As you know by now, I’m a bit of a precious metal investor/collector.
I list both “investor” and “collector” as I’m not really sure what I’d call myself. I buy a few coins here and there, but don’t have a large part of my net worth in metals.
At this point I buy mostly for my own enjoyment as well as for gifts (coins make fun and unique gifts, especially for kids, for holidays and birthdays.)
Here’s a quick review of my history in this area:
- I considered buying precious metals some time ago.
- I eventually purchased some silver coins.
- I also gave some away (BTW a little birdie told me there might be another silver giveaway coming up, so keep your eyes peeled)
- In addition to this, I continued educating myself about coin collecting as both an investment and a hobby.
Since my educational pursuits led to a lot of new questions, I contacted SD Bullion, the company where I buy my coins, and asked if they’d be open to answering my questions. (FWIW, I highly recommend them as they had the cheapest prices I could find on the web — as noted below.)
Not only were they willing, but the president of the company, Dr. Tyler Wall, answered the questions himself.
Below are my questions in bold italics followed by Tyler’s responses. Enjoy!
Why do people buy physical precious metals? (I assume there are many reasons, but what do you see as the top 3-4)
From your bullion investors to your coin collectors, there are several reasons individuals purchase precious metals. However, the most common reason our customers invest in precious metals is to hedge against currency devaluation. Our customers understand what 99% of the rest of the population doesn’t and that is this: the more dollars the US Government prints or the more money that is created out of thin air makes the dollars in your savings account worth less and less every year.
A lot of investors also consider precious metals as a safe haven investment against world-wide turmoil. When investors are “scared,” they tend to turn to gold and silver because they understand gold and silver have always had value dating back thousands of years and will continue to have value.
Other investors simply invest just to get “out of the US Dollar.” It’s no secret the purchasing power of the US Dollar is under attack from inflation and it’s also no secret the US Dollar is under attack from foreign countries as well. The BRICS bank is a classic example. The rest of the world is tired of all transactions being pegged to the US Dollar. A lot of investors understand this and invest in real money, which the constitution has declared long ago, as only gold and silver.
What are the advantages of buying PHYSICAL precious metals versus investing in precious metal companies or mining efforts?
Once someone decides to become a precious metals investor, there are a few options for the investor to choose from. The most popular are: physical, paper and mining stocks.
Our personal favorite is physical. The old saying “if you don’t hold it, then you don’t own it” is absolutely true. We live in a world where most everything is digital; especially investments. The common investor holds an IRA account in mutual funds. But what do they really own? They can’t tell you. When you buy physical metals, there’s something unique and special about holding gold and silver in your hands. It feels “real.” When you invest in physical gold and silver, you’re pulling your assets out of the digital world and protecting your wealth from risks such as rehypothecation and bank bail-ins to name a few.
Precious metal mining stocks are another investment to consider in the gold and silver space. We have friends of SilverDoctors.com that are experts in the field. We don’t claim to be experts; nor give advice on mining stocks as it relates to any one stock. Precious metal mining stocks often offer leverage to an increasing or decreasing underlying base metal price. The benefit of leverage has to be weighed against the risks of business/regulatory challenges, base input prices (oil), and local community support.
Lastly, there’s paper gold and silver; or GLD and SLV. This is not a type of investment we would recommend. There have been lots of stories coming out that the Comex doesn’t have the metal to back all the paper trades. In some reports, there has been respected industry experts who claim there is 100 paper claims to every 1 ounce of physical gold and silver. Therefore, if you’re holding a paper IOU certificate for an ounce of metal when it’s time to sell, there’s no guarantee there’s really anything backing your gold or silver paper investment.
What are the “best” precious metals to invest in (in your opinion) and why?
