Tony Lepage

So you want to buy gold or silver?

I hope this article is able to guide you in your quest to buy gold or silver. Herein, I will outline several things you need to keep in mind when making gold and silver investments.

Paper or physical

At this point in time, if you're looking to buy gold or silver, you're probably doing so because you are starting to lose faith in your currency. Otherwise, you may be trying to make a profit through speculation.

Obviously, knowing your investment goal is very important in determining your reasons for buying precious metals.

This article is not meant for speculators that wish to maximize their profit trading precious metals prices. However, this does not mean you can't make a profit trading gold or silver.

The discrepancy between the two is very important. Most private gold investors have lost faith in the value of the dollar (or other currencies for that matter) and wish to protect themselves against inflation. If you want to know more about topic, please see this article about inflation and this article about the future of the USD.

Examining the past 9 months of the gold market will show you that currencies are not the only asset that can see their values manipulated. In February of 2008, the gold price hit an all-time high in US dollars of $1050 per ounce. Since then, it has hit a few lows around $700 an ounce. The reasons for this price drop include many variables, but one thing has become very clear to those vested in this market. There is a dislocation between the price of gold (or silver) and the physical supply. It has been very hard to buy the metals at these lows because there simply isn't enough sellers. In fact, it is fairly easy to sell silver at prices over the spot price (otherwise called the market price). This means if you're able to buy at market price and sell over market price, you can make some quick money. Unfortunately, to buy silver and gold when the price is considered artificially low, you might need to buy a large quantity.

So, back to the original question: Should I buy physical or paper gold?

Paper gold is a certificate of ownership of gold. Depending upon who issues this certificate, you may, or may not have gold if quantities become scarce from high demand. This is not good if you're investing and hoping for a large spike in the gold price because you may end up on the short end without any gold at all.

Some investors prefer physical because governments have been known to confiscate gold or silver in the name of national security. This has happened in the USA during the great depression and during the 70s. Gold confiscation has happened in other countries as well, like Korea during the 90s. Of course, wherever it happens, it is never called confiscation. Gullible citizens then turn in their metals at fixed prices well below what they should be paid because it is patriotic—as well as being legally obligated to do so.

I personally prefer to buy the physical metal and purchase stocks that are positivly correlated to the price of gold. I keep my ratio at about 50/50 but this is well above what experts I respect might suggest.

The main goal is to get some gold in your hands!

Coin or bullion

Once you've decided to buy physical gold or silver, you'll be faced with another question—should you buy coins or bullion?

The price between the two is very close but you'll pay more for a coin because it has been minted and a high level of quality is expected. If you buy bullion, you're getting the same purity of the metal, but it is simply provided in brick form.

If you have a lot of money to invest, buying bullion will bring your price per ounce closest to the market price.

Speaking from experience, you can expect to pay about $50 dollars extra to buy gold in a one ounce coin form. But remember, this is $50 for each coin. If you were to buy ten ounces of gold, you'd pay $500 just to have it in the form of ten coins.

If you wanted to buy ten ounces of gold in bullion form, you will still pay a minting fee, but it will likely be less than $50 and will only be paid once. Of course, this assumes there are 10 ounce bars available. Traditionally, gold is available in 1 oz, 10 oz, 400 gram, kilo bars.

As for silver, this can also be bought in coin or bullion form. Lately, it is easiest to buy large bricks of silver only. Coins have been in shortage for about a year and there is a delay from the major mints (Canada, USA).

Silver and Gold Maples are the name attributed to the coins minted by the Royal Canadian Mint. The RCM has a worldwide reputation for the highest quality providing a purity of 99.99%. This is indicated on the coins with the numbers .9999. Recently, the Canadian mint has introduced the world's first .99999 gold coins. The price is slightly higher for these coins. Persons buying these coins are probably collectors (or were desperate to get gold in any form).

My own strategy was to first buy some silver coins and a few gold coins. These coins were bought incase the whole market goes to hell and the silver coins are a nice way to “provide change.” Silver has a lower per ounce cost (around $10 per ounce right now) and this is more reasonable for making purchases than using a gold coin valued at $800. Once you've got some silver coins, you can go ahead and add gold and silver bullion to your portfolio with less markup.

Realistically, there is little difference between coin and bullion.

Your investment currency

This article, as well as nearly every investment article on the internet uses the US dollar to quote the gold price. This is helpful only if you're investing in US dollars and, in the long run, if you're buying other goods priced in USD.

