| The two most important factors to look at when buying precious metals are the markup over the spot price of the metal and the cost of storage. One of the big advantages of gold is that the volume-to-value ratio is very high so it is easy to store metal of a high value in a small space. You could store enough gold to care for a small family for six months (approx. 9 ounces) on the inside of a belt buckle.
Possession is nine tenths of the law and nothing beats physical ownership. However it is extremely important to find somewhere to store it and note down the locations. The average safe in the closet is an obvious target and won’t stand up long to a determined thief with power tools and sledgehammers. In addition, houses can burn down – gold and silver have relatively low melting points. As paranoid as it may sound “midnight gardening” may be the best way for the average individual to store precious metals securely on his or her own property. Gold is nonreactive, but silver tarnishes and corrodes easily, so you want good, durable, water-tight containers to plant in your garden. Put instructions in encrypted form in a safe place. To confuse the burglars put some fake tungsten gold bars in your safe. Contact us if you wish to purchase these bars.
An advantage of coins is that they are easy to sell anywhere in the world. People will buy coins without assaying them which is not the case with gold bars. Unfortunately it is easy to produce fake gold bars using tungsten, which has the exact same density as gold making a fake bar salted with tungsten indistinguishable from a solid gold bar by simply weighing it. Because tungsten is brittle it is hard to do this with coins.
Keep a gold coin handy to settle bets with your friends.
London good delivery gold bars (weighing approximately 400 ounces each) must assay at least 99.5% pure gold; that is, 995 parts of gold per thousand parts of metal, or “995 fine“. Some gold coins and small gold ingots are made from gold that was refined up to 99.99% pure gold; that is, 999.9 parts per thousand, generally stated as .9999, or four nines.
While investors often prefer .9999 gold for psychological reasons and may be willing to pay a premium for it, it was not created for their benefit. Four nines gold and even higher-purity six nines gold (99.9999%) are made for electronics uses by further refining of .995 gold. The purpose of the extra refining step is to eliminate impurities that impede electrical conductivity. The additional refining cost is part of the premium over the loco London price that an investor will pay for the higher quality gold.
Gold is sold by its fine weight, so a customer who buys a 400 ounce .995 bar that weighs exactly 400.000 troy ounces will pay for only the fine gold content (the fineness times the gross weight of the bar): 400.000 x .995 = 398.000 troy ounces. Each good delivery bar will be stamped with the refiner’s mark, its year of manufacture, purity, gross and fine weight, and a unique bar number. Sometimes weights of small bars will be rounded, so a kilobar, which weighs 32.1507 troy ounces, might be stamped either as 32.15 or 32.151 gross weight, but will be sold at its fine weight of gold contained.
In Asia and the Middle East you can buy jewelry at about 5% over the spot price of gold. In the West the best way to buy gold is in the form of estate jewelry, which you can often buy at less than its scrap value.
Hard times are forcing people to sell their jewelry to pay off debts. They will sell it for considerably less than it is worth. Our poll on the price that people would be prepared to sell a 14k gold chain for shows that 60% of respondents would be willing to sell it for 20% or less than its value and 25% of respondents would sell it for 40% or less. Buying people's unwanted jewelry is probably a better way to invest in gold than buying coins or bullion.
There are many TV buyers doing this and then selling the jewelry to refineries; however you could just keep the jewelry.
- Owning gold in the form of jewelry means you can use and enjoy it. Even if the gold price does not go up or declines, you have still got something out of it. Men like women to wear jewelry.
- Jewelry that you are wearing is not subject to customs duties or exchange controls. This is useful if you need to get money into or out of the country. In China for instance it is illegal to take gold out of the country, but you can take jewelry.
- Gold jewelry is unlikely to be subject to government confiscation. This might seem unlikely in this day and age but its worth remembering that in 1933, President Roosevelt ordered U.S. citizens to surrender all their gold coins, gold bullion and gold certificates to the Federal Reserve. Gold jewelry was exempt.
- The paper trail in the ownership of gold jewelry will eventually go cold. Most retailers don't keep records for more than 2 years. In this event if you give your gold jewelry to your heirs there would be no tax liability.
- During calamitous events like war jewelry such as rings, necklaces etc can be used to make small trades without your being taken advantage of and having to trade a gold bar for a candy bar.
Exchange Traded Funds
If you can't spot the sucker at the table, then it's probably you. - old poker adage
It is possible to buy shares in a gold ETF called GOLD, which has the ticker symbol GLD. The shares are priced at the mid point between the buying and selling price of the spot price of gold.
There are several disadvantages to this way of owning gold.
- While the expenses of the gold ETF are low, the Trust will have to sell part of its gold stores to pay these expenses. Thus, over time, the fractional amount of physical gold represented by each share will decrease. Indeed it is not clear how much, if any, gold the Trust actually possesses as it is never audited.
- The tax treatment of ETF's is unfavorable. In the US, exchange traded funds that invest in metals do not qualify for the 15% rate on long-term capital gains. Instead their top top tax rate is 28% as the fund's investors are deemed to own a share of the metal. The gain is treated as coming from the sale of a collectible.
There are a number of other ETFs that track the gold price. If you are bullish on gold it is probably better to short the double short ETF ( DZZ ) rather than go long the double long or long. This might sound unnecessarily complicated but there are several advantages.
- Prices of a double short ETF will erode if gold drifts sideways. Shorting an ultra-long ETF is similar to shorting an out-of-the-money call.
- The high fees that the companies that market these products charge work in your favour as they help drive the price down. If you are short a stock you want its price to fall.
- You don't need to worry about fraudulent behavior by the company or government confiscation. In fact you will benefit as this will erode the stock price.
Gold Mines and Gold Mining Shares
A gold mine is a hole in the ground with a liar on top - Mark Twain
It is possible in some parts of Africa to buy gold dust or uncut diamonds at considerably less than they are worth. If there are no refining facilities in the country then gold dust is of little use and people will be happy to swap it for a shirt or a pair of shoes which have more practical value. However this cannot be recommended as there are many risks associated with this kind of transaction.
Financial advisors love to recommend buying shares in gold mining companies because the complexity means that it is easy to charge big fees. In reality it is little more than gambling and in most case you would be better off going to the casino where at least you'll get free drinks.
Gold mining companies are destroyers rather than creators of wealth.
- They are often badly managed.
- They like to raise capital by issuing new shares which dilutes shareholder value.
- It is difficult to assess the real value of their reserves.
- The costs of extraction are understated.
- Gold mining is one of the most environmentally destructive industries in the world, making the companies at risk from tougher environmental legislation.
- Most gold mining companies are overvalued selling at around 2 times book value. The average gold mine lasts about 8 years so you are effectively buying a company in liquidation.
- They pay small dividends
If you do wish to buy shares in gold mining companies there are a number of ETFs that let you do this easily. As with gold bullion it is probably better to short the double short (DUST) than to go long the double long.