SD Bullion originated due to a passion for bullion investing and we will always be a bullion dealer at our core. Our company started when we were looking to make a purchase ourselves. Instead of purchasing bullion from the high price online retailers available at the time, we instead posted an inquiry article on SilverDoctors.com to see if any of our readers were interested in joining together for a wholesale group buy to get lower prices. The interest from our reader base was incredible. We saved a lot of people a lot of money in the initial purchases and continue to do so today. It’s funny, but this is how SD Bullion started out.
So we believe in “bullion.” In the industry that would be described as products that have a low premium over the spot price of the metal.
However, this is not to say collectibles shouldn’t be considered as well. There are plenty of numismatic coin investors out there that understand the collectors market and can make a good profit buying and selling rare gold and silver coins. But if you’re not an expert or being mentored by an expert, then our advice would be to stick with bullion products.
Most people are interested in buying physical gold and silver. What are the best ways for people to invest in these and why? (Coins, bars, etc.)
If you are a beginner in precious metals investing, then you should likely start with diversification within bullion type items. These are going to be your US Mint Gold and Silver Eagles, Royal Canadian Mint Gold and Silver Maple Leafs, as well as gold and silver bars and rounds. Another product to consider in this category is 90% silver which is pre-1965 US currency.
A lot of newbie investors get stuck on which type of product to invest in. We try to focus on diversification not only between gold and silver products, but also within the products themselves. Quite often we find investors delaying purchases just because they are hung up on whether to select rounds versus bars versus coins….instead of just getting into the game. In our opinion, the fact that you are investing in physical metals and protecting a portion of your assets from currency devaluation is what’s prudent.
Which is better to invest in (in your opinion) gold or silver and why?
We don’t really like to take a stance against one or the other because we believe they are both great investments. Diversification is what we view as important as there are subtle differences between the two metals that may become more pronounced as time passes.
Gold is typically seen as the investment of large institutional investors like banks, governments, businesses, universities, etc. Therefore, most would consider gold to be less “risky” and more “stable.” While its industrial uses continue to evolve, Gold is most often correlated with currency. If you are a conservative investor, then maybe gold is right for you.
Silver, on the other hand, is a lot less expensive on a per ounce basis and thus is widely considered the investment of the common man. Furthermore, Silver is currently trading at a 75 to 1 price ratio to gold. In other words, you can buy nearly 75 ounces of silver for every 1 ounce of gold. The historical ratio estimated by industry experts has been somewhere between 15 to 1 or 20 to 1. Therefore, a number of industry experts have called silver cheap on a historical ratio basis to gold. Additionally, silver has a very high industrial use. For these reasons and more, most metals investors would agree that silver is heavily undervalued and will lend a higher return on your investment on a long term horizon basis. However, most metal investors also agree the “swings” in silver could be greater than gold on a short term horizon basis. Therefore, if you are a more aggressive investor, silver rather than gold may be the better investment for you.
In summary, we recommend diversifying your investment into both gold and silver. In our opinion, let gold be the anchor of a portion of your investment portfolio while letting silver provide the possibility of a greater return.
Also, don’t forget about platinum. Not many people discuss platinum. But platinum seems to be fairly undervalued as well. It has been less expensive than gold for quite some time now even though platinum is one of the rarest precious metals in the world and has high industry use.
How can people get the best price when buying physical precious metals?
Investors can get the best price by shopping at SD Bullion. We have built our business and reputation as being lowest priced precious metals dealer online. Each week we post our specials online.
How can people sell their physical precious metals if they want to?
When an investor wants to sell their precious metals, it’s as easy as when they purchased the metal. All they have to do is call SD Bullion, lock in a price with one of our traders, and ship the metals to us. We will need to inspect the metals to make sure they are authentic and then remit payment to the investor. It’s a simple process.
What are your best tips for storing precious metals (both for safety as well as preservation of the item)?
Storage is a very personal topic for each investment and each investor’s situation is unique. But all investors should take storage seriously. If the investor is storing the metals at their residence, then we highly recommend getting an insurance rated safe or a built-in vault. The safe should be installed in a discrete location. It’s best to keep the fact that you store precious metals at your house to a very close, tight-knit group of people.
