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The Complete Guide to Investing in Gold and Precious Metals: How to Earn High Rates of Return Safely

The Complete Guide to Investing in Gold and Precious Metals: How to Earn High Rates of Return Safely

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The Complete Guide to Investing in Gold and Precious Metals: How to Earn High Rates of Return Safely

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288 pages
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Nov 15, 2011


As the U.S. economy struggles to recover from the worst economic crisis since the Great Depression, citizens across the country are searching for alternative investment vehicles. Many are finding solace in a precious metal that has been a universal measure of wealth since early civilization: gold. Investment brokers and novices alike are reaping the benefits that come with diversifying their investments. In 1910, gold was worth $20 an ounce; a century later, in 2010, the value of gold reached nearly $1,120 an ounce.

This book discusses where the value of these metals first originated and how they have evolved over the course of human history. You will learn how practical uses of precious metals have directly affected their value over time and how metals like gold and silver are direct indicators of the current state of the economy. Most importantly, you will learn to recognize market trends that pinpoint the risk of inflation and the exodus from stock to precious metals that will often occur as a result. You will learn how to use mutual funds and futures to diversify your port- folio without spreading yourself too thin. With advice from dozens of financial experts and commodities traders, you will learn how to maximize your return and minimize your risk. If you are looking to diversify your portfolio and protect your investments, The Complete Guide to Investing in Gold and Precious Metals is your handbook for making the most from your investment.

Atlantic Publishing is a small, independent publishing company based in Ocala, Florida. Founded over twenty years ago in the company president’s garage, Atlantic Publishing has grown to become a renowned resource for non-fiction books. Today, over 450 titles are in print covering subjects such as small business, healthy living, management, finance, careers, and real estate. Atlantic Publishing prides itself on producing award winning, high-quality manuals that give readers up-to-date, pertinent information, real-world examples, and case studies with expert advice. Every book has resources, contact information, and web sites of the products or companies discussed.

This Atlantic Publishing eBook was professionally written, edited, fact checked, proofed and designed. You receive exactly the same content as the print version of this book. Over the years our books have won dozens of book awards for content, cover design and interior design including the prestigious Benjamin Franklin award for excellence in publishing. We are proud of the high quality of our books and hope you will enjoy this eBook version.

Nov 15, 2011

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The Complete Guide to Investing in Gold and Precious Metals - Alan Northcott

The Complete Guide

to Investing

in Gold and

Precious Metals:

How to Earn High Rates of Return — Safely

by Alan Northcott

The Complete Guide to Investing in Gold and Precious Metals: How to Earn High Rates of Return — Safely

Copyright © 2011 Atlantic Publishing Group, Inc.

1405 SW 6th Avenue • Ocala, Florida 34471 • Phone 800-814-1132 • Fax 352-622-1875

Web site: www.atlantic-pub.com • E-mail: sales@atlantic-pub.com

SAN Number: 268-1250

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be sent to Atlantic Publishing Group, Inc., 1405 SW 6th Avenue, Ocala, Florida 34471.

Library of Congress Cataloging-in-Publication Data

Northcott, Alan, 1951-

The complete guide to investing in gold and precious metals : how to earn high rates of return safely / by Alan Northcott.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-1-60138-292-4 (alk. paper)

ISBN-10: 1-60138-292-8 (alk. paper)

1. Gold--Purchasing. 2. Precious metals. 3. Metals as an investment. 4. Investments. I. Title.

HG293.N67 2010



LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation warranties of fitness for a particular purpose. No warranty may be created or extended by sales or promotional materials. The advice and strategies contained herein may not be suitable for every situation. This work is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If professional assistance is required, the services of a competent professional should be sought. Neither the publisher nor the author shall be liable for damages arising herefrom. The fact that an organization or Web site is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or Web site may provide or recommendations it may make. Further, readers should be aware that Internet Web sites listed in this work may have changed or disappeared between when this work was written and when it is read.

A few years back we lost our beloved pet dog Bear, who was not only our best and dearest friend but also the Vice President of Sunshine here at Atlantic Publishing. He did not receive a salary but worked tirelessly 24 hours a day to please his parents.

Bear was a rescue dog who turned around and showered myself, my wife, Sherri, his grandparents Jean, Bob, and Nancy, and every person and animal he met (well, maybe not rabbits) with friendship and love. He made a lot of people smile every day.

We wanted you to know a portion of the profits of this book will be donated in Bear’s memory to local animal shelters, parks, conservation organizations, and other individuals and nonprofit organizations in need of assistance.

