Gold for profit or wealth preservation?

There seems to be some confusion among buyers of bullion-priced precious metals as to their motivation for making such purchases. Are they buying gold and silver to preserve their wealth indefinitely through diversification (which I refer to as owing precious metals for insurance purposes)? Or are they thinking in terms of seeking a profit, meaning that they are planning to sell at some point at a higher price – however they define it?

I believe that many people are thinking of the insurance aspect of owning physical precious metals as protection against possible future calamities with paper assets such as stocks, bonds and currencies. It no longer surprises me when our customers tell us that they plan never to sell the gold and silver they are purchasing, but intend to leave it to their heirs.

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However, there are also a number of customers who ask for guidance on how they will know when it is the best time to sell their holdings.

In my mind, it is prudent to have an insurance position of physical precious metals in your direct custody or stored in an account under your name (as opposed to the name of the company that sold it to you, or an outside trustee of some kind).

Just as I would suggest that people pay for home or renter’s insurance, vehicle insurance, life insurance, at least catastrophic health care coverage, and possibly even umbrella insurance, I suggest that people put a bare minimum of 5 percent of their net worth or what they consider their investment portfolio into physical gold and silver. Actually, with the current state of the world’s problems, I suggest looking at owning a minimum of 10 percent for wealth preservation purposes.

For this reason, any time would be the right time to purchase precious metals without considering current and possible future prices. At the same time, also plan to hold onto the insurance portion of your gold and silver until you die. Yes, emergencies do come up and sometimes people have to liquidate what they intended to hold forever. But, try to hold onto your wealth preservation insurance indefinitely, just as you would continue paying premiums for any other insurance policies.

Once you have your insurance position of precious metals, you may consider purchasing additional amounts on a profit-seeking basis. In making such purchases, you need to evaluate the current markets and make judgments on what you expect in the future – on whatever time frame suits your situation.

You need to consider the level of risk you are willing to accept, as the higher percentage of your total net worth or investment portfolio you devote to owning gold and silver could defeat the benefits of asset diversification. For most people, I consider a maximum of 25 percent of your total devoted to precious metals as being prudent. To go beyond that level, you seriously need to think about whether you could manage if the prices of gold and silver go against your expectations.

When people ask me what kind of price target I have as to when it would be a good time to sell their physical gold or silver, I explain that I don’t know what those prices would be. Instead, the answer will be revealed by the behavior of people.

For example, if you get a shoe shine, haircut, or are served at a beauty salon and the person serving you says they heard it is a good time to buy gold or silver, and then you hear the same advice from a taxi driver – SELL!

When almost everyone who could be in the market to acquire precious metals has already taken a position, there will be little future potential gains after that. However, if this time to sell comes around, I would still recommend holding onto the 5-10 percent insurance portion of your total net worth or investment portfolio in the form of physical gold or silver.

Obviously, each person considering the ownership of physical precious metals should decide why he or she is acquiring them. Ideally, this evaluation should come before you buy any, but since most people reading this already own some, it is useful to decide what you want metals to achieve for you.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for The Greater Lansing Business Monthly (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).