If you don’t feel storing your metals at home is right for you, then there is an array of affordable options on the market for consideration. The most common are precious metals depositories that look like something you’d see in a movie. These are highly secure and safe and your metals will be insured. You can visit the depository if you’d like to check on your metals.
At SD Bullion we offer depository options inside the US as well as right across the border in the Cayman Islands. The Cayman Islands option offers the benefit of being outside of US Jurisdiction, yet only a few hours flight from most major US cities. Several of our high net worth individuals with purchases well into the seven digits have chosen this option to mitigate risk of government confiscation. It’s also an approved IRA storage depository.
If you do decide to store your metals in a depository, our advice is to make sure your metals will be segregated from other clients’ metals. This makes sure the metals you purchased are the metals you will receive when you go to sell the items in the future.
How much of a person’s wealth do you recommend be invested in precious metals?
We never claim to be financial advisors so it’s a tricky question. Some investors are comfortable with only 10% of their portfolio in precious metals, while others are comfortable being “all-in” with 100% of their investment funds in precious metals. Investments, by nature, all carry a certain level of risk. Therefore we don’t push individuals one way or the other. We want them to be confident and comfortable with their investment portfolio and risk allocation.
What makes you different than other precious metals dealers?
When you look at the landscape of major precious metals dealers out there, we believe the biggest separator is our belief in the metals and our low prices.
As mentioned earlier, we were precious metals investors long before SD Bullion started in 2012. While other major bullion dealers hedge against market movements in dollars (meaning they offset their physical metal with paper contracts), we actually hedge our inventory by simply re-purchasing more inventory when sold inventory goes out the door. In other words, we’re in the same boat with our investors with market price fluctuations.
SD Bullion’s focus on being the lowest price online bullion dealer has led us to be the fastest growing Inc 500 bullion company in the United States. Our low prices are a product of a focus on our automated backend technology systems and mostly free word of mouth advertising. When someone is looking to invest a sizeable amount of their life savings into bullion, they often turn to a friend or family member for guidance on a reputable company. Over 95% of our customers surveyed will refer us to their friend or family member. We are one of the most widely reviewed online bullion dealers in the market with nearly 10,000 customer reviews making SD Bullion one of the most trusted bullion dealers online.
Mike H says
Hi ESI,
What percentage of your investing portfolio is in precious metals?
I know you are more of an ETF investor, but what do you think about getting physical stock certificates for individual stocks? These are tangible claims to property, witnessed by the steady paychecks coming to you from dividends every 90 days or so, assuming it’s a quarterly dividend payer.
I have a little bit of physical gold lying around but I’d say it’s a good bit less than 0.1% of my net worth.
-Mike
ESI says
I probably have the same percent as you do. And you couldn’t call them “investments”.
I really only buy for fun (not really collecting, just to have some silver around), giveaways (I have another silver giveaway coming up soon on ESI Money), and gifts (IMO silver coins make great, unique presents, especially for kids).
Mike H says
The silver giveaways are really cool. You’re making it rain over there!
Not quite the same as giving your tenants a free month of rent…
I think coins make great gifts too. I got the coin bug when I was a 10 year old kid!
-Mike
CJ @ The Vow of Practicality says
I really like gold and silver as well. My advice to beginners would be to not get the bug so bad that you start buying fancy Pandas and Koalas (guilty) before you know what you’re getting into. They can be hard to unload and come at a premium in the first place. Hard to go wrong with Eagles, Royal Canadian Mint, or well known generics. Also remember that these aren’t “investments” they are commodities that tend to keep inflation at bay over time. The reason you don’t want to be heavy in metals (pun intended) is because you lose out on growth investing in the long run. On the other hand they are great when the market drops, as they often go up.
