The world is turning cold to U.S. dollars, as governments race to diversify their reserves out of the greenback and into gold. Just this week India announced the largest central bank purchase of gold in over 30 years, as India’s central bank bought 200 tons of IMF gold during October. This was half of the total amount the IMF was slated to sell and the news sent gold soaring more than $25 in a single day. Private investors are also turning to precious metals as a store of wealth, hedge against inflation, method for maintain purchasing power and insurance against a collapse in the economy, dollar crisis or both. If you aren’t convinced yet of the importance of owning gold, read “The Case for Dumping Dollars and Buying Gold.”
While The Gold Stock Bull newsletter focuses primarily on identifying and trading undervalued gold and silver mining stocks, I believe it is important to first have a base of physical bullion or coins. Many of you have written asking the best way to purchase and store precious metals. The following options are obviously not exhaustive, but cover some of the easiest, cheapest and most popular ways to buy gold and silver. This article contains several crucial points to consider as you contemplate the very important step of converting your fiat money into a scarce, tangible asset that carries no counter-party risk, can not be printed out of thin air and has maintained its value and monetary function throughout history.
Gold or Silver?
I believe it is wise to have a mixture of both metals. The obvious advantage of gold is that it allows you to store greater value in smaller space and allows you to more easily transport your holdings. But due to its large denomination (1 ounce = $1,000), it would not end up being practical for purchasing food and other everyday items. At roughly $20 per ounce, silver rounds and silver junk coins are more practical as a monetary medium of exchange. Many investors also view silver as undervalued relative to gold and believe it will outperform its bigger brother during a breakout. My personal preference is to hold both and I like a split of around 75% gold and 25% silver.
Where to Buy and Store Your Gold and Silver?
Let me start by saying there is no “best” way to go about purchasing and storing precious metals. It all depends on your particular situation and desires. There are a variety of ways to buy and store precious metals and each have their own set of advantages and disadvantages.
This option gives you the benefit of having the metals in your possession and immediately available, without worrying about how or when you might be able to take delivery of your gold. If you are going to store it at home, you can either use a safe or hide the gold somewhere very inconspicuous and difficult to discover.
If you choose to use a safe, it is recommended that you use a floor safe and bolt or cement the safe into the ground. A few strong guys can easily pick up a safe and carry the entire thing out of your house to a safe location where they can work on busting into it. Don’t assume your safe is actually “safe,” unless you have it secured in a way that thieves can not easily bust it out and walk away with it. Likewise, it is not wise to spend $50,000 or $100,000 on precious metals and then skimp on the safe by purchasing a budget model for $100.
Another option for home storage is to find a hard to discover place to hide your gold. This could include burying it in the ground, hiding it under the floorboards, in the attic insulation or anywhere else that would elude potential thieves. If you decide to engage in “midnight gardening,” make sure that you buy corrosion-resistant containers and that nobody is around when you hide your gold. Of course, you can never be 100% certain that someone isn’t watching and you run the risk of not hiding it good enough or not being able to find it in the future.
The best method for home storage is probably a combination of the two options listed above. Buy a high-quality safe, bolt or cement it into the ground and conceal it well. Some have reported pulling up floorboards or digging a hole beneath their garage or storage shed, pouring in concrete and dropping in the safe (door facing up), then covering the safe and replacing the floorboards. With this method, you have the dual security of having your gold hidden where it is difficult to find and secured even if someone were to find it. Hiding it behind artwork on your wall probably isn’t the smartest move. Thieves watch movies too.
The last important element of home storage is secrecy. You will want to share the location and combination with one person that you can trust. If something happens to you and your family doesn’t know where you hid the gold, it doesn’t do much good. So, leave instructions somewhere that only your family will find or confide in one person, but otherwise the word is mum. Don’t tell friends and neighbors about your gold and how clever you were to store it so securely. Word tends to get out and if economic and social conditions deteriorate, you don’t want your home or family to become a target. This is certainly a disadvantage of home storage. Even if you have the gold hidden and secure, an armed robber holding a gun to your head or to a family member will likely succeed in getting you to reveal the location and combination. This again goes back to the importance of keeping your gold storage secret.
