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There are lots of ways to get your money into gold and silver. Each has pros and cons, and it is more important than ever that you are well-informed.
Bullion Coins
This is my preferred choice for current times. Commission costs are small. Common bullion coins are easily sold, often to dealers or even via local classifieds or Craigslist. But where you buy matters. Prices can vary from dealer to dealer by as much as 5% or even more. You will generally have to pay in cash (if local) or wire transfer. For any dealer giving you competitive pricing, the cost of credit card processing is just too high. If your dealer takes credit cards, you are WAY Overpaying. More on sources at the end of this article. Storage can become an issue if you are buying large quantities. But in the case of gold, 100 coins (or five rolls of 20) is a small little package (maybe 8×1.5×2 inches) and has a value of $135,000 or so. Easy enough to hide in a sock drawer. A case of silver Eagles (500, or 25×20 coins) is bigger (10x10x2 inches?) and only stores $15,000 of wealth. Even 10 cases (5000) of silver coins is not THAT big, but is noticeable.
You could put them in a safe deposit box, and that is the traditional suggestion. But you may be running some additional risk of confiscation (more on this later).
ETF
ETF’s are liquid. You can buy and sell them in seconds inside any stock brokerage account. But they have some drawbacks. Biggest is taxes. Unlike a regular ETF, precious metals ETFs are treated differently by the IRS, and you will have to pay income taxes each year whether you sell them or not. Additionally, they are treated as regular income, not capital gains, so you pay a much higher rate. Before you buy any ETF’s, speak with a tax advisor to determine which rules affect you and whether they have been changed since I last checked them.
Gold ETF’s have some special concerns. There have been rumors for years that the GLD is not holding as much gold as they are supposed to have. Can you spell “fraud”? Even more disturbing, the gold ETFs were growing so fast a few years ago that they did not have time to verify what they were buying. Stories of them buying gold-plated tungsten abound, and again this will not become obvious until they try to sell this stuff. Even more scary yet, GLD does not have to hold gold at all. They can have your money invested in “gold investments”, which basically means derivatives, options, and futures contracts. If you want to own gold and silver as protection against a financial collapse, GLD and their cousins will be the first ones to fail in a market meltdown. ETFs may sound good in theory, but they do not provide the protection you should be seeking. Run Away.
Gold Mining Stocks
Owning some mining stocks may be a good idea. They provide some protection against outright confiscation, since you know that they will be exempted. But the companies themselves can be nationalized, or individual mines can be taken. So you have to look at WHERE the company has it’s mines and be aware of political risk. In addition, you are buying a company, so have all the risks and challenges that entails. Lower earnings. Fraud (ala ENron). Rising costs. Bad management. Hedging programs can make companies insensitive to the price of gold, so buying a gold miner may not give you the appreciation you expect. And watch out for leverage – mining stocks tend to move faster than the metal, up AND down. They are not bad investments, but you have to do your homework and you have to understand exactly what you are buying.
Junior Mining Stocks
Junior Mining Stocks have the all the drawbacks of senior mining stocks. Plus they are VERY speculative. They may or may not have any proven reserves. They might not own a single truck or hard hat or single ounce of gold. Even in good times they trade based on rumors and gossip. As a group, they are one of the most fraud-ridden areas of the stock market. And they are not for casual or even most professional investors. Be especially careful of junior miners that do not trade on a U.S. exchange. But the best advice is just do not mess with them at all. You can have more fun losing your money in Las Vegas, and at least they will comp you a cheap buffet meal.
Commodity Futures
Not for the timid. This is the “market”, where price discovery happens and where all other gold pricing is based. To trade in it, you just need to open a commodities account. The big risk is leverage. You can buy a single gold futures contract with about $3800, and you control 100 ounces of gold. That means you have about 3% of the contact value amount. If gold goes up by $38 an ounce, you have doubled your money. If it goes down by $38 you are wiped out. And believe me, gold can move a lot more than $38 in a single hour during a selloff or panic. It is a good market, and reasonably fair, but you REALLY need to have some sophistication to play here. Not for the neophyte.
