulations change often, you would be well advised to check out the exact sales tax status with your bullion dealer before you buy. Of course, sales taxes are a direct out-of-pocket expense. When you resell the coin, you don’t get back your tax and, to make matters worse, you can’t deduct this expense for tax purposes, even though bullion coins are an investment.

• Relatively inexpensive.
• Instant convertibility into cash.

— Negotiable internationally.

— Direct investment in precious metal.

— Bullion coin prices are quoted widely.

— Storage risk.

— Money tie-up.

— Sales tax in most provinces and states.

Opportunities and Pitfalls:

— Fractional sizes cost more.

— Make sure coins are uncirculated.

Keep an eye on Krugerrand prohibition bill.

Krugerrands, Maple Leafs and Mexican Onzas also come in “fractional units” of one-half ounce, one-quarter ounce and one- tenth ounce coins. These are attractive to investors who cannot afford to purchase one full ounce of gold at a time, and they make very attractive gifts. But, if you have the choice, you would be wise to take the full ounce coin rather than ten one-tenths of an ounce.

This is because the premium on fractional coins is much higher than it is on one ounce units. In the case of the South African Krugerrand, for instance, the selling premiums are as follows:

• one-half ounce Krugerrand: 6% to 9%
• one-quarter ounce Krugerrand: 10% to 14%
• one-tenth ounce Krugerrand: 15% to 20%

As you can see, investing in one-tenth ounce units is not an inexpensive proposition.

There are also several other bullion coins, the most popular of which are:

Austria 100 Corona gold content .9802 troy oz.

Hungary 100 Corona gold content .9802 troy oz.

Mexico 50 Peso gold content 1.2057 troy oz..

Russia “Chervonetz” .2488 troy oz.

Although these were the world’s most important bullion coins not too long ago, they are of little use to today’s practical investor. To start with, their awkward weights make it rather difficult to calculate the value of these coins. Moreover, dealers do not particularly want them in their inventory because they have lost a lot of their liquidity due to the success of the Krugerrand, the Maple Leaf and, to a much lesser degree, the Mexican Onza.

The United States, by the way, is now joining the race with a program all of its own. A series of half ounce and one ounce gold medallions has been minted by the U.S. Treasury, and Goldman Sachs/J. Aron have been appointed as the official distributors. Before buying, make sure there is a reasonably low premium and that good liquidity is guaranteed.

For the time being, however, the South African Krugerrand and the Canadian Maple Leaf are likely to remain the most popular bullion coins, and the choice between them is becoming increasingly difficult. The Krugerrand is better distributed world-wide and, with almost 40 million ounces in circulation, is more negotiable. However, this is starting to change. Introduced just over five years ago, the Maple Leaf is catching up not only in Europe but also in the United States, the Krugerrand’s largest market. One reason for this may be that the Maple Leaf is made of four nines pure gold, compared to the Krugerrand’s fineness of .9167. But most experts feel that this difference is of no consequence because the South African coin weighs slightly more than one ounce to make up for this variance in purity. Some even go further and say that a lower purity coin cannot be damaged as easily and is therefore preferable.

A far more important consideration is that a bill to ban the importation of Krugerrands was introduced in the US House of Representatives in 1983. Although the bullion dealing industry responded by criticizing such a concept, brokers discontinued their aggressive Krugerrand programs and switched to alternatives. The bill has yet a far way to go, but if it ever became a law, it would seriously affect the liquidity of America’s most popular gold coin investment.

For the time being, though, the Krugerrand is still freely available. And when it comes to the most important investment considerations, such as selling premiums, ease of transaction, and negotiability, it is rivaled only by the Maple Leaf.

If you decide to purchase bullion coins, make sure you handle them carefully. You should not scratch them, dent them or nick them. To be on the safe side, it is best to leave them in their original wrapping. You will always get back the basic gold value on your investment but, if the coins are in bad shape when you return them, you may not get any recognition for the premium you have paid. Moreover, because the dealer cannot sell coins once they are damaged, he may deduct a hefty melting charge from your proceeds.

Silver Coinage

Although none of the major silver producing governments has an actual “bullion coin” program, the market itself has filled this void. Fearing the worst, the citizens of Germany, Mexico, Canada and the United States all reacted alike when their governments gradually withdrew silver coinage from circulation and substituted it with worthless base metals. Hundreds of tons of such coinage was privately hoarded and some of it is today still freely traded.

In the United States, anything minted prior to 1965 has a silver content of 90%. In Canada, the story is more complicated but the rule of thumb is that from 1920 to 1966 Canadian coinage contained 80% of the white metal.

In both countries, silver coinage is traded in bulk, usually in “bags” with a face value of \$1,000. An American bag of \$1,000, by the way, weighs about 720 troy ounces. In Canada, \$1,000 worth of pre-1967 coins is equivalent to 580 troy ounces.

Silver bags of this type have several advantages. To start with, they provide the investor with a certain downside protection. If silver ever did drop substantially, you could still go out and freely spend each coin at face value. Thus, bagged silver is both real money and a direct investment in the white metal.

Many analysts also believe that over long periods of time silver coins may appreciate more in value than silver bullion. Particularly in the extreme event of a currency collapse, they argue, silver coins would quickly establish themselves as a favored medium of exchange.

This is quite true, but investing in silver bags also has disadvantages. One is that they are often hard to negotiate. The interbank market does not deal in silver coinage, because melting it down into bullion is illegal. This leaves investors dependent on the smaller coin dealers who generally run their inventory according to demand. And in the late stages of a bull market this can cause quite a problem. At record prices, when everyone wants to sell, coin dealers will be very reluctant to purchase bagged silver at bullion prices because they will anticipate sitting on the accumulated inventory for some time and will therefore discount the value to correspond with the financing cost.

Selling a portion of a silver bag is even more difficult. When a coin dealer does purchase, let’s say, a face value of \$300 in silver coins, he will usually charge an even heftier discount. With bullion, on the other hand, you would not run into this problem. If you want to participate in the market to the tune of 600 ounces, you can simply purchase six 100 ounce bars and sell these, one by one, as you see fit.

Finally, there is again the problem of sales taxes. It never fails to amaze me that governments can actually tax the currency of a country, but most take the view that, if the market value is higher than the value stamped on a bullion coin, they have the right to do so.

CERTIFICATES

Gold Certificates

Bullion and bullion coins both have one major drawback: they involve a storage risk. Certificates, on the other hand, provide the investor with a practical means of avoiding this problem and give him a secure alternative.

In most cases, the issuing institution will register your gold bullion or gold coin certificate in your name and hand it over to you. Certificates generally state that you have the right to demand the actual gold you have purchased or, alternatively, its fair market value. In return for keeping the bullion for you, you have to pay a modest storage charge. In addition, most institutions charge a transaction fee at the time of purchase. Gold certificates are now by far the most popular investment vehicles for Canadians purchasing the metal. In the U.S., where they have not been around as long, they are rapidly catching on as a more practical alternative to physical gold holdings.

At least ten dealers issue certificates which, in turn, are sold through at least twenty financial institutions. The Deak-Perera organization, Citibank and Republic National Bank are among the leaders in the United States. In Canada, the Bank of Nova Scotia and the Canadian Imperial Bank of Commerce sell their certificates primarily through their nation-wide branch networks. Guardian Trust Company, another leading dealer, is represented in major cities and uses most of the Canadian brokerage industry as its sales outlet.

• Inexpensive.
• Highly liquid.
• No storage risk.
• You invest only in a precious metal.
• No sales tax, in most cases.
• Bullion prices are quoted widely.

• Money tie-up.
• Most certificate issuers reserve the right to a few days’ notice if you want delivery, although this right is rarely exercised.
• Certificates are usually registered in your name

Opportunities and Pitfalls:

• Make sure your certificate is backed by bullion.
• Compare certificate features and charges.
• Avoid conversions into bullion.

Different certificates have different features and different advantages — comparing them carefully can save you a lot of money! The first thing you should examine is the size of the transaction charge. Currently, issuers charge commissions of between 1/4 percent and 3 percent. Of course, it makes sense to pay more than the lowest commission available if you get added convenience Out of it. For instance, it may be well worth your while to pay a broker a 2 percent commission if you can do the entire business by phone, when paying a 1/2 percent commission means that you have to run to your bank with your gold in your hands and then stand in line at the bullion dealer’s wicket — a time-consuming and frustrating experience if you are trying to sell into a bull market. Nor is the transaction charge the only factor to consider. You will find that some certificate issuers levy manufacturing charges whether you intend to take delivery of the gold or not. Others will only pass this charge on to you if, and when, you decide to take delivery of the physical metal. In the latter case, if you end up cashing the certificate, you save money because you won’t have to pay for the manufacturing of bars you never use. It also pays to check how each issuer’s certificates are backed up.

Do physical metals stand behind your document or is it secured by more paper in the form of futures or options? Where are the metals held, how are they insured, and how quickly can you get at them? Don’t be afraid to ask these questions — after all, you are inquiring about your bullion.

