- Personal Finance»
5 Rules for investing in Gold and Silver - Protect yourself from inflation and the falling dollar
First off, I am not a "Gold Bug, or Silver Bug..." I do not have tunnel vision and do not think that Gold will go to $3000 an oz in the next couple of years....but I do think that precious metals are one of the easiest ways for the average person to protect against inflation. Gold and silver continue to set new highs and it seems like every day the news is full of concerns about the falling dollar and the potential for massive inflation in our future. Many people feel that the monetary policy of the US, the free spending and massive money printing of our government, should be of concern to use average people. Many experts believe that it is a matter of time before inflation really sets in and slowly robs many of us of the value of our savings. But as frightening as that is, most people do not know what we, as individuals, can do to protect ourselves and our families.
Much of the information out there on hedging (protecting) against the coming inflation is either A. very complex and confusing for the average person or B. possibly a scam or at least not a good deal (infomercials on buying gold etc., gold clubs etc.) or C. requires a great deal of money to implement. I wanted to create a guide that would help the average person to invest in precious metals, to understand why it is a good idea and how to buy and sell without getting ripped off.
ALWAYS own the physical metal if it is at all possible. What I mean is that you want to actually have the coins, bars etc. in your possession. Precious metals have been used as currency for thousands of years. Conspiracy theorists and end of the world types say that you should have small pieces of gold and silver in case the economy implodes and you need to barter with them to buy food etc. Now, that is pretty absurd....but I guess if it ever did happen then owning physical gold and silver would be even more valuable.
My reason for wanting to own the physical metal is simply that I have no confidence in someone else holding my asset if I do not have an iron-clad guarantee that I can get at it whenever and wherever I want. This is really pertinent when looking at the precious metal funds. These are usually called ETFs (Exchange Traded Funds) and they are essentially just like mutual funds except that you are buying fractional ownership in the underlying precious metal (gold, silver, palladium, platinum etc.) instead of ownership in a company or group of companies.
My main concern with this type of ownership for precious metals is that I have no idea where the metal that I own actually is, or if there actually IS any metal...unlike a bank where I have the Federal Government (FDIC) guaranteeing that the money that the bank says I have will actually be available to me, even if the bank fails. This is not true with ETFs, or with any fractional precious metal ownership program. While they may have some of the actual metal on hand, and in fact, the largest of the ETFs for Gold (Ticker: GLD) is one of the largest owners of gold in the world, they do not have anywhere near the amount of physical metal that all of the funds sharholders actually think they own. In fact, much of what they own is in futures contracts, which are just promises from other companies to give them gold. Many people believe that if even a portion of the owners of these ETFs and futures contracts were to demand delivery of the actual metal that the whole system would collapse since there is not enough physical gold to meet the demand...Hmmmm, sounds a lot like the banks runs during the Great Depression where the banks did not have the cash to meet the demand for withdrawals. The FDIC was created to prevent bank runs and protect depositors, but no such protections exists for ANY ETF, future contract or commodity fund. My concern here is that if a fund were to go under, shut down, or stop allowing trading for whatever reason, you could be left with just a piece of paper. At the end of the day, if you can not trade a IOU (which is what each share of a metal ETF is) for the underlying asset, then you don't really own the asset, you just own a promise from the company that gave you the IOU...and I am not a huge fan of trusting companies with something like this.
Great Deals on Silver
Know WHAT to Buy and WHERE to Buy! Numismatic value (the value over and above the value of the raw metal itself) is unbelievably hard to judge and subject to massive swings based on availability of "rare" items. All this means is don't buy fancy or "rare" coins. You should buy items that are as close as possible to the market price of the precious metal in the coin or bar. This is pretty easy to judge. If you are looking at a 1 oz silver coin and the spot price of silver is $20 then you do not want to pay very much more than $20 for the coin. (Google "commodity prices" for the most up to date price for various metals)
There is always going to be a
slight premium on coins, bars etc. as it costs money to make them, but
it should not be more than maybe 10% above the spot price of the metal.
Don't worry about the items being in perfect condition, it is not worth
the extra premium. Ebay can be a great place to find coins, bars etc,
but you really need to make sure you are careful in who you buy from,
make sure that they are reputable sellers with a LOT of POSITIVE
feedback and ALWAYS pay with PayPal as then you are protected and if
you do not receive your item or if it is not real they will refund your
money almost immediately. Stick with the highly rated sellers and you
should be just fine as many largest precious metal wholesalers and
refiners have Ebay shops. Amazon is another great place to get coins,
bars etc and you know they will stand behind the product. I would
recommend trying to get larger lots of coins etc. 100 of the 1 oz
silver coins will get you a lower price per coin then buying 100
individual coins. Also, generic or mine labeled coins will be cheaper
than fancy "Morgan Silver Dollars" or "Walking Liberty" coins. You just
want to get the most metal for your dollar.....being pretty is nice but
not worth the extra money. Bars will be even cheaper as they cost less
to make then coins. The same rules apply for bars as for coins...you
want the most bang for your buck, so look for larger bars, ones that
aren't pretty or even "weird" ones. I have over a thousand ounces of
silver that are in "commemorative state coins" of little bars of
silver, usually 10 oz that were handed out for awards at peoples jobs
for 5 years of employment etc. That used to be pretty common and many
people don't know what to do with these, especially if they are older.