Collectible Coins
Coins are pretty. They are fun to look at and to collect. The biggest issues I have against them as an investment are price and liquidity. Prices can vary way more than bullion coins. The same coin might be listed in a coin price list as valued at $100, but be available for $50 or $125. They always trade a significant premium to melt value, yet the sellers mention “melt” quite often when trying to convince you they are good investments. It’s true that a collectible coin will always be worth at least melt (well almost always). But the value may have to double just to break even. When I make an investment, I don’t want to wait for it to double just to break even. In addition, when you want to sell a collectible, you have to go to a dealer or find another collector in order to get some part of your premium. Dealers typically work on a 25-50% markup, so that $100 coin that a dealer is selling at $50 might only be worth $30 when you are ready to sell it.
This is a very specialized area. People who are serious about coins live and breathe them. There is no logic, it is completely about special cases. One year can be worth 1000 times another one, and the only way to know is to know. Catalog prices are at best a general guide, but not very useful. Unless you want to become serious about this market and learning about it (10-20 hours a week for a year might get you started, for 20 years is better), my advice is to stay away as an investment.
But coins are pretty. Buy some if you like to look at them, as they certainly are better than most artwork. They make great gifts, especially for children. If you are a silver buyer, there is something special about having a complete set of American Silver Eagles in MS-69 grade. As bullion, you could buy these 26 coins today for about $860. As collectible certified coins, one company is offering this exact collection for $1450. right now. Or maybe you want a nice collection of coins from the various countries. Some are very beautiful as art. These are pretty and nice to show off to your friends, and bullion is NOT. But for real save-your-ass investing, stick with bullion. The coin collection goes to your grandchildren in your will, so you don’t have to know what it cost you.
Jewelry
Jewelry is the traditional way for lower-income people to own a little bit of gold. The dual-use nature of jewelry lets them buy a gift and make an investment at the same time. This is very true in third-world countries, and a big part of the culture in India and China. It is a way to have an asset in a country that generally discourages that or periodically confiscates it all. Not even the most stupid dictators would try to take a womans wedding rings!! But you can only wear so much at a time, or you end up looking like a Calcutta hooker or LA pimp daddy. So its good in small amounts, but not larger. And you have a big difference between price and melt value, so as an investment it doesn’t really work. If you disagree, go buy some jewelry and take it immediate to a “cash for gold” place to see what they will pay you.
Other Comments
Confiscation is a concern for a lot of people. The US government did it in 1933, and this president seems to worship FDR. I have always thought it was over-the-top to think they could do it again. But some really smart people think it is inevitable, so I have to seriously consider it. One scenario has the government requiring all citizens to redeem their gold for cash. Likely they will pay you at (or even above) market rates. Once they have all the gold in their possession, they can take the USA off the floating exchange rate system, declare gold to be worth $20,000 an ounce, and they are back in business with a gold-based dollar (albeit one that is devastated in terms of purchasing power).
The legal way to avoid having your gold confiscated is to get it out of the country ahead of time. If you live near the northern border, take a ride to Canada and open a safe deposit box. If you have a home in another country, store it there. You can also open a depository account or a gold based account in many countries. There are two types. With one (unallocated), you have a part-ownership in a generic pool of physical gold. But you can also have what they call an allocated account, where you have ownership of specific gold coins or bars. An allocated account is more expensive, but there is no risk at all. With an unallocated account, it is conceivable that if the depository institution goes bankrupt you may be part of the general creditors and waiting in line for your payout. You need to pick your institution carefully. One that is well known and safe is The Perth Mint. http://www.perthmint.com.au
Your other alternative is to have physical possession of your gold, not in a safe deposit box. You can bury it in the backyard or hide it in your sock drawer and just wait out the prohibition on gold ownership. The last time they did it, it lasted 40 years.
