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How To Buy Physical Gold

October 15th, 2011 No comments

There’s a frenzy about precious metals these days, particularly Gold and Silver. There are many people who are financial types that manage or recommend investments pushing their clients and readers to buy Gold and Silver for some portion of your portfolio.

The reason why is simple: currencies around the world are being de-valued through what academic economists call ‘quantitative easing’ (QE), or more simply money printing. Money can be printed at will but traditional stores of money (gold, silver) are in finite quantities. The U.S Federal Reserve says that QE doesn’t cost the taxpayer anything and that they will pull back the expansion at the appropriate time. Markets are saying otherwise: precious metals have been on a 10 year uninterrupted bull market.

In this article I discuss what you need to know to buy physical gold (coins, bullion, jewelry). As investments metals are simpler because there are fewer fundamentals (no P/E ratio, enterprise value, etc), but the market for the metals is less transparent that it is for stocks and other similar investments. Read on for what you need to know to start buying physical gold.

First, Consider Value Added Products

Buying jewelry is one way to buy and own physical gold. The main advantage to this is that you can enjoy your purchase in an intimate and personal way. Also, it is possible that the jewelry or watch can increase in value in excess of the value of the precious metal value.

If you buy signed pieces from well known brands, such as Tiffany’s, Rolex, Cartier, Piaget, or others, the value of the precious metals is a fairly small part of the value in the whole piece. This has a key advantage: quality pieces will generally keep up with inflation or better providing a means of storing value that isn’t tied directly to the price of metals. The value will be maintained because new pieces keep going up in prices, so the used ones will maintain value.

For an example of how to buy signed gold jewelry, see my article about buying a used Rolex watch. In the time since this article was first published, Gold has increased from $900 to over $1600 per troy ounce, and the Rolex watch mentioned in the article has a street value of about $9,500 versus the $8,000 value (an increase of almost 20%).

Next, Consider Gold/Silver Bullion/Coins

The simplest form for precious metals is so called bullion, which is virtually 100% of the metal in coins, bars, and other forms. In some forms, such as coins the precious metal content can be less than 100%. It’s also possible that coins can be valued higher than the precious metal content due to desirability by collectors.

When buying bullion consider the following.

Understand Metal Pricing

Products designed to be vehicles to purchase precious metals have (3) prices you should be aware of. Before buying find out what these prices are so that you can be comfortable that you are making an informed purchase at the best value:

  1. Spot Price – the current market price for raw Gold or Silver as determined by the futures markets. For example, Marketwatch.com has a real time quote for Gold here.
  2. Buy Price – the current market price for the item. In most cases, bullion will sell for a premium above the Spot Price. This premium can vary widely because bullion can also have collector value which can affect value.
  3. Sell Price – the current market price for the item that a dealer will pay you to buy the item back.

Sell Your Coins Before You Buy Them

The first important consideration is to know how much your coins will fetch when or if you decide to sell them. Bullion does not trade as transparently as stocks, which at any given moment you can get full current market value. So, research what it is that your are buying so that you can have a good chance to get back as much of the current market value as possible.

Here are some guidelines on this:

  1. Before you buy, ask your dealer how much he would buy the same item today. Ideally you want to be able to get back at least 90% of value, or even more.
  2. Find out how much in dollar terms (10K, 5K, etc) you would need to sell to get the highest percentage of value. Dealers may only give you the best price for higher transaction amounts.
  3. Size matters. Large sized coins and bars (e.g, 1/2 ounce or 1 ounce) will fetch higher prices enabling you to keep more of the value when you sell. Smaller pieces enable you to buy in, but may not provide the same price level when you sell.

Sell Price is More Important Than Buy Price.

When you price coins or bars, you may notice that some coins go for much higher prices than the metal contained would suggest. Your first thought may be to buy the coins with the ‘lowest’ premium to the precious metal cost. In most cases this is not the best strategy.

The reason why: it’s more important to be able to sell the coin at a higher value percentage regardless of the underlying precious metal value. More expensive coins will usually protect your investment better because they will fetch not only a higher price but a higher percentage of the purchase price. Lower priced items may provide significantly lower sell rates. I will give you examples below to demonstrate what I mean.

Example 1: Different Coin Sizes

In this example, I compare the purchase price of two different sized Gold American Eagles versus what a dealer would buy them back at. In this example, I use the online dealer APMEX which is pretty transparent about its pricing.

2011 1/10 oz Gold American Eagle

Buy Price (to you): $193,  Sell Price (from you): $180

Percentage of Purchase Price Received: 93%

2011 1 oz Gold American Eagle

Buy Price (to you): $1774,  Sell Price (from you): $1724

Percentage of Purchase Price Received: 97%

Given the same transaction amount and everything else being equal, the larger coins retain more of the purchase price.

