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10 Rules For Buying Gold And Silver Safely

Gold and silver bars.
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One rationale to buy gold and silver safely for investing in precious metals is ownership of an asset that is no one else’s liability. Investing in physical precious metals (coins and bars) and physically-backed exchange-traded offerings achieve this objective.

In contrast, forms of paper such as gold certificates and futures contracts are generally unbacked by physical metal, do not grant ownership title, and cannot provide the ability for investors to exchange them for physical metal or buying gold. In any instance of issuer default, paper gold investors will likely become unsecured creditors.

Only consider investing in precious metals such as silver coins or physical gold, which grant direct ownership title, or fully backed physical exchange-traded offerings, which provide beneficial ownership to the underlying metal and (preferably) the ability to redeem shares for physical metal.

Allocated Or Unallocated Metals?

There are many important implications in the difference between allocated and unallocated precious metals. Allocated precious metals provide the highest degree of investor safety. They are segregated, unencumbered, and provide the holder ownership title. Allocated precious metals cannot be lent or leased to third parties. In contrast, unallocated precious metals begin to introduce counterparty risk, as ownership title is not secured by the holder. In certain situations, it becomes possible for gold investment vehicles to grant investor claims exceeding the total amount of underlying metal if that metal is unallocated. In the event of issuer insolvency or bankruptcy, investors can become unsecured creditors.

Only consider investing in precious metals that are fully allocated, providing the security that the metals are not encumbered in any way and ownership claims do not exceed the value of the underlying metal.

Gold bars.


Is There A Mark-Up To Spot Metals Prices?

The purchase of precious metals in coin and bar form generally involves mark-ups of 2% to 8% over reigning spot prices. For example, when gold is trading for $1,250 per ounce in the spot market, a gold dealer might sell gold sovereign one-ounce gold coins at premiums ranging from 2% (South Africa Krugerrand) to 4.5% (American Buffalo) to 6.5% (Chinese Panda), based on variables such as rarity, purity, volume and dealer inventories.

Exchange-traded funds (ETFs), are typically purchased and sold at prices very close to the spot price for the metal, but charge annual management fees to cover costs (trading, storage, insurance, trustee oversight, and shareholder reporting) and provide a profit for the manager. Closed-end funds are a similar investment proposition to ETFs but can often trade at significant discounts to the underlying spot-price of the related metal unless they offer an option for investors to redeem shares for physical metal.

If buying silver bars and coins from a dealer, compare the mark-ups and customer reviews among a number of them. If you intend to hold precious metals for only a few years, compare the total mark-up and mark-down costs versus the estimated management fees you will pay for owning an ETF or closed-end fund with a financial advisor. For example, if you buy and sell an American Buffalo your total cost could be 13% of your investment. In comparison, it could take 20 years to pay the equivalent costs in management fees which would be a rip-off and create illusions of wealth.

Where Are My Precious Metals Stored?

A key reason to own precious metals is to hedge against risk, so storing metal with a risky counterparty or online dealers should be avoided. Many reputable storage providers offer insured storage. Most precious metals ETFs store underlying metal at bullion banks such as HSBC or JP Morgan. As demonstrated in 2008, even the largest financial institutions are exposed to a market calamity. In certain situations, bullion banks are also permitted to use sub-custodians for storage which introduces another layer of unquantifiable risk.

Mitigate counterparty risk by selecting trustworthy and reputable storage facilities. For ETFs and closed-end funds, avoid storage custodians which are subsidiaries of levered financial institutions.

Can I Take Delivery Of My Precious Metals?

Direct investment in coins and bars or gold bullion is the easiest way to take physical delivery but there are trade-offs such as mark-ups and the cumbersome nature of traveling to a dealer and then choosing the resting place for the metal, such as a safety deposit box. Most prominent bullion ETFs do not permit the average investor to take physical delivery of underlying metal - this flexibility is reserved only for a limited number of Authorized Participants (mostly bullion banks) selected by the ETF to support the creation of new units. Some closed-end funds allow investors to take physical delivery of underlying metal such as gold and silver bullion.

The option and ability for investors to take physical delivery of the underlying precious metal is an important feature of any bullion investment vehicle of gold and silver collectibles. Choose accordingly.

What Are The Ongoing Costs?