These are great as you can very often get them for LESS than the spot
price of the metal. At the end of the day all you want is the metal
inside, so who cares what form they are in!
Make sure you understand the item you are buying. One of my first purchases of silver was a set of commemorative state bars. Each bar was 10 oz of STERLING silver which I THOUGHT was the same as .999 silver. Sterling silver is 92.5% silver, not 99.9% (or .999 as you will usually see it on a coin or bar etc.) So I was getting 7.49% less silver than I thought as the other 7.49% is usually copper or nickel which is worth far less! For silver you want .999 silver, if you are getting Sterling (.925), then make sure you are paying about 7.5% less then for .999 silver. The same is true for gold. Gold is measured in karat weight which will correspond to a certain percentage of the metal. Now, 24 karat gold is 100% gold, you will not usually find this in coins (Canadian Maple Leaves are one famous exception) and the reason why is that gold is VERY soft, if you drop a 24k gold coin on a hard floor it will probably dent the coin. So gold coins are usually mixed with other harder metals to make them more durable. This is fine, you just want to make sure that you know how much gold is in each coin and price accordingly.
This is very easy to find out online and most adds (Ebay, Amazon) will list how much actual gold is in the coin. The third thing to know is how much it weighs, metals are weighed in TROY oz. These are different than standard OZ and there are 12 Troy OZ in a Troy LB NOT 16. Just be careful and if you have questions, check online. Google "How many troy oz in a Kilo" etc and Google will provide many easy to use calculators such as the one I have linked below. Precious Metal Value Calculator
Finally, make sure you understand the actual metal content if you are going to buy "face value" or "junk" coins. These are coins, usually they are Older US currency that is part silver content. The US used real silver to make coins until 1965. Depending on the years of the coins and what type of coins they are, they will contain a certain percentage of silver (anywhere from 35-90%.) These coins are usually sold in "bags" or lots which are usually listed both by weight and the actual or "face" value of the coins. Face value just means how much they are worth as US currency (100 quarters are worth $25 for example.) However, the only thing you need to worry about is the weight and the percentage of silver. Just take overall weight times the silver percentage to get the amount of silver and use that to figure out what the value should be.
Keep your metal safe! Precious metals are a great store of value as they are easy to transport and store. HOWEVER!!!! This also means that they are easy to lose and easy for others to take. I would recommend a good safe for home storage, especially if you have a lot of silver (get a fire safe, which is a safe that is designed to make it through a fire and keep your important papers etc in there as well.) If you have more than a few gold coins or bars, I would recommend a safe-deposit box which should be available at your local bank for a small fee (sometimes they may even be free if you have all your accounts with the bank.) Ask about specials for renting one for long-term. These are great for the high value gold as well as for storing important documents such as wills etc.
Know how to sell your precious metals should you need to. Though I recommend buying precious metals for the long haul as a protection against inflation, as important as knowing how and what to buy is knowing how to sell if and when you need to. I am a big fan of precious metals as they are a great way to retain value, protect against inflation and are just cool to own. However, should you decide that you want to or need to sell some or all of your metal, it is important to know how to do that. This also goes for selling scrap or junk silver and gold (old jewelry etc.) The first thing to know is what the value of your item is. 100 ounces of silver in a bar form is worth at LEAST the spot price of silver per ounce plus a small premium for the silver bar. 100 oz of silver coins would be worth still more as there is more of a premium for coins than for bars due to the added cost to make the coins.
The best place to sell coins, bars etc will probably be the same as where you bought them. Ebay and Amazon are both great places to sell precious metals as they have large customer bases and are very reliable companies. You will have to pay a commission when you sell and thought it is very easy to get an Ebay account if you do not allready have one, Amazon takes a little more effort get set up for selling. You could also check out local coins shops, but usually, Ebay is going to get you more money, especially if you are selling non-perfect coins or "weird" silver such as "junk coins" or those odd silver bars. NEVER sell at a pawn shop as you are not going to get anywhere close to the real value of your items. This also goes for the "we buy silver and gold" companies you see advertised everywhere. Those companies MAY be appropriate for scrap metal such as old jewelry, silverware and other things that need to be melted down and refined to get out the silver and gold, but they are going to give you only a portion of the value of the metal. Even scrap silver and gold such as old jewlery is probably better off being sold on Ebay. Ebay is one of the best markets for precious metals with MANY buyers and sellers and many different types of items being bought and sold. Liquidity is key and Ebay is probably the best place to get it. Amazon is probably a little safer though and I would recommend them as a great place to Buy and Ebay as a great place to sell.
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