Certificates, by the way, are issued for different denominations. Canada’s Bank of Nova Scotia, for instance, recently decided to sell gold certificates for as little as one ounce. The programs of Citibank and Deak-Perera call for a minimum purchase of \$1,000. Guardian Trust, on the other hand, insists on a minimum of five ounces of gold per certificate. Most institutions charge storage fees which, at present, are more or less identical. Some dealers also offer certificates drawn on foreign locations. This means that you can take delivery of your gold in market centers outside the United States or Canada. But don’t be blinded by meaningless extra features. If you want your gold shipped abroad, most issuers will arrange it for you anyhow, whether it’s stated on the certificate or not. And the cost will be just the same.

One final difference between the various certificate programs lies in what type of gold they offer. Most bank programs restrict themselves to bullion only, while firms like Deak-Perera and Guardian Trust also offer Krugerrand, Maple Leaf and Mexican Onza certificates. This is of particular interest to those investors who are discouraged from purchasing bullion coins by state and provincial sales taxes. Depending on where you live, coin certificates give you the opportunity of owning your favorite bullion coin and only having to pay the sales tax if and when you decide to take delivery.

However, if you take delivery, there is one major tax disadvantage to all precious metals certificates. Both Revenue Canada and the IRS sometimes consider that a change from a certificate into bullion represents the disposition and repurchase of a commodity and is therefore to be treated as such. More easily explained, if you had purchased a ten ounce certificate when gold was \$200, and if you were now to take delivery of that certificate while gold is traded at \$400, you would have to declare a \$2,000 capital gain — even though you never received a penny!

Obviously, this is the wrong way of looking at the situation because a certificate is nothing more than a receipt for bullion already purchased. But unless you are determined to challenge the tax department on this point, you will have to bear it in mind.

Still, all this only becomes a problem if you take delivery which, of course, is not the purpose behind investing in certificates. The fact remains that, for convenience and ease of transaction, precious metals certificates give you the best value for your money.

Silver Certificates

The same points discussed in the section on gold certificates apply to silver certificates. They are issued by the same institutions for sale at their branches or through the brokerage network. Again, it will be worth your while to compare the advantages and drawbacks of individual certificate programs.

The usual minimum for silver certificates is 50 ounces. At present, no major institution issues certificates for silver coins.

In the U.S., most banking organizations regard platinum and palladium as a specialty area and the market is left almost entirely to the Deak-Perera Group.

In Canada, only Guardian Trust Company offers platinum and palladium certificates. The company’s program is represented through most Canadian brokerage firms, allowing you to place orders directly through your account executive.

Certificates are by far the most practical way of owning the physical metal because they overcome the hefty premiums you would otherwise pay in the form of manufacturing charges and sales taxes. Again, it is only if you take delivery that you are exposed to these extra Costs.

Platinum certificates are normally issued for a minimum of five ounces, and palladium certificates are available for ten ounces or more. Storage and commission charges are similar to those on gold and silver bullion certificates.

PRECIOUS METALS ACCOUNTS

The late Seventies were a frustrating time for precious metals dealers and investors alike. Prices were extremely volatile and everyone wanted to purchase at the same time, causing long line-ups. For bullion dealers, it was also a very creative time. As a result of the “Gold Rush”, dealers expanded their certificate programs to the brokerage industry and brought out a number of new services on their own.

In 1979, one us bank, the First National Bank of Chicago, satisfied their clientele by introducing a gold savings passbook. Operated like a normal savings account, the holder simply buys gold which is then shown in his passbook as a credit balance, or he sells gold to have it deducted from his balance again.

Today, passbook accounts for gold and other precious metals are available from a variety of institutions, some as far away as the Philippines, where Summa International Bank offers the service.

— Convenience and time savings. Usually no storage risk.

— Transaction speed.

— Usually more expensive to operate.

— Restricted negotiability (you can negotiate only where account is held)

— Money tie-up.

Opportunities and Pitfalls:

— Determine what exactly you want from such an account.

— Compare charges carefully.

• Avoid plans which restrict you, should your objectives change.

A number of programs go a step further and offer additional, alternatives. Deak-Perera was the first to announce a program which allows the purchase of gold, gold coin and silver certificates over the telephone. Because the firm does not provide banking services, clients are asked to settle by mailing certified checks. They receive their certificates later.

A similar service called “Tele-Trade” was introduced by Canada’s Guardian Trust. This plan offers nation-wide toll-free dialing and enables investors to buy and sell gold bullion and coins, as well as silver, platinum and palladium. Tele-Trade also pays daily interest on cash balances and allows investors to place free buy and sell orders. One particular advantage is that it does away with such things as manufacturing, storage and insurance charges.

Some precious metals plans are designed to facilitate the accumulation of bullion, but are less suitable as a trading vehicle. Among these are the programs operated by Merrill Lynch and Shearson American Express Inc. Both services allow you to buy gold and silver bullion on an ongoing basis, and in amounts and intervals of your choice. These features are of particular interest to investors who believe in averaging their purchases over a period of time and want someone else to take care of the actual accumulation according to the criteria they choose. One of the most interesting services in this category is “Goldplan”, a Swiss concept offering five individualized cost averaging systems, suited for different investment needs. One of “Goldplan’s” programs combines bullion accumulation with optional life insurance, a concept offered also by the Tyndall Group of Bermuda, as well as by several other Swiss firms.

As you can see, each one of these programs has its individual drawbacks and advantages. I suggest that you write to each company in order to compare costs, flexibility and convenience. Knowing them well will be increasingly important, because it is in this sector that the largest growth in the precious metals business will take place over the next five to ten years. Running to your bank to get a certified check, standing in line at one of the local bullion dealerships and carrying your precious metals home are rapidly becoming things of the past. More and more investors call a trader or broker from the privacy of their home or office in order to place a purchase or sale order. Most of these convenience facilities, by the way, have not been designed with only the aggressive trader in mind, but are just as suitable for longer-term holders of bullion.

With precious metals accounts of this type, it is even more important to “shop around”. Try to know what you want from the facility you are looking for before making a decision. If you’re trying to accumulate gold with the idea of eventually taking delivery, make absolutely sure that your “account balance” is actually convertible into physical bullion of the size you want. Check, also, whether getting at your gold is practical and doesn’t entail unacceptably high shipping or tax expenses. Few of the investors who hold precious metals in bullion accounts in Switzerland, for instance, realize that taking physical delivery would not only bring with it manufacturing charges, but that they would also be taxed with a hefty 5.6% value-added tax!

But perhaps you are not interested in delivery at all and really need an account in order to trade. Obviously, your objective will be quite different. Whether you can place buy and sell orders, what the trading hours are, and how often you receive a statement may be of far more interest.

Finally, you will want to keep transaction charges as low as possible. In the U.S. and Canada, by the way, there are large discrepancies between the commissions charged by individual banks and dealers. They can range from as little as 1% per purchase or sale to as much as 4%, and extra fees such as those for administration, storage and insurance are often added!

FUTURES CONTRACTS

Futures contracts were initially designed to provide protection against fluctuations in the price of commodities and foreign currencies. In the case of precious metals, the people seeking such protection are primarily industrial users. For example, let us assume that a jewelry manufacturer wants to prepare his Christmas sales campaign. It is now mid-summer and during the past three months gold has been trading as low as \$430 and as high as \$550. Where the gold price will be at Christmas-time is strictly a matter of speculation. At the same time, price lists and catalogues have to be prepared and they of course have to be based on a certain price level. Instead of leaving himself open to further fluctuations, our manufacturer would typically purchase the amount of gold he anticipates will be needed in the futures market.

— You can profit when prices go down.

— Leverage: your money tie-up is substantially reduced.

— Liquidity.

— You invest only in precious metal.

— Futures contracts are widely quoted.

— No storage risk.

Open risk: theoretically, no limit to your losses.

— You are tied to certain contract sizes, maturity dates and trading hours.

— Delivery, if taken, is at an exchange warehouse.

Opportunities and Pitfalls:

— Study the literature the exchanges provide.

• Start small, build up as your expertise grows.

You can also protect yourself by selling on the futures market. Take the case of a mining company as it watches the gold price run ahead of itself and wonders when the inevitable price correction will set in. Smart management will lock in the temporarily high price by selling the gold to be produced during the next few months in the futures market.

But today, those using futures contracts for their protective appeal are not always in the majority. Ironically, futures are frequently used for the opposite purpose, namely for speculation. The main attraction to the speculator is leverage: the ability to put down a small deposit to guarantee the price of a large transaction.

Astonished by the staggering volume of business transacted in North America’s commodities exchanges, a European banker recently asked me how many private investors were actually buying and selling futures contracts. When I told him that just about every one of my clients had at one time or another owned a gold futures contract, he looked at me in disbelief. Coming from a culture where precious metals are purchased and then kept for twenty or thirty years, he simply could not understand why ordinary investors would want to indulge in this kind of speculation.

It is true that futures have made many a speculator into a millionaire, but you should realize that for every winner in this game there is also a loser. Leverage can make you more money than you ever expected to make, and it can lose you more than you are now worth!

However, the futures market need not be only for speculators — leverage can be of equal advantage to you even if you are a very conservative investor. Having only a small part of your capital tied up can be invaluable, particularly in a volatile financial environment. Just think of the advantages of having other investment opportunities coming along and being able to utilize them. In short, leverage increases your flexibility to an enormous extent.

