Gold Reigns as Universally Recognized Store of Wealth

What is it about gold that on some level every human feels the need to have some? We scoff or snicker at those insecure souls who show off their gold ostentatiously but they’re not wrong, just vulgar. The Wall Street broker laughing at the hip-hop artist’s golden grill and bling rings has a horde of golden eagle coins in his safe at home and 5% of his portfolio in gold equivalents. It’s classier to hide your gold.

So what’s the best way to own gold? Depends upon your personality. Optimists and pessimists both buy gold but for different reasons. There is sanity somewhere between wearing it on your front teeth and burying bullion in the backyard.

Beyond it’s magical affect on humans, gold is an ancient, universally recognized store of wealth. It can be traded for anything anywhere in the world. It’s this universal acceptance as a currency that makes it particularly attractive when national paper currencies have been debased by economic turmoil. Like now. It’s investment luster fades a bit when times are good but that is the very time it becomes more attractive as an ornamental display of one’s good fortune. Now that the Chinese and Indians have more prosperity, gold is being sought and bought by more people than ever before.

So, buy gold jewelry? Only if you like how it makes you look and feel. It’s probably the worst way to own gold. The exception is when jewelry is actually art. The gold in a Faberge pendant is worth a lot more than it’s weight in gold. The piece of crap 14K ring you bought at the mall is worth a lot less. Buying gold as art is for experts.

You don’t have to be an “end-of-days” kinda guy to think our horrendous debt will be paid off in cheaper dollars. Gold is an inflation hedge against an inevitable decline of the dollar. If you actually want the yellow metal in your hot little hands, the best way to own it is as bullion bars or better still, as gold coins. The U.S. Mint sells gold coins at a small premium over the commodity price but you have the assurance that your gold is pure and comes with papers. Rare coins may provide added appreciation opportunity but buying these coins is like being a Vegas tourist joining a game of hold’em with the locals. You’ll lose.

The golden rule used to be that mining stocks prices flowed in tandem with the price of gold bullion. Not recently. Bullion is at record levels over $1520 per ounce and the gold miners, though sitting on mountains of cash, have seen their share prices fall significantly since the beginning of the year. I am not the only one to notice this irrational dichotomy. George Soros recently sold his massive bullion holdings and bought depressed mining shares, most noticeably Eldorado Gold (EGO), Barrick Gold (ABX) and Goldcorp (GG).

What has made the difference this time around for gold bugs? Mining stocks have been losing out to bullion ETFs. You may not be aware that it has become popular to hold shares of a gold trust such as GLD and have claim to actual gold bullion without having to take delivery. The shares typically sell at a set fraction of the price of gold and track bullion’s price exactly. SPDR Gold Trust trades about 15,000,000 share per day at 10% of the commodity price, minus fees for management and storage that is built into the price.

In an effort to compete with gold trusts, the aforementioned big miners have announced that they will be raising their dividends to a 2% yield. That’s not much, but may be enough to get the investing public interested in gold mining equities again. Gold trusts deliver zero yield.

So, is George Soros right? Is it finally time for gold mining stocks to shine. I think so. The trick is to pick the right miners. The most important thing to consider is a mining company’s cost of extraction. The richer the find, the more profitable the mine. Except, most of the easy to find gold has been scooped up long ago. It keeps getting harder and more expensive to find. Some of the least attractive places on earth are where miners now have to dig. Some places are political nightmare countries. Some places the weather is awful. The most promising place to find gold is also the most difficult to mine, under the sea.

Sounds crazy but a company called Nautilus Minerals (NUSMF) is doing it. They are exploring the sea bed near New Guinea and coming up with rich cores of ore. The technology required to exploit this find will be complicated and expensive but consider this, man has been scouring the earth for millions of years in search of gold but has never been able to lay a hand on what is beneath the sea.

The ocean floor is totally virgin territory and it constitutes 3/4 of the earth’s surface. We should do this only if we can extract the ore without displacing marine life or ruining the ocean environment. Makes me think of Avatar. If we make a mess, the dolphins would be right to kick our asses. Done responsibly, it’s could be a gold lovers wet dream.