Investing in Gold Stocks

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Investing in Gold Stocks: The Smartest Way to Invest In Gold and Pocket 40% or More
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Thursday, November 14, 2002: Issue # 189

In January of 1980, the Dow Jones Industrial Average was at 850, and gold was worth $850 an ounce. Twenty-two years later, the Dow is up ten times, while gold (at $320) has been cut in half.

With such a dismal 22-year performance, you might wonder if investing in gold stocks is a wise move. The answer is “yes” – but not under typical circumstances. Here’s what I mean

All you need to really know about gold is this: when everything else is getting clobbered, gold does well. Of course, the opposite is true, too when everything else is doing fine, gold does poorly. The problem for gold has been, from 1982 to now, everything else did just fine.

Since March of 2000, however, stocks have been clobbered. Meanwhile the XAU Index, the index of major mining stocks, is up 20%. And the price of gold has risen from about $280 to about $320 an ounce in that same period. What this tells us is that gold’s traditional role hasn’t changed, even though nobody has paid much attention. Nowadays, a 5% or greater portfolio position in gold makes sense, to diversify your risk and give you a boost up in your investments when everything is going down.

In today’s Investment U, I’ll share with you the following:

My favoriteand also the smartest way to invest in gold
What could cause gold to continue rising
My favorite book on gold (it’s truly great)
My favorite gold broker
And the best gold websites
And finally, I’ll share the name of an individual that works for the industry that you can e-mail any of your questions about gold, and he won’t try to sell you anything (since he’s got nothing to sell)

How The Prospects For Gold Investments Changed After September 11, 2001

For the masses to pile into gold investing, they need to believe that we are at war. They need to believe that our nation is at risk. They need to believe that the dollar is going to fall and that the men at the controls are going to print money wildly. Most important, they need to believe that the men at the controls are no longer in control.

It will be hard to convince investors of these things. Investors haven’t worried about any of them for many years now – if they’ve ever worried about them. Yet, 1980 wasn’t that long ago

In January of 1980, nobody trusted anybody in government to man the controls. Gold hit $850 an ounce. After a decade of dumb ideas from our political leaders (including Nixon’s price controls), the Vietnam War, and the OPEC oil embargo, we were stuck with drastic inflation, high unemployment, and no signs of economic growth. Everything the government touched turned to stone. So people wanted out of government, and especially didn’t want government to have control over their wealth.

My, how things have changed. Over the last 20 years, there have been no major international wars (which are a direct source of inflation, as governments print money to finance their war budgets). Without war, the U.S. economy became fiercely competitive, which kept prices down and inflation at bay. Technological advances made many things significantly better and significantly cheaper.

Things are different since September 11th. We have new fears. We have war. We have wartime government spending on defense. The stock market is falling and so is the dollar. It may be time to own some calamity insurance – and history tells us that means gold.

The Smartest Way To Invest In Gold Stocks And Pocket 40% Or More

The way I suggest you buy gold is truly unique. I’ve never seen such a thing anywhere else. But it’s simple and easy. Here’s what you need to know: we’re buying shares that are manditorily redeemable in February 2006 at a price of one-tenth of the value of an ounce of gold. So today, gold is close to $320 an ounce. If $320 is the price in 2006, you’ll get $32 a share. The technical name for this is a “gold-denominated preferred stock,” but that sounds more difficult than this really is – all you need to know is you get the value of gold in February 2006.

What’s amazing is, the current price of this gold-denominated preferred stock is only about $25 a share. The name of this gold-denominated preferred share is the Freeport McMoran Copper and Gold Preferred “C” share. So by buying today, you’re guaranteed $7 in appreciation between now and February of 2006 – if gold doesn’t move from here.

What’s more, when you buy this, you get about a dollar a year in dividends – 4% a year (actually it’s 0.00325% of the gold price), payable quarterly. Since we have over 3 years to go before this preferred stock comes due, that’s an additional $3.00+ we will collect in dividends.

So you pay $25 today. And you get $32 in three-and-a-half years, plus an additional $3.00 in dividends. Now we’re up to $35.00, on a $25 investment. That’s a $10.00 gain – a 40% gain. But it gets much better

Safely Turn A $25,000 Gold Investment Into $44,000+

All of that analysis assumes that gold goes nowhere. But if gold is at $400 or more in February of 2006, then you’ll be incredibly happy. Your $25 investment will be worth $40+ (remember, you get one-tenth of the price of gold). Plus, don’t forget your dividends, which at that point would be $4 – for a total return of $44. On a $25 investment, that’s approaching a double for you. On the flip side, you wouldn’t lose money on this investment unless gold fell below $200, which we haven’t seen in decades.

Gold rises during times of fear and panic. Gold rises during real wars. Gold rises when faith in public officials falls. And gold rises as real interest rates fall to zero. (For more information visit Investment U E-Letter # 494, Gold as an Inflation and Market Indicator: Where to Put Your Money When Prices Edge Higher) Right now, we are seeing many of these things. By the time we’ve seen them all, it may be too late to invest in gold. We can’t know the future, but we can invest in a “known.” This investment is one of the best “knowns” out there, with a built-in 40% if nothing happens. Sounds good to me.

Gold Investing Resources

I’ve already written too much here. And I haven’t fulfilled all my promises yet. So, let me get to it to give you the best places to search for more information

The very best book on gold is Peter Bernstein’s The Power of Gold: The History of an Obsession. This is not about investing in gold, it’s really the story of gold throughout history, and Bernstein is a fabulous storyteller. Definitely a worthy read. Available in all major bookstores and online.

The best person to talk to about buying gold is Michael Checkan at Asset Strategies. (Mcheckan@AssetStrategies.com). I’ve known Michael for probably five years, and I’ve never heard anyone say a bad thing about him. Michael and I usually try to get together at conferences for a lunch here or a dinner there to talk about the world. Michael is always a gentleman and has never tried to push any gold products or ideas on me (though the temptation must be great). I appreciate that. I’ve seen him with customers, and it’s the same way. He’ll listen to what you’re trying to do, THEN make a recommendation.

If you’re just curious about gold and not really close to doing anything, the World Gold Council is a great place to learn more – www.gold.org. They have nothing to sell you. I believe they’re a non-profit entity – funded by gold companies – that simply exists to increase awareness and knowledge of gold. John Nadler is a nice fellow at the World Gold Council, and his sole job is to answer questions from individual investors about gold. I’ve invited him to speak at the Investment U conference about the basics of gold and gold investing. He can answer your questions by e-mail at John.Nadler@gold.org

For gold coins, in addition to Michael Checkan, Mike Fuljenz and his company, Universal Coin, (www.universalcoin.com) have been around for a while and have a good reputation. In addition to the nice offer in the ad below, I’d like to point your attention to Mike’s well-known coin-pricing guide, The Insider’s Guide To U.S. Coin Values 2002. Published by Random House, it’s 231 pages of coin prices, and an excellent primer on coins. And it’s priced at only $5. I know Mike (I had lunch with him last week in New Orleans), and though I’ve never bought coins from anyone, I think that Michael Checkan and Mike Fuljenz’s Universal Coin should be good places to start.