Bank Safe Deposit Box
This has historically been a safe and practical option for gold owners, but considering the current condition of the banking industry, you might want to think twice. First off, over 115 banks have failed thus far during 2009, a year of “recovery.” Also, if there is a bank holiday or run on the banks, you might not be able to get at your assets. And with plenty of evidence that the banks are pretty much running government, if your elected officials should declare a national emergency and need to confiscate gold as they did in 1933, you are out of luck. It is also worth noting that assets stored in safe deposit boxes are not insured by the bank and not protected by the FDIC.
Lastly, the major banks and their subsidiaries are often the very organizations that GATA and others have documented as suppressing the price of gold and holding ridiculous levels of short paper contracts against precious metals. Their livelihood rests on the fiat money system, putting them naturally at odds with gold and gold investors. Do you really want to trust and support these institutions? That being said, if you have a local, responsible bank or credit union that does not get involved with risky derivatives gambling, it might be an option worth considering.
Buying from Local Coin Shops
If you plan to hold and store precious metals yourself, you can order online for delivery from any of the places listed below, but you are likely to get a lower premium from your local coin shop. In Southern California, both Wilshire Coin and California Numismatic Investments (CNI) charge reasonable premiums for gold and silver coins. At the time of writing, they were charging around 4% over spot for Gold Eagles and 12% over spot for Silver Eagles. Call around to your local coins shops and you should be able to find similar premiums. If you purchase over $1,500, there is no tax charged and most shops have no reporting requirements, allowing you to buy anonymously (cash and carry). This is of particular importance for those concerned with another round of government confiscation.
Safe Storage Outside of the Banking System
There are other options for professional storage that are outside of the banking system. When considering the various options, it is important to make sure that your gold is allocated, segregated, independently audited and insured. Confirm that you are the outright owner, the company is not leasing out your gold, there is no other counter-party risk and that you can ask for delivery at any time. Please note that this excludes the major ETFs such as GLD and SLV, excludes unallocated certificate programs and excludes pool accounts. If you want to make sure that your investment is safe and liquid, here are a few companies that meet the criteria outlined above:
Kitco & Perth Mint (www.kitco.com)
Kitco has the most trafficked Internet site for precious metals and the Perth Mint is one of the largest bullion dealers in the Asia-Pacific. At the time of this writing, Kitco was selling gold eagles for about 9% over spot price and silver eagles for 15% over spot price. Delivery is a flat fee of $30, no matter how much you order. Kitco is a good option if you aren’t near a coin shop, your local store doesn’t have inventory or you simply don’t want to drive to the shop and transport the gold yourself.
Kitco also sells Perth Mint certificates, which come in both allocated and unallocated form. The price for allocated is 11% over spot for 1 oz Nugget or Lunar gold coins and 36% over spot for 1 oz silver Kookaburra or Lunar coins. Allocated means the Mint removes the coins from its operating inventory and places them in the Perth Mint Depository vault under the client’s account number. Allocated precious metal is therefore segregated from the Mint’s operating inventory and is held under a custody arrangement. The Perth Mint is wholly owned by the Government of Western Australia and operates under an explicit Government Guarantee, which means your exposure is actually to the Government’s solvency. Perth Mint Depository clients ultimately accept a sovereign risk exposure to the State of Western Australia.
The Perth Mint certificates offer a relatively safe way to own precious metals, but you are still owning a paper promise. In addition, some believe Kitco and Perth Mint are short gold and unethical in their business practices. Here is a forum with unsatisfied customers discussing their dealings with the Perth Mint.
BullionVault allows you to buy, sell and store gold at some of the lowest costs available. Your gold is stored with VIA MAT, which is privately owned, based in Switzerland and insulated from the risks of the banking industry. VIA MAT International is part of Mat Securitas Express AG, which is one of Europe’s largest and oldest armored transport and storage companies. With VIA MAT you can choose to have your gold held in Zurich, London or New York.
One of BullionVault’s major advantages is that they offer one of the lowest-cost methods of ownership. This is possible because your gold is stored in large (400 oz) “good delivery” bars, the same bars held and traded by the largest bullion dealers, bullion banks and government agencies. Storage in these larger bars allows for lower costs of ownership, yet you don’t need to come up with $400,000 to buy one. You can buy just a small portion of one of these bars, down to just one gram of gold ($30).
The gold is your outright property, as delivery has been taken and it is stored for you physically with the third party (VIA MAT). Every day BullionVault publishes the complete register of all its gold owners on the Internet – with each owner listed under a public nickname known only to themselves. This register reconciles exactly to the official bar list published with it. The bar list is produced by the vault operator, independently of BullionVault.
