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Thursday, August 12, 2010

CNBC Cramer Recommends Gold

Wednesday night CNBC's Jim Cramer recommended people buy gold Thursday 8/12/2010, stating that gold would pull back on Thursday and open up an opportunity to buy.  Well this didn't actually happen. Gold went sideways in the morning and then started up at 6am till about 8:30, where it leveled off.   Volume was unimpressive on the rise.

I think it is great that Jim Cramer and CNBC's Fastmoney has recommended that people own a little gold bullion in their portfolio, unfortunately his call was off or maybe his call in gold started a buying spree.

He also recommended buying the gold miners and the GLD ETF.  I would say GLD is good for a short term trade, but I don't treat it as a long term bullion holding, as the amount of gold that paper gold owns has been called into question recently and carries counter-party risk.   GLD says it is backed by gold, but does not promise redemption in gold.   So if you think that your GLD stock will be redeemed in gold if the dollar devalues considerably, you'd be wrong.

Jim suggests that gold could go as high as 1300 by September based on historical trends from August into September, demand for gold from China and India and the scarcity of gold in the world.  There are more motivators for gold than those 3 stated reasons and frankly 2 of the 3 have been on the table for quite some time.  China has been acquiring gold for a some time now, but doing it slowly as to not affect the price.  Not helping gold is the unmonitored manipulation in the metals market which has suppressed both gold and silver. General consensus is that gold will do well long-term, but we may be in for a bumpy ride during summer months.  As you can see from the chart above, getting into gold after the media suggests it may not have been the best opportunity (as prices increased). there was no apparent pull back.  It will be interesting to see how this plays out over the next couple of days.

I have read over and over, that the general public seems to be afraid of buying physical gold and silver for some reason (this is a problem the wealthy does not have, the own it and have been increasing their holdings).  Why does the general public not hold a percentage in their portfolio?  From what I can gather, it seems to be confusion on where to buy it (Goldline scandal has not helped), lack of knowledge about metals value (its store of value), tax treatment and fear that it is too expensive for them.  As of this writing, spot price on gold sits at 1215.70 per ounce.  You can purchase it in smaller denominations like 1gram for 51.01, 2.5 gram for 110.56, 5 gram for 213.01.  Coins have a similar pricing based on weight.  Accumulating a little at a time can help diversify your portfolio.  If gold is still out of price range Silver can also add value to the metals portion of your portfolio, but starts at 1 ounce and higher.  Currently a one ounce bar is $20.14, not terribly expensive (that is spot of 18.09 plus a small commission that any dealer will charge).  What is the tax treatment for gold, well as of this writing it is treated as a collectible and is taxed at a 28% rate on the capital gain.  Having said that, because GLD is structured as a grantor trust, not a mutual fund (meaning the grantor is ignored for tax purposes, so the investor is treated as owning the pro-rata share of the underlying holds), GLD is considered a collectible and taxed at a 28% rate as well.

The next question I always hear is bars vs coins?  That one is a little tougher and really depends on you plus your reason for purchasing metals.  If you believe the dollar will continue to devaluate and want to protect yourself against inflation then straight bullion is the way (you pay spot plus a small commission charge as stated prior).  If you feel you want collector gold coins because you want to be a collector, then you can pay the extra fee to get those as well (this can be a considerable fee).  Just keep in mind, just because they are collectors coins doesn't mean that if the government decides to confiscate them, they cannot (because they can if it comes down to that situation).  As usual, consult a financial advisor of your choosing to assess the proper allocation for your portfolio.  Here are a few examples of what gold coins look like:

These are the American Golden Eagle, the South African Krugerrand and the Canadian Maple Leaf.  Examples of the bars are as follows:

I prefer my bars to be sealed in these packages, as they have serial numbers on the back and are easier to track if you purchase them for a metals IRA.  Yes, you can get an IRA that stores physical bullion bars and coins in a vault.  If there is interest this topic can be discussed more. 

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