A Beginner’s Guide
I am often approached by would be first time buyers of gold and/or silver who are looking for some guidance. To save my flapping tongue repeating the same old things over and over the following are some of the things to contemplate.
Weights
Buy in small weights. There are a few good reasons for this. Firstly you may wish to exchange them at some future time. It is likely to be easier to transact if instead of 1 × 10 oz bar you have 10 × 1 oz bars. There is very little paper money to be saved by buying a larger weight, normally none at all. You always have more options with smaller weights, whether in transactions or storage. 1 oz coins and bullion are the most popular weights in the marketplace which also helps.
Secondly, this allows you to steadily purchase gold and silver over the long haul. This will lower your entry price as both metals will continue to cost greater amounts of paper money over time.
Thirdly, the smaller the weight the less likely it is to be counterfeit. This is a problem that is likely to increase, not decrease. This does not mean that 1 oz bars are not worth counterfeiting, it simply means that anyone going down that path will find it more cost effective to counterfeit larger weights.
Effective counterfeiting of gold involves the use of tungsten which has a very similar weight to volume ratio. A bar is made from Tungsten and then coated with gold. It is almost impossible to tell the difference without special equipment, or slicing open the bar.
Coins or Bullion?
Bullion is the most gold or silver for the least dollars. The manufacture of a coin has greater costs associated with it than the manufacture of a bullion bar. Coins reflect this increased cost of manufacture and are more expensive per ounce than bullion.
The great advantage of bullion coins is that you can carry them in a purse mixed up with junk government coins and you can walk straight past a security screening at an airport etc. I have done this on many occasions in many countries. The same is not true of bullion. I was pulled up in Europe last year because of 2 × 1 oz bullion bars in my wallet. They came up on the scanner.
I showed them to the security guard and she asked me what they were. I told her it was gold and she lost interest and waved me through. That is not always the case. Some countries allow gold to be freely carried across the borders, some don’t. Be sure that in the future most countries will not allow it.
If you are planning on carrying your gold, then buy coins. If you are planning on burying your gold/silver in the backyard then buy bullion. I suggest a mixture, but as long as you understand the merits of both then that is a personal decision based on your own predicted circumstances. Gold coins usually, but not always, have a copper content to add to their toughness. A 1 oz Krugerrand will have exactly 1 oz of gold in it, but will weigh slightly more (1.0909 troy ounces) because of the copper content. A Canadian Maple on the other hand is pure gold and therefore weighs 1 troy oz. Both coins are equally valuable and will usually purchase an equal amount of legal tender.
I own some American Buffalo silver coins because they are beautiful, other than that I only buy silver bullion. The manufacturing costs of coins, on top of a 1 oz weight that is only worth $16 – or thereabouts, makes the manufacturing costs of silver coins very expensive compared to the silver value of the coin itself.
Numismatic Coins
These command a far higher price than their gold or silver content because they are collectibles. They are in limited supply because no more are being produced. These represent the least amount of monetary metal for the most amount of paper money. If you are buying gold as an investment then these coins can appreciate very well. If you are hoarding gold because of its monetary quality then collectibles are not your best buy.
When buying numismatic coins you not only have to have a knowledge of gold, but a knowledge of the rarity and condition of the coins. This is a specialized area and as I have never bought a numismatic coin I am not able to help here.
Buy Brand Gold and Silver
Buy the brands. The gold or silver from the big name minters are no more expensive than from the obscure minters in obscure countries. When you come to spend your gold or silver, whether for legal tender or real goods, then the person that you are giving the gold or silver to in payment will want to be able to identify it easily, quickly and surely. If the bullion has a known stamp on it (ABC bullion or the Perth Mint etc) then it is easy to exchange. With coins, Krugerrands, Canadian Maples and American Eagles are far more recognizable than Australian, or Chinese coins. Thus they will be easier to exchange down the line.
Where to Buy
Buy from a reputable dealer. Check out the Yellow Pages and start wandering around. Talk to the dealers… and find someone who will talk to you. Tell them that you are brand new and ask for their advice. Don’t buy over the internet as scams are plentiful and growing.