Chadnudj says
I understand the thought process and appreciate the guest who came to answer questions, but I see absolutely no reason to ever buy a physical hunk of metal to sit in a safe someplace.
Gold and silver have always historically had value, but will they continue to? Plenty of milennials are turning away from diamonds/gold/silver in terms of jewelry/engagement rings already — why wouldn’t they do the same with physical gold and silver?
If the US economy disintegrates entirely (basically the only scenario where hunks of metal might become key to survival), I’m sure it will be from forces that not even physical gold/silver assets will protect you or I from….which is why I’ll keep plowing my investments into stock/bond index funds and FDIC insured savings (and my rental property and primary home).
Apex says
The statement from the president of SD Bullion above suggesting some “investors” have 100% of their funds in metals is a scary thought to me that seems to be about uninformed buyers almost all of which I suspect are chicken little’s convinced the sky is about to fall due to the evils of fiat currency.
Gold and metals resellers have gotten a lot of currency (pun intended) out of the rise in the price of Gold in the last 15 years. An examination of the historical record isn’t nearly as rosy however.
Gold was pegged to $35 per ounce from 1934 to 1970 when we were on the gold standard. The intention of this was to protect the purchasing power of the dollar because every dollar was backed by gold. So how did that work out? Was inflation kept at bay from 1934 to 1970?
http://www.usinflationcalculator.com/
No. From 1934 to 1970 inflation was almost 200%. Meaning that a dollar in 1970 was worth about 35 cents of what a dollars was worth in 1934. So gold backing the currency didn’t stop inflation nor the devaluing of the currency.
We came off the gold standard in the early 1970s and admittedly inflation sky rocketed. It was already creeping up in the late 1960s and got out of control by 1980. I don’t know enough about the historical causes of that time period to say what caused it. I am sure many gold advocates will point to the lack of a gold standard. There could be some cause there, I don’t know. But it is interesting to note that it only lasted for a decade and it wasn’t fixed by going back on the gold standard or using any hard form of currency. It was stopped by Fed chair Volker raising interest rates high enough that inflation was killed by it.
So we were on fiat currency and have not looked back. If fiat currency was so bad for inflation then inflation should have continued. In fact the inflation rate from 1980 to 2016 (the same 34 year period as when we were on the gold standard) is almost identical at slightly less than 200%. It is only the decade of the 1970’s where inflation ran at an excessive rate.
So the gold standard didn’t stop inflation and not being on the gold standard has given us inflation in the last 3 decades that is comparable and often lower than when we were on the gold standard.
Ok so what about the idea that holding gold will at least be a hedge against inevitable inflation. Perhaps. It is a hard asset and all hard assets tend to go up with inflation so in that sense it is hard to argue that it won’t over time tend to keep up with inflation. But what does that look like? Real estate for example goes through ups and downs but tends to mostly keep up with inflation with some fluctuations around the mean (sometimes more wildly fluctuating than one would like but recovering in less than a decade).
Does gold’s price movement look like that? It does not appear to. We know gold was pegged at $35 an ounce from 1934 to 1970. So that was clearly held artificially low. Once we came off the gold standard in 1970, it was a rocket ride to the moon. Gold shot up from $35 an ounce to over $600 by 1980. 10 years with a nearly 2000% return. For the next 20 years if you bought gold at ANY TIME between 1980 and 2000 you lost money. Gold was always worth less in 2000 than at any time in the previous 20 years. That’s a tough feat to accomplish. I don’t know of any other asset that can claim that track record. After 2000 Gold shot up again from around $300 to almost $1800 in 2011. Since 2011 we have the same patterns as after 1980. Any gold purchased anytime from 2011 to now has lost money. 7 years now with negative returns in gold.
So Gold made big money in the 1970s and 2000s. Lost money every other time. Those are some very lump results and don’t really give me the sense of a reliable inflation hedge that I would like to have. How will it be priced when I need it? Historically the price has been unreliable. I would much sooner own something that shadows inflation which real estate tends to do rather than something that goes backwards for long stretches of time and then promises me a big pay off some day in the distant future.
