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What Type of Precious Metal Investment is Right for You?

March 8th, 2018 at 04:58 pm

This is part 3 of Milly's "Precious Metals for Beginners" series. For other parts see:
Part 1:Why you NEED Precious Metals in your Portfolio
Part 2: Silver vs. Gold
Part 3: Coins? Bars? ETFs? What form of Precious Metals are right fo...
Part 4: Where to buy Precious Metals



Which Form of Precious Metal to Buy? - Pros and Cons
Once you've decided to get some precious metals and have decided on what type of metal to get, there are a multitude of options what form to get the metal in. Each option comes with it's own advantages and disadvantages.

Buying Non-Physical Metal: Stocks, Futures Contracts, ETFs, etc.
Gold Stocks are just the stocks of companies within the gold sector, usually mining and exploration companies.

Futures Contracts/Options are basically leveraged bets made on price changes of the metal. Any change in the metal's price, whether up or down, is greatly magnified leading to large gains or losses.

ETFs and other investment assets can be set up to track the price movements of silver and gold. Some even offer delivery upon request.

Advantages
All of these methods are very liquid. While sitting at home, you can click a few buttons, and sell or trade your assets. You can access your wealth rapidly. Buying and selling physical gold requires physical movement and can be much more cumbersome with large price vs. speed trade-offs.

Gold Stocks and Contracts can offer leverage. If you are certain that gold will grow within a narrow enough time window, you can grow your wealth relative to gold, not just the dollar.

Disadvantages
Gold Stocks are still just stocks. They may or may not make the anticipated changes in value based on gold price. Sometimes their values even head in the opposite direction as the metal they "should" be tracking.

A single bar of gold can have many contracts claiming it. Not all of the claims can be filled by a physical delivery, the rest will have to be settled in dollars. In the case of rapid inflation, you'll be very disappointed if a check is delivered instead of bullion.

Even if the precious metal is backed up one for one in your name and audited by third parties, there may come a time when people will do anything they can to keep it or seize it. Companies can change policy, governments can change regulations, and mailed packages with precious metal company names on them might be more likely to disappear.

I don't recommend any of these methods as your "precious metals" investment. That doesn't mean they can't be right for some people own, it just doesn't count as owning precious metals in my book. Instead, they belong as part of a well diversified stock portfolio. If you don't physically have it, you own someone else's liability and are at the mercy of their willingness and ability to pay.



Buying Gold and Silver Bars/Rounds
These are simply gold or silver bullion that has been refined and pressed into tokens (rounds) or bars by private mints.

Advantages
Depending on where and when you are purchasing from, this is usually the most affordable way to buy any precious metal in both price per ounce and buy/sell spread.  You can even get a few ounces of silver at spot price from JM Bullion with this deal!  Without the deal, you can still usually find silver specials for $0.69/ounce premium or less over spot.

Disadvantage
The potential drawback with this choice is that they are not recognized like government coined gold and silver.  If it didn't come from a well-known private mint, people might not trust it. If you are getting it second hand, maybe you shouldn't trust it either.

If you stick to well known brands such as Sunshine, Silvertowne, and APMEX you should be able to resell your rounds just fine. Expect less demand though.



Buying Junk Silver
Junk silver is a deceiving term for old coins that have silver content.  Most junk silver you'd buy are 90% silver, but pay attention because they can be as low as 35% in war nickles (we needed nickle for the war, so we used silver in 1942-1945) or even 10% in old Mexican Pesos (1957-1967).  Don't worry, all the coins and dates are listed under the "coin" tab in my free junk silver spreadsheet so you can just look up the silver content/ weight if you get confused.

Advantages
In a time of crisis, survivalists have deemed junk silver the currency of a collapse.  I don't think it will become the standard because it is too uncommon, but it is a good idea to have some on hand just in case you need smaller amounts of silver in a barter scenario.  At today's price a 90% silver dime is worth just over $1, so you can easily price things in these lower denominations.

Another major advantage of junk silver is it's recognizability.  Everyone knows what a quarter looks like.  We've been using the same Washington obverse since 1932!  Also, it is very hard to counterfeit something that has been worn from years of circulation.  You will notice if something is amiss in a counterfeit.

We are also accustomed to doing transactions in these coins.  Sure a 90% silver dime is worth more than 10 cents, but you know that 5 dimes is the same as two quarters and that two quarters is the same as a half-dollar (so long as they are all 90% silver).  It is easy to make change with this system.  One exception to the "face value" math is the old silver dollar.  Despite being 90% silver just like the others, Morgan and Peace dollars are heavier than 4 quarters so they have more silver and are worth more.

Disadvantages
You have to do more research when purchasing in this category.  If you limit yourself to large reputable dealers who sell quality coins in standardized batches, it simplifies things.  If you only invest in US 90% silver coins it gets even simpler.  Each face value dollar worth of 90% silver US coins contains 0.715 troy ounces of silver (unless they are silver dollars).

Seriously, if you haven't caught on yet, you need my junk silver spreadsheet.

Junk silver doesn't follow the ups and downs of the silver market as much as 99.9% fine silver does.  In my observation, regardless of silver price, junk silver trades around $13-$14 per dollar of face value for US coins.  What that means is that if silver spot price is above $19, you might be better off buying junk silver, otherwise rounds would be cheaper.  Sometimes Junk silver even sells at spot price! It also means that these are a poor investment choice since they are likely not to increase in value as much over time.  I can't say this trend will always hold true though.