From a cost viewpoint, however, futures are no better and no worse than a direct holding of bullion. When you enter a contract, your broker will ask you for a margin deposit, normally between five and ten percent of the contract’s value. But this is not the end of your financial commitment: if the market goes against you, you will have to put up additional sums of money in line with your losses. There are also commissions to be considered and, most important, the fact that precious metals for future delivery trade at a premium over the cash price.

The premium for any one metal is usually a direct reflection of the cost of money and, to a lesser degree, what the market expects interest rates and the price of the metal to do in the future. In other words, if you purchased gold for delivery in six months’ time, and if present interest rates were twelve per annum, the premium you would have to pay would be somewhere around six percent. If it were seven percent, then you would know that the market expects either gold to increase or interest rates to rise.

One of the key advantages of futures contracts is that they also allow you to benefit when the price of a metal drops. In other words, you can not only buy gold, silver, platinum or palladium for future delivery, you can also sell it. The nice thing is, in order to do so, you don’t actually have to own any bullion! You simply sell “short” at a given price and then purchase it back at a lower rate prior to the delivery date stipulated in your contract. And, as long as you liquidate in time, you don’t have to deliver the gold either because yours has been a purely paper transaction. But the profits you have made, the difference between the price you sold gold at and the price you paid to repurchase it, are real!

“Going short”, by the way, is more speculative than “going long”. Since you can lose no more than the total value of your contract, your maximum loss with a long position is limited. If you go short, on the other hand, your risk is open-ended because gold could theoretically soar to unimaginable highs. Luckily, there are some ways to eliminate the danger of losing excessively. Today’s futures markets do, in fact, offer a wide range of buy and sell order mechanisms, which can be placed as “stoplosses”. Here is how they work:

Let’s assume you have “gone short” ten contracts at \$473.10. You expect gold to go down and you hope to repurchase it at a lower rate prior to the time you will have to make delivery. But, because you could easily be hurt by rising gold prices, and because you can only afford to lose \$10,000.00, you want to place a stoploss. Given that you have sold ten contracts, your risk limit of \$10,000 translates into \$1,000 per contract. And since each contract is for 100 ounces, \$1,000 per contract translates into a net gold move of \$10. In other words, you need a stoploss at \$483.10.

As soon as your broker confirms to you that he has sold ten gold contracts at \$473.10, you would instruct him to place a stop-loss for ten contracts at \$483.10. Once your order is in, the broker will automatically close your contract out if the market goes the wrong way. If, on the other hand, gold starts to drop as you expected, you can lower your stop-loss in accordance with market movements. For example, if gold dropped to \$463.10, you could simply cancel your order and put a new one in at \$473.10.

If you do this, you should make sure that you place “open orders”. These are stoplosses which are effective until they are either cancelled by yourself or executed when the market moves to the price level you specified. “Day orders”, on the other hand, expire at the end of each day, leaving you unprotected unless they are renewed at the opening of every trading session.

But stoploss orders, regrettably, don’t protect you 100%. Today’s futures markets limit commodities as to how far they can rise or drop during any one trading session. Gold’s movements, for instance, are limited to a rise or fall of \$25 from the opening price. Now let’s look at how that can interfere with your stoploss order.

To revert to our example, you have shorted ten gold contracts at \$473.10. You feel that you want to limit your losses and place a stoploss at \$483.10. During the first few days of your investment things go exactly as planned: the gold price tumbles. But then, in one day, the price moves from \$457 to \$482, the full \$25 permitted during any one trading session. The market closes “limit up” and you think you are safe. But, in the Far East and Europe, there is further buying which pushes the price up another \$24 so that, by the next morning when your futures exchange opens, gold is trading at \$504 Obviously, your stoploss cannot and will not have been executed. Even if your broker acts immediately, your losses will be much higher than what you wanted them to be.

Another disadvantage of futures contracts is that they are basically “paper gold”. It is relatively difficult to take delivery of a futures contract even when the contract expires and you cannot do so at all until it does. One of gold’s attractions is obviously that it represents something which is highly portable and which can be exchanged into ready cash just about anywhere on earth on demand. If that is the kind of security you are after, then futures contracts are not for you. But, as we have just seen, there are advantages to futures contracts as well — provided you understand the risk.

Don’t be confused by the fact that I have chosen a gold contract to explain the various mechanisms inherent in the futures market. It works exactly the same with silver, platinum or palladium. There are, however, important differences between these precious metals when it comes to liquidity. Even if you held a hundred gold contracts at New York’s COMEX, you would never experience any difficulty in getting an immediate bid for these, because tens of thousands of contracts are traded every week. By contrast, when it comes to palladium, for instance, the only exchange at which the metal is traded is the New York Mercantile Exchange, where the business is generated predominantly by industrial users. As a result, it is often difficult to sell twenty contracts, although fewer than that should be no problem. So liquidity can be an important consideration and, in general, I recommend that you stay with those exchanges where a consistently high volume is traded.

From a taxation viewpoint, futures can be quite complicated to understand, and considerable differences exist between Canada and the United States. Canadian legislation treats precious metals the same as any other commodity which means that, the first time you incur a trading profit or trading loss, you have the right to choose Capital gains treatment or income treatment. Once you have done so, however, you have to consistently apply the same standard to all future transactions you may enter into. My recommendation is that you select capital gains treatment, due to the fact that only 50% of a gain is taxable. Unfortunately, not everyone may do so. If you are directly involved in the precious metals markets, or have a professional link with the analysis, investment or trading of commodities, you are forced to declare your profits from precious metals futures as income.

These “insider” restrictions also apply in the United States. For normal investors, however, American laws are much tougher. Capital gains treatment is only available to those who hold on to a contract for a period of more than six months. U.S. legislation has also come down hard on year-end “straddles”, maneuvers used by many traders to create artificial losses by selling a contract at an opportune time and simultaneously purchasing it for delivery in the following year. Revenue Canada is expected to announce similar restrictions in the near future.

One final point to consider is that the futures market is a game of timing, not of trends. If you are convinced that gold is going to go up within the next six months, a futures contract may affect you quite differently than a physical purchase of bullion. If you buy wafers, bars or certificates totaling 100 ounces, and the price, at the end of six months, is down and not up, this may not bother you much because you know that the long term trend is still in your favor. If, on the other hand, you had purchased a six months futures contract you would have had numerous margin calls and, finally, you would have been forced to take a loss.

Because timing is so very important, I recommend you study the art of charting and follow the market on a day-to-day basis. An intimate knowledge of moving averages, support and resistance levels, open interest and volume figures can improve your timing tremendously and save you thousands of dollars.

Playing the futures market also requires nerves of steel. A number of excellent books exist on the subject and, inevitably, they conclude that a keen understanding of technical indicators and a lot of discipline are essential. One of the hardest things to learn is to cut losses early and decisively and to let your profits run when prices go in your favor. If you speculate, you will also have to learn to look at the market each morning in order to ask yourself whether the situation is still the same as it was the day before and whether your position still makes sense. The futures market can make you a lot of money and it can lose you a fortune. It will be your ally if you treat it with respect and caution, and it can turn into your Worst enemy if you ever feel too sure of yourself.

OPTIONS

Call and put options have existed for gold, silver, platinum and palladium for several years but, unlike options on shares, they were never traded on the exchanges. The leading options dealers were Valeurs White Weld of Geneva, Switzerland, and Mocatta Metals Corporation of New York. In 1979, the Winnipeg Commodities Exchange announced an options program on gold but, unlike the vehicles available from Mocatta or Valeurs White Weld, Winnipeg options were for futures contracts, not for actual physical gold. Shortly thereafter, the first exchange-traded puts and calls for physical gold were introduced by the European Options Exchange in Amsterdam. Several banks in European countries were appointed as depositories for the gold while the actual options contracts were made available to the public through brokers.

In 1982 the concept caught on in North America. A Canadian dealer, Guardian Trust Company, was appointed as the depository for North America and the Montreal and Vancouver exchanges provided the trading mechanism. This means that you can now buy and sell Canadian call and put options on physical gold bullion simply by telephoning your broker.

The market is still in its early stages and, at times, experiences liquidity problems. As a result, quotations are not always very favorable to the investor, but indications are that this will soon change. Not only is the European Options Exchange trying to link up with one of the Far Eastern exchanges so that a 24-hour market can be provided, but several U.S. exchanges have also joined the club.

The first of these is COMEX in New York which recently started an options program for gold futures. Other vehicles are expected to come on stream soon and will include options for physical bullion in much the same way as they are now offered through Montreal and Vancouver exchanges. Professional traders are anxiously awaiting these developments because they will benefit from the minute differentials between various markets which will allow them to arbitrage. And when the traders arrive they will bring with them better volume and liquidity.

Gold, by the way, will not be the only options traded commodity. The Toronto Stock Exchange recently launched a silver options program and most experts think that platinum and palladium will not be far behind.

— You can profit when prices go down.

— Leverage: your money tie-up is substantially reduced.

— Clearly defined risk.

— You invest only in precious metal.

— Options prices are widely quoted.

— No storage risk.

— Liquidity is often poor.

— You are tied to certain contract sizes, maturity dates and trading hours.

— Expensive.

Opportunities and Pitfalls:

— Know what your option represents: physical gold or a futures contract.

