These Are For Protection Only

My cousin approached me the other day about buying gold.

I'm not talking about a small wager on the gold price. Marco wants to convert the sum total of his lifelong savings into gold!

I was surprised at first. Marco isn't even vaguely interested in investing. He doesn't read DailyWealth and he certainly doesn't read the Financial Times.

Then he explained his reasons. Here's what he told me:

Right now, Marco’s money is in the bank, in a low-yield savings account that pays about 3.5%. He doesn't think he's getting a fair rate of interest for keeping his money in the bank when the cost of living is rising as fast as it is.

But Marco's big fear is the integrity of his bank's accounting system and records. He doesn't like having his wealth is represented by nothing more than a number on a screen... and he doesn't think interest rates compensate him for his good faith. Things go wrong sometimes. Could the bank's information ever get wiped out somehow?

Who knows? Marco doesn't want the risk. That's why he's buying gold.

Some people might find my cousin's stance a little over the top... but I think having a portion of your wealth in gold is a smart idea. He's not predicting a financial meltdown. He just doesn't want to take the risk that one could happen.

And here's the best part. Marco's opportunity cost for taking this unusual stance is very small. He gives up a few measly points in interest and has to pay sixty-five bucks a year to maintain a safety deposit box.

At the same time, the asset he's buying just came off a twenty-year bear market. So he's getting in at very low prices. In real terms, gold is down about 75% from its 1980 peak. Gold has already started to rise over the last couple of years, but I think there's much more to come.

So if I'm right, Marco gets two benefits - protection and profit - all at one great low cost.

To set it up, Marco is going to buy a slug of British gold sovereigns minted during the rule of Queen Victoria. Each coin contains one-quarter of an ounce of gold. He's buying them for around $160 each. Today, an ounce of gold trades for around $620.

I think the sovereigns are a very good investment. Your money is safe. Those coins will never be worth much less than $150. Never. And they'll keep pace with inflation - I mean, each sovereign will always be exchangeable, at the very least, for a fine pair of leather shoes.

There's one more thing I want to say.

If you want to invest or speculate on gold coins, you don't buy the coins Marco is buying. These are for protection only. But if you want to take a chance on bigger profits, you need to go for something with a collectible and rarity value. For instance, in the last gold bull market, the rare gold coin index went up over 1,000% in four short years! 

Beware, with bigger rewards come bigger risks. Rare coin prices are more sensitive to market fluctuations. There's also the grading issue. Only a professional coin grader can tell you if a coin is in mint condition, or just very fine condition. And how do you know the truth about the coin’s rarity... or how much it's worth?

If you're not an expert, you won't know if the dealer is overcharging you.

So before you buy rare coins, you need to either a) do some research or b) find a coin dealer you trust and knows what they're doing. There's a third option too:

Buy a 12-month subscription to True Wealth for $49. We've put hundreds of hours into gold coin research so you don't have to. When you subscribe, you'll get immediate access to Steve's recommended way to buy gold and a list of dealers who will give you a square deal.

Good investing,

Tom