“The Market is not benevolent.”
“The market is not benevolent,” a friend of mine quips whenever I complain about this or that. He means that the market doesn’t owe you a living, and being insensate, doesn’t wish you good or ill. Like a chainsaw, it’s a great tool but dangerous to the ignorant and unwary. And unfortunately, markets are always plagued by charlatans, frauds, and con men ready to pray on the naive, so it’s safer to study a little before you jump in. That way, you avoid jumping into a nest of water moccasins.
The Bid/Ask Spread
Every investment in the world is traded on a bid/ask or buy/sell spread. Sellers sell at a higher price than they buy. The difference between where they buy and sell is called the “spread.” The wider the spread, the greater the transaction cost out of your pocket, so you want to do everything possible to keep that spread narrow.
Unlike stocks or bonds, silver and gold have a physical reality, so they cost more to handle. Unlike the electrons of digital assets in a computer, they must be stored, safeguarded, insured, packaged (and unpackaged and repackaged), and transported, all of which adds to the spread. When you invest in silver and gold, you should expect a total round-trip transaction cost of 7.5% to 10% (that spread has risen as high as 13% on silver products since early 2020). That means that if you buy silver at $20, it must rise to $21.50–$22.00 before you can sell and break even. Above that $22 level, the profit is all yours.
This rule of thumb is complicated when buying panics, like the one that has been raging since January 2020, add premium to the price. That brings us to the importance of always buying the lowest cost per ounce item.
“Premium” is the total cost of a gold or silver item above its precious metal value. When spot gold is $1,900, a one-ounce coin with a 10% premium would cost $2,090 ($1900 x 1.10).
It gets more complicated when the coin doesn’t weigh one ounce exactly. To calculate cost per ounce, always divide cost by content. For example, a U.S. $20 gold piece contains 0.9675 ounce of gold. If it costs $2,090, the cost per ounce is $2,160.21 ($2,090 divided by 0.9675). What is the premium on that coin, though? It’s 13.7%. How do we know? Divide the cost per ounce of $2,160.21 by the spot price of $1,900. There’s cheaper gold out there, by far.
Always try to buy the lowest cost per ounce item.
The Floor Under the Bid
On the sell side, there’s virtually no limit to how high premiums can rise, but on the bid side, there is a limit to how far they can fall. Whenever any item falls lower than 98%– 99% of the spot metal price, it pays dealers to buy it at 1% or 2% below spot, melt it for the metal, sell the metal at spot, and pocket the difference. This “free market” mechanism keeps the price of various coins from falling far below their melt or spot value.
Here’s an example. We like the Austrian 100 corona gold coins (0.9802 ounce) because they are usually the cheapest large gold coin, cheaper even than one-ounce bullion gold bars. Historically, dealers buy them for 99% to 99.5% of melt (spot price X coin weight), and sell them at 0.5% to 1.5% over melt. American Eagles or Maple Leafs are going to cost 3% to 4% over melt in the wholesale market.
During the 2008 buying panic, the premium on gold American Eagles rose as high as 10.3% at wholesale when Krugerrands were at 8.3% and Austrian 100 coronas at 3.4%. Which was the better buy? That becomes much more apparent when you know the Axiom of Premiums: over time, premiums always disappear—always. The higher markets rise, the more they grind away at premiums. That happens even to the vaunted American Eagles, and that’s why we recommend you always buy the lowest cost per ounce. To put it another way, just because you pay a high premium when you buy a coin doesn’t mean you’ll get that back when you sell a coin. It’s ounces that give you return, not premium.
Think about it: gold is gold, silver is silver. It makes no economic sense that one coin should cost more per ounce than another, but for long periods of time, they do. Having said that, though, I hasten to add: always buy what you are comfortable with. If you say to yourself, “Well, I live in America and I prefer an American coin, I think it would be easier to sell,” that’s fine. You are the one who must live with the decision. It’s your money; buy what makes you comfortable.
A special case of a high-premium gold coin is the numismatic, semi-numismatic, or collector’s gold coin. In the 1970s and 1980s, there were gobs of boiler room operations full of salesmen armed with WATS lines selling gold and silver. They flogged especially the U.S. $20 gold pieces because the price was so opaque to the public. It was published nowhere and to figure cost per ounce, you had to divide the price by the content, 0.9675, which nobody understood. They could mark up these and other coins as much as 200% and pay a generous commission to the salesman and a nice profit to the house. The salesman’s pitch promised these numismatic coins always outperform bullion coins (they don’t) and that they were safe from a government confiscation like 1934 (they aren’t). Fear and greed are powerful sales tools.
Very few of these operations are left, but there are some and they are very active, persuasive, and advertise everywhere. Some still sell U.S. numismatic coins, but some sell small mintage Canadian coins struck especially for them—in odd sizes, which makes the price per ounce more difficult to calculate. They sell these at huge premiums as “rarities,” but they aren’t and never will be.
Avoid all of these gimmicks like your life depends on it. You don’t want to be one of the poor couples taken in by these salesmen. We have had to break the terrible news to people that they were taken. Their life savings were now worth one-third what they were before some slick talker got a hold of them and sold them coins that were actually worth 30% of what they paid for them.
Trading vs. Investing
Buy gold and silver as part of your core investment position. That means you are buying them for the long term, not to trade in and out on small price moves.
Think of silver and gold as insurance. Imagine someone who bought a $500,000 life insurance policy to protect his family. Would you think he was nuts if at the end of a year he went to his insurance agent, pounded his desk with his fist, and said, “I didn’t die this year, so I want my life insurance premium back!” Of course he’s nuts. He didn’t buy the life insurance because he thought he would die, but only to protect his family, and protection is what he got, and his life in the bargain.