— Few people understand the options market. If you

— don’t, make sure your broker does.

— Study the literature the exchanges provide.

Start small, build up as your expertise grows.

How Options Work

As we saw in the last section futures contracts provide you with leverage, the ability to play with more money than you actually put up for investment. We also saw that the major drawback with a futures contract is that it represents an open ended risk.

This is where the advantage of an option comes in. With a futures contract you actually purchase or sell a commodity at a fixed price for future delivery. With an option, on the other hand, you only buy the right to purchase or sell the same commodity, which means that if the market goes against you, you just write off your initial investment and forget about it. In other words, you have no obligation to go through with the deal. The net result is that you can effectively use leverage without having to live with an unlimited downside risk. In fact, you can calculate your risk to the penny because it can never be greater than the option’s price.

Understanding options is not a simple matter but the chart below goes a long way in explaining the basics. It was made available to me by the Montreal Exchange whose publication, “Understanding Gold Options”, I highly recommend.

Fig. 101

Basic Gold Options Strategies

As you will note, there are two basic types of options: calls and puts. When you buy a call option, you purchase the right (but not the obligation) to buy gold at a fixed price in the future. In return for this right, you pay a price, or “premium”, and this price is the entire extent of your risk. Conversely, when you buy a put option you acquire the right (but not the obligation) to sell gold at a fixed price in the future. Again, you pay a premium.

Writing an option involves an obligation, not just a right. But, in return for undertaking this obligation, you receive a premium. If you write a call you give someone else the right to purchase your gold at a fixed price. If he exercises that right, you have to deliver. Therefore, you have to give evidence to the Exchange that you have the gold at the time you enter this transaction. Writing a call does not cost you a thing, but generates income. The premium you receive comes from the person who bought the right to buy gold from you.

You can also write puts, meaning that you give someone else the right to sell gold at a fixed price to you in the future. In other words, you have the obligation to buy gold if the purchaser of the put exercises his right to sell, and therefore you have to evidence the fact that you have sufficient money. Again, writing a put costs you nothing and you actually pick up a premium.

As our table shows, buying calls and writing puts are strategies to exploit an increase in the gold price, while buying puts and writing calls are maneuvers which work when the price falls. Which one you choose will depend on your particular objectives and on the condition of the market.

Once you understand the basics of options trading and are ready to make a transaction, make sure you think it all the way through. Many investors totally overlook factors such as brokerage commissions or the cost of carrying margin deposits, where necessary. Don’t forget to take these into account.

You should also consider whether the newly created COMEX options on futures can be of use to you. Options can eliminate the largest drawback of a futures Contract, namely the open ended risk. For the price of the premium, you can buy far more effective protection than a stoploss ever gives — and you still have the advantage of leverage! Moreover, if you place a futures contract and a protective option at the same time, the exchange will recognize that as one “spread”, rather than as two independent positions. This means that as long as the option appreciates by as much as the futures contract loses in value, no margin deposits will be called. Obviously this can translate into real savings while eliminating the inconvenience of frequent margin calls from your broker.

But options on gold futures contracts are every bit as complicated as options in bullion study them carefully before you act.

Finally, I should point out that there are many more strategies available than the four we have explored. Options are highly creative vehicles which lend themselves to a great variety of applications. If they interest you, try to find a broker who is an expert in options and has a basic understanding of the precious metals market. This sounds logical, but it may not be easy.

Let me say two more things about options. While they seem to cater to just about every objective, you should remember that they are short term investment vehicles best suited for trading. If you do not have the time to watch them constantly and if you do not want to go through an exercise, roll over or close out every few weeks or months, they may not be right for you. The second point is that options are still very new. The options contracts available from private dealers such as Valeurs White Weld and Mocatta Metals, as well as the exchange-traded options on the Montreal Stock Exchange and on COMEX have all had considerable liquidity problems.

It is my firm belief that options will be among the most successful and accepted investment vehicles a few years down the road, but right now they have the opposite problem: not enough people participate to make their purchase or sale as smooth as bullion, certificates, stocks or futures.

MINING SHARES

The first thing you have to realize when investing in mining shares is that you are not investing in precious metals alone. To an equal degree you are also investing in the future of a corporation, which makes the issue much more complicated. Instead of analyzing only the outlook for the precious metal — which is difficult enough in itself — you also have to consider the corporate health of the specific mine you will be purchasing a share of.

initially, you must familiarize yourself with the background of the corporation, its recent development and its prospects for future production. You should also look at an earnings projection, the capitalization the dividends, and other important statistical in formation. In addition, there are a number of factors which pertain specifically to the stock of an operating mine.

The first thing to take into account is how much it costs the mine to produce its precious metal. The production cost usually depends on the grade of the ore mined. In general, the lower the grade, the higher the production cost. Production cost and grade are therefore important investment considerations. You would hardly want to invest in a gold mine if the production cost were \$480 per ounce, while the market price was only \$375. On the other hand, if the gold price reached \$500, a mine with that production cost would have an excellent outlook.

Many smaller mines and mining properties, which are not now operative, may suddenly become profitable if precious metals prices continue to rise. Some of them will be run by their current owners and others will become candidates for a takeover by larger corporations. There are a number of factors which affect the production cost. To name only some of them, there are labor costs, corporate management, taxation changes, and the state of the equipment to worry about.

— You earn dividend income.

— Highly liquid.

Prices are widely quoted.

Eligible for tax shelters such as RRSP’s, IRA’S, KEOGH’S.

— You invest in more than just precious metals.

— More knowledge required.

— You are tied to “lots” (e.g. 100 shares) if you want to avoid high commission charges.

— Money tie-up.

Opportunities and Pitfalls:

If you don’t understand both the mining business and precious metals, be sure that your broker does.

— When dealing in foreign mining shares, choose a broker who specializes in them.

• Check taxation on foreign shares.

Another consideration when analyzing a particular mining property is its “life”. This is the length of time a mine can be expected to operate at unchanged production levels. In other words, the expected reserves of gold in the ground determine the mine’s life. A mining operation with a very short life is obviously not suitable as a long term investment.

You should also bear in mind that the purchase and sale of mining shares, like other stock market transactions, are subject to a broker’s commission, usually somewhere between one and a half percent and five percent. On the other hand, since the investor is normally paid dividends, these should more than compensate.

As you can see, investing in mining stocks is not a simple proposition. The guidance of a good broker is absolutely essential unless you are experienced in mining share analysis, and are also familiar with the price outlook for precious metals. Relatively few sales representatives of brokerage firms are really knowledgeable when it comes to gold, silver, platinum and palladium. If you need help, you should deal with one of the institutions which maintain a high profile in this field.

Canada is the free world’s second largest producer of precious metals, with about five percent of its gold, platinum and palladium, and about fifteen percent of its silver. Since Canada is also a stable country politically, its mining shares are highly prized even beyond its own national borders.

Most popular with the international investment community are the shares of producing Canadian gold mines, some of which are compared in our table below:

 Mine Outstanding Shares (millions) Average Grade (oz. Gold per ton) 1983E Production (Oz.) Life of Mine Approximate Production Costs per Ounce Agnico Eagle Camflo Campbell Red Lake Dickenson Mines Dome Mines Giant Yellowknife Kiena Gold Mines Lac Minerals Pamour Porcupine Sigma Mines 4.1 48.0 12.0 14.1 70.0 4.3 5.9 24.4 7.0 8.1 0.62 0.18 0.12 0.31 0.26 0.23 0.20 0.18 0.09 0.13 49,000 50,000 220,000 51,900 418,000 62,500 61,200 257,100 102,000 61,500 medium medium long long short-medium medium medium medium long short-medium \$205 \$225 \$405 \$250 \$320 \$240 \$190 \$205 \$240 \$350

This table, by the way, was made up from data prepared by the brokerage industry, as well as statistics contained in the annual reports of the various mining companies. Another favorite source of mine is the Canadian Mines Handbook, which is published annually by The Northern Miner (Northern Miner Press Limited, 7 Labatt Avenue, Toronto, M5A 3P2). Although the handbook costs around \$20, it contains a wide variety of production figures, financial results and the share prices of over 1,000 mining companies.

Once you know the cost of production and the mine’s estimated life, the next question is, what would happen to your earnings if the gold price were to change by \$100?

Actually, the impact of such a price movement is quite easily calculated. All you have to do is multiply the mine’s production by the dollar amount you expect the gold price to change. If, for example, a company produced 50,000 ounces of gold, and if the gold price suddenly jumped by \$100, this would translate into ¶5,000,000 in added revenue. You can then look up the number of shares the company has outstanding and, by dividing the extra revenue into this figure, arrive at the additional earnings per share.

Of course, your calculation would be somewhat simplified. To begin with, it assumes that the mine’s production rate and the grade of ore exploited would stay Constant. Secondly, the figures you arrive at are gross figures which would be brought down by operating expenses and taxation.

Obviously, professional mining share analysts have to concern themselves with even more details than these. Such factors include yield, price/earnings ratio, working capital, debt / capital ratio, book value, etc., etc. On the production side, an analyst will try to determine whether a mine’s equipment is in good repair and what its exact milling capacity is. During times of depressed precious metals prices, he will try to find out how much metal a company pre-sold in the futures market and at what price. These are vital questions which, after looking at the Canadian Mines Handbook, the various companies’ annual reports, and talking to your broker, you should be able to answer before making an investment decision.