Buying and selling is settled instantaneously and you can withdraw your money and have it sent straight back to your original funding bank account. This set up makes BullionVault ideal for those wanting to hold gold and gain the benefit of its price appreciation with a low cost of ownership. BullionVault is also ideal for active traders, as it allows you to choose to behave like a market professional and quote prices. This allows the true trader a potential negative cost per trade, through the opportunity to earn the spread.
Fees: The dealing spread is around 0.5% and you pay a commission ranging from 0.02% to 0.8%, dependent on the quantity purchased. Storage charges are down to wholesale rates of 0.12% annually ($4 per month minimum) with insurance included. That’s less than a tenth of the storage fees charged by retail banks, and less than one-third the annual fees charged by typical exchange-traded gold funds (ETFs). BullionVault customers also save money because they deal directly with each other, willing seller to willing buyer, by using the BullionVault order board, which is open 24 hours/7days week.
Today, gold was being offered at 0.5% over spot, + 0.8% commission on the first $30,000 purchased, which allows you to buy gold at just 1.3% over spot price! Buy more and the premium goes down.
But BullionVault is not a particularly good option for those wanting to take delivery of their gold. While you can request physical delivery of your gold, BullionVault is really not set up for this purpose and carries some hefty delivery charges. The withdrawal fee for good delivery bars is “not more” than 2.5% and for other forms it is 7.5%, which you will likely need unless you have a minimum of 400 ounces. Your withdraw is accommodated only in the form of whole numbers of appropriate bars of varying sizes and, of generally accepted bullion coins, to be selected at BullionVault’s discretion. Plus, you may have to buy insurance for delivery, can not withdraw directly from ViaMat (must go through BullionVault), may be required to identify a local bank or equivalent institution to which your gold can be delivered. In addition to direct shipping costs borne by you, BullionVault makes a 0.5% arrangement fee for this service subject to a minimum of $500.
BullionVault has 40,000 users and more than $220 million in holdings. The sign up process is quick, easy and not overly intrusive.
GoldMoney – (www.goldmoney.com)
GoldMoney enables you to hold gold, silver & platinum, fully insured and stored securely at the VIA MAT vaults. Similar to BullionVault, your gold is held in 400-ounce good delivery bars, plus 1,000-ounce silver bars and platinum bars anywhere from 1 to 6 kilograms. But unlike BullionVault that offers storage of gold in VIA MAT’s New York location, GoldMoney uses either London or Zurich.
A unique aspect to GoldMoney is that they have established a patented currency, goldgrams® (1 goldgram = 1 gram of gold), to give customers the ability to make gold payments to each other electronically. The idea of bypassing the banking system and fiat money system to transact 100% in gold with another person or business entity is very appealing and I imagine this idea will gain momentum in the coming years. You can send and receive funds to your GoldMoney account via traditional financial institutions, such as banks and brokerage companies, yet hold those funds in gold rather than fiat currencies.
You can redeem and take physical delivery of your gold in handy units of 100 gram or one kilo (1,000 gram) gold bars. The vault operator, VIA MAT International Ltd., an independent third party, routinely prepares a bar list showing all of the precious metals owned by GoldMoney’s customers that is held in its vaults. These reports, which include bar number, weight, refinery, and fineness, are posted quarterly to the GoldMoney website. The vault auditor, Inspectorate International Ltd, an independent third party, audits on a quarterly basis the precious metals owned by GoldMoney’s customers to ensure that the physical bars held in the vaults operated by VIA MAT International Ltd correspond to the bar weight lists posted to the website. The audits are performed on a statistical random sample basis with the exception of Registered Gold Bars which are audited on a 100% basis every quarter. If you have 400 ounces or more, you can pay one gold gram extra to have your bars registered in your name. Once a bar is registered to you, you may arrange to take delivery of it at any time. Whether you transfer it to another vault or choose to store it at your home, GoldMoney can arrange delivery of the bar to the location of your choice.
Fees: GoldMoney charges about 2% over spot price to buy gold and about 4% over spot for silver. The storage price is a bit higher than BullionVault (0.12%), but still minimal at just 0.18% per year. If you want delivery, the redemption price is 2.75% for 100 gram bars and 4% for 1,000 gram bars.