Do use the internet to check out prices though. Many dealers have a website where they will show their prices. Prices vary from dealer to dealer. Or just ring around and ask. Don’t look at the spot price in the financial section of the newspaper and expect to buy for that. You will always pay a premium. The premium covers such things as transportation, storage, security, dealer profit etc. How much of a premium depends upon who you buy from.
Constantly talking to dealers will start to give you some confidence. After a while you will be able to recognise gold and silver simply by their feel and recognise the various coins with a quick glance. At that point you are ready to start buying. Until you are experienced buy only from a reputable dealer.
When to Buy
There are two stages to buying gold and silver. One is when you are accumulating your core position. A core position is that which you determine to be the minimum amounts of gold and silver that you wish to own. Whilst building your core position you should buy as soon as you have some spare paper money. Forget the price in paper money terms, just build your core position a little bit at a time. Sometimes you will buy a little high, sometimes a little low… just establish your core position.
The second stage is when you have established your core position, but still wish to purchase more. Then you can be more picky and try to time the market. Buy on the dips. That is not as easy as it sounds. Personally as soon as I reach a core position I increase my idea of what my core position should be. Thus for ten years I have continued to add to my position a little bit at a time. You will be amazed how quickly your stash will increase.
Personally I suggest accumulating gold, and to never stop accumulating gold. But then I do not view gold as an investment, I view gold as money and as such I measure my wealth in how many ounces of gold I own. To me the idea of selling gold or silver is a bit silly… how can you sell money?
What Proportion of Gold to Silver Should You Own?
When the monetary metals circulate then silver is the most commonly used money. It is used for daily transactions. Silver didn’t stop circulating in the US until the 1960′s. Gold is for the big money purchases.
Because it has a far greater value to weight ratio gold is much more convenient both to store and to carry. $20,000 worth of gold is quite easy to carry inconspicuously. $20,000 worth of silver will pull your pants down and anchor you to where you stand.
However, if you are viewing your gold and silver as an investment, then when TSHTF silver will go up in value far faster and further proportionally than gold, but only when TSHTF. When TSHTF gold will too expensive for all but the elite. Joe Blow will chase silver, and he will chase it to the moon.
Despite this, gold is very convenient because of its size. Make your own educated call on this one. I would suggest having some of each in a proportion that you are comfortable with.
Where to Store Your Gold and Silver
Always, always hold the physical metal yourself. Never, ever take a piece of paper as proof of ownership and leave your metals with a third party. Midnight gardening is a popular pastime with gold and silver owners.
Whilst government confiscation of the monetary metals may not happen again (it happened under Roosevelt in 1933), in my opinion it remains a strong possibility, at least. Personally I act at all times as though it will definitely happen.
Never tell anyone that you keep gold and/or silver at home. You are asking for trouble. Best if no one even knows that you own it. Right now your conversation about your gold or silver ownership may evoke slight interest… more probably yawns. When gold and silver are on the front pages of the newspaper (that’s coming), then that conversation is likely to be remembered, and you will be regretting your incaution. If you do bury gold and silver in a midnight gardening exercise then bury two lots. One with a very small amount of gold and silver, and another in a different location with your main stash. That way if you are robbed you have something to hand over which is not going to wipe you out. Spreading iron filings around your garden will help avoid the problems of thieves with metal detectors.
Why Own Gold and Silver?
Because they are real money with a 4,500 year history as such. Central banks always hold a large part of their monetary reserves in gold. So should you.
So far this latest experiment in government issued legal tender has not collapsed. It will, the only unknown is when. Every single paper money in history, always and everywhere, has collapsed and gone to zero value. Gold and silver will transition wealth from here to wherever ‘there’ is. If this is a dubious proposition to you then it makes sense to regard gold and silver as insurance.
You may not believe that your house is going to burn down, but you still have insurance on your house. Gold and silver should be regarded as insurance on your wealth. Except that it is even better than insurance.
If your house does not burn down you cannot get your insurance money back. If the paper money system doesn’t collapse you can walk into a mint and cash in your gold and silver insurance. Gold and silver are more correctly viewed by the investor as a money-back guaranteed lottery ticket. What are you waiting for?
Philip Barton
March 5th, 2010
