Invest in gold or gold stocks?

David Berman of the Globe and Mail writes about the pros and cons of owning gold versus gold stocks.  Sometimes I wonder how much experience financial journalists have in investing.  Usually, I think that they don’t really invest much besides perhaps their own RRSP’s.  I would guess that many of them, particularly the full-time staff writers, have very little hands-on experience, though they do watch the industry closely and this makes them knowledgable.  But there is no substitute for experience and competence.

One thing Berman doesn’t discuss is commissions.  I’ve had some experience trading gold mining stocks but very little with physical gold; the reason for that is the expense and risk that is involved in buying and owning gold.  If you visit the Kitco site, you will see that gold sells at a premium of about $60 or more per ounce, plus shipping and handling of $30 plus $4 per $1000. So if I were to purchase about $10,000 of physical gold, my expenses equal 10 x 4 = $40 + $30 (for shipping) and 8.33 oz *60 = $500 premium on the gold itself = $570 total costs. That’s roughly 5.7% commission. Then one has to consider storage costs. I would leave it in my house, which could be broken in and the gold stolen. Thus, I find that gold mining stocks are much more attractive than physical gold, since the discount brokerage fee of $9.99 per transaction means that I can take possession of $10,000 worth of stock at a commission of 0.1%. Thus, commissions are an important factor when deciding what to invest in.

But I think there will come a time when I will want to own physical gold.  If I lived in the US, I would consider storing a few thousand in gold, but I’ve more confidence today that the Loonie will maintain a semblance of its value, probably losing no more than 2-7% per annum. That’s why I am shorting the US dollar in favor of the Loonie.  But if I were an American, I would consider having some gold on hand, because paper money becomes worthless when hyperinflation hits, and then people resort to alternative currencies.  At that point, silver and gold coins may come back into circulation.  These will not necessarily be government approved currency, but coins with intrinsic value minted by third parties.  Once the Federal Reserve has discredited the US dollar completely, people will have no choice but to barter or do transactions in other currencies.  In Austria after WW I, the Swiss Franc was a sought after currency.  For us in Canada, it will be a very funny irony if the Loonie ever becomes a currency of preference in the US.