The Basics of Buying Gold and Silver
The Basics of Buying Gold and Silver and Other Precious Metals
Precious metals commodities like gold, silver, platinum, and palladium all have a global value. The universal understanding of their value is part of their appeal and why many choose to purchase precious metals as an investment. Today most governments around the world and their Central Banks hold large reserves of gold, especially as the world currencies are resetting to all gold back paper currency that are valued based on a spot price “per gram” of gold value published by the International Monetary Fund (IMF) with regard to its Standard Drawing Rights (SDR).
Unlike paper currency, gold has a 4,500-year history both as currency and as a long term investment. If that isn’t reason enough to invest, consider that most banks typically hold a healthy portion of their reserves in bullion that is grated or rated by the American Numismatist Association (ANA) in no less than almost uncirculated (AU) or better gold coins, bars, wafers, or ingots as part of a bank’s total cash reserves.
The spot price is the real time price at which gold in its raw form, also known as a commodity can be bought, sold and delivered immediately right now on the spot. One ounce of the alloy equals 31.1034768 grams. Additionally, the latest international Basel III banking rules require gold (bullion, bars, wafers, ingots) held by banks to be considered part of a bank’s Tier 1 deposit reserves (part of the capital adequacy that is sufficient enough to withstand unexpected financial shocks as part of the Basel III framework) under the January 2015 Frank Dodd Banking Law currently in place.
Why Do Banks Hold Almost Uncirculated AU Gold Bullion?
First, AU or better graded bullion coins, bars, wafers, and ingots hold their value because there is very little to no loss of any of the full true gold alloy content in the gold held. They are very recognizable and easy to sell if needed. Sovereign gold coins, bars and ingots are held because they can be purchased close to the spot price. Wafers are mostly used in jewelry making and come at a high premium above the spot price due to their ability to be broken up in very small denominations.
There are forty gold exchanges around the world that make up the international gold exchange market. However, of these, the four most important ones are: London, England, the United States, Zurich Switzerland and China’s Hong Kong exchange. Prices for precious metals commodities can be found on the gold market sites used by gold dealers around the world. The most influential on price is the London market.
Second, history suggests that paper currency-dependent society will eventually collapse. As a general rule, holding gold and silver as part of one’s total portfolio are considered to act as an insurance policy (an inflation hedge and flight to safety against total loss) should the value of paper cash decline or plummet.
Financial guidelines generally state that there is a place for gold, silver and other precious metals within each individual investment portfolio, starting at five to usually no more than 25 percent of the total investment portfolio’s value.
As an investment, gold and other precious metals do not pay any dividends or interest when you own it. It is strictly a safety play from an investment stand point against the worst case scenario of total loss. Please note that gold clad commemorative coins are not gold. Gold Plate is gold electroplating. Vermeil is 22 to 24 Karat gold plating over Sterling Silver. Gold filled is 1/20th of the total metal weight rolled in gold.
Everyone’s financial position is different, so always seek professional advice regarding your own investment strategy. It should be noted that gold prices are inversely related to the Federal Reserve, and Central Bank policies, and to the different general, geo-political, geo- physical, and market events, and requires prudence when investing in precious metals.
A Starting Point for Purchasing Gold or Silver
Philip Barton of The Gold Standard Institute International suggests breaking your quest for gold or silver into two steps:
- Accumulate your core position – Determine the minimum amount of gold and/or silver that you want to accumulate and work toward that goal.
- Build from your core position – Once you have achieved your core position attempt to read the market by selling and buying at optimal times. Using a dollar cost averaging investment strategy often works best.
In step one, the goal is to purchase gold, silver and other precious metals to “get your feet wet.” In this stage pay little attention to the market and focus on not getting ripped off.
There are different ways to buy and sell metals: as wafers, ingots, bars and coin bouillon per ounce price and a fee, as a currently minted government gold coin bullion with a currency value attached to each coin by the government plus a fee. American coins are available and can be ordered directly from the American Governments official site, the United States Mint, major banking institutions, gold dealers, and gold brokerage houses. Remember, banks also buy gold in addition to the gold dealers and gold brokerage houses who sell it to you. The United States Mint does not buy gold. So make sure you shop around before you buy or sell.
