A few years ago I read a copy of Buy Gold and Silver Safely: The Only Book You Need to Learn How to Buy or Sell Gold and Silver.
I was considering buying gold and/or silver at that time, but the rest of the world was as well and prices were sky high. I decided I would not buy at that point but revisit the subject once prices normalized a bit.
Fast forward a few years and I’ve been re-reading the book.
I thought I’d take you through its highlights and my thoughts so you can give me your thinking on next steps.
Overview of the Book
The reason I like this book so much is because it’s anti-establishment (or at least portrays itself that way). It gives the reader a behind-the-scenes view of the often unscrupulous gold and silver markets. I like these “this is how it works and what you should do to beat the system” sort of books, so this one was perfect for me.
The author covers several key points as follows:
- There are two reasons to buy gold: 1) appreciation and 2) to protect against currency devaluation/economic collapse. If you’re looking for the former, the author feels you should buy and sell it just like a stock/mutual fund. He’s not a fan of this approach. He focuses on the second option — that there’s a chance of major economic problems in the US due to massive government spending and printing money.
- The author’s answer to “what to do” to prepare for the economic problems is to buy physical gold and silver. He argues against gold funds, ETFs, and the like since these are geared more for an appreciation strategy. He says we need to own physical gold or, at a minimum, gold that is held somewhere with the option of being delivered. It’s not so much an “investment” as it is “insurance.”
- There are two ways the author recommends investing in physical gold: 1) bullion coins and 2) bars. For coins, there are various weights and types of coins. The author recommends only the most common options because they are recognized worldwide as the gold standard (pardon the pun). As such, he recommends only 1-ounce coins and ranks them as follows: 1) American Gold Eagle, 2) American Gold Buffalo, 3) South African Krugerrand, 4) Chinese Gold Panda, 5) Canadian Maple Leaf, and 6) Australian Kangaroo Nuggets. One reason he likes these is that they all have the weight written on them in English. He later recommends one of these above the others saying, “Because of the liquidity, worldwide recognition, and durability, I recommend the 1-ounce gold American Eagle bullion coins for delivery.”
- He recommends buying gold bars if you do not have them delivered but want the option to do so. But he says they have disadvantages, namely many dealers won’t buy them back and most homeowner’s policies won’t insure gold bars. For these reasons, I crossed gold bars off my list.
- The author says the spot price of gold is what everyone sees gold trading for on the various exchanges. Gold dealers pay a premium over this to buy gold (around 3%) and then mark it up (anywhere from 2% to 10%) to sell to investors. That means investor prices are 5% to 13% above the spot price.
- You have to watch dealers. Some dealers try to mark up gold some coins even more claiming they are “first strike”, valuable because they are collectible/rare, or for some other made-up reason (which is really a marketing gimmick). These coins can sell for much higher mark ups and, according to the author, have no or very little additional value. As such, they should be avoided. He spends a chapter talking about how gold dealers try to manipulate buyers, converting them to the highest margin coins. He details their tactics to warn investors not to fall for their tricks. The author does say, “I may buy a few coins because they are aesthetically beautiful, but not as an investment.”
- The author talks about where to store physical gold (in a safe, of course) and details the types of safes acceptable for protection and insurance coverage. He recommends against a bank safe deposit box for a variety of reasons.
- He lists a wide range of places to buy gold coins including his own site called Buy Gold and Silver Safely. Supposedly he only has a 1% mark up, but his prices appear higher than at other places. More on that later.
- The author dedicates a chapter to silver where he basically comes to the same conclusion as with gold. For silver investing for delivery he recommends 90% junk silver, circulated coins that are partially made out of silver. They are sold in bags and one with a $1,000 face value has 715 ounces of silver. For storage (you don’t take physical possession) or IRAs, he recommends 1,000-ounce silver bars because they have the best price.
- He recommends 10-20% of a portfolio be in physical gold and silver. He says that amount should be split 75% gold and 25% silver.
- He says silver prices tend to be higher in October through May and lower in the summer months, the best time to buy.
After reading the book and considering the above, here are some thoughts I have:
- Do I really need physical gold and silver in my portfolio, even if I consider them more insurance than investment?
- If I did decide to add them to my portfolio, there’s no way I’d invest 10%-20% of my portfolio in them. I’m thinking maybe 5% at most. More likely, 2.5%.
- I looked online a bit at a site that compares gold prices from various sellers (there’s one for silver too) and it looks like you can get the best prices on American Eagles by 1) paying cash, 2) buying in bulk, and 3) accepting coins from any year (versus current years). I’d be willing to do all those.
- It looks like the author’s prices were higher than the ones on the comparison site.
- I would probably go with American Eagles, but the other 1-ounce coins he said were acceptable were less expensive.
- If I invested I’d have to get a safe and/or find a good hiding place. Do I really want to deal with that?
- I would recommend the book to anyone thinking of investing in gold or silver. All around it’s a great book and very informative. I’ve shared the highlights, but there’s much more to this book.
- I do love the idea of having physical gold coins (I’ve always been a bit of a coin nut). Is this why I’m considering investing this way or is it really the right thing to do?