There are attendant costs to physical ownership of gold and silver bars and coins, including insurance and storage. ETFs and closed-end funds charge annual management fees to cover costs and provide a profit to the management company that sells gold.

It’s important to consider all of the initial and ongoing costs related to whether you choose to invest in gold bars and silver coins, bars, ETFs, or closed-end funds. For ETFs and closed-end funds, compare the management fees across different offerings, but also consider the differences in features and the associated risks with each offering to determine the overall value you receive.

How Liquid Is My Investment?

While many investors intend to invest in precious metals such as gold and silver bullion for the long term, there is always the possibility that a change in circumstances requires short-term liquidation. Selling gold and silver coins and bars can be a cumbersome process. ETFs and closed-end funds, on the other hand, trade on an exchange and can be bought and sold throughout the trading day.

ETFs and closed-end funds provide the most convenient way to sell your investment in gold and silver bullion or bullion coins. The settlement period (when you receive the cash proceeds) is three business days after your sell order is executed.

Gold and silver investments gained popularity with both large and small investors during the period of instability in the global financial system after the Great Recession following the 2008 economic meltdown. While some advantages and disadvantages go along with investing in gold and silver, liquidity is not an issue with either of the precious metals. Gold and silver coins or bullion coins can easily be exchanged for cash, making them very liquid assets, because of the large number of investors who actively buy and sell both commodities around the world.

The spot price dictates what either of the precious metals is worth at a particular point in time based on supply and demand. You can take your silver or gold coins, bars, or jewelry to any precious metals coin dealer during business hours and exchange it for cash based on the weight and purity of the gold or silver content of the items you bring in.

How Are Precious Metals Taxed?

For U.S. investors, the IRS considers precious metals such as gold and silver bars to be collectibles in the class of art, rare books, and fine wines. The collectible capital gain tax rate for precious metals investments held for longer than one year stands at 28%. The 28% collectible tax rate is significantly higher than applicable U.S. capital-gain tax rates for other investment assets, which range between 15% and 20%, depending on the level of gross adjusted income and filing status. The tax rate on precious metals investment accessibility held for less than one year will always be the ordinary income rate for the taxpayer. ETFs holding precious metals are subject to the same tax treatment as ownership of precious metal gold and silver coins or bars. 

For some closed-end funds, special U.S. federal income tax rules apply because they are defined as Passive Foreign Investment Corporations (PFICs) by the IRS. If a U.S. non-corporate holder makes a timely QEF election each year by filing IRS form 8621 with his or her federal income tax return, it will generally mitigate the otherwise adverse U.S federal income tax consequences of owning precious metals via gold and silver coins, silver bullion, or ETFs. Capital gains will be taxed between 15% and 20%, depending on the holder’s specific personal situation.

For non-corporate U.S. investment strategy, consider closed-end funds that are classified as PFICs due to their potentially favorable tax advantages versus owning metals directly or precious metals ETFs.

Gold and silver bars.


Should I Invest In Gold and Silver Precious Metals?

Gold and silver are the most popular precious metals. However, there are also many other types of precious metals, such as platinum and palladium.

Throughout history, gold has been an unparalleled store of value. Buying gold is a monetary metal and an alternative form of currency. It has no counterparty risk to buy gold. Gold has also served as a safe-haven asset in times of geopolitical upheaval or economic downturn. Central banks hold roughly one-third of the global investable gold stock to diversify foreign currency reserves. Historically, gold has been an effective diversification tool for portfolios.

When economic times get tough and the U.S. dollar drops or the stock market looks jittery, investors often turn to gold as a safe-haven. For example, interest in gold surged in early 2020 during the coronavirus crisis and the recession that followed it, as investors looked for a safe asset to park their money.

Savers and investors like gold for many reasons, and it has attributes that make the commodity a good counterpoint to traditional securities such as stocks and bonds. They perceive gold as a store of value, even though it’s an asset that doesn’t produce cash flow. Some see buying gold as a hedge against inflation, as they worry that the Fed’s actions to stimulate the economy - such as near-zero interest rates - and government spending may send inflation racing higher.

