JAY TAYLOR

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The Value
Investor

Jay is a former banker and value investor whose picks have greatly outperformed the S&P 500 since 2000.
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BULLION, COINS, AND STOCKS

Bullion, Coins, and Stocks

Assuming you agree with me that gold is a good asset category to hold in your portfolio during bear markets and difficult economic times, you might then ask the following obvious question: "What should I buy - gold bullion, gold coins, gold stocks, or a combination of all three?"

Why Gold Stocks?

They Provide the Biggest Bang for your Buck.

During a gold bull market, I have a strong preference for gold stocks over either gold bullion or gold coins, largely because gold shares are leveraged to the price of gold. In other words, as the price of gold rises, profits of gold-mining stocks rise more in percentage terms. Generally, over the longer term, the share prices of major gold-mining firms rise by a factor of two or three times more than the price of gold.

The reason gold-mining profits are leveraged to the price of gold is obvious. A rising gold price does not lead to a rising cost of production. Therefore, for companies that are already profitable, incremental revenues received from selling gold at a higher price flow straight to the company's pre-tax bottom line. For companies that are unprofitable, a rise in the gold price can suddenly lift them into profitability and with that, the share prices can sometimes rise dramatically.

Successful junior gold-mining companies, or those companies that are not yet in production, frequently rise by a factor of 5 to 10 times more than the price of gold. Not only does a rising gold price make the gold in the ground more valuable, but junior gold-mining firms frequently make gold discoveries that raise the intrinsic per share value very dramatically, compared to what a discovery of similar size would do for a senior mining firm. For example, if a major mining firm with 100 million ounces and 200 million shares of stock outstanding discovered a million-ounce gold deposit, it would have increased its reserves by just 1% and added 0.005 oz. gold/share. On the other hand, if a junior gold-mining firm with 20 million shares outstanding and just 200,000 ounces of reserves made that same one-million-ounce gold discovery, it would have increased its reserves by 400% and the gold equity in the ground would have risen from 0.01 oz. gold per share to 0.06 oz. gold/share. Therefore, in a secular gold bull market, I am partial to gold shares, but even more so toward junior gold-mining shares.

Another reason I favor gold shares is that while gold bullion itself was made illegal to own during the 1930s, gold shares were not. We hope our government will never make the same foolish decision to make gold ownership illegal again. But if they do, there is a precedent for believing gold shares may not be affected.

J Taylor's Gold & Technology Stocks covers more than 50 gold-mining shares with an emphasis on junior exploration companies as well as major gold-mining firms. To learn more about our wide selection of junior gold stocks, subscribe to J Taylor's Gold & Technology Stocks Newsletter. First time subscribers may subscribe for 12 weeks of our service plus three monthly issues for just US $59.

Why Buy Gold Coins?

They Are Good for Portability and Recognition.

First, the difference between gold bullion coins and numismatic gold coins needs to be underscored. Gold bullion coins like the American Gold Eagle, the Canadian Maple Leaf, and the South Africa's Krugerrand are examples of gold bullion coins. Their value is derived entirely from their gold content and being universally well recognized, the value of these coins is easily recognized and verifiable. By contrast, numismatic coins are valued on the basis of their relative rarity and uniqueness and only a relatively few dealers who know these markets very well can recognize the value of these rare pieces. The value of these coins, like those of a work of art, is subject to market factors that may have little or nothing to do with the intrinsic value of the gold contained within them.

Unless you wish to collect numismatic coins for the sake of their art rather than for their gold content, I do not suggest you buy numismatic coins as an investment hedge against declining stocks and bonds and other paper-denominated assets. In addition to not being good hedges, these coins can be very expensive in relation to their intrinsic gold value and frequently are subject to questionable pricing practices by dealers. Also, the market for numismatic coins is not nearly as liquid as for regular bullion coins.

Bullion coins are preferable to gold shares in at least two ways. First, if you own gold bullion, it is, in a sense, risk free-as long as you retain possession. Sure, its market value can go up and down, but you can hold it securely in your hands. When you own gold shares, you own a claim against the gold in the ground and not the gold itself. Moreover, gold shares represent business risks that are absent when you own gold bullion coins. One other positive point for gold coins is that they can be and have been literally a lifesaver during periods of economic depressions, wars, and political unrest. Gold shares are harder to use as a means of purchasing safety or life-sustaining products.

Where to Buy Gold Bullion and Gold Coins?

Our favorite vendor of gold and silver bullion and gold and silver coins is Blanchard & Company, which is the world's largest rare coin dealer and second largest bullion dealer. Visit www.blanchardonline.com and/or call toll-free 1-888-524-2646.

Bullion - the Bars Are for Bank Vaults

I do not see any real reason for most people to buy gold bullion bars rather than gold bullion coins. Bars usually range in size from as little as 1 ounce and as much as 400 ounces. That compares with coins, which are as small as 0.10 oz. to around 1 ounce. The disadvantage of bars over gold coins is that the bars are far less portable and difficult to sell. Bullion bars are designed for bank vaults and not for individual investors.

Why Buy GoldMoney?

GoldMoney.com

In Electronic Form It Is Inexpensive and In the Most Portable Form of All.

As much as we love to hold gold and silver bullion ourselves, our personal preference for gold ownership is through GoldMoney, where you can buy electronic gold through the one legitimate dealer on the market, namely GoldMoney. When I recently sold my house, we took 10% of the proceeds and purchased gold grams via GoldMoney. The commission price is lower than for gold coins or similar-sized purchases, and storage is as low as you will find for gold storage of any size in the world. The storage cost per year, no matter how large the amount of gold you store with them, is around US$10. GoldMoney is constantly audited, and the audit certificate is displayed on the Internet. One hundred percent of the bullion you purchase is stored in the Channel Islands, and you can quickly access your gold and turn it into a host of fiat currencies with a few keystrokes of your computer. James Turk, the proprietor of this firm, owns a patent for the use of the Internet to make payments in gold. I anticipate that this company will, in the not-too-distant future, make available debit cards such that you can use your GoldMoney account to buy groceries, gasoline, or any other purchase just as you now do with debit and credit cards. But even now, in my view, GoldMoney is the best way to buy, own, and store gold. Visit Goldmoney for additional information.

Address: PO Box 780555, Maspeth, NY 11378-2915

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