February 2011

How to Buy Gold
We have had an increasing amount of questions and inquiries about gold and precious metals from our clients, and how to include those in our portfolios or as part of our personal investments. I thought I would try and answer those questions in one of our client letters. There are a number of ways to own gold or have gold sector exposure. Let's list out a few of the most common ways and examine some of the benefits and disadvantages of each. Before we do that though let’s first address another question we also hear commonly, “Is gold in a bubble/ Is the price too high?” It's difficult to answer that question. However, from a diversification point of view, what I would suggest is that owning an investment that historically is very inflationfriendly is a valid and important strategy in uncertain economic times like this, and therefore, we may want to have some gold and precious metals as a portion of our overall portfolio. The unbelievable amount of money that the US Federal Reserve has been printing might further weaken the USD, and is another important reason to consider and maintain a significant allocation to gold and precious metals in our portfolios, as the following graph vividly demonstrates.

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A few other observations on whether or not gold is in a price bubble: 1. We are seeing many TV advertisements about gold. Interestingly enough, many of the advertisements, including some even featured on the Super Bowl, were advertisements to sell your gold. If gold were in a bubble, wouldn’t people would be rushing to buy gold rather than selling it? 2. The relative amount of money in gold investments is still minuscule compared to conventional stock and bond investments. I commented on this in detail in our client letter of Nov. 2009. 3. And finally, the majority of investors even today, own little or no gold in their investment portfolios. It's hard to imagine a bubble forming with those kinds of circumstances in place. Try an experiment to test this out – ask ten of your friends and neighbors if they own any gold in their portfolio and if so, how much. On the other hand, if everyone you know starts buying large amounts of gold and starts selling their 401(k)s and IRA accounts to move into gold investments, (like which happened in the tech stock craze of the late 1990s), then that might be a signal that a bubble is in place and we may then want to reduce or eliminate our gold positions at that point in time. However, that does not seem to be occurring today. So again, our advice is to keep a healthy diversification into gold and precious metals as part of our overall portfolio plan. As an investment advisor, I also have to confess there is a part of me that really dislikes having gold and precious metal investments in our portfolios for a couple of reasons: First, gold and precious metal investments tend to be extremely volatile and have huge price moves. For example, one of the gold-based investments we use in our client's portfolio has been up in the double digits, and has also been negative in the lower double digits in the first 45 days of 2010, a 20% price swing in a very short period of time. It's common in these types of investments to be quite happy one week and literally almost the next week quite disappointed in the returns and price. Unfortunately that's the natural state of affairs as these types of investments tend to be very volatile. Second, owning gold and precious metal investments in a sense is a vote against the United States or maybe more accurately a vote of no confidence in the US financial system and the US Dollar. As a citizen and patriot, it makes me a little sad to take that stance, but as an investment advisor, I feel compelled to recommend that diversification because of ongoing concerns about the US and the USD. Despite these issues, I still believe very strongly that a healthy diversification to gold and precious metal investments is a very important strategy for us in the current economic times and again that's why we have been recommending some gold and precious metals since early 2004 as part of our portfolio diversification plan. So with that out of the way, let’s answer the original question that we keep getting asked; “How Do You Buy Gold?”

How to Buy Gold - Gevers Wealth Management, LLC Page 3 Physical Gold: The first way to buy gold of course is to actually purchase the metal. You can either take possession yourself and keep it in your safety deposit box or safe, or have someone (typically a bullion company) hold it for you. If you do invest in physical gold, my opinion is that actually taking possession yourself is the way to go, rather than having some other institution hold it. There are however several paper certificate programs that offer gold ownership in this form. If you decide to pursue this option, you should very carefully research this and the potential drawbacks of allowing someone else to custody your gold.

If you decide to buy and hold physical gold, the most common is bullion in the form of coins like Canadian Maples, American Eagles, or Krugerrands, or perhaps smaller (100g – 1kg) bars by refiners like Credit Suisse or PAMP. Coin shops, bullion dealers or private or government mints are all sources of physical gold. The demand now and for the last couple of years has been rather high relative to supply, and you may experience some delays in getting gold in this manner from any of these sources.

(A 2010 1 oz. Gold American Eagle.) Buyers need to watch the "spreads" as the markup on buying or selling physical gold can be quite high. To check this, look up the “spot” price of gold for that day as quoted by an exchange like the New York COMEX, then compare that to the price that the coin dealer is offering to sell it to you for. The difference between the two numbers is the spread. It is wise to check the spread among a few dealers to ensure that you are receiving a fair price. One of the disadvantages of buying physical gold is that the spread is a form of commission, and being relatively high, means that the gold price has to rise just to break even on the transaction costs.

How to Buy Gold - Gevers Wealth Management, LLC Page 4 Here is a recent example of the spot gold price.