– Douglas and Sherri Brown

PS: We have since adopted two more rescue dogs: first Scout, and the following year, Ginger. They were both mixed golden retrievers who needed a home.

Want to help animals and the world? Here are a dozen easy suggestions you and your family can implement today:

Adopt and rescue a pet from a local shelter.

Support local and no-kill animal shelters.

Plant a tree to honor someone you love.

Be a developer — put up some birdhouses.

Buy live, potted Christmas trees and replant them.

Make sure you spend time with your animals each day.

Save natural resources by recycling and buying recycled products.

Drink tap water, or filter your own water at home.

Whenever possible, limit your use of or do not use pesticides.

If you eat seafood, make sustainable choices.

Support your local farmers market.

Get outside. Visit a park, volunteer, walk your dog, or ride your bike.

Five years ago, Atlantic Publishing signed the Green Press Initiative. These guidelines promote environmentally friendly practices, such as using recycled stock and vegetable-based inks, avoiding waste, choosing energy-efficient resources, and promoting a no-pulping policy. We now use 100-percent recycled stock on all our books. The results: in one year, switching to post-consumer recycled stock saved 24 mature trees, 5,000 gallons of water, the equivalent of the total energy used for one home in a year, and the equivalent of the greenhouse gases from one car driven for a year.



All trademarks, trade names, or logos mentioned or used are the property of their respective owners and are used only to directly describe the products being provided. Every effort has been made to properly capitalize, punctuate, identify, and attribute trademarks and trade names to their respective owners, including the use of ® and ™ wherever possible and practical. Atlantic Publishing Group, Inc. is not a partner, affiliate, or licensee with the holders of said trademarks.

The e-gold name and logo is a trademark and property of e-gold Ltd. The Goldmoney name and logo is a trademark and property of Net Transactions Limited, regulated by the Jersey Financial Services Commission. The iShares name and logo is a trademark of BlackRock Institutional Trust Company, N.A.


Dedicated to my beautiful wife, Liz, my constant companion through life’s adventures and strength for more than 30 years.

With special thanks to Nicole Orr at Atlantic Publishing, my editor, and to Doug Brown, publisher, who shares my love of and concern for animals.

Table of Contents


Chapter 1: Why Invest in Gold?

Chapter 2: Gold’s Record

Chapter 3: Where it Comes From

Chapter 4: The Shape of Gold

Chapter 5: The Stock Market

Chapter 6: Trading for Profit

Chapter 7: Finding a Broker

Chapter 8: The Other One

Chapter 9: Other Metals

Chapter 10: Tax Matters

Chapter 11: But is it for You?


Appendix A: Just the Facts

Appendix B: Frequently Asked Questions

Appendix C: Additional Resources

Glossary of Terms


Author Biography


You are probably reading this book because you believe there may be good reason to invest in gold, particularly because of turmoil in the financial markets. You want to see if that is true, and what methods of investing are best. Fortunately, you will find those answers in this book, including discussion of the different opinions about where the price of gold is headed, and the pros and cons of the great variety of ways that you can take a financial interest in it.

There are many people saying that the best time to invest in gold and precious metals is when the economy seems to be taking a turn for the worse — and the more inflation seems to dominate our lives, the more people are looking for a constant, such as gold, to stabilize their sense of lasting wealth in their savings. Apart from the monetary side of owning gold, there is also the delight of owning jewelry, and decorative gold has always been recognized as a status symbol. It seems inevitable that currency will become more worthless, given the amount of money that is being invented in 2008 and 2009 by the government to fend off a financial crisis. In 2008, there was a total of $829 billion of U.S. currency in circulation, most of which was held outside of the United States. By 2009, the amount of currency in circulation increased to $890 billion, a trending growth that leads investors to believe that a greater amount of money in circulation will be chasing ostensibly the same number of goods and services, resulting in an increase in prices, too.

But this view is simplistic, as it does not account for many other economic factors, such as whether savings increase, so that the money is not spent on services. While these finer points may be debated at length, most people would agree that the dramatic increase in available currency must translate to inflationary pressure from the government and the creation of what could be excess currency.

Many people think gold has always increased in value in the long-term; however, this may not be the case. Even though the value of gold remains the same because it is immutable, does not corrode, and does not really change over the centuries, the value of everything else is decreasing. So, therefore, you need many more dollars to buy the same piece of gold. Certainly, gold shows a steady increase in price over time, and with the recent amount of spending by the government, it seems this trend is bound to continue.

Although gold is the focus of this book, it also considers other precious metals, as the arguments that apply to investing in gold can be related to similar investments such as silver.