Because these coins are not "fine silver" you would have to pay a refiner to process them before you could use it in jewelry or industrially.  After adding that cost, the coins are probably more expensive than just buying bars or rounds.  40% silver coins are often not even accepted by refiners, but that could change in a large silver price jump.

Unless you are paying a hefty premium (additional price over spot price) for fancy coins, these are not showroom pieces and have been through may years of abuse.  Personally, that makes them fun. It is a little piece of history and I can sort through them and play with them without damaging their value. If the coins are extremely worn make sure to you get the price in weight, not face value as some silver has rubbed away.



Buying Fine Gold and Silver Coins
Fine Coins are generally 91% to 99.9% (or even 99.99% in the case of Canadian Maples and Australian Kangaroos) gold or silver and are minted by a government and has a monetary face value.

Advantages
When you hold a silver eagle, it makes all the generic rounds feel like a toy version.  Silver eagles even feel heavier in my hand.  I know it is just an illusion by pressing them a little wider and thinner, but it still feels nice.

Another benefit of coins is their weight and purity is guaranteed by the sovereign government.  Of course, reputable private mints are defending their reputation too, so I wouldn't worry about fraud.

In general, government minted coins are easily recognized globally and have very liquid markets.  The American Silver Eagle is the most liquid silver coin in the world. The Canadian Maple is the most liquid gold coin. You could sell them at any pawn shop on any day they are open.

Because these are coins, they have years stamped in them.  This adds an additional collector value to the coin.  This is especially true of Chinese Pandas since each year has a different adorable picture of pandas.

Disadvantages
More of a note than a disadvantage, but the face value usually doesn't mean anything because the value of the metal is worth so much more than the face value.  The most extreme example I know of is an America the Beautiful 5 oz silver "quarter".  With a silver spot price of $16.56/troy oz, this coin is worth 331 times it's face value!

The premiums are very high on Silver Eagles, currently about 13%, even on large volumes.  The generic rounds are only about 3% over spot.  For gold, however, this is not the case.  A Gold Eagle premium is only 2% and the cheapest bar is still about 1%.  I'd pay the extra $15ish and get the coin.  It will probably be much easier to sell in the future.



Buying Collectibles: Nuggets, Numismatic, Proof, Graded coins, etc.
Nuggets are chunks of precious metal in the raw, as pulled out of the earth.  Most of the gold and silver mined is in tiny particles encased in rock.  They get it out by grinding and chemically removing the rock.  Nuggets are rare and often found with metal detectors by hand.  The larger the nugget, the exponentially rarer the find.

Numismatic coins are rare coins such as extremely old coins, coins with low mintages, or errors.  The value is primarily determined by the quantity in circulation, not age.  Check the mintage on the years and mint marks carefully. One year might be rare while another year is common.

Proof coins are the normal coin design, but the blanks and dies are both carefully cleaned and polished for a superior finish.  They also struck at least twice to ensure a well defined design.  These coins are absolutely beautiful!

Graded coins aren't inherently anything special, but when people get a hold of a seemingly flawless coin, they may send it to a company, such as PCGS or NGC, to have a professional rate its perfection. If the coin is certified at a high standard, it increases it's collector value.  If not, the cost of grading it exceeds your gain in value.

Advantages
These coins are collectible, interesting, and often stunning in appearance, a good choice for display or jewelry.  They hold their price even in market lows because much of their worth isn't just derived from the metal content.

Disadvantages
When dealing with unique pieces, things become less standardized. Go figure. It is easy to get confused or tricked. Where do they come up with their market values? Are they telling you the weight of the piece or the weight of just the gold portion? Are you sure they are talking in troy ounces not standard ounces?

For a little extra help, see my free Gold Nugget Calculator. It can be used for gold or silver nuggets, jewelry, and even coins (if not using face value).

If you are looking to invest in precious metals, put your money into the metal, not baseball collections.

Very rare museum quality pieces (of any type) aren't a bad idea for a tiny portion of your investments, just don't get confused and include them in your "precious metals" allocation.  They belong in "fine art". (note: Jim Rickards recommends 5% of your investible assets in Fine Art)

The cost of these fancy coins far exceed the cost of the metal within them.  You'd get a lot more precious metal and exposure to market gains, if you just bought the everyday bullion.

The Bottom Line
All of these types of metal have their own role. It is nice to have non-physical metals for liquid and leveraged positions. It is nice to have bars/rounds because you can get the most metal for your dollar. It is nice to have junk silver because you can get small fractions of metal (and a little piece of history) cheaply. It is nice to have coins because they have the most confidence (and in the case of gold is still very close to spot!). It is nice to have collectibles because, well, they are fun.

The important thing is that you know what type of role you are trying to fill with your purchase and get the right form (or mix of forms) of metals to match your needs and definitely don't invest in anything you don't understand.

Enjoy!

-Milly

Compare deals and evaluate premiums with my precious metals spreadsheets:
Coins and Rounds: Junk Silver Spreadsheet
Nuggets and Jewelry: Gold Nugget Spreadsheet

This is part 3 of Milly's "Precious Metals for Beginners" series.
For the next part see: Where to buy Precious Metals
For part 1 see: Why you NEED Precious Metals in your Portfolio.





Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.

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