The same factors which apply to gold shares also affect the price of silver mining shares. There is, however, one substantial difference. The mines listed above are primarily in the business of mining gold, while other metals are only produced as a by-product. With silver it is the other way around. Most of the white metal is produced as a by product of copper, nickel, zinc or lead. Thus, it is very difficult to invest directly in the price of silver through the purchase of a major Canadian mining share.

The second half of 1982 illustrates this problem perfectly. Assume that, in June of 1982, you purchased shares in inco Limited, a leading Canadian silver producer. At the time of purchase, the price of silver was very depressed somewhere between \$5 and \$6. Three months later, however, the silver price shot up to \$10. What would have been the value of your shares? Well, the fact is, Inco shares actually went down, because Inco’s major product is nickel and nickel prices were still falling.

The same, by the way, is true of platinum and palladium, where again Inco is Canada’s largest producer. Unfortunately, the firm’s platinum and palladium output contributes relatively little money to overall earnings and it is nickel that determines production policy.

A second group of precious metals mining stocks are those in the “junior” category. This term is used to describe mining operations which don’t have an established production record and which usually don’t pay dividends. Some of these firms are still trying to build up their operations, others own ore bodies which could do exceedingly well under the right price conditions. Junior mining stocks are always purchased for their capital gains potential and are a more risky investment. They are often listed on secondary exchanges, such as the Montreal and Vancouver exchanges.

— Greater profit potential if project succeeds.

High risk: relatively few juniors advance to the senior category.

— Low negotiability.

— Money tie-up.

— Expensive (transaction costs are unusually high).

— Not a direct investment in precious metals.

— Price quotations more difficult to obtain.

Opportunities and Pitfalls:

— Avoid companies with debt.

— Make sure the shares you purchase can be traded.

— if you invest several thousand dollars, diversify.

• Do not purchase penny stocks unless you are prepared to lose every penny

Many investors hold a very small percentage of their money in junior mining shares because of their enormous appreciation potential in an environment of rising gold prices. This, however, can also work in reverse. Many junior stocks which traded at \$5 in early 1980 were worth only a few cents a few years later.

One problem with junior mining shares is that you often lose in liquidity what you gain on paper. Make sure that the shares you are interested in are actually listed and check on how negotiable they are.

Another group of shares which may interest you are those of exploration companies. These firms don’t even produce gold. Instead, they own properties which increase in value as the bullion price rises. Once their price objective is met, the property is sold to a larger operating mine for exploitation.

As is the case with junior mines, shares of exploration companies tend to outpace senior stocks in a positive price environment. But be careful: if the gold price doesn’t move in the right direction, these shares are very vulnerable on the downside.

The shares of major producers, junior shares, as well as shares of exploration companies all have one great advantage. If you are a Canadian resident, you can deposit them into Retirement Savings Plans, provided they are listed on a Canadian exchange. This allows you to defer capital gains and income earned on your shares into the future. Americans are even more fortunate: tax deferral plans such as KEOGH’S and IRA’s also accept foreign share-holdings. If you are a U.S. resident, the only drawback is that your dividend income from Canadian sources will be reduced by a withholding tax of 15%.

South African Mining Shares

South Africa is the world’s largest gold producing nation and, as such, features a whole array of gold mining shares. Almost all of these represent a very direct play in gold and have an excellent production and dividend record. Dividends, in fact, are easily their most popular feature and you will quickly see why when you look at our table.

Another advantage of South African mining properties is that their ore reserves are very sizeable, especially when compared to North American mines. At least ten of the major gold producing companies pride themselves on ore bodies with a life of more than twenty years! My favorite South African mines, by the way, are Driefontein Consolidated, Kloof, Southvaal and Vaal Reefs. All four represent conservative long-term investments which will generate attractive dividend income in the meantime.

South African shares are actively traded on the Johannesburg and London exchanges and, over the counter, in the United States. Because Canadian or U.S. holders are considered non-residents, there is a fifteen percent withholding tax which is deducted from dividends. You should also know that not every broker can assist you in trading these issues, although the list is steadily growing.

A number of major South African gold shares are available in the U.S. as “ADR’s”, or American Depositary Receipts. An ADR is really a storage receipt issued by a U.S. bank for shares it holds in a safekeeping facility abroad. Although you shouldn’t make your share selection dependent on this point, it does help if it is available as an ADR. Its negotiability, its registration and its dividend flow are a lot more efficiently organized than with physical holdings of a foreign share.

Be careful, however, when you buy ADR’s. They are not always quoted on a par with the actual shares. Quite often, one American Depositary Receipt represents ten, or even a hundred shares. So don’t rush to your broker asking him to buy 500 ADR’s of a particular issue if what you really want is 500 shares. If you do, you may end up with 5,000 or 50,000 shares!

Even easier than owning ADR’s is to buy a foreign stock which is actually listed on a North American stock exchange. Most South African mining shares, unfortunately, are not.

Evaluating a South African mining share requires the same knowledge as any other stock. If you are a conservative investor, you should concentrate on mines with a long life and a low Cost, because these can be expected to increase their dividend as the gold price rises. Moreover, since there are so many excellent mining properties to choose from, you should diversify your portfolio as much as you can. This has two advantages. It protects you against bad management in any one mine and, at the same time, it provides you with a safeguard against sabotage.

While the chances of sabotage are not very great, you should seriously think through how it would affect you as an investor. Let us assume that your favorite gold mine became the victim of a terrorist attack and several of its major shafts collapsed, thus bringing production to a standstill. The inevitable result of such news would be a sharp rise in the gold price and, along with it, the plunge in value of your shares.

Perhaps the best way to protect yourself is by buying shares in one of the many diversified South African investment houses. Companies like Anglo-American Corporation, De Beers Consolidated Mines Limited and Gold Fields of South Africa Limited have holdings in a great number of operating mines and, as a general rule, fluctuate up and down with the value of precious metals. One problem with these shares, however, is that they represent an investment in more than just gold. Most also have holdings in coal, diamonds and even oil, although their interests in gold are normally high enough that the bullion price determines their value.

By far the most popular of these shares is ASA Limited, formerly American South African Investment Company Limited. Listed on the New York Stock Exchange. ASA provides investors with asset diversification in the minerals and metals sector. Here is a listing.

ASA’S holdings as of February 2, 1983:

INVESTMENTS HELD BY ASA LTD. IN EARLY 1984

(Number of shares)

Long life, high grade gold mines

Driefontein Cons. 3,158.000

Kloof 1,257,000

Western Deeps 150.000

South vaal 1,273.000

Vaal Reefs 720,000

Unisel 284.000

Kinross 215,300

Winke 1,216,700

Major gold mines

Hartebe 242,600

Buffets 483.000

Zandpafl 988,300

President Steyn 503.

St. Helena 432,100

Miscellaneous Holdings

Anglo American (finance house) 121.000

Amcoal (coal) 553,200

De Beers (finance house/diamonds) 1.000.000

Impala (platinum) 268.700

Palabora 150,600

Rustenburg (platinum) 348,712

Sasol (oil/coal) 1,875,000

TCL (coal) 582,300

Trans Natal Coal (coal) 810,000

Samancor (manganese) 521,000

As you can see, ASA gives you access to most of the long life and low cost gold mines, as well as to other holding companies and direct interests in uranium, coal, diamond, oil and platinum group metals. interestingly, when the gold price rebounded in mid-1982, ASA appreciated at an even faster rate.

One minor problem with South African shares is that their profits and dividends are originated in South African rands. Thus, the rand/dollar exchange rate has to be a factor in your decision. At present, however, the rand is very depressed, which means that now is the time to buy. As world prices for metals and minerals start to recover, the rand’s value should go up along with them, making the dividends you will get even more attractive.

But what about other precious metals? Isn’t South Africa also the world’s largest producer of platinum, and the second largest producer of palladium? Luckily, South Africa does have two mines whose major earnings are derived from platinum group metals. The world’s two largest producers, Impala Platinum Holdings and Rustenburg Platinum Holdings are listed in Johannesburg, London and, again, over the counter, in New York. Even during difficult periods dividends often remain at the high levels typical for South African precious metals shares. Because the management is aware that a high dividend is one of the prime attractions in foreign markets, sharp declines in earnings are usually not fully reflected in the dividend. But bear in mind that the same is true in reverse. South African mines tend not to distribute earnings fully during times of very strong prices.

You should note that Impala and Rustenburg are the only two investments which give you a relatively direct interest in platinum and palladium and which are traded internationally and very liquid. If you are convinced by the case for these two metals, (and more will be said about them in our section on strategic metals), you should seriously consider their purchase.

U.S. Mining Shares

The United States still contributes heavily to the world’s gold and silver output. Exciting new ore-bodies are being mined but, the trouble is, most major U.S. mining firms have grown and diversified to such an extent that they no longer represent a direct play in any one metal. The Homestake, for example, is still America’s largest gold mine, producing about 300,000 ounces annually. But it is now equally interested in its uranium, lead, zinc, silver and forest product operations.