My own take is that complete confiscation seems less likely than in the past. Last time they exempted collectible coins, and that is a lot fuzzier line this time. Is a proof coin collectible? How about foreign coins like Pandas? If a coin has been graded by a coin grading service, most anyone would consider it to be collectible. Of course they could try to get the collectible coins as well, since the government can and will do anything they can get away with. In my mind, the most likely outcome is that they nationalize the ETF’s. Why spend a lot of time going after coins one at a time when the GLD ETF has 10,000 tons of gold in it’s possession? They could almost double official reserves in one swoop, without getting out their guns. They just pay off shareholders at market (which is ultimately all an ETF owner can expect anyway), collect their taxes, and move on.
More on Bullion
So as you can see, for that SHTF money, physical bullion that you can hold in your hands is the superior investment for most people. You have several options for buying gold and silver bullion.
Preservation of Wealth
I discovered this company a short while ago. Preservation of Wealth (POW) is a buying club, with wholesale prices available to their members. I have found their prices to be as good or better than anywhere else, and without the big minimum purchases required by the big dealers. Current pricing is $52 over spot for an American Eagle. They also sometimes have member specials as low as $25 over spot. You can buy a single coin or a thousand. In the interest of full disclosure, once you are a member you can earn a referral for each member that you refer. Refer just a couple of people and your membership is free. Look over the details and join if you see how it makes sense. Once you become a member, share your own link with your friends and earn the referrals for them. If you refer a lot of people, you might even make some real money. Use it to buy more coins. LOL.
Tulving.com
There are several national dealers that have very good pricing. One of the biggest in Tulving.com They always have the most competitive prices for both buying and selling, and list their premiums over spot right on their website. But you have to be a quantity buyer. That means a minimum of 500 ounces of silver or 20 ounces of gold at one time and of a single type. No mix and match. If you want big quantities at one time, these are the guys to check out. Yet POW has the same pricing (sometimes cheaper) without the minimums. The difference is POW has an annual membership fee. Check the Tulving website, then call POW for a fair comparison.
Traditional Dealer
There are two groups. National dealers and local dealers. But essentially the same rules apply. Prices will vary a lot from dealer to dealer, and sometimes from day to day. Today’s price may be $75 over spot or $125 over spot, but that changes at the whim of the dealer, possibly based on their inventory or their cost basis or if the rent is due. You have to do lots of price research if you want to buy from them, and do the same research every time. The other issue I have encountered is that when prices drop, small dealers are mysteriously out-of-stock, and you just can’t buy bullion at good prices. It can be extremely frustrating to have a buying plan in place, have prices drop to your target, only to have dealers lock up their inventory while they await higher prices. This caused me to miss a great buying opportunity when gold was at $700-$750 in 2008. It is why I went on the hunt to find Tulving (and now POW). This issue is not a problem at Tulving or POW. They just ride the market wherever it goes and keep on selling.
Local Classifieds / Craigs List
This is NOT a reliable source of coins, but you may get lucky. Your goal in buying or selling here is to take out the middleman (dealer) and split the difference with the other party. So let’s say a gold eagle has a $20 spread between market buy and sell prices. You can save $10 an ounce by seeking out these people. Or you may get even better prices if you are dealing with an unknowledgeable seller and you can convince them your lower price is a good one. Or you may find someone who wants to sell for cash and does not want a paperwork trail. The new health insurance law requires dealers to issue a 1099 for basically anything they purchase, so someone trying to avoid taxes may give you a nice deal. If you run an ad looking to buy gold, people will call you with all kinds of oddball things including private mint medallions, plated souvenir coins, and clads. You have to be very careful of fakes. They will usually think their oddball coins or fakes are worth way more than reality. You may find yourself driving around town and meeting strangers with a lot of cash in your car. Be security-conscious. I don’t have an opinion about any of this. Just be knowledgeable whatever you decide.
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