GoldMoney has over 12,000 customers and $800 million in holdings. The company was founded by James Turk, whose writings I follow on a regular basis. The GoldMoney main office is located in Jersey, British Channel Islands, a British crown dependency situated in the English Channel near the north-western tip of France. I found their sign up process to be tedious, requiring your social security number and identify verification. While this verification might work online, mine required printing out forms, getting certified verification from local judiciary, police or notary and then snail mailing the forms to their office. They state this procedure is necessary to comply with anti-money laundering legislation, but I’ve found other companies to have an easier process. Your experience may differ.
Central Gold Trust, Silver Bullion Trust and Central Fund of Canada (www.centralfund.com or www.gold-trust.com)
If you are investing with funds in a 401k or IRA and can’t easily get the cash out to invest in gold using one of the methods mentioned above, you still have a better option than resorting to the major ETFs such as GLD and SLV. You can buy shares of GTU or CEF, which represent actual bullion being held for you in a bank in Canada. Unlike the popular ETFs such as GLD and SLV, these funds do not lease out your gold and they always maintain 90% or more of assets in unencumbered, segregated and insured, passive long-term holdings of gold and silver bullion. Inspections are required to be performed in the presence of both Central Fund’s external auditors and bank personnel. Central Fund’s chief executive comments:
“Our bullion is stored in separate cages, with the name of the owner printed on the cage, and on top of each pallet of bullion it states Central Fund or Central Gold-Trust. This disables the bank from using the asset from any of their purposes. We also pay Lloyds of London for coverage of any possible loss.”
Adding to investor peace of mind, those running these funds have been around since 1961, they are based outside of the U.S. (Calgary, Canada) and run by a board that is respected in the precious metals community, not a bunch of corrupt Wall Street cronies. Demonstrating transparency that is much needed in today’s investment climate, Central Fund makes regular trips to visit the assets and takes their auditors with them. And you get the sense that you are dealing with honest gold investors and not slick marketing or public relations specialists by taking a quick perusal of the CEF website. While they aren’t going to win any design awards, the website is packed with all of the investor information necessary for due diligence. I wrote extensively about this option in this article from last year.
Avoid Fool’s Gold
Make sure to avoid “Fools Gold.” ETFs, pool accounts, futures contracts and leveraged accounts are not real gold. They are just paper promises often with no gold or silver behind them. If you are going to use futures contracts to buy gold, make sure to demand delivery right away, rather than waiting and hoping the gold will still be available when you need it. Many have been forecasting a default on the COMEX and you need only do a google search to learn more about this possibility. I suspect we will soon see if the Comex depositories, the ETF custodians, and the LBMA, hold all the gold and silver they pretend.
You should also avoid collector coins such as those sold in late-night infomercials. They have ridiculous premiums that are often several times above the metal content in the coin. You can usually get 50% or more gold buying non-collector coins such as Gold Eagles, Krugerrands, Canadian Maple Leafs, etc. If a crisis unravels, how much of the metal you own will be infinitely more important than having your favorite animal, actor or football team engraved on the coin.
Ultimately, I favor having a mixture of investment vehicles and storage locations. The old adage about not storing all of your eggs in one basket is certainly applicable. Split up your precious metal holdings between physical metal and shares of quality mining companies, while owning both gold and silver and storing part of your physical assets at home and the remainder with a company like BullionVault or GoldMoney. This gives you exposure to the leverage offered by mining stocks, the insurance offered by having the metals in your possession and the safety of having a portion of your assets stored professionally.
If inflation accelerates or a currency crisis ensues, the dollar is going to plummet while gold and silver skyrocket in value. Even absent a major crisis, the investment return from holding precious metals has far outpaced any other investment class over the past decade. In fact, while the stock market (S&P500) is down (-39%) since the start of 2000, gold is up 325% and silver is up 350%! Kramer, Kudlow and the rest of the talking heads can continue espousing the virtues of investing in the stock market and the worthlessness of a barbaric relic such as gold, but the numbers paint a very different picture.
Once you have secured a base of physical gold and silver, you might consider investing in shares of quality mining companies. The leverage can be quite impressive and if the company hits a major discovery or is bought out by a larger miner, you can quickly see your investment double or triple in value. For example, during the same time period that gold appreciated 325%, one of our favorite miners (Goldcorp: GG) increased by more than 1,300%! Our Premium Membership allows you to view the Gold Stock Bull Portfolio in real time, receive email trading alerts whenever we buy or sell and get the monthly contrarian newsletter. Click here to get started.