With the recent drop in precious metal prices, a lot of first time buyers are getting into the market right now, filling up their sock drawers with silver coins. After a series of long discussions with friends and co-workers, I sat up late last night formulating this post to try to address the myriad questions that come up when talking about buying precious metals. I tried to keep this as concise as possible, so I had to limit the level of detail – do your due diligence and read up on the subject from multiple sources and points of view.
Why precious metals?
Think of precious metals as highly liquid, higher-yield versions of your cash assets (money market accounts) in your 401k. Given the joke rates that cash savings accounts and CD’s are paying right now, precious metals are, in fact, one of the few ways to make real earnings on liquid assets. Yes, the metal market plunged recently, but those were mostly recent gains – more of a market reset than anything, and prices are still higher than 5 or so years ago. Nonetheless, this shows that metals are not 100% liquid – you may be forced to hold them for a few months or years during times like these.
Paper or Plastic?
Lots of metal heads will rant about paper metal bonds that are not backed by any physical metal. Don’t get too freaked out by this – none of your stocks are backed by anything solid either. Nonetheless, owning mine or mineral stocks means fees and usually less liquidity. When you buy physical precious metals, they will arrive encased in plastic, often as part of an assay certificate. So, no – you don’t get to open them and play with them. But you can walk right out your door and sell them to a local or online dealer any time you want. The main advantage of buying your own physical metal is no brokerage fees, one less middle man, better liquidity and control. The main drawback is that you bear the burden of secure storage ( more on that later).
I think precious metals are very cool gifts for new babies, marriages, graduations, birthdays, etc. They are not as gauche as money, and since they are investments, they are thoughtful and can get people in the right state of mind for saving and investing. Plus, kids think coins and silver bars are cool. Trust me, a $26 bar of 0.9999 silver gets more ooohs and aaahs than a $100 sterling knick-knack.
Gold vs. Silver vs. Platinum vs. Palladium
I’m not even going to touch this. There are so many arguments on all sides of this, it’s impossible for me to offer meaningful advice, except this: don’t believe everything you read. For every good argument you find, you’ll find ten other counter arguments. Plus, metal hoarding tends to bring out the wacko in all of us, myself included.
I can, though, comment a little on the relative buy and sell prices of silver and gold, particularly with respect to their spot prices. Since silver, at the time of this writing, sells for about $25/oz while gold sells for $1450/oz – it’s difficult to compare their pricing side-by-side. So I went to a few metal broker websites and wrote down their selling and buying prices quoted for several forms and quantities of silver and gold, then I calculated the % difference between these two prices and I was surprised at the results. In short, both metals have similar buy-sell differentials as long as you compare 1-5 oz of silver vs. 1/4 to 1 oz of gold. The smaller, 1/10 oz gold coins were a bit of a rip off because their relatively low re-sell price compared to their high purchase price.
I like silver because you can easily buy it in a variety of forms, in easily sellable “denominations” that equate to $25, $125 and $250 (at today’s prices). At $1450 for 1 oz of gold today, denominations of $2900 and $5800 are tough for 98% of us, plus you are instantly exposing yourself to $100 fluctuations in the value of your single piece of metal. And, again, that $1450 piece of gold is going to sell for $2000 down the road, which can be a lot more difficult than selling several 10oz bars of silver for the same net $2000.
Nonetheless, diversification is always a smart idea – so you should buy some smaller “denominations” of gold (1/4 or 1/2 oz) and lots of moderate “denominations” of silver (1 to 10 oz), with a few pieces of platinum here and there just for the bragging rights.
Look over the 1 yr, 5 yr and 10 yr spot price charts for these metals, and note the differences in trends and volatility.
Buying metals in large quantities is a double-edged sword. Higher quantities always have the advantage of lower prices per oz, approaching spot prices for large bars. Both coins and bars are discounted based on the number of pieces purchased, but also on the individual piece weight. Bars have the advantage in the latter case, because they are available in very large weights such as 1 kilogram. Coins are rarely offered in weights larger than 2 or 5 oz, and 1 oz coins are the standard. In contrast, 5 oz and 10 oz bars are commonplace.
In my previously mentioned buy-sell price analysis, I also examined the effect of unit quantities and price differentials. For silver, even though there is a linear relationship between unit (bar, round or coin) weight and “% over spot” purchase price, there is a similar differential on the re-sell prices, so the effect of unit weight isn’t huge; in other words, buying and selling one 10 oz bar only has a very slight advantage over buying and selling ten 1 oz bars. For gold, there was a stronger effect, up to about 1 oz. As I previously noted, for coins, 1/10 oz bars carrying a high cost penalty, so I would stick to 1/4, 1/2 or 1 oz coins, going with the highest denomination (weight) that your budget allows.
But large quantities, in particular large indivisible bars, can be difficult to liquidate quickly. In addition, aside from the American Eagle, Canadian Maple and Austrian Philharmonic coins, large quantities require 1099 reporting to the IRS when sold. Pre-1933 coins are also exempt.
Back on the positive side, purchases over about $2000 from online sellers often get you free insured shipping.
Finally, many online sellers have minimum purchase requirements; if you find a great price, but your budget is limited, the required minimum purchase may determine the amount you purchase.
Go in together with your good friends or family members to buy a large amount in one transaction, so you get quantity discount and free shipping without bearing the full cost yourself. Needless to say, you should only do this with people that you trust and are close to.