Of course, diversification can be an asset. As a rule, it lends a share more price stability and makes your investment less vulnerable to drastic price declines in just one metal. But, on the other hand, as you have seen in our example with Inco in Canada. a rise in precious metals can go ignored when they are not a major profit source for the company. In other words, if you want to invest in gold, as opposed to mining in general, buying shares in a conglomerate is not the answer.

One exception may be Newmont Mining Corporation. This is a diversified resource firm with a relatively high interest in gold, although right now most of its capacity is devoted to copper. Still, gold mining is taking on a more and more significant role — so much so, in fact, that Newmont may soon become the leading U.S. gold producer.

LARGEST U.S. SILVER PRODUCERS

 Mine Hecla Mining (includes Day Mines) Asarco Inc. Anaconda Co. Kennecott Corp. Sunshine Mining Co. Phelps Dodge Corp. Gulf Resources & Chemical Corp. Callahan Mining Corp. Homestake Mining Co. Occidental Minerals Corp. Nev Mining Corp. Amax Inc. Duval Corp. (Pennzoil) Coeuc D’Alene Mines Corp. Cyprus Mines Corp. Average Annual Production (millions of oz.) 5.5 4.0 3.4 3.2 2.4 2.2 1.9 1.9 1.8 1.7 1.3 1.3 1.2 1.0 0.8 Impact of Silver Price on Share Performance 2 3 3 3 3 2 3 2 3 2

Impact of silver price fluctuations on share price

1 = relatively pure silver play; impact high

2 = reasonable diversification, reduced impact

3 = high degree of diversification; impact negligible

Most U.S. shares which do offer direct metals plays. by the way, are in the silver sector, an important fact given the lack of relatively pure South African and Canadian silver participations. The most popular among the major American silver producing mines are Bunker Hill, Callahan Mining, Coeur d’Atene, Day Mines, Golconda, Hecla, Silver King Mines and Sunshine Mining. In addition, there are dozens of junior mining properties which your broker should be able to identify.

Be careful, however, because us. junior stocks have the same advantages and drawbacks as Canadian issues. They can be put into your IRA or KEOGH, but they are often traded on smaller exchanges like Spokane or Denver, where liquidity can be low and commissions high. To Canadians, of course, they are not eligible for an R.R.S.P. and are subject to the usual 15% withholding tax.

PRECIOUS METALS FUNDS

A variety of precious metals funds have recently become available to the North American public. As a general rule, the investor can purchase individual units or shares which then go up and. down according to the fund manager’s performance. You pay for this service in the form of a fee which is usually charged to the fund and often amounts to a very modest amount of money.

Precious metals funds fall into two major categories: mutual fund trusts and investment corporations. Most mutual funds are adjusted to their net asset value on a regular basis. In other words, the managers calculate the total value of all the fund’s holdings once a week or month. The purpose is to establish a value basis, at which new investors are allowed to buy units, or at which existing unit holders can sell. This is an important point, because it guarantees that the value of your investment fluctuates in line with the value of the assets held by the fund. If the market goes down, so do your units — if it advances, you can be sure that you’re on the up side as well. And when you want to take your profits, you can depend on getting your percentage of the fund’s net worth.

One disadvantage to many mutual funds is that they carry heavy commission charges when purchased from a broker: usually between five and ten percent! An exception to this are “no load” funds which are sold to the public on a direct basis and therefore carry no commissions.

The second broad category of precious metals funds is that of investment corporations. Very few of these exist in the United States, but in Canada they are so popular that no less than five of them were successfully launched in 1983 alone! Unlike mutual funds, investment corporations have a fixed operating capital which is usually raised in a public underwriting. Once the corporation is funded, its shares freely trade at the exchanges, depending on what the market thinks their value should be. Unfortunately, the market place has a tendency to overlook certain things, and this can cost you dearly. In 1983, for instance, I helped raise \$50 million for BGR Precious Metals Inc., an investment corporation in which I share management responsibilities with N.M. Rothschild, a leading London bullion dealer. Although we quickly increased the net asset value per share by over 10%, in the open market our shares were soon selling at a handsome 20% discount! Why? Because the public saw the bullion price decline and deduced that BGR would automatically fall in tandem.

This simple example shows the risks — and the opportunities — of investing in one of the new investment corporations. At certain times, the shares will sell at a discount, frustrating you if you would like to sell. To an astute buyer, on the other hand, they may represent the only opportunity to buy bullion and shares at a hefty discount!

The safest route is to contact your broker or the funds manager to• obtain a prospectus before you commit yourself to the purchase of units in any particular fund. Pay special attention to the section dealing with selling commissions and management fees. You should also examine the performance of the fund and familiarize yourself with the strategy and objectives the managers use in running it. Some funds have the policy of always being fully invested in the market, no matter whether it is in a down trend or an up trend. This may be exactly what you want and then again, it may not. Finally, make sure that the fund units you are considering for purchase are traded with some liquidity, so that you can sell them again if and when you want to.

—Note: The author also manages the bullion portion of the Dynamic-Guardian Gold Fund, a no-load fund investing in physical precious metals and mining shares.

MANAGED ACCOUNTS

Managed accounts, like precious metals funds are only as good as the experts who run them. However, there is one important distinction: while a unit fund has to appeal to many investors and can only have a very general strategy, a successful account manager can tailor his approach to the market with your objectives in mind.

Account management is usually available from investment firms, brokerage houses and bullion dealers, and generally requires a financial commitment of not less than \$100,000. A great number of funds managers compete for this business in the offshore havens and, to a lesser degree, in the United States. In Canada, there are very few institutions which engage in the managed accounts business.

— Convenience.

— Professional management.

— Management fees.

— Risk of poor performance.

— Money tie-up.

— Liquidity usually poor.

Opportunities and Pitfalls:

— Examine manager’s track record.

— Meet account manager and make sure you agree.

— Negotiate fees if a large amount is involved.

• Check Cost of liquidating account.

If your financial holdings are significant, a managed investment program can be an excellent option. Particularly if you are a professional in your own field and have neither the time nor the expertise to follow developments in the precious metals market, a managed account may be just what the doctor ordered. Most firms devote considerable time to such accounts because it is in their interest to impress their client and get a larger share of his business. At the same time, management fees are usually quite reasonable. You should realize, however, that a managed investment program is discretionary. In other words, you have absolutely no control over the manager’s investment decisions, and you generally have to give him full powers to use your money as he sees fit. In addition, you have to agree not to hold the manager responsible if he happens to make a mistake and you lose your money.

The best safeguard is to get to know a manager very well before you entrust him with your account. Try to find out what his track record is and don’t be shy about asking him to document it. Having friends or acquaintances who have already had positive experiences with the firm you are considering is a big advantage. Once you are convinced that the manager is an expert in his field and can make you money, explain to him carefully what your investment philosophy, your financial standing and your expectations are, and make sure that he understands it. You should also examine the balance sheet of the firm he represents and, if possible, obtain references.

Once you have done all this, and are happy with the results, place as small an amount as the firm will take and give the manager a fair chance. Try to spend time with him every three months to review his performance. This will help you understand his style and strategy and, in turn, he will get to know you better and do a better job. After a year or so, you will know your manager reasonably well and, if all goes the way it should, you will trust him. That is when you can deposit additional funds.

Good money managers are extremely rare, and the best are not in the business of running \$100,000 accounts. Unless you are not happy with his performance, try not to phone him every few days to see “how things are going”. Remember that you want your manager to be your ally and not someone who sighs when he hears your voice. You can rest assured that your manager is every bit as aware of the money you have given him as you are.

COLLECTIBLES

The only area of precious metals investments we have not yet explored is that of collectibles, a term which I should further define. All the vehicles we have so far discussed have one thing in common:

they are purchased only because they represent an investment. Collectibles, on the other hand, are items which are also purchased for their beauty, historical significance or educational value. In other words, the cool judgment of an investor is here complemented with emotional sentiment.

One of the first things professional traders learn is that investment considerations and emotions don’t mix well. Collectibles such as numismatics or jewelry illustrate this point. The fact that they may appeal to you personally does not necessarily mean that they also appeal to other people, which can translate into a tremendous loss of liquidity just when you need it most. Picture yourself wanting to sell your favorite ring in an emergency and try to assess how others would react to such an idea. Quite likely, you would get much less money for it than you paid. The same can be true of numismatic coins or other collectibles made Out of precious metals, It is therefore essential that you don’t tie up too much of your money in them and don’t consider them as an investment.

— Esthetic appeal, historical significance, etc.

— Potential as a hobby, not “just an investment”.

High cost.

— Low liquidity.

— Not a direct investment in precious metals.

— Adverse taxation (sales taxes in most states and provinces).

— Emotional appeal may cloud your judgment.

Opportunities and Pitfalls:

— Don’t buy collectibles as investments — buy them because you like them!

Numismatic Coins

In contrast to modern bullion coins which are minted in enormous quantities and whose price depends strictly on the content of bullion, numismatic coins are governed by four major factors: their rarity, their age, the quantity originally produced and their condition.

A numismatic dealer’s inventory may range from items minted in 500 B.C. to the 1982 Constitution coin issued by the Royal Canadian Mint. In recent years, an increasing number of governments have issued coins to commemorate events in their history. Aside from the factors mentioned above, numismatic coins are also collected for their beauty, historical significance, their precious metal content and their educational value.

