GOLD -- AND THE SWISS METHOD OF ACQUIRING IT Gold is a traditional means of inflation protection. Some investors have been disappointed with the performance of gold in the past decade, but they are forgetting the primary purpose of gold as an inflation hedge. There has been very little inflation in the American economy in the past decade -- so there has been nothing to be protected from. This does not mean that gold has been a bad investment. The proper comparison is not to other investment performance, but to buying life insurance and not dying. The gold did exactly what it was supposed to do in the investor's portfolio -- provided a store of value with inflation protection. An investor who is paying attention to the current price of gold is completely missing the point. Gold is the most effective protection of purchasing power. This is illustrated by comparing its value today with its value in Biblical times. From the Old Testament we learn that during the reign of King Nebuchadnezzar, an ounce of gold bought 350 loaves of bread. An ounce of gold today will still buy about 350 loaves of bread. Speculators have often lost badly with gold, but that is true of any speculation, and is not because of some inherent characteristic of gold. This speculation is very different from the proper use of gold in an investment portfolio, as a way of achieving balance, diversification, and inflation insurance. To put an entire savings program into diversified paper investments, without a gold diversification, is not a truly balanced plan. The security of the Swiss franc is one step in that diversification, because of its strong gold backing, and its traditional strength as a currency. But only a step. The next step is to also diversify some of the portfolio into a pure gold investment. Every paper currency buys less than it did at the turn of the century, but gold buys almost two times more. That is true inflation insurance, and has nothing to do with overnight speculations on a belief in short term price trends. There is nothing wrong with speculation, but it should not be confused with balancing the portfolio. In fact, a small percentage of any diversified portfolio is devoted to speculation. As we have seen in the history of money section, paper money inevitably declines in value and purchasing power. In an era when most governments have legally freed themselves from any requirement to act responsibly or tie their paper to real assets, This makes it particularly important for the investor to create his own "reserve fund" since the government's paper money no longer is required to have one. For thousands of years, gold has been man's premier store of value, more trusted worldwide by individuals than any paper investment or paper currency. Gold cannot be inflated by printing more of it. It cannot be devalued by government decree. And, unlike paper currency or many other kinds of investments (such as stocks and bonds), gold is an asset which does not depend upon anybody's promise to repay. Although gold has been mined for more than 6,000 years, only about 110,000 metric tons have ever been produced. If you could bring it all together, that is just enough to make a cube measuring only 18 meters (approximately 55 feet) along each side. Gold is one of the scarcest, and so most sought-after, metals on earth. Gold cannot be fabricated by man. Nature limits its supply. The amount of new gold mined each year totals less than 2,000 metric tones -- an amount that could be fitted comfortably into the living room of a small modern house. Throughout recorded history, gold has held its value against inflation. Experts say, for example, that the same quantity of gold is needed to buy a loaf of bread today as in sixteenth century England. This is why so many investors world-wide see it as the "ultimate asset" -- an important and secure part of their investment portfolios. Gold has an international value that tends to respond to the changes in value of national currencies. Time and again, gold has proved a successful hedge against the devaluation of an investor's national currency. Gold is one of the few investments that has survived -- and even thrived -- during times of economic uncertainty. Gold is man's classic hedge against almost any monetary crisis, moving independently of paper investments. For example, in the slump following the "Wall Street Crash", from September 1929 to April 1932, the Dow Jones Industrial Index slid from 382 to 56 -- a drop in value of 85% -- and some 4,000 U.S. banks closed their doors. Meanwhile, the price of gold actually went up. Gold also increased in value during the events following "Black Monday", October 19, 1987, when the Morgan Stanley index of world shares fell 19% over 10 days. And during the mini-crashes which have afflicted the stock markets since then, gold has held its value and ignored the travails of share investment. Investing in Gold Bullion Coins Although many numismatic gold coins have been purchased by investors, most investors think of gold bullion coins when they think of investing in "gold coins". And bullion coins are favored by many investors who want physical possession of their gold. The popularity of these coins and privately minted coin-like medallions can be attributed to their small size, convenient weights, and easiness to store. The "typical" gold bullion coin is legal tender of a nation and its gold content is guaranteed by the issuing nation. It bears a face value that is largely symbolic because its market value depends totally on its gold content. If you invest in gold bullion coins, or in privately issued coin-like gold medallions, pieces, or "rounds", it will be easy for you to keep track of the daily value of your holdings because many of the most popular gold bullion coins and medallions contain one troy ounce of pure gold. And the price of one ounce of gold is reported daily in most newspapers. Other bullion coins have been minted in easy fractional weights such as 1/2-ounce, 1/4-ounce, and 1/10-ounce. Among the countries issuing bullion coins are South Africa, Canada, Mexico, China, Great Britain, and the United States. Bullion coins normally sell for a 3 to 15% premium over the bullion value of gold, but a large part of this premium may be recovered at resale. The premium of gold coins is