Investing With Jay Today

March 22, 2009

  
Practical Ideas on
Buying Gold and Silver

  

PURCHASING GOLD AND SILVER

Q: How should I buy gold and silver and in what form?

A: In my opinion, the safest way to buy gold and silver is coins or bars held in one's personal possession. 99.9% pure coins and small bars of both metals can now be bought from honest coin dealers in the US at 3% to 7% over spot. For investors who wish to buy gold and silver in their IRA or 401-K, the only simple way is to buy the ETFs, GLD or SLV. Small investors can buy these in any quantity on a level playing field with other investors, and I am willing to use them to a point as a way of getting a position with a view toward getting the physicals in my possession at some future date if I feel it would be best. There is some risk, as with every other investment held in paper form, but I believe the risk is far, far less than the vast majority of all other types of paper investments. (See Gold, Central Banks, the GLD ETF and Risk.)

For gold, I like South African gold Krugerrands, which can be bought currently for $60 to $65 commission per coin (7% above spot price), and 1-oz gold bars minted in Switzerland which can be bought for about 3% above spot price. I have bought both. A reputable coin dealer can suggest other acceptable coins. Just make sure they are 1-oz coins 99.9% pure. 100-oz bars can also be bought through the futures market at spot by taking delivery. Shipping and insurance costs will increase the price by only a fraction of 1%, an excellent value. 

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For silver, I like pre-1965 US silver coins (called junk silver), which can be bought currently at 15% over spot, a price which I do not consider a very good value. I would not pay more than that now. 1000-oz bars can be bought through the futures market at spot by taking delivery. Shipping and insurance will add only about 1% to the cost, an excellent value.

Q: What is spot price?

A: That is the price of gold and silver on the Comex futures market in New York.

Q: Why is the retail price more than the spot price? 

A: The retail price in the coin shops is determined by supply and demand. About a year ago demand began to increase rapidly and quickly got ahead of supply driving the price up to a substantial premium above the spot price. Recently that trend has begun to reverse and appears to be moving back toward "normal" levels.

The spot price in the futures market is also determined by supply and demand, but by a different group of investors and traders who transact there. Until a year or so ago, there was no significant difference between the prices in the two markets. Then the number of investors who buy in smaller amounts through the coin dealers began to increase quickly helping create the imbalance in supply and demand.

It is likely there is an additional force at work influencing this balance, and that is manipulation by a few very large traders in the futures market, probably a few large banks, possibly other entities, unknown at this tine. Their objective is to manipulate the price of gold and silver down to provide opportunities for themselves to buy at artificially low prices in order to create quick gains for themselves at the expense of other investors in gold and silver. Such activity, if it is occurring, is illegal and fraudulent. It is currently under investigation. The lack of progress on the investigation suggests the possibility of cover-up. There is a lot of good research on this issue (see The Smoking Gun, by Theodore Butler.) Interestingly, the research indicates the possibility that manipulation has been going on for years if not decades, and yet the prices in the two markets have been essentially equal until the last few months. That suggests to me that both gold and silver have been held artificially well below their intrinsic values, and at some point the market will correct this inequity resulting in a major correction over a short time. History records that manipulations never continue indefinitely.

Q: Do you need any proof of purchase for later sales?

A: If possible, it's always good to keep your invoices.


BIG ORDERS

Q: What about investors who want to buy large bars - like 500-5000 ounces? How can they do this?

A: The best way for this is to buy a futures contract which is due in the earliest month possible. Your broker will set it up that way and notify you when the gold or silver has been delivered to the bank storage vault. You will receive a certificate from the bank. Then, ask the broker for the phone number and name of the person at the vault who will arrange for delivery. Call that person and they will tell you how to endorse the certificate, and quote the shipping and insurance charges. Send them a check and the endorsed certificate along with a letter requesting delivery.

Q: Can you recommend a broker to buy a futures contract for gold or silver bars?

A: My broker is R.J. O'Brien, headquartered in Chicago. They have offices all around the US, including one ten blocks from my house. I understand they are one of the largest and best, and have been in business since around 1900. You have to meet certain requirements to open an account, including futures investment experience and a high financial net worth (probably minimum US$1 million). I do not know whether they operate outside the US or not. You can find them at http://www.rjobrien.com/corp/index.php. The broker you deal with will answer all your questions about shipping, insurance, etc. I had never taken delivery before, and it went quite smoothly. Their phone number is 312-373-5000.


