Three Rules for Buying Gold and Silver

01/06/2010 1:00 pm EST

Focus: MARKETS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts & Strategies, says gold and silver can be good investments, but there are some dangers, so you have to be careful.

Gold and silver are excellent hedges against inflation, financial crisis, and bad government policies. Gold and silver coins also can be a good private investment.

But investing in gold and silver can be dangerous. Let me offer three warnings.

First, don’t overdo it. Some hard-money advisors are urging investors to sell all their stocks, bonds, and real estate and buy gold. Or they recommend you put 70% or more of your 401(k) or IRA money into gold.

This is a clear violation of the “prudent man” rule. It always pays to diversify. For those who have no gold or silver, it’s a good idea to have some, perhaps 10% of your portfolio.

But to have 70% of your funds in precious metals is foolish, because in today’s world, the metals are highly volatile, and you could be buying near the top. Remember, after the top in 1980, gold and silver basically did nothing for 20 years!

Think of buying gold and silver coins as an insurance policy against rough times. You wouldn’t put 70% of your money into car, homeowners’, and medical insurance, would you?

Second, beware of huge mark-ups on bullion and rare coins—by as much as 50%. The most expensive coins are sold by promoters who advertise heavily on television and radio. They are taking advantage right now of the US Mint’s temporarily suspending the sale of 2009 American Eagle gold and silver coins.

I emphasize the word “temporarily.” In a couple of months, the US Mint will be offering 2010 Eagles, so be patient and don’t overpay.

Important note: The premiums are historically high right now for American Eagle gold and silver coins—6% to 7% over spot on the gold coins and about 14% to 15% premium on the silver coins.

[Coin dealer] George Resch says he is telling his customers to hold off buying gold and silver eagles until the US Mint begins issuing new coins in 2010. Or he suggests you buy Canadian Maple Leaf silver coins, which are much cheaper but still contain one ounce of silver—or in the case of gold, buy Canadian Maple Leafs (premium 4 3/4%); Vienna Philharmonic gold coins (premium 4 1/4%), or better yet, Mexican 50-peso gold coins (1.25 ounces of gold, 2 1/2% premium).

Third, watch out for “up-selling” and “bait and switch” techniques by aggressive gold promoters.

Most of the TV salesmen also sell “rare” collectible coins, where the mark-up is significantly higher than [for] bullion coins.

It’s an investment market that requires considerable expertise. The bid-asked spread on rare coins can be 20% to 25%, and rare coins are always easy to buy but hard to sell for a profit. The danger is that when you call one of these gold promoters to buy bullion coins, they will try to up-sell you to buy rare coins. Caveat emptor.

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