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How To Buy Physical Gold

October 15th, 2011 Leave a comment Go to 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, 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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