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- Questions about gold
- Why buy physical bullion?
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Gold and silver are not an
investment - The coins I buy
I’ve been receiving
a steady barrage of questions from readers wanting to know about buying gold
and silver.
While I’ve been answering many of these questions in a
piecemeal fashion throughout issues of the Resource
Prospector, I thought I’d once and for all cobble the
information together in one place.
Like anything, if you’re just getting started in buying gold
and silver it can be a somewhat daunting process.
That’s because there are about as many different precious
metal vendors as there are types of coins, and it can be a bit of a minefield
if you don’t know EXACTLY what you’re looking for, how much you should be
paying, and perhaps most importantly, why you’re buying precious metals in
the first place.
I recently received a question from reader David W. which
seems to encapsulate just about every possible angle of this topic:
“I have not bought gold yet because I haven’t decided
exactly how to go about buying it, what type of gold to buy, should I buy
U.S. mint gold coins (or Canadian mint) or foreign gold coins, how do you buy
just gold bullion and how do you get a small quantity of gold bullion, and
what about old gold coins that were minted by the U.S. government and lastly
I have seen these independent minting companies have gold coins
also?
So what I discovered that to say I am going to buy some
gold and going about getting it without being ripped off (getting quality
gold at a fair market price) are two different things. I am examining
different options but have not decided which way would be the best for say
buying some quantity of gold (say $1000-$2000) that I could hold in my hand
and lock up in a safe or safety deposit box.”
First and foremost,
you need to understand exactly what you want from your precious metal
purchase. If you’re a short-term trader, then taking physical delivery of
bullion makes little sense. I can only tell you why I buy physical gold: I
buy it as an insurance policy protecting my wealth in the event of a currency
crisis.
If you have the goal of getting rich from physical gold or
silver, then you’re probably not going to achieve that goal. Sure, assets can
skyrocket in price, but that’s a speculation, not an investment.
If you want to speculate, then I’d recommend trading options
on an ETF like the SPDR Gold Trust (NYSE: GLD).
You can buy out-of-the-money calls if you’re bullish, or
out-of-the-money puts if you’re bearish. That’s the simplest trade, and if
you’ve traded options at all you know that you can do some pretty fancy stuff
into the homestretch of expiration. But trading options on gold or silver
ETFs is pretty much the opposite of loading your home safe with physical
metal.
I want to remind
everyone that gold and silver are not an investment by any classic
definition of the word. They produce no cash, or rent like a business, and
they don’t grow in size or value like a plot of timberland. It certainly
experiences price fluctuations, but so does every other asset.
Precious metal is a store of value as well as a medium of
exchange, to a lesser degree. In the event of a currency crisis, it will
revert to its use as a medium of exchange.
So that’s why I buy physical gold and silver. Your reasons
might be different, and you need to think about your specific situation, as
well as how you might store the metal once it arrives.
In any event, if you do decide to take physical delivery and
storing it in your home, I’d recommend only telling one other person.
To get back to David’s other questions, about specific
coins, it’s vital to research any purchase ahead of time. You don’t want to
get on the phone with a bullion dealer and not know what you want.
I recommend buying coins from reputable dealers like
Kitco.com and blanchardonline.com – and while I’ve
bought bullion from both vendors, and I consider the representatives from
these companies to be knowledgeable, fair and generous, they also happen to
be salesmen. If you call to buy gold and silver bullion from these salesmen
and you don’t know what you want, you probably won’t get the coins that are
right for you.
And again, I don’t
know what’s right for your situation, I can only tell you the kinds of coins
that I buy, and why.
As I said, I buy coins as insurance against currency
calamity. In such an environment, it would be advisable to own a variety of
coins in a variety of denominations. Silver one ounce coins sell for about
$20 today – which is the kind of walking-around denomination that will be in
high demand. $20 will get you a sack of flour, a few gallons of gasoline,
eggs, milk, bread, etc.
I purchase American Eagle one ounce silver coins, because
these coins are among the most recognizable. Any US minted, pure silver coin
will suffice, but again, I recommend doing your research, and knowing
everything you can about any coins you buy. In general, I don’t buy many
foreign minted coins, for the simple reason that I don’t know much about
them, and they’re much rarer than US minted coins.
If you’re buying coins with the understanding that you might
have to use them as money, then you shouldn’t be looking for rare or
collector coins. Regular gold and silver coins are known as bullion, and
barring major damage or abuse, these coins will hold their value, which is
what you want from your money. Rare coins are valued primarily by their
rarity and condition, and their metal content as a secondary
consideration.
Most people know nothing about rare or collector coins, so
the value of these coins is, by definition, understood and appreciated only
by rare coin collectors.
You want to buy coins that everyone knows and are familiar
with. That goes for every denomination, in every type of metal.
I also own some mid-value denomination gold coins. The most
common denomination of gold coin is the one ounce coin – which currently
sells for a little over $1,200. That’s not walking around money, but these
coins certainly have their use.
So besides buying US minted gold one ounce Eagles, I also
like to have smaller denominated gold coins on hand.
These smaller coins are among the most expensive in terms of
cost over spot price, so you really have to do your research. Shop around.
Know the metal content, know the spot price, do the math on delivery costs as
well as spot price premiums, and just make sure you get the best deal you
can.
My personal favorite small-denomination gold coin is the
British Sovereign. It’s arguably the most recognized gold coin in world
history, having been first minted in the 15th Century, and it’s
still minted today – though you’ll pay a premium for newly minted “proof”
coins from the Royal Mint.
Each Sovereign contains a little under