Example 2: Different 1 ounce Coins

$20 1850-1907 Liberty Gold Double Eagle (Cleaned)

Buy Price (to you): $1729,  Sell Price (from you): $1597

Percentage of Purchase Price Received: 92%

These coins are more than 100 years old and have collector value. When selecting them for collector value, condition matters since other versions of these same coins can sell for 2-3X more than the ones I have listed here. If you are investing simply for the Gold content, be careful here, because these coins and others won’t get you back the highest percentage of purchase price based upon Gold content. The 2011 1 ounce American Eagles in the last example are a far better choice.

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Invest in Gold…Buy A Rolex?

February 11th, 2010 No comments

Investing in gold has become impersonal.  You don’t even need to buy physical gold anymore (such as coins), an ETF such as GLD offers the ability to own gold without taking possession of it.

Investing in gold has been a hedge against stocks and the dollar for a long time. The same goes for silver (it’s equivalent ETF is: SLV).

Another way to own gold is to buy a signed piece of gold jewelry, such as from Cartier or Tiffany’s. In addition to owning gold, you can enjoy it even more, than say, owning gold coins. I also find this a lot more enticing of an idea than putting more money into a gold investment that you can’t really get a hold of. I don’t see this as a large portfolio addition but as a small part to be used as a diversification method. Not all of my investing money, just some of it.

There aren’t as many choices for men in this area than there are for women. The most acceptable jewelry selection for men is to buy a gold watch, and the most popular in this regard is a Rolex watch. Rolex not only sells gold watches but they have convinced men to buy watches with diamonds as well – most watches for men rarely offer diamonds.

Here’s why a Rolex is a good choice

  • Liquidity – You can buy other fine luxury watches, but Rolex watches have a lot of liquidity – there is a very healthy after market for them.
  • Opportunity for Appreciation – Some models will actually appreciate in value and provide a real rate of return. This is difficult to predict of course and you shouldn’t count on it.
  • Terminal Value – More common models will depreciate to a point – and then no more. A new gold Rolex president sells for about $22,000 (UPDATE: 2011: $28,000) A 25 year old model will sell for $7000-8000 (UPDATE: 2011: $9,000 – $9,500) It is unlikely to depreciate further.
  • It’s a Watch! A good one at that – it doesn’t need a battery.
  • Timeless Design – the classic Rolex’s have not really changed that much and still look great today. Part of the reason why they hold their value is that they maintain a classic look throughout their history.

Which One Should I Buy?

There are many different watches to choose from, some are made of all gold or all platinum, plus models that have some precious metal with stainless steel. Also, they are sometimes offered with precious stones (diamonds, sapphires, rubies and emeralds), usually the woman’s models.

The best choice as an investment is the Men’s Gold Rolex Day-Date (commonly referred to as the President). This watch is very popular and is offered at a lower price than other full gold models in the Rolex lineup. Also, there is an almost 40 year product history with the 18K model. Here’s a quick summary of the different models over the years and how much they sell for in the aftermarket.

Model: 18038, produced 1970s-1980s

Single Quickset

Approximate Value: $9,000-9,500.

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Model: 18238, produced 1990s-2000s

Double Quickset

Approximate Value: $10,000-12,000.

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Model: 118238, produced 2000s-Today.

Double Quickset, 30% heavier.

Approximate Value: $16,000-18,000.

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Exactly How Much Gold is in There?

The scrap value of a Rolex President is much less than the value of it as a watch, even at today’s gold prices. Over time the amount of gold in a President has been increased. Even so, the amount of pure gold in the watch is worth around $2,000 (UPDATE: 2011: $3,700) at today’s price of $900/troy ounce (UPDATE 2011: $1700/troy ounce). This works about to about 2 1/4 or so troy ounces of pure gold in total (the newest model is about 30% heavier, putting the total weight near 3 troy ounces) . The most recent versions (1970s on) use 18K gold, which means that about 25% of the watch is of non-precious materials.

It’s Not A Substitute For Bullion

If you buy a Rolex Gold watch, keep in mind that it’s not a substitute for investing in gold bullion, which are physical gold investments made of nearly 100% gold. There is a considerable markup due to brand equity and the added value of its construction and mechanical functions. This is both a benefit and a non-benefit. The watch won’t trade up as quickly as pure gold does (or down for that matter). But, on the other side, it will likely trade up at a rate near or above inflation giving you a long term consistent store of value. The key to get this benefit is to buy a used watch that has fully depreciated near its terminal value as I mentioned above.

Final Tips

  • The best bang for the buck is to buy a used watch near its terminal value, e.g, a 25 year old President.
  • Buying a used Rolex watch can be trouble some due to authenticity issues. One option is to buy from an established physical retailer.
  • Each watch can be verified with Rolex based upon its original configuration at retail sale – this can be used to determine, e.g., if that diamond bezel was original.
  • Buying a used watch online has obvious dangers – however, you can get great deals here. Buy from the most trustworthy sellers. One example is generalwar on Ebay.