Ok, now it’s your turn. A few questions:
- What do you think about investing in physical gold and silver?
- Do you do it?
- Do you have any tips/thoughts to make the most of doing so?
- Anything else I missed that should be considered?
Let the discussion begin…
[Update: Since this post, I did buy some silver.]
What do you think about investing in physical gold and silver?
– You’re the second PF blogger I’ve seen bring this up recently. The other was Dom over at GenYFinanceGuy and he recently took a position in physical gold. This hadn’t really been on my radar because I don’t know how it fits into my investing goals. I have been prioritizing real estate as my next venture so my savings were going towards a down payment. Without having lived through the great depression, how exactly does gold save you in an economic collapse? Do you count the great recession as an economic collapse? Would the expectation be that you would use partial or whole coins to pay for goods and services in lieu of paper currency during a collapse?
Do you do it?
– Not at the moment but I could be okay with a sub 5% allocation
Do you have any tips/thoughts to make the most of doing so?
– When I think economic collapse I also think civil unrest. Like make sure you have personal firearms kind of collapse. Is there a distinction there for you? Maybe go 2.5% gold silver and .5% guns and ammunition to protect that asset (and your family)?
Anything else I missed that should be considered?
– Why would older vintages be priced differently than others? Isn’t 1oz of gold 1oz of gold? After all, it’s still a polished up element. Or is there an assumption that older years are less pure or something along those lines?
– Buy a non-digital scale and learn how to smelt?
Appreciate your comment.
Maybe “Should I invest in guns?” will be the next post. 😉
Guns would certainly have more utility than gold/silver.
Guns and silver bullets have great utility in encounters with Werewolves. Preparation for any eventuality is the key!
Investing in gun stocks have been explosive since the current admin. wants to limit guns…. Obama and his admin have been the best sales people for guns and ammo…..
There is nothing like the feel of a physical silver coin in your hand, or at least in its protective case. The weight, the shine and the beauty of a physical coin. I was intrigued when I bought silver American Eagles with the year of my sons earning his rank of Eagle Scout from Boy Scouts in 2013. It was a nice commemorative piece for him. I bought the coin for $35 which got me thinking about investing. I have a high school friend who has been coin collecting since his teens so I asked him about investing. He has his Doctorate in Physical Chemistry from Berkeley California and works in the semiconductor industry so quite knowledgeable about commodities especially rare earth metals need for semiconductors. His words in 2013 were
“You would be an idiot to invest any sort of money at these current insane prices. $30 an ounce for silver is way too much and for silver or gold. It is a volatile commodity that is dependent on supply and demand. The price is being driven up by China building gold and silver reserves. Wait a couple of years when China stops buy and prices will plummet. If you are looking to collect or start a collection just start buying some things that you think are nice but don’t look at them as an investment.”
Not the answer I wanted to as I had a little of a silver bug but I did not buy any more. His advice is to do it for a reason and not as an investment. He said “I have a substantial collection of gold silver and common piece of coinage. It has higher value as a collection to me than an investment. I have some proof sets he has gained substantial on and others he has lost money by over paying”
I remember him saying that his collection is only as much as someone would be willing to pay for. It is an asset but for him he would never sell.
Two years later I saw that silver was now $20 an ounce and asked him was a fair price seeing that it was 1/3 lower? He said it was a reasonable but still a little high but I started my collection. I am currently buying 15 silver American Eagles that are BU grade in bulk as potential gifts to either give to grand children or just to have as a potential hedge and something to collect. If there is another insane run up in silver I might sell 5 of each year just to recoup some of my costs but I definitely not looking at it as an investment more as something to collect and pass on.
My projected amount that I would invest in gold or silver will be probably about .0001% of my portfolio
Sorry… it should say 15 American Eagles per year….
I like the idea of buying just a bit each year…
Mike H says
We have a few ounces of Thai gold bars- the weight is written and the shop owner will buy it back at the market price- they’ve been in business for 80 years so the reputation is there. The spreads between buy and sell is only 1% or so but that is for items with their own stamp / engraving. They do a lot of volume so make good money on the tiny spreads. We bought some silver bowls and utensils when going through a shop in Cambodia- the owner was selling this at the market price for silver, so the workmanship was free. I was able to test it and determine it was silver.
Silver is a pain in the butt because it tarnishes so easily. And I used to have the precious metal bug until I became obsessed with assets that generate cash flow. Metals on the other hand consume cash flow as you have to pay to store and protect and test it.
It’s like what Buffett said, and I’m paraphrasing: “Owing gold makes no sense. You pay someone to dig it out of the ground and process it, and then pay someone else to put it in a safe and put it back into the ground. An alien observing from Mars would be scratching their heads.”
I’d much rather own shares in a company that has a strong brand and can set pricing where they are bringing in increasing cash flow and profits during inflationary and deflationary periods.
Keep gold and silver as a collectible item but not as an investment source. When you take away the cash flow of the asset and hold it for a long period you are incurring a huge opportunity cost when compared to a proper investment.