FINDING A DEALER

Q: Where can I find a coin dealer?

A: You can try Jason Hommel's web page, Find Your Local Coin Shop, which lists whom he trusts and does not trust. You can also visit http://somehelpful.info/Money/Bullion-Dealers.htm 

Q: Do you have any other advice on finding a gold and silver bullion dealer?

A: If you are going to deal with a coin dealer, you must have some way of verifying his honesty and integrity. I am fortunate to have a dealer seven blocks from my house, whose family I have known 50 years, with a long reputation for integrity. When I go in to buy gold or silver, we sit down together at the computer, and he shops every dealer in the country who is offering whatever I want to buy or sell. We find the best price, then using our combined expertise, decide if it's fair, and if so, he can lock the price with the click of a mouse. When the metal arrives at his office, I write him a check. That's the only way I will deal.

Q: How do I know if the dealer is honest or not?

A: You don't unless you have seen him operate for a number of years or unless a trusted friend tells you so.


STORING GOLD AND SILVER

Q: What about storage?

A: You can either store it at your home or a friend or relative's home - someone you trust. I also trust my dealer, Tom Stout. He has storage facilities near my home, you can contact him at 806-374-8698.

Q: What about those who live in places in which gold and silver are not sold as easily as in the US?

A: They can purchase it in the US and store it with someone trustworthy in the US - not a stranger unless referred by a friend or relative. That would also save on shipping and avoid customs duties when selling the items in the US. I think it's around 6-9%. I would trust Tom Stout in Amarillo, Texas to hold some of my silver if I were a resident of another country. If they want to keep some in their home to be super safe, they will need to insure the shipment, and not all shippers do that. I heard that FedEx will do it for people who have a FedEx account in the US, but I'm not sure. Hand carrying on an airplane is another option.


SELLING GOLD AND SILVER

Q: Finally, how many years do you think people should hold gold and silver before selling?

A: If you have part or all your money in Permanent Portfolio (PPF), you will always hold a percentage in silver and gold, so the only time you sell your PPF metals is when the price drives the allocations too high or when you need to take money out of your portfolio for personal reasons. As previously stated, I use a modification of the PPF strategy based on what I glean from my experts. That being the case, there can be times when for the portion of my portfolio outside PPF, I might sell part or even all my gold and silver. You might wonder how that could be. Let me share a fact possibly known by less than one investor in a thousand. Over the last 208 years there have been several periods of 10-20 years during which gold has gone down against the stock market, and gone down against the dollar. (See The Most Important Chart in the World for Long-term Stock Investors.)  Since the institution of the Federal Reserve, these secular bull and bear markets in stocks and commodities (including gold and silver) have been relatively easy to identify. Although nothing is certain, and the future is unknown, my experts have done a great job identifying the current secular bear in stocks and secular bull in gold and silver. I have tried to share this in my letters, and will continue to do so. This is all part of the important principle of diversification. Solomon said 3000 years ago, "Cast your bread upon the waters, for after many days you will find it again. Give portions to seven, yes to eight, for you do not know what disaster may come upon the land." (Ecc. 11:1,2 NIV). This was about diversifying assets in several trading ventures. If one ship sank, you didn't lose all you had. (See also Chapter 16 of Biblical Economics, page 188).


References for further study:



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WORDS WE HOPE TO HEAR ONE DAY
"Well done, good and faithful servant; you were faithful over a few things,
I will make you ruler over many things.  Enter into the joy of your lord"
(Mt. 25:21 NKJV)

 WORDS ABOUT INVESTING
If you have not been faithful in the unrighteous mammon, who will commit to your trust to true riches?" (Lk. 16:11 NKJV)

WORDS OF WARNING
The Apostle Paul wrote, "Now godliness with contentment is great gain. We brought nothing into the world and it is certain that neither can we take anything out. So having food and clothing we will be content with that. But those who want to get rich fall into temptation and a snare and into many foolish and harmful desires, that plunge people into ruin and loss; because the love of money is a root of all kinds of evil; in their greediness some have been led away from the faith and have impaled themselves on many distresses." (1 Tim. 6:6-10 NKJV)

TERMS OF USE
This information is public domain.  Jesus said, "Freely you have received, so freely give." (Matthew 10:8b)

DISCLAIMER
The information in this article is the responsibility of Jay O'Keefe and Ted Spaeth, but all your decisions are your own responsibility.


This web page was last updated on 14 November 2014 .