Precious Metals Buying Guide
Building a Precious Metal Portfolio That's Right for You
Precious Metals Specialists at Independent Living Bullion field lots of great questions from customers who are new to buying physical bullion. One of the biggest is "What should I buy?"
The first rule we have often addressed is to avoid collectible or numismatic coins and the exceptionally high
premiumsPremiums The market value of a coin minus the intrinsic value of its metal content. A coin that contains $28 of silver (intrinsic value) and sells for $30 (market value) has a $2 premium. that dealers charge for them. So we won't review this subject again here. Rather, we will discuss how to determine which of the precious metals to own and provide some guidance regarding which bullion coins, rounds, or bars will meet your objectives.
Should You Buy Gold, Silver, Platinum, or Palladium?
Silver looks undervalued relative to gold at the moment. The
gold / silver ratioGold / Silver Ratio The gold / silver ratio is measure of how many ounces of silver it takes to buy an ounce of gold.
The formula for the gold / silver ratio is:
Gold / Silver Ratio = Price of Gold per Ounce / Price of Silver per Ounce is currently around 50, which is to say one ounce of gold is priced at about 50 times the price of an ounce of silver. This ratio has generally been much lower on a long-term historical basis. Combine that with some pretty compelling supply / demand fundamentals, and it appears silver will continue to outperform over the medium to long term.
That said, the 2011 price action is a prime example of why owning gold makes sense in circumstances of extreme fear and uncertainty. As the European debt crisis grew and world economies again began to slow in the fall of 2011, precious metals markets corrected. But the gold price held up better than silver, and volatility was much lower. Gold benefited from its ultimate status as a safe haven and finished up more than 10% in 2011 – its 11th straight year of nominal dollar gains. A gold portfolio has been the steadiest and most profitable asset class over the past decade.
Platinum and palladium have seen major price
correctionsCorrections A correction refers to a price decline of at least 10% after a temporary increase in market prices., and they too present an opportunity for investors who want to be more aggressive. Platinum, with its price per ounce still below that of gold (an unusual situation, historically speaking), looks particularly compelling. However, both platinum and palladium often trade more like industrial metals than monetary platinum and palladium so, in some respect, your investment is a bet on stabilization or improvement in worldwide manufacturing.
Our general guidelines:
Determine the Purpose of Your Bullion Investment
In our experience, customers build a precious metals portfolio for some combination of the following reasons:
Investors focused on holding for the long term should give priority to finding the lowest premium. In a
bull marketBull Market A bull market is associated with increasing investor confidence and increased investing in anticipation of future price increases. A period in which investment prices rise faster than their historical average. for precious metals, it is the ounces you own that will produce the investment returns. The lower the premium the more ounces you will acquire. (As a general rule, premiums can be expected to fall as a percentage of the value of a coin, round, or bar as precious metals prices rise).
Always remember to consider the marketability of what you buy – you will most likely want to sell at some point! Most investors should avoid 1,000-ounce silver bars, for example. These large bars carry low premiums, but they could be discounted when it is time to re-sell – unless the bars have been kept in an approved storage facility (thereby avoiding a reassaying fee). There will also be a smaller pool of prospective buyers for bars of that size – especially if you are in a hurry or try to sell back to a small coin shop rather than a large national dealer like Independent Living Bullion.
Investors with a self-directed precious metals IRA should focus on low premiums, as they are also oriented toward long-term appreciation. However, certain low-premium options, such as pre-1965 90% silver coins or gold Krugerrands, are not allowed in an IRA because of federal rules relating to purity. So plan accordingly.
Even as some in the financial establishment begin to warm up to precious metals, they continue to scoff at the possibility of a total fiat currency collapse and the necessity of using precious metals for barter and trade. However, those who pay attention to history and to current events know better than to rule out that possibility.
History, including examples from the past decade, is replete with currency crises precipitated by governments that borrow, spend, and devalue their currencies to the point they utterly fail as media of exchange. The prudent are adding some component of smaller-denomination bullion in trusted and recognizable forms to their overall metals portfolio. Fractional-sized gold (American Eagles and rounds) and silver ("junk" silver and rounds) will give you more flexibility in barter situations.
Don't Lose Your Position in Precious Metals by Trading In and Out
In regards to short-term trading, we caution people to avoid trading in and out of their core holding of physical metal. We are in a bull market for metals, and we are living in uncertain times. World events can move markets suddenly and without warning, so you absolutely cannot risk giving up your core position in this environment. However, there are opportunities to increase the ounces in your overall holding by swapping one metal for another – trading the gold / silver ratio.
Currently at levels above 50, we think this ratio favors over-weighting silver. Should silver prices move violently upward in relation to gold, it may then make sense to swap silver for gold. Savvy metals investors have used this technique to reap even greater returns – without ever abandoning safety or gambling their position in this bull market for precious metals.
Keep Transaction Costs Low
When it comes to choosing a bullion form best suited for trading, investors should focus especially on keeping the transaction costs as low as possible. In physical bullion, there are two components in the transaction cost; the buy-sell spread (also known as the bid-ask spread or the difference between the premium you pay to buy your metal and the premium or discount you receive to sell your metal back) and the shipping expense. Independent Living Bullion Specialists can help you identify which forms currently offer the lowest buy-sell spreads as you build your gold and silver portfolio. They can also help you arrange storage at a secure vault if you would like to avoid shipping and insurance expenses (although there are storage fees).
And finally, in many jurisdictions there is a third component in your transaction costs that must be considered – sales tax. However, Independent Living Bullion is not required to collect any sales tax whatsoever – even if a precious metals dealer in your own state is. Our headquarters is located in Idaho, and the Gem State specifically exempts bullion from sales tax, and the Interstate Commerce Clause of the U.S. Constitution also prevents your state from imposing sales tax on your out-of state purchases from Independent Living Bullion.
What Do You Like?
As a general rule, the buy-sell spread is low and does not vary a great deal from one bullion form to another. However, you will pay a little more to buy American Eagle coins versus other forms of gold or silver bullion. You can expect to get a little more for them when it is time to sell back, but the premiums on them are unlikely to rise as much as the metal itself.
Some appreciate that American Eagles are beautiful and well recognized, and they are happy to pay a bit higher premium to buy them. Others prefer things like pre-1965 silver coins because they generally offer the lowest premium, are widely recognized and salable, and are legal tender for their face value (just like Eagles). Buyers of pre-1965 coins don't mind that the coins are worn and that the metal content isn't displayed.
Above are charts outlining some of the pros and cons of the most popular bullion forms to help you zero in on which forms will best suit your needs, preferences, and budget.
Prudent investors who know they should take prompt action to build a position in physical precious metals sometimes delay doing so simply because they are unsure about what to buy. We launched Independent Living Bullion to help new investors get their questions answered and get started. We hope this article will help, but customers often tell us the best thing they did to get started was pick up the phone, call 1-800-800-1865, and talk to one of our Precious Metals Specialists. They are happy to answer any questions and will never pressure you to buy.
What's next to do?
Stefan Gleason, President
Independent Living Bullion