Gold and silver has always symbolized wealth so the allure of having it and holding it is there. AHHH look at all this shiny gold! I’m RICH! its tangible evidence of wealth. How can looking at numbers on a balance sheet compare?
I will not be adding it to my portfolio however. The little I have read on the topic suggests that one must time the market to buy or sell it and this just does not fit into my passive investing philosophy. Buying gold and silver smacks of speculation and/or of ‘preppers’. The end is coming you’d better prepare with gold coins, guns and dried foods. LOL
It also does not fit into my risk management-the physical risks of theft are too high.
So…. no I wont be buying any gold.
“What do you think about investing in physical gold and silver?”
Why on earth would I buy an asset that provides no return (no dividends/interest), doesn’t grow (it’s not like a gold/silver bar would increase in size; it merely fluctuates based on commodity prices), has no practical utility to me (if Mad Max Fury Road becomes our future, I’d rather have a working vehicle/gasoline/guns/food/water than a useless hunk of metal), and whose total value is based on how much people think it’s pretty (see: no utility) and which thus is just as ephemeral as cash in terms of being a store of value (i.e. if everyone stops believing cash is safe, it loses value; if everyone decides gold/silver are dumb, they lose value).
Gold/silver are just a dumb investment (and calling them an investment is using the term VERY loosely). If the world ends to the degree that gold/silver could “save” you, you’ve got lots bigger problems than lost net worth (i.e. marauding bands of criminals, environmental destruction, lack of food/water/shelter, etc.)
Chadnudj hit pretty much all the points I would make so there is no sense in repeating those.
For me personally the only gold I will ever own sits on the 4th finger of my left hand. I have no attraction to it, and I find no value or utility in it. You can’t eat it. You can’t build anything useful with it. You can’t buy anything with it. But if some people knew I had a bunch they might shoot me for it.
If you just like having some bling in your hand then go for it, but I wouldn’t think of it as an investment. Whatever you do stay far, far away from the Gold Bug mentality and those who promote it.
The road to conspiracy and paranoia is littered with Gold Bugs. It is an alternative universe where up is down and black is white. Be careful not to go through that looking glass.
Aaron M. says
I keep about 5K in silver american eagles in my safe at home. Its <1% of my NW so it's more of a last resort safety net. I basically forget I have it and hope I never need it. I have been thinking of buying a few K in gold as well. I really like diversification and it helps me sleep at night.
I am mainly invested in high yield dividend stocks and real estate.
Doug Eberhardt says
Hi ESI, thanks for the nice review of my book Buy Gold and Silver Safely. Since the book is from 2010, I have changed a few things with my thinking on metals and I’ll address them below. I am updating that book later this year, but just finished another book that will be on Amazon.com soon after the 4th of July called Illusions of Wealth. http://illusionsofwealth.com It hits the 99% of investors that need help not just understanding gold in a portfolio, but how to profit in up and down markets.
When it comes to investing in gold my philosophy is simple, buy as low to spot as you can. For gold that is the 1 and 10 ounce bars. For silver it is the 1 ounce rounds and 1 ounce, 10 ounce and 100 ounce bars.
You had said that our prices were not cheaper than the site above, but it wasn’t an apples to apples comparison. The gold American Eagle coins they show on the site are backdated and are actually cheaper than 2016 which are the coins we show priced on our site. The reason we don’t show backdated is they are not always available and I view those who advertise them as somewhat a bait and switch tactic. That said, I think our 2016 prices may be cheaper than there backdated prices now.
For silver rounds we are no doubt the cheapest, and dollar for dollar lower than Eagles and Maples and we do guarantee lowest prices.
Our philosophy on pricing is simple, we just look at our competitors prices and undercut them. Because we don’t have the overhead like some of these companies have, we can offer lower prices.
Regarding the 10% to 20% into metals, I do break that down to 10% physical and 10% miners and break even that down further in the book for aggressive, moderate and conservative investors. Richard Russell, who wrote Dow Theory Letters for 40+ years had said 50%, but he had been saying it since gold was $250 an ounce. A little bit too much for me, but when he died not too long ago, I don’t think his kids minded it.
The problem moving forward, from an asset allocation perspective, is you take from what is reaching new highs and dollar cost average into what is being beaten down. If you see the future as a problem of government meeting obligations for their “balanced budget” which they define as 9 years of more spending and 1 year coming under budget, lol, then some insurance in the 10% range might be prudent.
I write my Current Thoughts on the metals market daily here: http://buygoldandsilversafely.com/category/current-thoughts/
At present I am micro bullish but see a top at $1,400 and a contraction lower with the overall markets, similar to 2009 which I explain further in my Illusions of Wealth book. I’ll send you a free copy if you would like.
Thanks for your comments! I appreciate you leaving them.
I’d love to receive a copy of your book. Thank you!
Doug Eberhardt says
Hi ESI, thanks. I always call it like I see it and I think you’ll appreciate that in the Illusions of Wealth book. Shoot me an email to [email protected] with your address or let me know if you just want the pdf version and I’ll get it to you.