Numismatic coins do depend on the price of metal to some degree, but it is usually a minor factor. Thus, their price is usually far higher than the value of the gold or silver they contain and their values fluctuate to a much wider extent. For example, a rare \$5 gold piece may contain \$80 worth of gold and may sell for as much as \$800.

The minimum you can recover from a numismatic coin investment is always either its face value or its metal content. But this is not an entirely realistic standard of value, because in order to sell the metal you would have to face assay and melting charges which can be significant.

1. Proof

Coins struck specially in small numbers for investment, presentations, and other purposes. These coins are usually struck twice (“double struck”) and as a result have a high, mirror-like finish. Due to the small number produced and the great demand among collectors, proof coins usually sell at a considerably higher price than the standard issue.

2. Brilliant Uncirculated (B.U. or U & C)

These coins are struck on regular dies, although they are not intended for circulation. Most bullion type coins and most numismatic coins produced today remain in brilliant uncirculated condition. In other words, their holders try deliberately not to damage the coins in order not to reduce their

investment value.

3. Extremely Fine ( or Extra Fine (x.s.)

These coins are slightly circulated and show some signs of wear, but still have their original polish.

4. Very Fine (v.f.)

Details and design are still clearly marked; only the highest surfaces are worn down slightly.

5. Fine (F.)

Coins which have been circulated and show definite signs of wear, especially on the finer parts of the image. However, all the details are visible. The grading “fine” is the minimum standard for coin collectors.

6. Very Good (V.G.)

The inscriptions and design are still clear and bold, but worn.

7. Good (c.)

Design and inscriptions are readable but quite worn.

8. Fair (F.)

Features are still identifiable but not easily readable.

9. Mediocre (M.)

Very worn or damaged.

10. Poor (p.)

Unless it is very rare, a coin in condition usually doesn’t fetch more than the value of the metal it contains.

In the numismatic sector, probably more than anywhere else, the selection of a reputable and long established dealer is essential. Numismatics are a complicated field and require a high degree of expertise and knowledge. Coins are sold in various conditions, along a “grading scale” which ranges from poor to proof. Determining the right grade is very difficult, although the price of each coin is highly dependent on it. With older coins, particularly those from ancient times, evaluation is even more difficult: in many cases only your trusted dealer can separate an authentic ancient coin from a forgery.

The numismatic coins of recent years help you overcome this problem. Almost all of them are encapsulated in plastic and, unless you tamper with them, will therefore retain their original condition. On the other hand, collecting modern coinage is not nearly as interesting and exciting as collecting coins from ancient Greece, Rome or Constantinople.

Medals and Medallions

One area you should stay away from altogether is that of “medallions”, unless they are struck by governments or are of historical value. Medallions are not legal tender and therefore never show a face value. Most of you will have received brochures advertising such “coins” made by private mints and refining institutions. Printed and distributed at a very high cost, these offerings are always directed at the “serious investor”. In reality, the investor usually pays a hefty premium for all the expenses of the mail order promotion which, even after significant appreciation of the precious metal, often make it impossible to recoup the original investment. Don’t expect any dealer to pay a premium for the esthetic appeal of such a private issue. The best you can usually get for such items is the market value of the metal it contains — minus melting and refining charges!

Jewelry

“If things get really rough, I can always trade in my wife’s jewelry” is a sentence that best illustrates the widespread belief that jewelry is a safe investment.

Jewelry made of precious metals offers the classic appeal of an incomparable gift, but it cannot be seriously recommended as a good investment. To begin with, precious metals in their pure form are not suitable for use as jewelry. They are usually alloyed to standard finenesses, such as 22, 18, 14, 12 and even 10 karat in the case of gold. This process creates a cost which is passed on by the refiner. Once the craftsman takes delivery of this alloy, he charges for the considerable workmanship and expertise he has put into the jewelry he makes. Then, on the way from his workshop to the store shelf, jewelry is heavily taxed and an array of excise, wholesale and retail mark-ups are added to the base price. Not only is it very unlikely that you will be able to recover these additional costs but, in a crisis, you may even have to pay refining costs when you try to sell.

In this connection, I am again reminded of the plight of those Vietnamese refugees who came to the U.S. a few years ago. While most brought gold wafers with them, some carried jewelry. Those carrying bullion had to pay assay charges because their wafers were not made by internationally recognized refiners. However, the three or four percent charge was a small price to pay for the convenience of being able to instantly acquire local purchasing power.

Now, here is what happened to those refugees carrying gold jewelry: they received the equivalent of the precious metals value after deduction of melting and assay charges. But they lost everything they had paid for in the production of the jewelry, the taxes applied to it, and the selling mark-ups. In most cases, they recovered no more than one-sixth of their original investment!

You don’t have to read a book on precious and strategic metals to learn about the advantages of borrowing. Having access to credit can increase your purchasing power and, particularly in markets where volatile corrections can occur within a very short time, this can be a tremendous advantage.

Just think of the thousands of investors who tied up their disposable capital in gold, but bought too late or too early. Most of them looked on helplessly as prices declined further and further and then, when prices started to rise again, they were unable to participate because all their money was already tied up in the market. Financing could have solved their problem. Unfortunately, borrowing money for the purchase of precious metals is not always as simple as borrowing money for more conventional purposes.

fact:

In 1967, the U.S. Federal Trade Commission defined “solid gold” as “any article that does not have a hollow centre and has a fineness of ten karat or higher”... Investors beware!

That is why lending programs for precious metals are offered by the majority of bullion dealing banks. Most of them are not “aggressive” lenders: the minimum loan required is often as high as \$50,000 and most restrict the size of a loan to a maximum of 50% of the total value of the precious metals which serve as collateral. On the other hand, their charges are usually reasonable, generally two to three percent above prime.

Margin Loans

A margin loan provides you with the ability to put up as security something which you want to buy more of. Buying go/don margin, in other words, means that you go to a bank in order to buy more gold than you can actually afford to pay for. In practice, unless you make a profit, you will never get to see your gold or your money. The bank takes the money that it has theoretically lent to you, uses it to buy gold on your behalf, and then keeps the gold it has purchased as a security against your loan.

If the bank were to finance fifty percent, a deposit of\$100,000 into a margin account would allow you to hold \$200,000 worth of gold. But, remember, if you borrowed to the full extent and indeed purchased \$200,000 of gold, you would have to be prepared to stand by with more money in case the market declined. In short, if the value of bullion dropped sufficiently to make your original investment worth only \$180,000, the bank would ask you for an additional deposit of \$20,000. If you could not come up with it, the bank would simply sell enough gold to bring your margin ratio back into line.

As you can see, a bank’s risk is quite limited if its margin ratio is as high as fifty percent. Nevertheless, the larger banks do not announce their activities in this field as a service package but prefer to negotiate a loan with each client individually. This is particularly true of organizations with a vast branch network, where the relationship between a customer and the local manager is often a more important consideration than the risk of lending money against bullion. As a result, it is impossible to compare the terms of organizations such as Bank of Nova Scotia, Citibank or Swiss Bank Corporation against smaller institutions who specialize in this field. Margin lending programs whose terms are known and advertised are offered in the United States by Republic National Bank and by Westcoast Bank. In Canada, Guardian Trust Company offers a similar service.

Republic National Bank’s and Guardian Trust’s financing packages call for a minimum loan of \$50,000 and offer competitive rates. Guardian has the added advantage that it also accepts platinum and palladium as collateral.

Westcoast Bank’s program is more expensive, but it allows investors to borrow as little as \$10,000. The package is retailed through a number of regional bullion firms who are not themselves in the lending business. Most prominent among these is Manfra Tordella & Brookes, a leading New York dealer.

Collateral Loans

In contrast to a margin loan, a collateral loan does not imply that you want to buy more of the same commodity which you then put up as security. Instead, you may well want to borrow against gold you already have in order to buy more Swiss francs or, for argument’s sake, more municipal bonds, because their market is right at a•. particular time. In other words, many investors actually take advantage of their gold holdings in order to make profits somewhere• else at the same time. The bank will again want to hold your bullion for you, but it will also purchase whatever security or investment you had in mind or it may even give you the money to make the purchase yourself.

By using collateral loans, you obviously have all alternatives open to you, which is why I recommend them highly. But it would not be fair to give you this advice without warning you that most banks do not encourage this type of loan. A collateral loan allows you to spend the borrowed money elsewhere while a margin loan forces you to do even more business with the lender.

One final point to remember, both on margin and on collateral loans, is that they are in the category of demand loans. This means that the bank can ask you to pay up at any time, although this privilege is rarely exercised. In short, before taking on such a loan, take a good look at all your assets and try to identify at least one other vehicle that you can liquidate in a real emergency.

WHERE TO STORE PRECIOUS METALS

Most people buy bullion not only because they want to make a profit, but also because they deeply distrust paper money. Thus, holding precious metals in physical form is as much a philosophical choice as it is an investment decision. That is why you have to delve back into the history of money when you consider where you should store your bullion.

Should you keep your hoard at your home, where you have ready access to it, but where it is exposed to the risk of theft? Or is it better to keep it in a safety deposit box at your bank, where it is safe from burglars, but where you cannot get to it whenever you wish?

