What are the purposes of buying gold and silver?
First of all, to keep purchasing power in the long term. In times of constant inflation, money loses its purchasing power. Precious metals are said to be very good protection against inflation. Empirical research on data from 1791 to 2010 confirmed this opinion in the case of gold, but not silver1. Research over shorter periods, i.e. 1990 – 2016, gives different conclusions for different countries. Gold has proven to be a good protection against inflation, e.g. in Canada and the USA during the bear market, but in some countries, during the period under study, it didn’t turn out to be as good of a guarantee.2 Links to the research can be found on our website.
An interesting example is the fact that about a hundred years ago (1920s) for 15 ounces of gold, or about 300 dollars3, you could buy a new Ford (model T). Today4, as the spot price for gold is about $1580 per ounce, for 15 ounces of gold we can still buy a new Ford, of course much better technologically, but we can no longer buy it for $300.
Product selection
If you have decided that you want to buy physical gold and silver, you should choose a product. In the case of gold, it is worth focusing on the weight starting from 1-ounce coins or bars, and in the case of silver, from 1-ounce coins. 1 ounce is 31.1 grams. Why from 1 ounce? Firstly, the smaller the bar or coin, the higher the price per gram at the dealer. Secondly: 1-ounce coins are the most recognizable, the easiest to check their authenticity and the easiest to sell them in the future.
In the case of larger bars, the margin is lower, but it can be a problem to sell such a bar quickly because it is worth a lot due to the weight of the metal it contains. Precious metal dealers should offer an option to buy back their products from you, but it may happen that you want to sell them to a private person. It will then be difficult for you to sell a bar of great value, because of its low liquidity. In addition, the higher value of large bars, increases the risk that such a bar may be forged. Of course, we can significantly reduce the risk by buying from trusted dealers.
Another thing worth mentioning when choosing products is to pay attention to the type of coin. For investment purposes we should be interested only in gold and silver bullion coins and bars. We should avoid coins of numismatic and collector’s value. We should also avoid various limited editions. Such coins often cost much more than the metal they contain. It is also difficult to sell them later. For the same reasons, we should not invest in precious metals in the form of jewelry or even silver cutlery. It is only worth investing in numismatics if we have vast knowledge of these things.
The list of trusted gold and silver refineries can be found on the LBMA website, i.e. London Bullion Market Association, in the good delivery list section, to which we provide a link to on our website.
Among the most popular and recognizable investment coins are those for gold:
South African Krugerrand, Canadian Maple Leaf, American Eagle, American Bison and Austrian Philharmonic.5
Some coins, such as the Krugerrand and the American Eagle have admixtures of other metals to increase the durability of the coin, so they are slightly larger and heavier, but still contain 1 ounce of pure gold. So, it shouldn’t come as a surprise to you when you make a purchase.
In the case of bars, the solid producers are, among others:
Umicore, Heraeus, Valcambi and Rand Refinery
Popular silver investment coins include.:
Canadian Maple Leaf, American Eagle, Austrian Philharmonic and British Britannia.6
Price of gold and silver
When we check the current market price of gold and silver as a commodity on the Internet, we look at the so-called SPOT price. However, when we look at the price of a 1-ounce coin or bar, the price is higher. Why? Because the SPOT price is the price of the commodity. The price of a gold coin also includes the cost of minting the coin, the cost of transport, the manufacturer’s margin and the dealer’s margin. The price of a 1-ounce coin or ingot should not differ more than a few percent from the spot price. Clear information on how much the product costs above the SPOT price, both in amount and as a percentage, should be required when purchasing. It’s worth comparing offers from different dealers.
The margin over the SPOT price can be reduced by buying gold or silver in larger sets. For example, if we buy silver coins in a tube of 20 or 25 pieces the price should be lower per coin then when we’re buying a single coin. We will also probably pay more if we want to get the goods right away. When we are ready to wait for delivery, the price should be lower.
Choosing a precious metal dealer
It is important to have a trusted supplier of precious metals. It must be a company with an established position on the market, existing for some time and having a good reputation. If we want to purchase precious metals personally or anonymously, if there is such a possibility in a given country, of course the distance to the nearest branch counts as well. The dealer should also have good product availability. The price of gold and silver fluctuates quite strongly in the short term, so it is important to be able to get the product quickly when the price of the metal’s falls, as such a fall often does not last long. The dealer should also be ready to buy back gold or silver from us in the future (and declare at what price he will buy it back in relation to the SPOT price). This will mean that he is confident in his product and will make it easier for us to sell in the future without having to look for a buyer.
Safe storage of precious metals
The basic safety principle should be that we do not announce that we have any gold and silver. Just as we don’t announce that we have cash in our wallet.
There are several methods of storing precious metals. The most basic method is the so-called “land bank”, i.e. simply burying the gold in the garden or hiding it somewhere at home. However, this method carries some obvious risk, so it should be used – if at all – only for minimum amounts of metal needed “for the rainy day”.
Another option is to buy a safe, but this can be very expensive.
The next option is a bank safe deposit box. However, there are certain risks, such as lack of insurance for the contents of the deposit. Additional insurance can be expensive and difficult to obtain for precious metals in a bank deposit. Another danger is the lack of access to the metal outside bank opening hours (e.g. on weekends) and it is not possible to react quickly to large price changes during this time.7
When we have large quantities of gold and silver, it is worth looking at professional companies specializing in precious metal storage services.
Finally, it is worth noting that we do not give any recommendation or investment advice here, that you should buy precious metals. We are not investment advisors. Every investment involves risk. Each asset should be understood before purchase, its specifics known, and an informed decision should be made, preferably in consultation with a specialist.
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4 30.01.2020