You can also buy gold in the form of collectibles or numismatics, typically pre-1934 coins. The difficulty here is that you are paying a large premium over and above the gold content for the rarity or scarcity of the coin and the condition of the coin. The price of a collectible is typically far above the actual bullion or melt value of the gold the coin contains. You really need to have expertise in the world of coin collecting, and most folks are probably better off sticking to the bullion types of precious metals. Gold or Gold Related Investments There are a number of different types of securities that an investor can hold in their portfolio to gain exposure to and participate in the precious metals markets. These investments typically come in two flavors. The first are investments whose price is somehow linked to the price of gold (or some other precious metal.) When the price of gold goes up, that investment may also go up, and of course when gold goes down so does the value of the investment. The second flavor is gold mining company stocks. A senior gold mining company's stock price tends to move in proportion to the price of gold. It is easy to understand why. Let’s say for example that ABC Gold Miners has an established mine with several millions of ounces of gold in the form of ore. It may cost ABC Gold Miners $600/oz. in production costs to extract, refine and bring the gold to

How to Buy Gold - Gevers Wealth Management, LLC Page 5 market. That cost is relatively fixed and may not vary too much. If the market price of gold is $650/oz, the gold mining company is barely making a profit. However at $1300/oz. the company could be extremely profitable. In general, when the price of gold rises sharply, mining companies make lots of money, and the stock markets often quickly recognize that in the form of higher stock prices. A rough rule of thumb is 1.5 to 2 times price movement in a senior gold mining company stock compared to the price of gold. In other words these stocks tend to go up more, and down more, than the overall price of gold. (A word of caution, these types of investments are quite volatile and subject to special risks. Read the prospectus carefully.)

For those of you who are aggressive investors, you may want to watch small and mid size mining company stocks. When large mining companies become successful and are flush with cash, they look for places to put that cash to work. It is easier for a large gold mining company to buy a smaller miner who has an established gold field, than it is for them to send out exploration teams with the hopes of finding something new. As a result the large miners tend to start buying those smaller companies. If gold prices remain strong, it is possible that there may be a powerful trend of acquisitions, a phenomenon that tends to be very favorable to the stock price of the smaller acquired company. There are a few investments that focus on small to intermediate mining companies and might make for an interesting part of a portfolio if that acquisition phenomena does occur.

What About Silver? Silver is often called the “Poor Man’s Gold.” It is somewhat unique in that it has both precious metal status, as well as a significant industrial demand. Analysts have written much about the skewed supply/demand circumstances in the silver market which favor higher silver prices. Just like gold, the price of silver has risen significantly in recent years. The methods and comments on investing in gold apply equally to silver as well. Silver just like gold is extremely volatile in price, perhaps even more so than it’s yellow cousin.

(A 2010 1 oz. Silver Canadian Maple)

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So What Should We Expect in the Future? Gold and precious metal investments have always been very volatile and investors have suffered or enjoyed dramatic price swings when investing in this asset class. I would not be surprised by a large drop in value over the coming year, nor would I be surprised if the price continued to rise dramatically. This is the perspective you may want to adopt as an investor as it relates to gold; If you observe the US Government change it’s ways and start to act fiscally responsibly by paying down debt, by avoiding deficit spending, by responsible money supply stewardship – then we as investors may want to reduce or eliminate our gold and precious metals allocation in our portfolio. However, as long as the US Government recklessly continues to print and creates new money, and goes deeper into debt, we may want to keep a healthy portfolio allocation to gold and precious metals, despite any price swings, as a form of financial protection. The price of gold and gold investments is greatly dependent on the fate of the USD I am hoping and cheering for the former scenario, and in the long run still believe our country will eventually return to greatness and fiscal responsibility. Please feel free to call us if you have any questions or comments. Warm Regards,

William R. Gevers Financial Advisor PS: We have been repeatedly asked by clients if they could share these e-mail notes with their friends or neighbors. Please feel free to forward this with the stipulation that it may only be forwarded if done so in its entirety with no portions omitted. We would be delighted to share our comments and opinions with your friends, and welcome your comments and feedback. If you received this and would like to be included on our newsletter list, please email us at wgevers@geverswealth.com

PPS: Have you ever wondered how other countries like China feel about gold? This short clip is worth http://www.youtube.com/watch?v=SbUvvfJakfI watching…

Copyright 2011 William R. Gevers. All rights reserved.

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Gevers Wealth Management, LLC I-90 LakePlace Center 1605 NW Sammamish Road, Suite 250 Issaquah, WA 98027 Office: 425.657.2238 Fax: 425.657.2138 E-mail: wgevers@geverswealth.com
The views are those of William Gevers, Gevers Wealth Management, LLC, and should not be construed as individual investment advice. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors can not invest directly in an index. Please consult your financial advisor for more information.

Securities and advisory services offered through Financial Network Investment Corporation, Member SIPC. Gevers Wealth Management and Financial Network are not affiliated.

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