Many sellers offer “cash” prices that are around 2% below “invoice/list” prices that are charged when using a credit card. The reason should be obvious – credit card transaction fees are about 2.5%, so the sellers are just trying to recoup that cost. While “cash” often means wire transfers, money orders or bank transfers – all of which carry fees – sometimes “cash” prices include personal checks. This can be a great way to save money on your purchases, so long as you’re not in a hurry: though sellers may require you to send payment postmarked within 24 hrs of purchase, they are still going to sit on your order until your check clears. Credit cards have the advantage of speed, traceability, dispute and fraud protection, and also often 1-2% cash back (or other) rewards that may offset the slightly higher purchase price.
I won’t get into storage contracts with sellers or other warehouse type arrangements, since I presume the 2%ers with $100k in metals have people that take care of that sort of thing for them, rather than reading my blog. A $35/year small safe deposit box at your bank is a no-brainer, and you should have one anyway with the originals or copies of all your important documents inside. If you start hoarding silver bars, you’ll fill up the typical small safe deposit box within your first few $k of metal. Plus, many banks have limitations on the amount of insured precious metals in certain boxes – so ask around and make sure you have the right size and type of box. You should also drop $120 for a heavy-ass safe at home that will give any robber a hernia before he moves it a foot. It took me and my neighbor both to move mine in place. Again, you should have one anyway for your important stuff, and God damn is it fun to spin that big dial and open it up to see the glittery metal that you have not yet moved to the bank. I like to keep a few bars and coins on hand just to gaze at and stroke fondly from time to time, but I keep the majority in my bank.
Coins vs. Bars vs. Rounds
Notes: coins are government issued money with legal denominations ($1, $5, $20…); rounds are made by private mints, just like most bars, and are not legal tender.
This is another Pandoras box. Coin investing is in itself an art form. I list a few arguments for each below. One thing I will discount is the argument that the $1 face value of coins somehow imparts some magical inherent value on them in the case of the collapse of the paper dollar. Really? Give me a break.
I also group bars and rounds together, as my buy-sell cost analysis has shown that there is little difference.
Advantages of Coins
1. Government-minted coins are sometimes easier to sell, and arguably more difficult to fake
2. Coins often come in more weight options, particularly for gold (1/10, 1/4, 1/2 oz), although often these are from private mints
3. Higher selling prices (albeit with higher purchase prices than bars)
4. A few government coins can be sold in any quantity without requiring the buying dealers to file a 1099 with the IRS
Advantages of Bars
1. Less expensive per oz; silver 1 oz bars are usually less than 8% over spot (however, selling prices are lower than coins) – compared to 15-30% over spot for coins
2. The sell/buy price differentials at any given time are much closer than those for coins, so there is less short-term risk; you must hold on to coins longer than bars
3. More compact than coins, especially in large quantities – particularly in rectilinear safes, deposit boxes, etc.
4. The larger weights available with single bars equate to prices closer to spot, allowing a buyer to approach spot prices much closer than any coin; however, upon selling, bars are indivisible
Novelty Coins and Bars
Don’t do it. Aside from pouring acid on your gold to test its purity, the only way that you can definitely ruin your return-on-investment is by buying a themed, holiday, baby, wedding, engravable or other hokey coin or bar. Not even a dealer wants to buy those. People want coins and bars that look expensive, with lots of 9’s on them, troy ounce units, serial numbers, industrial logos and fancy-sounding mint names. Not Donald Duck, flowers or your nephew’s name.
Approved Brand and Good Delivery Listed Silver Mints
You will only buy your metals from a reputable dealer that is also a U.S. Mint dealer (there’s a list on the U.S. Mint website, where, incidentally, you can buy collectors coins but not actually investment coins – go figure). Texas Precious Metals and Provident Metals are well-established on-line dealers (who buy and sell) and accept personal checks.
Further, you will only buy gov’t coins (U.S., Canadian, Australian, etc.) or privately-minted bars from mints that are listed on one of the two approved lists below.
Now, in actuality, there are several perfectly legitimate mints that are not on these lists, which have good regional reputations. Just do your homework. Northwest Territorial Mint is one such mint. In Seattle, you can move their product no problem. In NYC, bring a NTM bar into a coin shop and they might look at you like you have three eyes. OPM and Sunshine are two listed American private mints that offer bar and round bullion that typically sell for very close to spot.
In my previously-mentioned buy-sell price analysis, I looked at the effect of mint type, and found that there were three groupings: generic, unlisted mints (Scottsdale, Northwest Territorial…); listed mints ( OPM, Sunshine…); and listed brand name mints (JM, Engelhard…). The generic mints are less desirable, as their re-sell prices were lower than other mints, low enough to offset the benefits of their low initial purchase price. On the other end of the spectrum, the brand name mints had very high purchase prices that were not offset by proportionally high re-sale prices. So the best way to go seems to be listed mints with less well-known names. I am personally a big fan of OPM bars and rounds.
This is just a partial list of common mints; there are dozens of other listed mints. The names listed generally refer to the mint mark, not necessarily the corresponding company/producer name. Check the full lists:
NY = New York Mercantile Exchange (NYME) Approved Brand
London = London Market Association (LBMA) Good Delivery List
Britannia Refined Metals (NY, London)
Johnson-Matthey (NY, London)
Metalor (NY, London)
Pamp (NY, London)
Perth Mint/Western Australian Mint (London)
Rand Refinery (NY, London)
Royal Canadian Mint (London)