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Friday, 18 March 2011 11:33
How to Buy Gold
If you're a first-time gold buyer, you shouldn't be intimidated by the prospect of buying gold. Though the task may seem daunting, the process is rather easy once you know the basics. You should start by asking yourself several questions.
Suggested reading: Gold Price Per Ounce?
1. How much money am I looking to exchange for gold?
Note, that despite the fact that most people refer to gold as an investment, gold is not a traditional investment because gold does not produce a dividend. Gold is money, and as money, its true value is measured by its purchasing power in relation to other assets. Determining whether you have $1,000 to exchange or $100,000 to exchange will go a long way in helping you select the right gold vehicle.
2. Do I want to take possession of my gold?
In the modern market, there are many ways to invest in gold, such as purchasing through a custodial service, like GoldMoney.com, BullionVault.com, or the Perth Mint. These companies allow you to purchase gold and keep it in their audited vaults. The advantages are ease of buying, ease of selling, and a safe place for storage. The disadvantages are cost (you pay yearly fees and higher premiums) and lack of access to your holdings.
An alternative is to buy through an Exchange Traded Fund, such as the GLD (SPDR Gold Trust). The GLD and SLV (iShares Silver Trust) are two of the most popular ETPs. The price listed for GLD is approximately one-tenth of an ounce of gold, and for SLV is approximately one troy ounce of silver. In both cases, the price is usually less than the spot gold price and silver price, respectively. These funds assess storage fees, insurance fees, and management fees by selling a slice of the holdings in these funds, and as a result, the amount of physical bullion backing each certificate diminishes with time.
Another popular method for gaining exposure to precious metals is investing in the companies that prospect and mine for them. Mining shares do not reflect the gold price at all, but their shares often correlate with price movements. If the gold price increases, mining profits could be expected to increase, and subsequently, the share price. However, investing in mining companies can be risky, as factors such as company management, regulations, weather, and other factors reduce the monetary security of a gold and silver investment into an outright speculation.
A final method allows the buyer to take physical possession of gold bullion through the purchase of gold coins and bars. The buyer may then decide to store the gold bullion at home, in a bank, or a third-party storage facility. Leveraging gold custodians, ETFs, and mining shares to gain exposure to the gold market is as simple as opening an account with the respective institutions. We will focus on buying gold in physical form, which is a bit more nuanced.
3. What type of gold bullion do I want to purchase?
There are two main forms of gold bullion: gold coins and gold bars.
A gold coin is government-issued legal tender gold bullion. Popular products are Gold American Eagles, Gold Canadian Maple Leafs, Gold South African Krugerrands, Gold Austrian Philharmonics, Gold Chinese Pandas, and Australian Kangaroos, among others. The legal tender value of these coins represents only a minute fraction of the metallic value. For example, a Gold American Eagle has a legal tender value of $50 while the gold content exceeds $1400 (as of 3/18/11).
A gold bar is non-government issued bullion in bar form sold exclusively for its metallic content. Popular brands include Credit Suisse, Pamp Suisse, and the Perth Mint.
Gold coins and gold bars differ in cost (the gold bars generally carry a much lower premium). Additionally, government-issued bullion is more often used for IRA accounts, though not exclusively.
• American Eagle coins
• Australian Kangaroo coins
• Austrian Philharmonic coins
• Canadian Maple Leaf coins
• Credit Suisse Bars .999
• Pamp Suisse Bars .999
• U.S. Buffalo Gold Uncirculated coins (no proofs)
• Bars and rounds produced by manufacturers accredited by Nymex/Comex, LME, LBMA, NYSE/Liffe/CBOT, and ISE-9000 or a national mint. The minimum fineness for bars is .995+
4. Should I purchase a numismatic coin?
Numismatic coins are collectible coins whose market values are predicated upon the rarity, condition, mint date, and marks of their mintage, and not necessarily on their metallic value. For this reason, most numismatic coins are considerably more expensive than bullion coins. Numismatic coins might be considered a traditional investment on which buyers may speculate on future value. Bullion coins, as mentioned previously, function more as an exchange from one form of money into another.
Many buyers have chosen to "invest" in numismatic coins because of fear of a future gold bullion confiscation, which happened before in 1936. During the bullion confiscation of 1936, numismatic coins were not included.
5. What should I know about weight and purity?
Precious metals are measured in troy ounces, which is slightly different than the normal "avoirdupois" ounce. (see: Troy Ounce vs Ounce). Government issue coins like the Gold American Eagle and the Gold Canadian Maple Leaf differ in both weight and purity. The Gold American Eagle is 22k gold and contains an alloy to harden it. It weighs 1.0909 troy ounces. The Gold Canadian Maple Leaf is 24k (.9999) pure and weighs exactly one troy ounce.
The reason these two coins are considered "equals" is because the gold content is equal. Gold bars are generally .999 pure or greater.
Coins and bars come in many sizes, ranging from "fractional denominations," or those weighing less than one troy ounce, to large bars, measured in both ounces and kilograms. As a general rule, the smaller the denomination, the higher the premium, as minting costs generally increase the smaller the weight. For this reason, a 100 troy ounce gold bar will fetch a smaller premium than 1 troy ounce Canadian Maple Leaf.
However, there are tradeoffs. Gold in larger form is much more difficult to sell than the smaller denominations. At $1400/oz (as of 3/28/11), 100 ounces of gold runs approximately $140,000, and the number of potential buyers in that range diminishes. Additionally, if one needed to raise $50,000 in cash on short notice, one would need to sell his entire gold position.
6. I have $10,000. What can I buy?
As of March 18th, 2011, $10,000 is roughly the equivalent of 7 troy ounces of gold bullion. Therefore, any large gold bullion bar is not an option. Realistically, one can purchase seven gold coins, gold bars, or a combination, or the fractional equivalent of 7 troy ounces (i.e. 70 1/10th ounce gold coins).
The total amount you can purchase will be dependent on premiums (fractional gold carries a much higher premium than 1 ounce coins) as well as dealer minimums. Some dealers will not sell less than 10 ounces of gold at a times.
7. Where should I buy?
There are over 4,000 coin dealers throughout the United States, but since you are reading this article online, we will focus on the online dealers. You should first consider the dealer's reputation and especially their Better Business Bureau rating, if they have one. This will offer some indication of the number of complaints filed with the business.
Next, you should seek out those dealers selling in the denomination you desire. In the above example, the dealers with 10 ounce gold minimums would not be an option for you.
Industry standard is to purchase bullion via bank wire to the receiving company. However, some companies do accept credit card payment as well as payment by check. Those accepting credit card typically assess a 3% fee, at minimum, while those accepting check typically delay shipment until the check has officially cleared.
8. What other charges should I be prepared for?
Many dealers will charge clients for shipping and insurance fees. Others charge brokerage fees and wiring fees.
At GoldShark.com, the algorithm is designed to narrow your search for you. Once you enter the desired product and the desired weight, the system will filter through only those dealers applicable to your search. Additionally, it accounts for all additional costs by the dealer to help you make an accurate comparison.
9. How do I know that the gold I receive is real?
One easy test to ensure that the product you purchased is the one you receive is to take your newly purchased gold to your nearest coin shop. Not only can they inspect and test the coin there, their "stamp of approval" will lend credence to the expectation that the product you own is sellable.
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