Gold and other precious metals have stood the test of time, and have often been turned to for stability when society has faced an upheaval. Gold has long been recognized as a store of wealth, the ownership of which allows you to shrug off the changes of the current financial system and ensures lasting value in your portfolio. The metal, however, is so much more than an IOU, which is all any paper currency can be seen as with the abolition of the gold standard in the twentieth century. Because paper currency lacks the intrinsic value it once had when it was backed by gold until the 1970s, the exchange of money simply takes the form of a promissory note, as many see no limits to the Federal Reserve’s increase in currency production. Gold, on the other hand, maintains its value, but there are some considerations that you need to be aware of because although the long-term ownership of gold has always proved successful, there have been market fluctuations that have been disappointing to some buyers.

In 2009, gold broke the thousand-dollar-per-ounce barrier, and there are good indications that it may rise higher — perhaps a lot higher. Owning gold as a metal has some disadvantages, including storage and security, as well as the absence of any income until you sell. There are other methods with advantages and disadvantages that you can use to profit from an increase in gold’s price, and those are thoroughly dissected throughout this book. Financial instruments related to gold can benefit from any increase in its price and can also provide a regular income. Note that just because a security is related to gold does not mean that it will inevitably increase in value as gold becomes more sought after, and the reasons for this are covered in depth so that you will be able to decide on the wisest investments for your situation.

Table of Contents

Chapter One: Why Invest in Gold?

Why should investing in gold be regarded as one of the smartest moves the average investor can make in a hard economy? The old advice of practicing diversification in your portfolio has usually included buying some gold or precious metals, perhaps up to 10 percent of your portfolio in various forms. However, the advice of many analysts is for significantly more than this amount to be placed in a financial instrument related to the price of gold.

Diversification is usually considered the wisest course of action, even though it will never result in the highest returns. By its nature, diversification — investing in many different types of financial securities and deposits — cannot give the maximum return on investment because you are putting your money in a variety of different investment vehicles that are subject to different performance levels. Obviously, you can only achieve a maximum return if you selected the one type of financial instrument that would go on to perform the best. The reason for diversification, however, is if your selection is not optimal and you make an investment in something that loses money, then you only lose a proportion of your portfolio because your money is spread around in several different investments. On the other hand, if you do not diversify your investment portfolio and instead invest in the highest-performing vehicle, you risk losing all of your money instead of just some of it.

With the state of the financial markets in 2008 and 2009, it is difficult for even the best of analysts to know with any confidence which companies or shares are going to perform well in the future. Long-term investment suffered a severe blow by the machinations of the market, and it does not seem that the current financial climate favors the perennial wisdom of buy-and-hold. Those who follow the stock market in the short term can see opportunities, but it is a sad fact that the majority of would-be traders — at least 80 percent — lose money and give up in the first six months of their trading career.

Real estate, which was believed for many years to be unshakable as an investment that would always increase in value, has let many people down with a thump, and it will take several years for the housing market to get back to a place where the buying and selling of houses is anything other than a trial. Although fortunes can be made by opportunists taking advantage of irrational or erratic markets, it takes knowledge, skill, experience, and perhaps a little luck to stand a chance of profit in such circumstances.

An investment in a savings account or certificate of deposit does not attract the return needed to even keep up with published inflation figures, and changes the way these are calculated, meaning that your actual requirement for increased spending to maintain your standard of living is much higher than the published numbers. To estimate your return on your investments, use the calculator at www.bankrate.com/calculators/retirement/roi-calculator.aspx. This calculator allows you to fill in the appropriate fields about your savings method, then choose whether you want to see the results adjusted for inflation.

For those who find these investments and markets too risky and difficult to fathom, there is one store of value that has demonstrated, over the centuries, an ability to maintain its spending power — gold. Both new and experienced investors can be assured that gold is a reasonably safe way to hold on to their savings and maintain their value. Gold has consistently been used as a medium of exchange for both goods and work since ancient times and has not suffered devaluation in the same way as paper currency. Learn more about its history in Chapter Two.

One reason for this is that there is only a limited amount of gold in the world, and the amount mined each year is also restricted by physical constraints. Gold and other natural resources benefit from the economist’s simple principle of supply and demand, where a limited supply ensures that the value is maintained.

History has demonstrated time and again that paper currency, with its intrinsic ability to be manipulated by governments when times are tough, is almost bound to cause inflation from overproduction and lose its value. It is almost too simple to point to examples of this in your own lifetime — for instance, how much was your first automobile, and what would it cost to buy a similar vehicle now?