While physical gold performs well sometimes, it’s not always clear when to purchase it. Since gold by itself doesn’t produce cash flow, it’s difficult to determine when it’s cheap. That’s not the case with stocks, where there are clearer signals based on the company’s earnings. Moreover, because gold doesn’t produce cash flow, to make a profit on gold, investors must rely on someone else paying more for the metal than they did. In contrast, owners of a business - such as a gold miner - can profit not only from the rising price of gold but also from the business increasing its earnings. So there are multiple ways to invest and win with gold.

Silver is a hybrid precious metal. It has incredible physical properties which make it useful in technology and as a form of money. These properties lend silver to a wide spectrum of uses. Approximately 50% of the annual silver supply is consumed for industrial purposes. Silver is affordable relative to gold and has a reputation as the precious metal of the “common person.” Like gold, silver is a tool for portfolio diversification, but its price is more volatile than gold.

Between gold and silver bullion, the white metal is not only less expensive and therefore more accessible to buy, but it’s also more versatile to spend. That means if you are looking to buy silver in the form of a coin to use as currency, it will be easier to break than a gold coin because it is lower in value. As a result silver bullion is more practical and versatile than physical gold, making this type of silver investment more appealing.

Because the white metal is worth around 1/79th the price of gold, buying silver bullion is affordable and stands to see a much bigger percentage gain if the silver price goes up. In fact, in the past silver has outperformed the gold price in bull markets. Silver and gold have been used as legal tender for hundreds and thousands of years, and that lineage lends the metal a sense of stability. When individuals invest in physical silver, whether that be through buying a silver bar, pure silver, a coin, or other means, there is a reassurance that its value has and will continue to persist.

While cash, mining stocks, bonds, and other financial products are accepted forms of wealth, they are still digital promissory notes. For that reason, they are all vulnerable to depreciation due to actions like printing money. Silver bullion on the other hand is a finite tangible asset. That means although it is vulnerable to market fluctuations like other commodities, physical silver isn’t likely to completely crash because of its inherent and real value. Market participants can buy bullion in different forms, such as a silver coin or silver jewelry, or they could buy silver bullion bars.

Investors often flock to precious metals during times of turmoil. When political and economic uncertainty is rife, legal tender generally takes a backseat to assets like gold and silver. While both gold and silver bullion can be appealing to investors, the white metal tends to get overlooked in favor of individuals investing in gold, even though it plays the same role.

When investors try to buy any bullion product, such as the American silver coins known as a silver eagle, they will quickly find out that the physical silver price is generally higher than the silver spot price due to premiums put in place by sellers. What’s more, is demand is high, premiums can go up fast, making the purchase of physical silver bullion more expensive and a less attractive investment.

Platinum and Palladium are the lesser-known precious metals. They both have incredible properties that can make them very valuable. Platinum and palladium are both driven by the autocatalyst market but also jewelry. They are rarer than gold and silver and produced in only a few countries around the world, making their supply more sensitive to changes.

Gold remains a mandatory portfolio asset amid excessive debt levels and aggressive monetary debasement by global central banks. To investors sympathetic to the portfolio-diversification potential of precious metals, yet desirous of an asset with practical “real world” applications, to be considered are the unique fundamentals of silver. To most investors, it is simply easier to “wrap one’s arms” around the significantly lower per-ounce cost of silver compared to gold. While platinum and palladium are the rarest of the precious metals, their high industrial utility makes them behave very differently than gold and silver.

Can I Protect Myself From Counterfeit Gold And Silver?

According to one commentator, counterfeits have improved as technology has progressed, and China is leading the way in producing counterfeit precious metals coins and bars. While gold and silver have always been the obvious victims of counterfeits, even platinum products are now being counterfeited with great skill and success. Counterfeit coins (and bars) are flooding the market at an astonishing rate. This is compromising the investments of collectors, according to the American Numismatic Association (ANA). Not only are these counterfeits increasing in number, but also in quality and appearance.

Only deal with well-known and reputable bullion dealers and national mints when buying gold and silver such as the U.S. Mint and Royal Canadian Mint. Do not buy gold and silver metals online from unknown sources. For ETFs and closed-end funds, check to see if they own London Bullion Market Association (LBMA) Good Delivery physical gold and silver bullion. The good delivery rules include specific requirements regarding the fineness, weight, dimensions, appearance, marks, and production of gold and silver bars. They also specify procedures for weighing, packing, and delivery as well as policies for ensuring refiners’ compliance with the specifications.


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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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