Of course those could be anomalies and gold could perform much differently in the future. I don’t know what it will do. It has tended to keep up with inflation over long stretches, but the results are extremely uneven.
One last point on the inflation hedge. Why is an inflation hedge good enough? Does anyone really feel that keeping up with inflation is a decent investment. All that does is guarantee that the $30,000 dollars that you have today that will buy you a Toyota Camry will still buy you a Toyota Camry 30 years from now. Should that be considered a good investment? It’s like the servant in the Bible who went and hid his talent in the ground so he wouldn’t lose it. I am not interested in simply retaining the value of my investment. I expect it to grow not just in nominal value but in purchasing power. An inflation hedge doesn’t offer growth of purchasing power, only protection of purchasing power. And yes I know the number one rule of investing is return of principal before return on principal, but it is just the number 1 rule, not the only rule. A hedge only gives you return of principal, not return on principal, after accounting for inflation.
You can’t get ahead using hedges, you need investment growth that considerably exceeds inflation or you are simply running in place. I am not interested in running in place and certainly not in running backwards for 20 years so I can be shot forward to the same place I was 20 years later.
I am biased. I have never been a fan of gold (or any metals). I admit to that. I just can’t see any value in it.
ESI says
As usual, I feel like you’re holding back. Tell us what you really think! 😉
Alex C says
You make good points and I agree with you.
It’s more that a small allocation towards metals and commodities can reduce portfolio volatility and increase returns.
Coins and bars can be fun too.
Apex says
It is certainly possible that exposure to a hedge asset class like metals could reduce portfolio volatility. Decreased volatility does not necessarily lead to increased returns however. Bonds are less volatile than stocks. That doesn’t mean adding bonds to your portfolio increases returns, it just limits the swings.
Coopersmith says
I buy silver because of the feel of having a 1 troy ounce of pure silver in you hand (separated by a archive sleeve of clear material) I don’t have much and have no intention of having any portion of my retirement portfolio in precious metals. I think my buying of around 15 Silver american Eagles a year will be a nice keepsake for future generations and if needed unloading if required.
Alex C says
Agree, a little silver or gold is a nice keepsake.
TPS Reports says
If the system totally fails, copper and lead will be the most precious metals.
Gold and silver will still have value even if millennials don’t think so.
We were not on the gold standard 193x – 197x. The hyperinflation is a result of that.
KT says
I own gold & silver bullion coins & bars and recommend bullion bars for fresh purchase as they sell for less of a premium (over spot price) that coin, especially Gold Eagles. Gold eagle coins sell for a significant premium over spot. The only coin that sells for a small premium over spot are Canadian Maple Leaf. Also, and I’m not full of crap here; preowned Rolex’s are a good investment. They are highly liquid and they do appreciate in value (especially the simple stainless Submariner). I purchased one in 1990 brand new for $2400. To purchase the same model on eBay today would cost $5800.
Kirk says
The new Submariner retails for over $8000. I recently picked up a 2015 in mint condition and still had to pay $7300. for it. That’s the key here, just because it’s preowned, it’s not like a car. The depreciation up front is minimal and over years it appreciates. The 1990 model I still have will remain on my watch winder as I no longer wear it.
Back to Gold & Silver, it’s difficult to hold 10% of your investable assets in precious metals when you reach millionaire net worth. I think 10 oz. of gold and maybe 500 oz of silver is max to store at home (better get a gun vault!). The storeage offered by online dealers are legit but there’s fees involved and you don’t access immediate access and frankly, it’s no longer a tangible asset at that point.
Some of the ETF’s have actual gold backing them. Here’s a couple and I own all of this in my Schwab account:
PHYS, SGDM, SIVR.
I agree with the gentlemen in the interview, stay the hell away from GLD and SLV.
