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Author: Gold Why Webmaster
Date: June, 2011
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Hey everyone! Another exciting Gold Why question today, one about stock brokers and gold. If you've been reading Gold Why for a while, you may know that I'm not only a fan of gold, silver, and copper bullion, but I'm also a stock investor. I mostly invest in stocks for cash flow. I'm talking about high dividend stocks in companies that offer a recession proof product (such as electricity). I've also invested in shares of gold mining companies and also gold ETFs (exchange traded funds). I'm really excited about today's question because it brings the concept of the stock broker into the mix and why the average stock broker may have certain biases. (Side note: There's tons of great discussing happening on the Gold Why Facebook Page. Please make sure to step by and like me if you're a fan of Gold Why!)

Question: What does a stock broker lose when recommending gold to a client?

Answer: I love this question because it's somewhat loaded and for good reason. Let me say up front that a good financial advisor can really help you out. Even though I consider myself an expert when it comes to financial products - mortgages, insurance, stocks, bonds, 401ks, gold, silver, and more - I have personally learned a lot of what I know from great advisors and mentors. Unfortunately, however, there are stock brokers and financial advisors out there who are biased. To quickly answer this great question: A stock broker can lose commissions when recommending gold (physical, allocated gold bullion) to a client. To fully understand this, let's talk about the different types of gold ownership.

Physical Gold (Allocated) Vs. Unallocated Gold Vs. Gold Mining Stocks

There are a few different ways to own gold. The first one (my favorite by far) is purchasing gold bullion in the physical form. This is gold you can hold in your hands, hide at home, store in your safe deposit box, or store with your gold dealer that offers allocated gold storage (they basically store your gold in their safe, but earmark the gold as yours). This is the best way to own gold, by far. You know for certain that the gold coins (and bars) exist and that they're yours. This is called allocated gold and is where I recommend every single gold investor start. When you buy gold in the allocated form (the best way to own gold), your stock broker loses out. Why? Stock brokers don't sell allocated gold. Allocated gold means you're taking money out of your brokerage account and buying gold via another channel such as a great company like Blanchard, GovMint, or Monex. Stock brokers are incentivised by commissions. Allocated gold means they get less commissions. Even if your stock broker tells you not to buy allocated gold, don't listen to them! Do your research, here on Gold Why but also on other reputable, unbiased gold websites. (Helpful article: Check out my recent article about buying your first gold coin.)

Unallocated Gold and Gold ETFs

The second way to own gold is unallocated gold. The most popular unallocated gold fund is the gold ETF (exchange traded fund) called GLD. Some gold dealers also offer unallocated gold accounts too. I recommend started out with physical, allocated gold. Once you have a solid position, you may want to consider a gold ETF or unallocated fund with our gold dealer. The problem with unallocated gold: You never really know if the gold is truly there. What if everyone sells their shares the same day? Do they truly have all that gold in their vault? Unallocated gold and gold ETFs are a great way to supplement your physical gold, but are not the place to start, in my opinion. Since you can buy gold ETFs through your stock brokerage accounts (and they are so popular with investors), stock brokers are incentivised to hype up these products as the best way to own gold. My advice: These are good products, but are not the place to start. Resist the hype. Build up a huge position of physical gold bullion. Then, and only then, consider unallocated gold.

Gold Mining Stocks - It's Not The Right Time, Especially For New Gold Investors

The last way to own gold is by investing in shares of gold mining companies. If you're new to gold (or don't have a large position built up), I'd recommend waiting on this avenue of gold ownership. Why? I think the easy gains are gone. When gold was down in the $300-400/ounce range, these stocks went up very fast. The profit margins of gold mining companies went from negative to positive. The price of gold (on unhedged gold miners) had a great bearing on the profit margins of these companies. As such, the stocks went up fast. Now that the price of gold is at $1,500/ounce, any further price increase will have less impact on the profit margins of these companies. The easy leverage is gone and I feel a lot of the upside is priced in. Also, this stuff gets a lot more complex than owning allocated and unallocated gold so it's best to venture into gold mining company stocks when you're seasoned. Unfortunately, stock brokers may push these types of stocks on new gold investors because you can buy them in your stock brokerage account! Resist the hype. Want to learn more? I recommend checking out my article about why it's not the right time to invest in gold mining companies.

Wrapping Things Up

There you have it! Three ways to own gold, one clearly better than the others that goes directly against your stock broker's bottom line. I'd like to close out today by offering some simple advice that has taken me really far: Don't rely on just one source of information. Whether your source of information is your stock broker, your financial advisor, your tax person, or even me (Gold Why), one source of financial information is never enough. Rather, go out there and become an expert. Seek mentors and advisors across all the financial products. Read all the great websites (like Gold Why, but also others too). Then, formulate your own opinion. I believe you will quickly conclude the very opinion I have highlighted in this article - the fact that stock brokers are incentivised to avoid recommending gold and/or recommend non-ideal gold investment vehicles. That said, let's say you do all your research and conclude that ETFs are the way to go! Then, by all means, trust your gut. It's your hard earned money and it's up to you to make the best financial decisions. It's this very reason that I actually don't even have a stock broker at this point. I simply log into my own account and call the shots. Once again, awesome question and my sincere thank you for supporting Gold Why!

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