justified by their ready divisibility, convenience, portability and marketability. While many gold investors would prefer to keep all of their gold coins at home or nearby, other strategists keep only sufficient coins for immediate needs after a political or civil disaster, and the cost of tickets for the entire family to get to Switzerland, and keep the rest of their coins in a safe keeping arrangement with a Swiss bank. (The Swiss banking services chapter discusses this in more detail.) Gold Accumulation Plans -- Economical Way of Enjoying Ownership Gold accumulation programs allow the investor to enjoy all the benefits of investing in gold without the responsibilities and costs of handling and storage. An accumulation plan is an organized method of buying gold purely for the investment and inflation insurance aspects of gold, and does not involve gambling on coin collecting values, or other gimmicks. It is designed to be more efficient and more economical than buying gold coins for their bullion value. A monthly accumulation plan is based on cost- averaging, rather than trying to outguess the market. It is designed for simple and systematic savings -- for example, an investor might decide to put $250 per month into gold. That $250 is going into gold every month, regardless of what the market does. In the long run the gold cost will be less than the average market price in the same period. This is called cost- averaging. It requires no market expertise from the investor -- just the dedication to make the same fixed investment each month regardless of the market. (In fact, some investors make a point of not looking at the market price.) A similar technique is used by stock market investors -- the cost-averaging principle is the same regardless of what is being bought. A fixed dollar amount is being invested every month, rather than buying a fixed unit such as one share or one ounce. Buying gold through accumulation programs can provide you with a number of advantages. You can make purchases at any time. Your order will be combined with other orders received that same day, and will be executed the next business day. Since your brokerage house or bank buys and sells in the wholesale bullion dealer market, you are assured of competitive prices. Because you are investing by the dollar amount and not by the ounce, your purchases are made in whole or partial ounces. And you pay discounted commission rates that are up to 40% less than a regular broker charges on transactions. Your gold is stored in major depositories and is fully insured. Your record keeping is done for you, and you will receive a confirmation of each transaction and a periodic summary statement. While you leave your gold in an accumulation program, you do not have to pay state or local taxes. You can liquidate your accumulation plan holdings at any time. And when you do decide to sell, you will avoid paying costly assaying fees for weight and purity testing. GoldPlan -- The Swiss Gold Accumulation Method GoldPlan is an investment account created by UberseeBank, a medium sized Swiss bank which specializes in investment management. The bank does not engage in general commercial banking or in lending to corporations or foreign governments, so it is not exposed to such risks, nor does it have any conflicts of interest with managing the investor's money for best results. Founded in 1965, the bank now serves over 12,000 clients, managing funds of almost US $3 billion. It is a wholly-owned subsidiary of American International Group Inc., one of the largest insurance holding companies. AIG has assets exceeding US $45 billion and capital of US $8.3 billion. It employees 33,000 people in over 130 countries. Uberseebank handles the GoldPlan accounts, sending detailed statements on each purchase of gold made for the investor. By purchasing in this manner, the investors benefit from the bank being able to buy at wholesale prices normally available only to large purchasers. In turn the investor pays no extra fee on small unit amounts nor the regular spread charged when buying and selling gold. These savings can be as much as 3% because of the wholesale price, and another 8% by not having to pay small order surcharges. When added to the 20% savings that is often typical with cost- averaging, the investor is able to build the gold portion of his portfolio in the most economical way. Naturally, such accounts are treated with the same secrecy as any other Swiss bank account. Each investor's gold is held separately by the bank, in a fiduciary (trustee) relationship. This is important, because it means that the gold is always the investor's property, and not merely a gold denominated obligation of the bank. Thus solvency or credit standing of the bank can not affect the investor's holdings, although a bank failure in Switzerland is almost unimaginable even with a commercial bank -- and UberseeBank does not even assume commercial risks. Of course the gold is insured as well as guarded, and the investor has a choice of having it stored in Switzerland, the United States, or Canada. GoldPlan accounts can be tailored to the investor's needs. One may want to invest more money to achieve the diversification goal more quickly than originally intended. Flexibility is the keyword in the operation of these accounts. The investor can suspend monthly purchases at any time without penalty. Account possibilities range from monthly purchases to large lump sum purchases, depending upon the individual investor's needs. In deciding how much of a portfolio should go to each type of investment, it is best to ignore the existence of the personal residence or a personally owned business. These are not really investment assets, and serve a different purpose. They do not provide ready access to capital for either growth or emergency funds. To achieve a properly balanced portfolio, it is better to diversify based on only the liquid investments. Otherwise one can find that the picture has become unbalanced, by including a very large part of the wealth in a non-liquid position, and counting that as part of the diversification. For more information on GoldPlan, write to: JML Swiss Investment Counsellors A.G. Germaniastrasse 55, Dept. 212 8033 Zurich Switzerland telephone (41-1) 363-2510 fax: (41-1) 361-4074, attn: Dept. 212.