Jeff B. says
So you have a 240% increase in value in 27 years? That is about 8% a year. Basically the same as owning a good stock. Granted, you get pleasure from wearing it…..
Kirk says
That is correct. You get to wear it and that makes it worthwhile. Though with Gold, it’s fun pulling out your gold kruggerands from the gun safe and gazing upon them….
Jeff B. says
If gold is based in USD, how does it hedge against anything? You have to sell the gold for money. Who had ever taken gold and paid for gas or groceries or a car? I just don’t understand investing in precious metals.
Kirk says
Allow me to chime in on this one. Let’s say you are someone that holds cash in your home safe, say $25,000. If you hold 2 ounces of gold (equivalent amount) you’ve hedged any inflation erosion on that cash. You won’t lose purchasing power with that gold holding.
Noregret says
ESI,
You’re a rarity among PF bloggers talking about precious metals in anything but a negative light. My current PM allocation is 11%, counting bith bullion and miners. It’s under my target of 15% as I wait for it to come out of it’s basing phase.
The Comex stocks are much less than paper contracts as you say, but most don’t take delivery. It has always led to claims of manipulation. Individual investors are well advised to ignore all that.
The bullion funds have segregated and audited metal in storage. Some like GLD publishes serial numbers of the bars. I see no reason to distrust them. Whether one wishes to pay the ER vs. holding physical is a different matter. I have both.
The thing with PM is it’s a difficult asset to own. The discussions are always emotional. Monetary history and portfolio theory are no match to preconceived notions.
May you continue to enjoy your coins,
NR
Jeff B. says
Is Gold and PM taxed at ordinary income rates and not capital gains rates?
Noregret says
Bullion and bullion funds are at the 28% collectibles rate. Miners at regular CG rates. I used to own CEF/GTU which are PFICs that require the QEF election to get regular CG rates. GTU was taken over by PHYS in a bitter fight. CEF is still available.
You should consult a tax professional or own them in an IRA.
NR
Dan P says
Thanks ESI for a very different guest post and thank you to the Guest for the interview.
I recently had the conversation with a colleague about the merits of PM investing. I don’t really believe PM are an investment. It is either a speculation or a novelty/collectible. PM don’t grow or create value or become more efficient over time. They don’t pay a dividend, coupon or buy back shares. You cant rent it out or grow anything on it. 1 oz doesn’t become 2 oz if you wait long enough. They are entirely dependent on someone paying you more for it than what you bought it for. That is the definition of speculation.
I bought about $1200 worth of PM in 2009 as a teenager when everything in the economy was going up in flames. I wish i had have invested in something that created value, it could not have been a better time. If i had invested in stocks, i would have nearly tripled my money. If i had invested in bonds, i would have had decent 3% returns. My silver has done nothing and if i was to try and sell it, it would cost me a selling commission as well!
I think the financial doomsday crowd, if they really believe the system will immanently come crashing down, would be better served by having some very rural farmland or a cabin on lake. They should also own firearms, know how to bow hunt and fish and also be great gardeners. That would be better preparation for a financial doomsday and a pretty decent lifestyle post financial apocalypse. This is basically what i told my colleague, and he owns a small ranch in a very rural part of Canada and has 80 cows/calves on it. That is a way more productive asset and a better preparation for the financial apocalypse. Can you imagine post financial apocalypse trying to trade a gold coin for a loaf of bread? That sounds like the opposite of safety.
That all being said, I think PM are great for the novelty, I can appreciate that. I will probably keep that silver i bought as reminder of the difference between speculation and investment.
George says
I would add that in addition to livestock, land, and tools (including firearms) that knowledge is the greatest asset to have in case of financial doomsday. Dan mentions hunting, fishing, gardening- I would add building, irrigation systems (water recovery especially), solar power, just basically off the grid living. I don’t understand how living in suburbia with 100K in PM is protecting you against anything.