In fact, the principle of supply and demand operates to increase the price of gold and precious metals any time that the stock market starts to behave badly. Savvy investors put their money into gold as a safety move if they believe that the stock market may be a risky place for their portfolio. Thus, a shaky stock market almost guarantees an increase in the gold price by increasing the demand. Weakness of the dollar is the other factor in the equation. If the dollar was considered to be strong, investors might choose to stay in cash and cash equivalent financial assets. With the weakness evident from 2009, there seems to be no better place to invest than in gold and gold-related financial instruments, further pushing up the demand. In fact, sources like the Wall Street Journal and MSN Money reported gold as being at its peak in 2009. According to MSN Money, gold neared $1,100 an ounce in the early days of November that year.

This deduction, although valid, might suggest to some skeptics that the price of gold was being pushed artificially high by emotional trading, and that if and when the stock market appeared to be stable again, the price would go down as investors sold gold and bought into stocks and shares again. While there may be an element of truth in this accounting for short-term fluctuations in gold price, there are deeper underlying reasons that gold is well-positioned to continue increasing in cost.

For much of the twentieth century, the United States appeared to be prospering with a thriving economy that was the envy of many other nations. Stock prices showed strong growth, and the strength and lasting power of the dollar was evidenced by the fact that commodities around the world were priced in terms of the dollar. It was indeed considered the golden currency.

Underneath all of this, the government has been adopting an unsound and cavalier attitude toward the currency, generating more paper dollars whenever they were needed in order to stimulate the economy. Who can ever forget the speech of Ben Bernanke, then-governor of the Federal Reserve Board, when in 2002 he spoke of dropping dollar notes from a helicopter in order to keep the economy going? Accordingly, he was appointed as the successor to the Federal Reserve Chairman Alan Greenspan in 2005.

A student of the Great Depression, Bernanke chose to answer to the defeating deflation by simply issuing more money, and he noted that creating inflation by doing so was in the government’s interest, reducing the real value of the government debt. Unfortunately, as one-time presidential candidate Ron Paul has pointed out, the continuing inflation from unnecessary growth in the money supply causes an inflation tax, which is hidden taxation on everybody because of the falling value of each dollar.

There have been reasons for the dramatic growth in the money supply, most notably the events of September 11, 2001, which shook confidence in the apparent robustness of the financial sector, and the bailouts, such as that of Lehman Brothers in September 2008 to avoid an immediate crisis in the markets from the failure of a too big to fail company. For some, to blame these events on only inflation would be to deny the continuing economic policy that has increased the national debt of the United States consistently for several decades.

Government sources reveal that the debt was a mere $370 billion in 1970, increasing to $907 billion in 1980. By 1982, the debt was more than $1 trillion, more than $3 trillion in 1990, $5 trillion in 2000, and hit double-figures in the trillions in 2008. This is money that is owed currently, and the amount is much larger when you take into account the government commitments to programs such as social security, Medicaid, and Medicare, which will require payments in the future. The debt is typically financed by sales of Treasury bonds, and China and Japan are the chief bondholders, meaning that the two countries play a role in financing the U.S. debt. This is not surprising when you realize how many dollars they earn from exporting to the United States. In 2004 alone, China was expected to make more than $150 billion from exporting goods to the United States.

This issuing or creating of more dollars to finance existing commitments, including interest payments on existent debt, fuels inflation and devalues any dollars that are held in any accounts.

Although it is not unusual for a civilization to go down this path, currency seldom starts out on this track. Paper banknotes are easier to carry and

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    Before I read this book I knew nothing about investing in gold or precious metals. My interest was spiked after seeing TV commercials offering to buy gold jewelry, regardless if it is in good shape or broken. From that I knew there must be some incentive to do so.Investing in gold or precious metals isn't new; it's been around since early civilization. There has been a steady increase in its value but here are also market trends which cause inflation of value. Acquiring a knowledgeable and trustworthy broker or dealer is a must. Unfortunately there are many scams that one has to wade through to find a reputable dealer. The author suggests to look for length of service, amount of accessible gold, and testimonials. I think the most important chapter of this book is titled "But is it for You?" The author says "You have been made aware of the benefits, risks, and pitfalls of the various financial instruments discussed, and may have formed an opinion on what if any type of gold investing would suit you....So before you commit to the concept of putting everything you own in gold and riding it up for a large profit, you need to take a look at your financial situation and see to what extent you can afford to do this." He continues to provide a list of questions.I believe this is a good book for anyone that has no or very little knowledge about investing in gold or precious metals. The writing is lay-friendly, informative and covers the basic information one should know to make a decision to do further research. It sure helped me make a decision.