These concerns are as old as humanity itself. The reason why we relate to precious metals the way we do is because we know them to be indestructible and we regard them as the ultimate in portability and international purchasing power. We may not know what a real economic or political emergency would look like, but we all suspect we would be better off with a little bit of bullion.

Given that history abounds with examples of governments which suspended convertibility between gold and paper, which declared forced bank holidays, and which even outlawed the private ownership of precious metals, is it surprising that all of us have a slightly uneasy feeling when we think of keeping our gold at a bank? Even as a banker, I have to admit that I understand this feeling. But as a realist, I have to say that government confiscation of your gold is not very likely — not nearly as likely, in any event, as someone breaking into your house. But this doesn’t mean that you should not be careful and observe a number of important points when you put your bullion in storage.

First and foremost, you should select an institution whose integrity and financial standing are beyond any doubt. If you take a safety deposit box, get one at one of the larger branches of a bank where the Cost is just the same but the security is often a lot better. On the whole, the safety deposit box is still the best solution if your investment in bullion is relatively small.

If you deal in larger sizes, things become much more difficult. Your desire to keep part of your wealth private will inevitably increase, but safety deposit boxes will no longer be practical. Not only is their size very restrictive, but you also lack liquidity in that you cannot dispose of holdings and repurchase them simply by a telephone call. Far more suitable for this purpose are safekeeping arrangements which can be entered into with most bullion dealing banks. In other words, your metals are held for a fee, just as they would be in your deposit box, but your ability to “use them” will increase substantially. For example, you can call the bank and ask them to sell precious metals out of your safekeeping account when the price is high, and then do the reverse when the price declines.

Banks safe keep precious metals on an unallocated basis, or on a fully segregated basis, and the difference between the two is vital. Unallocated metals are those mingled with the assets of other clients and those of the bank itself, while segregated metals are clearly defined as yours and are generally defined by bar number on your safekeeping receipt. Because unallocated metals appear on the liability side of the bank’s balance sheet, they can be used to pay off its debts in the event of bankruptcy, while segregated metals do not appear in a bank’s balance sheet and are indisputably yours. Quite obviously, segregated safekeeping is more expensive than unallocated safekeeping, but the difference in price is well worth it. Most bullion dealing banks will open a fully segregated account for a fee of between 1/4 and 1/2 of a percent of the total value of the safe kept assets. There is usually an annual minimum charge to discourage smaller accounts.

The terms “unallocated” and “fully segregated” are used in Canada, Great Britain and the central European countries in the same way as the terms “fungible” and “non-fungible” are used in the United States. Under the concept of fungibility. in other words, your metals would be pooled together with those of other investments, while a non-fungible concept would provide you with full segregation.

But segregation or non-fungibility is not the only thing an investor may want. Increasingly, many investors feel that their precious metals holdings are no one else’s business and should be kept totally private. Unfortunately, nothing could be less private than a formal safekeeping arrangement with a bank. In many cases, such accounts cannot even be opened without the registration of your social security number, which means that the government can always find out what you hold in your account. Fortunately, there are alternatives.

Canadians concerned with anonymity can simply buy bullion and ship it abroad, or buy it directly for foreign delivery. Current tax legislation does not require any reporting until a capital gain or loss is realized, or until income is received. U.S. residents are not nearly so lucky. Any cash transaction over \$10,000 has to be reported to the IRS, as does any cash or valuables transfer of over \$5,000. Moreover, Americans have to report assets held in foreign bank accounts once every year.

But where there’s a will, there’s a way, particularly in a free market system. In the past few years, a great number of storage facilities have been built in the U.S., and many more will be added in the near future. Because they have to make a living from safekeeping alone, they are usually far better organized and equipped than the bank vaults we are used to. For instance, most firms offer 24 hour service, which allows you access to your box at anytime. Another advantage is that their private ownership allows them to by-pass banking regulations. As a result, it is not necessary to identify yourself when you enter into a safekeeping arrangement.

Various safekeeping companies cater to different client objectives. Perpetual Storage Inc., one of the nation’s largest facilities, is deliberately located in a valley outside of Salt Lake City. The Security Centre of New Orleans, by contrast, owns the former.

Federal Reserve vault right in the centre of the city. Far more modern are the facilities of Swiss Security Systems in Miami and Palm Beach. Building and security standards reflect the latest technology, and the flexibility available to the investor is excellent. Another excellent facility which has just been completed is that of Guardian Safe Deposit in Arlington, Virginia. Located minutes from downtown Washington, it features 24 hour armed guard services and numbered accounts facilities sufficient to attract a large number of investors, as well as less expensive bulk space designed for professionals who want to store computer tapes, discs or documents.

But convenience and privacy are not the only things to consider. Make sure you use the same standards of evaluation that you would before entrusting your bullion to a bank. In other words, examine the financial integrity of the institution you are dealing with and don’t be shy about inquiring into the details which govern the insurance of your assets.

Finally, compare the cost differences between a bank facility and a privately owned vault. You will find that in most cases private firms are considerably more expensive, but then you do get a lot more for your money. In the final analysis, your decision should be determined by how strongly you feel about privacy and unlimited access to your precious metals.

SELECTING A DEALER

The modern gold market provides investors with a great variety of risk factors. As you have seen, the possible investments range from straight bullion, for which you have to pay in cash, to highly leveraged futures contracts and options which allow you to buy far larger quantities than perhaps you can really afford.

Once you have decided what risk factor suits you, and what investment vehicle is the most adequate for your requirements, you should select a dealer. Finding the right financial institution, dealership or brokerage house is not easy. Ideally, you want a firm which is long established, can give you professional guidance, and offers a variety of investment vehicles. The table below gives you an overview of the major retailers offering precious metals services in the United States and in Canada. Their names and addresses, along with those of many other firms whose services I have referred to, also appear in the dealer listings in a later section.

Remember that commissions, storage charges, management fees and other investment costs will vary from dealer to dealer. These charges should be carefully compared but, obviously, they cannot be the only decisive factor. Don’t expect bullion dealers to engage in long conversations with you on the telephone. During banking hours, they are usually battling with a barrage of incoming calls. However, they will generally be happy to mail you some background material on their services which will help you make the right decision. Dealers are also not in the business of giving market opinions. If you are not well known to an institution, don’t try to call their precious metals dealers and ask them for trading advice. They simply do not have the time and it is not their function.

If you are interested in getting professional opinions, you should subscribe to a newsletter or forecasting service. (See the listings at the end of this book.) If your investments are more sizeable, it may even be worth your while to retain a recognized expert as your consultant.

HOW MUCH TO INVEST?

Deciding the percentage of your total assets which you want to invest in precious metals is crucial, It will depend on your age, your social and financial obligations, and your personal assessment of the seriousness of current economic and political problems.

Someone who is young can afford to take larger risks and can therefore invest a larger percentage than others. Someone who depends on retirement income, on the other hand, will have to be more cautious. A person who is married with children has certain obligations to meet and has a responsibility towards his dependents. Someone who is single can afford to be more aggressive in the market.

If you are convinced that ever higher deficits will lead to a new round of inflation and, eventually, the collapse of our monetary system, you will want a maximum of protection. But if you regard inflation as merely a periodic occurrence that eats away at your savings, your precious metals investment should be smaller.

Because of gold’s portability and its universal liquidity, I personally believe that the yellow metal should make up the larger portion of your commitment in precious metals although, as we have seen, more money may eventually be made in silver and palladium.

The table shows you approximately what percentage of your financial worth should be invested in gold. These figures only take into account what you need to protect yourself against economic or political uncertainty and do not include gold bought for trading or speculative purposes.

While I think silver, platinum and palladium are excellent long term investments, I do not recommend them for insurance purposes.

The drawback with silver is that a standard bar of 1,000 ounces is too heavy to carry and difficult to hide. And platinum and palladium are not sufficiently negotiable to fit the bill.

Never forget that precious metals are very volatile and therefore your overall investment in this entire sector should always be kept within reasonable limits. Always invest in a way which makes it possible to “average”. In other words, don’t spend all your money at once. Keep some in reserve so that you can purchase more if, against your expectations, the metal drops to much lower levels. Even after you have made such averaging purchases, you should still have enough money to pursue other investment opportunities and meet your obligations. As a general rule, I would say that your overall precious metals investment should never amount to more than 35% of your net worth. At the same time, I strongly recommend that you have at least 10% of your assets in fully paid gold bullion, and that you make an additional investment of between 5% and 10% either in other precious or strategic metals.

HOW MUCH GOLD YOU SHOULD OWN

 Net Worth Age Group 20-30 30-40 40-50 50-60 over 60 Up to \$50,000 10-20% 10-17½% 7 7½-12 5-10% \$50,000-\$100,000 12½-22½ % 10-17½% 10-15% 7/2-l2½% 5-10% \$100,000 \$250,000 15-25% 10-20% 10-15% 7 ½ - 15% 5-12 ½ % \$250,000 \$500,000 15-25% 10-20% 10-20% 7 ½ - 15% 5-12½ % \$500,000 \$1,000,000 15-30% 15-25% 10-20% 10-15% 7 ½-15%, Over SI million 17/2-30% I7Y 121/2.25% 10-20% 7½-17½ %,