by Adam Taggart, Peak Prosperity:
Most people aren’t aware of the full range of options
I’m always surprised by how few people understand the options for buying precious metals. Even the very affluent.
I recently returned from a conference full of highly-qualified investors who “get” the economic risks we discuss here at PeakProsperity.com. And on multiple occasions, I was asked if I could demystify the purchasing process for folks who wanted to build a position in gold and silver.
It seems the precious metals industry does a bad job of educating the curious buyer, probably because each player has a bias towards their particular slice of the solution set.
I find myself guilty of assuming that everyone is as familiar as I with the full spectrum of gold-silver purchase options available. So to correct that, I’ve taken the time this week to detail those options out for the novice buyer.
So, if you’ve been thinking about converting some of your paper fiat money into precious metals but are unsure how to start, wonder no more.
Below is a primer of the main options available to you, and in which situations each makes sense to consider.
But before continuing further, let me make a few things absolutely clear. This is NOT personal financial advice. This material is for educational purposes only, and as an aid for you to discuss these options more intelligently with your professional financial adviser(s) before taking any action.
Suffice it to say, everything discussed in this report should be reviewed with your financial adviser before taking any action. Am I being excessively repetitive here in order to drive this point home? Good…
Getting Started: Bullion (Stored Locally)
The primary reason for buying precious metals is Armageddon insurance; to own a form of money that will still have purchasing power should our paper-based currency suddenly become valueless.
Don’t think that’s a risk in modern society? Just talk to someone in Venezuela or Argentina today. They’d gladly trade you millions of bolivars or tens of thousands of pesos for a single gold coin.
Which is why many believe it wise to have a stash (or “stack” in PM-parlance) of gold and silver, in physical form, that you can quickly get hold of in your hot little hands should a currency crisis arise.
Physical gold and silver is referred to as “bullion”. It’s most common form factors are coins and bars.
When buying gold bullion for your emergency stack, most experts recommend restricting your purchases to 1-ounce sovereign coins. These are coins currently minted each year by select governments around the world; most notably the Eagle (U.S.), Buffalo (U.S.), Maple Leaf (Canada), Krugerrand (So. Africa), Philharmonic (Austria), Panda (China), Kangaroo (Australia), and Sovereign (U.K.).
Why stick to the sovereign coins?
First off, they have a low premium to the “spot” price of gold. So you’re buying your gold at a good value versus most other options.
Wait. What’s the spot price? And how does that differ from the price I pay at the store?
The futures market sets the price of an ounce of gold (called the “spot” price) at any given minute of the trading day. Because it takes cost and effort to convert a lump of gold into a specific shape and then ship it to a dealer, the mints tack on an extra fee when they sell their products to precious metals dealers. Those dealers in turn add their own mark-up. The total price above the spot value that you pay at the store is referred to as the “premium”.
OK, got it. So my goal is to try to buy my gold for the lowest premium per ounce?
Yes, in general. And that’s why experts recommend sticking to the 1oz sovereign coins. If you purchase gold in increments smaller than 1oz, the premium per unit of gold increases sharply the smaller you get in size. And if you buy numismatic coins, the collectible value often results in large premiums over spot price.
You lost me again. What are “numismatic” coins?
Numismatic coins are coins that have collectible value. Generally, they are no longer minted today and exist in a secondary market where they’re traded between collectors. Those building their emergency gold stack should steer clear of numismatics — in a crisis, coins are likely going to be valued primarily for their gold content. Any collectible value could be easily discounted or disregarded altogether. Also, unless you have years of experience trading them, it’s easy to lose money or get plain ripped off buying numismatics.
OK, stick with the sovereign coins. Any other reasons why?
Coin dealers — the folks you’re going to sell your gold back to someday — are by far the most familiar with these coins over all other forms. They can spot fakes more easily. So, if you’re buying from a reputable dealer, you can have confidence you’re getting a pure product. And, when the time comes to sell your gold, if you’re holding it as sovereign coins, a dealer will be most likely to accept them.
What about silver?
Government mints also make sovereign silver coins. Those are fine to buy.
There are private mints that also make coins, which are referred to as “rounds”. These tend to have a lower premium to spot that the sovereign silver coins. But you need to be careful here. If you buy rounds, make sure to buy a brand that your local dealer recognizes and agrees to accept. Otherwise, when it comes time to sell, you might find he’s only willing to buy them from you at a discount to spot (or perhaps, not at all).
By far the cheapest way to buy silver is by purchasing bags of pre-1964 US coins (quarters, dimes, etc), aka “junk silver”. Prior to 1964, these coins were comprised of 90% silver. Today, dealers sell pre-weighed bags of these coins at very small premia over spot. Bags of junk silver also give you the option value that, should a crisis ever force us back to transacting in silver, you’ve now got small-increment coins with which to buy low-cost everyday items (bread, milk, etc).
But as every silver investor learns quickly, silver is heavy! And beyond a certain amount, it becomes challenging to store and transport stacks of coins/rounds.
Which is why those looking to own hundreds or more ounces of silver typically purchase silver bars. As with rounds, there are many mints that issue bars, but there are two brands that have been around for a very long time that dealers prefer to deal with: Johnson Matthey and Engelhard
All right, so where can I buy gold & silver bullion?
You can purchase sovereign gold coins from your local coin dealer or from an online dealer.
In both cases, deal with a firm that has been in business for years — ideally a decade or more — and has a well-respected brand. These firms have a reputation to protect and thus will be less likely to gouge you, sell you inferior product, or do anything shady/illegal. If possible, choose a firm recommended by a longtime gold buyer who’s opinion you respect.
There should be no product quality difference whether you buy sovereign coins from a local or an online store. But there is an important advantage to buying from a local dealer: the relationship.
It’s highly valuable to have a local dealer who knows who you are, values your patronage, and knows that he sold you good product. In a time of panic, bullion supply can quickly dry up — as it did in supreme fashion in 1980, when coin shops had lines around the block of people desperate to exchange their dollars for gold. In that kind of limited inventory environment, being on a dealer’s “preferred customer” list — getting first access to restricted supply if you want to buy more, or receiving discrete VIP treatment should you want to sell — will be a tremendous advantage.
And a local dealer can be a font of useful intelligence and advice. Good dealers have their finger on the pulse of the PM market: are people net buyers or sellers? Are inventories tightening/expanding? Are premiums rising/falling?
Also, they can advise you on your purchases. For example, if you buy less than $1,000 worth of bullion in certain states, the transaction is subject to sales tax. Similarly, transactions over $10,000 are required to collect personal information from you to protect against money-laundering. An informed dealer can guide you to a purchase amount where you avoid both.
A quick Google or Yelp search should be able to identify the nearby coin dealers in your local area. But as mentioned earlier, if possible, it’s better to select one based on a recommendation from an experienced bullion buyer who’s opinion you respect.
How much gold and silver should I buy for my Emergency stack?
This is one of those uniquely personal decisions that a general article like this can’t give you a specific dollar amount for.
The right answer is: Consult with your professional financial advisor to determine the amount that best suits your risk tolerance and goals.
But time and experience has proven that an effective rule of thumb is: Whatever amount lets you sleep well at night.