Watching the value of your core position every day resembles that man pounding on his insurance agent’s desk. You didn’t buy it to see it rise, rise, rise, although you expect it will over time. You bought it to protect yourself and your family from economic, financial, and monetary death. It’s your ace-in-the-hole cash insurance.
Moreover, metals are volatile. Don’t panic and sell out on the first big drop. Remember that big spread—7.5% to 13%—between buy and sell. You’ll take a big hit selling out, and then discover later you want that insurance position after all and find yourself buying it back and losing money in the process.
Also, because of the big spread, never buy gold and silver with three-month money. “Three-month money” means funds you know you will need to spend in the near future. For example, if you sold your house and are planning to buy another one in three to six months, don’t put the money in gold and silver. You’re not allowing them enough time to rise and cover the buy/sell spread, and even if they do, the spread may take a big bite out of your savings.
Securing Silver and Gold
Silver and gold are the same as cash, so you must be careful where you store them. Believe it or not, some people store their gold and silver well and carefully but then forget where they hid it and lose it altogether. Or they leave it lying openly on a shelf in the basement and then are surprised they can’t find it after the plumber or electrician fixes something down there.
Some people balk at paying for a good safe. The safes we prefer have a TL-15 or TL-30 rating, and one large enough to hold $200,000 of silver and gold might cost you $4,000. Expensive? Nope, not when you consider you are paying about 2% to secure your metals. Depending on how much you store, that’s about what you’d pay for a year’s storage in a depository, so one year’s safety in your own home pays for this big, heavy, secure safe.
In some areas, you may find firms that specialize in concealment construction. They can build a false wall in your very deep closet or under your stairs to hide your safe. Or you can simply bolt it to the floor in a corner of your basement, cover it with a box and stack other boxes around it. The possibilities are endless. Check with your safe provider to see if they have ideas, suggestions, or concealment construction specialist recommendations.
Be discreet with your metals purchases. Don’t tell all your neighbors what you are buying. In fact, tell no one who does not need to know. Instruct your children and family members to be discreet and not talk about your metals purchases. Your lives may depend on their silence. If the nosy UPS man asks why that package is so heavy, just say, “Ammunition.” Or complain loudly to him about your husband or son who keeps ordering heavy machine parts for that old Corvette he’s restoring. Keep your metals well hidden and out of sight.
If you would prefer to use a depository for storage, we have included a list of reliable depositories in this report. These are only the depositories we know and have vetted. There may be others near you.
The Moneychanger’s Ten Commandments for Buying Gold and Silver
- Always take delivery.
- Never buy premium if you can avoid it.
- Buy bullion for business, numismatics for fun.
- Buy silver first, then gold.
- Buy small gold first, then large.
- Never buy exotic coins or modern rarities or anything you don’t understand.
- Know your dealer.
- What governments can’t find, they can’t steal.
- Never swap bullion coins for U.S. $20 gold pieces.
- Never break the law.
Let’s take them one by one.
Always Take Delivery
Never store your metals with a dealer, especially the dealer you buy them from. That makes it too easy for a dealer to charge you without ever buying the metals. I’ve witnessed that too many times to count. If you want to store metals, store them with a reputable depository. Silver and gold are the ultimate cash. It is best to store them where you have 24-hour, seven-day access.
Never Buy Premium If You Can Avoid It
Premium is what you pay above the precious metal value. You want to buy gold or silver, not premium, because over time, premium always disappears.
Buy Bullion for Business, Numismatics for Fun
Coin collecting or numismatics can be a great hobby, but hobbies are not business. If you want to invest in a coin, by all means buy a rare coin, but don’t buy those if you want to invest in silver or gold. For investing, buy the lowest cost silver and gold bullion coins or bars you can find.
Buy Silver First, Then Gold
Silver is the metal of daily commerce, more divisible and with a lower cost per ounce, so it is potentially the most useful (see Appendix 2, “Comparison of Physical Silver Investments”). Also, we expect silver to rise faster than gold.
Buy Small Gold First, Then Large
Divisibility has a value because it makes your gold investment more flexible. You can take four one-quarter ounce gold coins and put them together to make one ounce, but you can’t cut a one-ounce coin into four pieces.
Never Buy Exotic Coins or Modern Rarities or Anything You Don’t Understand
If you don’t quite get the sales pitch for the coins, don’t buy them. You ought to know what you are buying and be able to explain the reason for buying it, otherwise you are surely paying too much.
Know Your Dealer
Everybody believes his own doctor is great, but that really isn’t a judgment of his skill because most of us are not competent to judge that. We really just mean that we like the doctor. Check your dealer out with the Better Business Bureau or state consumer protection bureau. Ask his customers about him if you know any. Ask for references like banks or wholesalers who can verify that he keeps his word and is honest.
What Governments Can’t Find, They Can’t Steal
If you think your family’s life may depend on your holding a little gold or silver, then you had better secure and hide it where it can’t easily be found. I think a 1934-style gold confiscation is about as likely as your being struck by a meteor, but I still don’t trust governments.
Never Swap Bullion Coins for U.S. $20 Gold Pieces
U.S. $20 gold pieces have a much higher premium than vanilla gold bullion coins. Don’t let anyone talk you into swapping low premium gold for high premium gold.
Never Break the Law
I hear all sorts of crazy fears about leaving a “paper trail” when you buy silver or gold. These fears lead some people to try to buy for cash in an amount greater than $10,000 to avoid the federal cash reporting requirements. Even if a dealer agrees to that, he might be part of a sting trying to turn you into a scary headline. Whatever the law is, obey it. I don’t care whether the government knows I bought gold or silver. It’s my money and my business.