Precious metals have long been held as a hard asset by investors of all levels. Gold and silver are an excellent vehicle for portfolio diversification. But, not everyone needs to be an investor to buy metals. Whatever the case for buying gold or silver, if you are a first time buyer, you probably have a lot of questions. I attempt to answer the most often asked questions in this guide. Don’t worry, you don’t need an Masters in Finance from Harvard to understand buying metals.
All precious metals are inherently valuable.
This simply means that they don’t rely on outside factors to make them valuable. A stock in a company becomes valuable when the company’s profits grow. However, stock in a bankrupt company is pretty much worthless. You can never take the value away from gold or silver. Why? Because they are a rare element on this planet with a limited supply that can never be renewed. Imagine for a second how valuable gold would be if you could not dig anymore out of the ground and the rest was owned by someone else.
This does not mean that the value assigned to metals cannot be manipulated. Supply and demand comes into play in determining price. Also price can be manipulated by future commodity contacts and any number of other economical influences.
You cannot get rich overnight investing in precious metals.
If your goal is to try to take an amount of money and turn it around quickly for profit, then precious metals are not for you. Because of their inherent value as a hard asset, they are long term investments meant to be held onto. A good idea is hold part of your long term savings in precious metals.
They are almost recession proof, again because of their inherent values. There is always a risk that the price you paid when you bought them is higher than when you need to sell them, but if you hold on to them, you can set sell price triggers for yourself.
For example, in 1975, you purchased $10,000 in gold at approximately $150 an ounce, which is roughly 65 ounces of gold. Fast forward 40 years to today. You are now ready to sell some of your gold to fund your retirement plans. As of this writing, gold is approximately $1200 an ounce. If you were to sell all of your gold holdings, you would make roughly $78,000.
That is almost an 800% profit, all because you chose to hold onto the gold as a long term savings.
Keep in mind, as with anything you invest in, past performance does not guarantee future performance. However, looking at the gold and silver charts over the last 40 years, you can see that gold and silver experienced overall growth.
You need a safe place to store your precious metals.
If you decide to keep your metals at home with you, you would be wise to buy a fire rated safe to keep them in. Obviously, don’t disclose to anyone that you have them either. Or you can opt for the old fashioned method of burying them on your property somewhere, just like the pirates did.
All joking aside, you must do something to keep your metals safe from theft or possible destruction. Other methods available to you are a safe deposit box at your local bank. Or, for more security, you can store your metals with a trusted depository. Depository custodians have high security vaults with procedures in place that restrict access to your metals. These places also typically insure the metals that they are storing for you.
One note about metal custodians, make sure that your metals are kept in a segregated account. This means your metals will not be mixed with anyone else’s metals that are stored in the same location. They are all separated. The metals you get, should you take possession of them, are the original metals put into the depository. With mixed (unsegregated) accounts, if you choose to take possession, there is no guarantee of this.
You can add gold and silver to an IRA.
There is a type of IRA called a simple IRA that gives you a lot of freedom in the type of asset you invest in and hold with your retirement savings. Assets include real estate, precious metals, and even business loans.
If you are one that would rather not put your money into stocks or mutual funds that are outside of your control, then a simple IRA is definitely for you. Anyone can set up a simple IRA and fund it. Then, you just instruct the IRA custodian what you wish to invest in and they take care of the rest.
If you have an IRA or 401k already set up with money in it, you can also roll it over into a simple IRA. The only requirement is the money in the account must be liquid. That means it can’t be held in stocks or mutual funds. Those must be sold and the cash put into the account. This cash is then transferred to the simple IRA custodian for redistribution into those assets you do want, like gold and silver.
One final thought on having gold and silver in your IRA. You cannot personally hold the metals. The IRS requires that the metals be held by a depository. I guess they don’t trust you not to sell the metals and use the money up before they can get their hands on it.
Gold and silver make an excellent hedge against economic problems.
I’m sure most of you have heard the saying “hedge your bet.” This simply means that you have put precautions in place to balance against any potential loss on that bet. Most often, precious metals are used as a hedge against inflation.
Inflation is the increase in costs because of the lower purchasing power of currency. It usually increases by percentages year over year in a creeping manor. For example, if inflation were 3% from 2014 to 2015, then the soda that cost $1 last year would cost $1.03 this year.
Inflation can be deadly to a traditional bank savings account. Consider this: In the example above, we invested $10,000 into gold, and sold it 40 years later for $78,000. Now, let’s say we put that $10,000 in the bank and it received no interest at all, so that today there is still only $10,000 in the account. In 1975, you could buy a small house for $10,000. Today, you can’t buy a new car with $10,000.
I don’t know about you, but personally, I would rather have 65 ounces of gold that cost me ten grand than a bank account with ten grand in it that sat there doing nothing for 40 years. And yes I know that back then you could get interest paid on your balance, but today good luck finding interest bearing savings accounts.
One other thing I want to point out. If we have a total economic crash, I bet you can buy a lot more with a gold coin than you could with $10,000. Currency is destroyed when an economy crashes and burns. But a crash can’t destroy the inherent value of silver and gold.
You can buy gold and silver in many different forms.
Both gold and silver come in bar form and coin form. The term rounds just means the metal is in a round flat shape like a coin, but never minted for the purpose of currency. Both are valued by the weight of the precious metal they contain. Bars range from 1 gram to 1 kilogram with different sizes in between. Coins typically weigh an ounce or less, including a half ounce, quarter ounce and in the case of gold, a tenth ounce size.
Junk silver is the name given to US currency coins, such as quarters and dimes, that were minted before 1964. This currency was created when the US dollar was on a gold standard. That means that the value of a dollar was tied to the value of gold and the goverment could not print more money than what could be backed by their gold holdings. During the gold standard, dimes, quarters, half dollars and dollar coins were minted with silver, typically 90% of the coin was silver.
Rarer US currency coins were minted in gold as well. The eagle was a gold coin minted with a $10 value; a double eagle was $20, a half eagle was $5 and a quarter eagle was $2.50. People actually spent these coins like we would a twenty dollar bill today. Of course, you can still use these coins as currency, but you would have to be an idiot to do so. The value of the gold in a double eagle coin is probably over 50 times higher than the $20 face value.
All precious metals purchases have a dealer premium.
Precious metals dealers and bullion banks make their money by charging a premium for every item purchased. Premiums differ between dealers and you can get screwed by not paying attention. Most of the time, the premium is charged per ounce of precious metal. Almost everywhere you buy, you are paying a per ounce price.
When buying, pay attention to what the melt value is of a coin or bar. Subtract that from the price per ounce you are being charged and that is the premium being charged. Anything over $3.50 on silver and $80 on gold is too high. This doesn’t take into consideration coins that have value for their rarity (often referred to as numismatic value). These rare coins are sometimes much more valuable than their metal content because of their rarity.
Coinflation.com offers some great calculators to help you calculate the melt value of any coin you are considering buying.
Keep in mind that the different forms of precious metals (coins and bars) come with different premiums. Typically, the bigger the bar you are buying, the less premium you are paying per ounce. Also, junk silver coins tend to offer the lowest premium of coins. Brand new, sealed American Eagles, either gold or silver will probably come with the highest premium because of their high demand and record sales.
Regardless of the reason you have for buying precious metals, after reading this guide, you can make your purchases more confidently. If you find that you have other questions that weren’t answered here, please contact us or call 800.707.7923.
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