For us Canadians, following the gold price in our own currency is very important. In fact, only 3 months ago, my gold bullion had suffered the same loss as the rest of the market and I was down about 30% from the start of the year. However, the gold price in Canadian dollars is only about $30, or less than 3% away from an all-time high!

Watch for an upcoming post about my gold price outlook, but I think a worst case scenario might see the price in Canadian dollars staying around $1000 for a while. While a positive outlook will see further gains.

Looking at the chart below you can see this is an excellent time to buy gold if you're buying in USD. On the other hand, if you're buying in Canadian dollars, you might consider this a high price to be paying.



I bet you wish you bought back in September :)

Exchange rate expectations

From the previous chart, you can try and predict many things. It is highly feasible to expect the distance between the USD price and the CAD price to shrink. Whether this means it moves in Canadian dollars at all will remain to be seen.

How about another way of looking at the same picture. Let's say the price of gold will go up in USD. Now, the next question to ask is where you think the USD will go in relation to the CAD. I am expecting the USD to fall in value against the CAD much like it did in 2007 but over a shorter time frame. This means, I can expect to see the gold price go up in USD but potentially stay flat in CAD.

In the past, this is how the gold market has worked. The price of gold is usually an inverse to the USD meaning when the USD goes up, the price of gold goes down. However, over the last few years, there have been many instances when gold and the USD have gone up and down together—gold investors call this a de-coupling.

I expect gold to trade as it's own currency in 2009 meaning gold should rise significantly in USD and also rise in CAD.

Timing your purchase

Anyone who knows me, knows I have been buying gold and silver for years. I make this point for one reason: If i bought at a high in 2007, I have STILL made gains. My own personal belief is that gold and silver are in long term bull markets that will last for many more years.

Of course, it is best to buy when there is a dip in the gold price. There was definitely a dip in the gold price over the last few months, now it seems the price will begin to rise again.

If you use the strategy of dollar cost averaging, you should buy some now, and add to those investments on dips. This way, if the price falls more, you can take advantage of that—your investment cost per ounce will average out, and if you're buying on dips, you'll be better off in the long run.

Where to buy?

You can buy gold or silver coin and bullion mainly at two places: coin dealers or your bank.

Do a quick google search for coin dealers and you'll get a list you can check out. You'll want to make sure you know the current gold price so that you can be sure you're getting a fair price. I tend to find I will get a better price from a reputable coins shop than I will get at the bank.

Get the market price at www.kitco.com.

In Toronto, I like Arcade Coins Co on King St.

If you're hesitant at all, simply go into your bank and tell that you want to buy gold or silver through the bank. They will likely have someone on staff that will know the process.

Finally, I have ordered many time through kitco.com. Just click on the “Precious Metals Store” tab and you can view prices in Euros, USD and CAD. From that screen, you can place an order or two. They expect you to wire money to their accounts, or mail a money order to them within a week of your order confirmation.

Cost breakdown

You can easily tell how much extra you're paying by asking the seller how much they will buy the gold back for and subtracting that from how much they sell for. Here is a simple example: right now, kitco will sell you a gold coin at $1113.35 and buy an ounce at $1049.69. The difference between the two is $63.66. half of that is $31.83. This means, with kitco, you're paying about $31.83 extra to kitco—not bad at all (however, this does not include shipping!).

When I buy physical gold, I tend to pay about 10% over the market price including all the extra fees. Expecting to pay less is pretty unrealistic. Here is a breakdown of the fees included in this markup.

Commission: The profit off of this transaction. They must pay rent, pay staff and expand selection.

Coinage, minting fees: The cost to turn paper gold into physical gold. The cost to make the coin including the profit for the coin maker.

Shipping: Gold and silver are heavy metals, so you can expect to pay an appropriate shipping cost.

Insurance: a reputable organization will not simply send gold or silver in the mail. They will force you to pay insurance on the shipment.

In the past, when buying a 100oz silver bar from Kitco, shipping and insurance cost me about $150.00.

If you're buying from a bank, they will give you a breakdown of the fees. One of the fees listed will be shipping! Yes, even though they went to a back room vault to grab the bar for you, they still had to get the bar shipped to them, so they pass those fees onto you!

Selling it!

I prefer to buy only from places that will buy back as well. You should do the same.

Conclusion

I hope this helps you to understand the process of buying the precious metals and I hope that it also helps you to moving forward and making that investment. As I have written before, I firmly believe gold and silver are the lifeboats on the titanic—only the rich know about them until it's too late.

Leave your comments and questions below!!!!