As for pre 1933 dated bullion coins, they are available at the spot price of gold plus a higher premium fee that varies based on the ANA numismatists value Grade for each individual coin based on its rarity and condition rating. These coins come in value weights of 1oz. and in smaller denominations of fractional gold ½, ¼, and 1/10 of an ounce. They are 90 to 95 percent pure gold weight, and under current law they are said to be non-confiscatable. Please remember, current law and future law could be different so one should always check the current status of each coin. These coins are available directly from coin dealers.
Deciding which coin to buy, you should consider whether or not the coin you are buying is taxable and by how much if you were to re-sell it and how much you actually could re-sell it for. Often purchasers give you less than you bought it for. That is why banks purchase pre 1933 era bullion coins in AU condition. In general they don’t buy based on the numismatist value, rather they buy on the investment value of the gold alloy.
Finally every coin denomination has a different actual gold alloy content. Coins can be purchased from one tenth of an ounce to one ounce in 22 to 24 Karat gold. Depending on whether the coin is American or other world coins, each coin’s gold alloy weight can vary in a range from 99.9% pure for world bullion coins that are minted by sovereign countries and are legal tender and pre 1933 1oz. and fractional bullion which have 95%, 90%, gold content.
In step two, your moves should become strategic. By focusing on the trends of the market you can attempt to acquire more gold/silver at peak times when the market is low thus dollar cost averaging your purchases over time. For example: You buy 10 pieces of gold over time, all at different prices. That total amount of your purchase is then divided by the 10 pieces of gold to reveal the true average price you paid per item of gold based on the current price of that gold per ounce.
Purchasing Gold and Silver
The American Government’s United States Mint provides a locator tool to find bullion coin sellers near you. Although the companies on this locator are not affiliated with the United States Mint they are generally considered legitimate dealers. Until you’re comfortable estimating and identifying gold and silver, always purchase from a reputable dealer.
Everything valuable has a market that is motivated by exploiting novice buyers. The precious metal industry is no different. The potential for scams by local dealers and online sellers is great, so do your homework and only purchase when you are confident in the product and the price. Purchase a gold testing kit, and magnet as gold and silver are not magnetic.
Determining a Fair Price
Precious metals are measured in a troy ounce, which is equivalent to about 31 grams (approximately) 31 old pre 1960 solid copper pennies in weight in uncirculated condition, approximately 10 percent more than a traditional ounce. The value of gold is, in part, dependent on the market. The numbers fluctuate daily based on financial market conditions, but typically one troy ounce of gold is worth in 2015 between $1,000 and $1,500.
When purchasing from a dealer you can expect to pay a premium for things like storage, security, transportation and dealer profit. The amount of the premium will vary depending on the dealer. Don’t walk away from a deal because there is a premium, walk away from a deal because there is a high premium. Remember, when buying gold, even pre 1933 coins, you are always trying to buy as close to the spot price as possible. Common pre 1933 AU grade coins tend to be closer to spot as they are not rare and the numismatist value is usually lower on the coin.
Storing Your Precious Metals
The cardinal rule is to never tell anyone you store gold and silver at home. No one needs to know you own gold or silver and while you might not think they care right now, when and if the market crashes you won’t want anyone to remember that conversation and pay you a visit.
Never leave the metal with anyone else. It is not uncommon for people to bury metal in their backyard. Iron shavings can help throw off thieves with metal detectors. It is a smart strategy to bury your main stash in one location and a smaller portion in another location. If you are ever robbed you can dig up the small stash without being wiped out of your entire investment.
Diversifying Your Portfolio
Precious metals have their place in a savvy investor’s portfolio. In its many forms, gold and silver can be acquired over time and prove to be a long-term investment that withstands the test of time.
Note: That 188 countries around the world have been working toward a “global currency reset.” Resulting in the Standard Drawing Rights (SDR) basket replacing the U.S. dollar as the world’s reserve currency based on a gram of gold. The SDR is a basket of different currencies used as an exchange rate measure by the IMF to determine the value of each sovereign countries currency
Please remember, this is only an overview of things to consider when buying precious metals. It is not investment advice. Please consult your own investment adviser for your personal investment strategy.
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