Golden years indeed

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Michael Gupton, of KMG Gold Recycling, uses a Fischerscope X-ray fluorescence assay machine to test how much gold is in scrap jewelry. (BORIS MINKEVICH / WINNIPEG FREE PRESS) Photo Store

Few people haven't thought about gold these days. Whether owning it as an investment or selling it for quick cash, the precious metal has garnered a lot of attention in the last few years.

That's hardly surprising. The per-ounce price of the commodity has more than quadrupled in less than a decade, largely the result of fears about inflation, currency devaluation and even a complete breakdown of the world's financial system.

Though not everyone has morphed into a gold bug, many may wonder if they should at least own a little bit of the precious metal. Others could already be sitting on a small gold mine -- a jewelry box brimming with gold that could be sold at a tidy profit.

So if you're considering dabbling in or maybe even going all in on gold, here is a basic buyers' and sellers' guide to help get the most from of one of the world's most pricey commodities.

The buy side

Barre Hall is a retired securities lawyer and a self-professed student of gold's history ever since the 1970s, when inflation hit double digits and gold topped out at more than $600 an ounce. It wouldn't hit that price again until 2006.

"I don't view gold as an investment," he says, adding he isn't a "gold bug."

"It's a hedge to reduce downside risk in the economy, in particular an inflationary economy."

Although we have yet to see much inflation in the marketplace, gold has largely increased in price over the last decade because investors are speculating about future inflation.

Hall says it's not that gold increases in price so much as paper currency decreases in value. "Gold's value is the inverse of paper money," he says. "The more paper currency there is, the higher the price of gold seems to be."

In fact, many argue gold's value actually remains constant. Like many gold watchers, Hall points to the fact that throughout history, an ounce of gold could purchase a nice suit and shoes (or fancy toga and sandals in Roman times).

"But at today's price, you could buy an awfully high-quality suit."

That's because gold's current market price reflects investors' fears about future inflation. So far, consumer goods prices have yet to start soaring. If inflation were a problem, central banks would be hiking interest rates.

Hall says he is agnostic about gold's price. Its price is volatile and hard to predict, so why bother speculating? But he still allots about five per cent of his portfolio to precious metals as a hedge against economic upheaval.

To that end, investors have plenty of ways to own gold and other precious metals such as silver in their portfolio.

Buying a precious-metal fund is often the easiest and most worry-free choice. Investors have numerous options here, from exchange-traded funds (ETFs) to mutual funds to closed-end funds that are traded on the stock market. (One note of caution: Some precious-metals funds invest in mines, not the commodity itself, and gold-mining firms have different risks than the commodity itself.)

The upside with funds is their liquidity. You can buy and sell fund units easily on the stock market or through your financial institution.

Some funds, such as Horizons Comex Gold ETF (TSX: HUG), buy gold futures contracts instead of physical gold. Like most gold funds, it's relatively cheap to own, charging an annual management expense ratio (MER) of 0.65 per cent.

Hall says his preference is funds that actually own precious metals. Among the more popular choices in Canada are Sprott Physical Gold Trust (TSX: PHY.U,) with a 0.46 per cent MER, and Central Fund of Canada (TSE:CEF.A,) with administration fees of 0.3 per cent or less. Both are closed-end mutual funds, meaning unlike most mutual funds -- which are open-ended -- there is a limited number of fund units available to purchase and the units are traded on a stock exchange rather than purchased through a mutual-fund dealer.

Other investors prefer to own the real deal rather than own it indirectly through a fund. Most banks offer access to bullion-bar purchases and will store your gold for you so you don't need home security like Fort Knox.

Another option is buying one-ounce gold coins, and it just so happens Canada is the world leader in minting them. The Royal Canadian Mint's Canadian Maple Leaf coin is world-renowned for its purity, Hall says.

"Its purity is referred to as 4-9, meaning it's 99.99 per cent pure."

Physical gold, like the gold funds, is RRSP- and TFSA-eligible, but a third-party custodian must verify and report to the Canada Revenue Agency that you do indeed own it.

In all cases, you're best off storing gold at your financial institution, Hall says. You may not be able to fawn over its shiny gloriousness whenever you please, but if you want it for that, buy jewelry.

The sell side

As with owning gold, the easiest way to sell it is if you own gold indirectly in a fund. As long as markets are open, you can hock your gold fund, minus a commission.

Gold coins and bullion will also trade at or close to market value, but you need a buyer. Most financial institutions will likely grant your request.

So, too, will coin dealers such as Gatewest Coin. One consideration for coin sellers is numismatic value. "Numismatic means there's an important collectible aspect to it," Hall says.

Some rare coins have sold for millions of dollars, so if you're selling a family heirloom, do your homework first. Scour the web and seek the advice of a coin dealer, too.

Most people will never have the good fortune to find a rare gold coin, but it's entirely likely most people own unused gold jewelry.

There has likely never been a better time to unload a potential motherlode of trinkets, but getting fair value for your gold can be dicey, says the owner of a local gold buying and refining company.

"The whole industry is full of predators looking for a fast buck," says Michael Gupton, president of KMG Gold Recycling.

Many Internet and mall-based buyers offer higher than market prices in their marketing pitch, but that's just to get you in the door. It's far more likely they pay less than 50 per cent of the market price, says Gupton, who has a degree in geological engineering.

Fortunately, consumers can figure out for themselves the approximate value of their jewelry fairly easily. Let's say you want to sell a 100-gram, 10-karat chain.

First, find out the spot price for gold, which you can find on the Internet on websites such as Kitco.com, Bloomberg.com or Goldprice.org .

For the sake of argument, let's say gold's price is $1,630.70 an ounce (the actual price at one point last Monday).

Now you need to figure out approximately how much pure gold is in the jewelry. Rarely is jewelry ever 100 per cent -- or 24-karat -- gold. Pure gold is too soft to make durable jewelry. It needs to be alloyed with copper, silver or other harder metals.

"Any karat of gold is divided by 24, so 10-karat gold is 10/24th pure gold," Gupton says.

That gold chain in question should contain about 41.7 grams of pure gold. Then you need to figure out its worth by multiplying 41.7 grams by the market price for a gram of gold. Based on the $1,630.70 per ounce, the price per gram is about $52.43 (That is $1,630.70 divided by about 31.10 grams. Note precious metals are measured in Troy ounces--31.1034768 grams--not in avoirdupois ounces--28.4 grams--used for other measures).

Multiply that figure by 41.7 and you have your approximate value of the gold in the necklace: $2,186.50.

But it's unlikely you'll get that price. Most buyers pay a fraction of the spot price. "This is capitalism, baby," Gupton says. The buyer needs to turn a profit, buying low and selling high. In most instances, they do that by embedding a profit margin in their advertised karat price per gram of jewelry.

The easiest way to figure out the buyer's cut is to ask, Gupton says. A reputable buyer should easily be able to state their profit as a percentage of the spot price of gold.

KMG, for instance, pays 77 per cent sellers of the spot price of gold for amounts less than 100 grams. (In case, you’re curious Gatewest Coin was paying about 88 per cent of the spot price for amounts less than 100 grams.)

Because buyers' prices are often advertised as per gram of gold jewelry, it's not a bad idea to verify on your own whether the percentage of the market price for pure gold they claim to pay is reflected in that per-gram price.

To do that for the necklace, for example, you would multiply the pure-gold price per gram by 0.417 (10-karat gold jewellery is 41.7 per cent pure gold).

If a pure gram of gold is priced at $52.43, then a gram of 10-karat gold should be about $21.86. If the buyer pays only 77 per cent of that price—earning a 23 per cent commission—you would receive about $16.83 a gram.

So that 100-gram necklace should fetch about $1,683.

Gupton says he pays 77 per cent of spot price to sellers who want cash pronto. He verifies jewelry's gold content using an acid test. It's tried and true, used for thousands of years.

But it's not 100 per cent accurate, and he can't rely on the karat stamp on the jewelry, either.

"Just because something is stamped 10k doesn't mean it really is," he says. "In fact, it never is."

By law, gold jewelry must contain as much gold as its stamp indicates, but Gupton says the law isn't enforced, so jewelry often contains less gold than advertised.

That 10-karat necklace, for instance, may only be about 39 per cent gold instead of 41.6 per cent. The only way to be certain is to lab-test it, which takes time.

Sellers who are willing to get their jewellery lab tested will get about 90 to 96 per cent of the market price (sellers with larger quantities receive a better price), he says. The smaller commission accounts for refining costs and profit.

Transparency in the selling process is the most important aspect consumers should look for in a buyer, he adds. Get a guaranteed price you understand and get it in writing, or look elsewhere.

"Ask 'What percentage of market price do you pay?' " he says. "And get a real answer. Don't take some marketing bull... where they're advertising 100 to 110 per cent of the market price, because they will turn around and pay you 40 per cent or even less."

giganticsmile@gmail.com

Republished from the Winnipeg Free Press print edition April 28, 2012 B12