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Recent economic and monetary developments have increased interest in safe-haven assets. Precious metals (Gold and Silver) have historically thrived in uncertain times like these. The current financial crisis has been no exception, with metals rising hundreds of percent over the past ten years.
If you are interested in Gold and Silver, this guide should be a handy introduction to the metals. It was written with the beginner in mind to provide the basic knowledge on how and where to purchase bullion, what types to buy, and ensure you are comfortable making your first purchase. Whether through an online dealer, over the counter from a store, or a private transaction with another individual.
For some of us, the information in this guide is just a reminder. Still, hopefully, there is enough content here to benefit intermediate and expert Gold/Silver buyers and beginners.
To help get you started with the guide, here are some terms that you might not yet be familiar with but maybe litter through the guide:
- Gold: A precious yellow metal (Au, chemical element)
- Silver: A silver-white lustrous precious metal (Ag, chemical element)
- Bullion: A term that can be used to describe a precious metal in investment form (e.g., a bullion bar could be either Gold/Silver)
- Spot Price: The market dictated the 'base price of Gold or Silver
- Dealer Premium: The percentage markup charged by the dealer over the spot price
- .xxx Fine: Purity of Gold/Silver (measured as a fraction of the total)
- AGW/ASW: Actual Gold/Silver Weight signifies Gold/Silver content (Troy Ounces) in a coin or bar less than a .999 fine.
- Troy Ounce: Common unit of measurement for Gold/Silver (31.103 grams)
Why Buy Gold & Silver
This guide was written to direct readers on how and what to buy rather than why. However, it is prudent to include a small section on why to buy as this may dictate the way and what you believe.
Some people are buying Gold as money, somewhere to store their wealth as central banks destroy it through excessive money printing (keep their wealth safe from inflationary forces). Others buy as insurance, a hard asset that can be exchanged in the case of a complete financial meltdown (to keep their wealth safe from deflationary forces).
Some see that Gold and Silver are cyclical and are trying to time the move from buying when undervalued to selling as they move to overvalued (essentially a medium/long-term trade). Some buy due to the unstable political, financial, and economic environment, seeing that the metals have previously thrived in such situations.
Gold Prices - 100-Year Historical Chart
None of these reasons are necessarily wrong. Some may buy to protect against multiple situations, or their specific location may dictate which is appropriate based on likely outcomes.
Gold and Silver both have rich histories of use as money.
The perfect money should have the following attributes:
- Durable (not easy to destroy)
- Acceptable (something that other individuals will take)
- Portable (ability to carry wealth easily)
- Divisible (able to be split without destroying value)
- Homogeneous (consistent)
- Identifiable (easily recognized/measured)
- Retain value (rare/scarce)
Gold has all the above attributed and Silver most as well (could argue that at current low prices, Silver isn't very portable). It's no wonder that Gold and Silver have remained the people's choice as money for thousands of years.
Open your wallet and take a look at the plastic notes inside.
What gives this currency any value to be exchanged for goods?
Can you come up with a reasonable answer?
I suggest 'confidence' and nothing more gives this currency any value.
While the general public is confident that their currency has value, you can exchange it for goods (and to a degree, this reflects the public's confidence in the central bank or government to do right by the money supply).
Confidence in fiat currencies is slowly faltering as people wake up to the reality that central banks and governments are destroying the value of their savings through bailouts and money printing to try to avert our current debt crisis.
Eventually, we will reach the 'knee of the curve' or inflection point where the vote of nonconfidence in fiat currencies accelerates, but to what end? There is the possibility that governments restore faith in fiat currencies before they are ultimately rejected.
In the 1980s, they did this by jacking up the interest rates to control inflation and restoring a fair cost to borrow money above the inflation rate. I recently heard a story that went something like this:
There was a room full of 100 people. After 5 minutes 10 people get up and leave the room. The rest of the room is left wondering... why are they leaving? What do they know that I don't? Where are they going? Another 5 minutes passes and then another 5 people get up and walk out. Again the remaining 85 people question why these people are leaving... are we in danger? Should I leave as well? Another 5 minutes pass and 10 more people get up and leave. At this point the final 75 people in the room decide it's not worth waiting around to see why these first 25 have left and everyone left gets up and leaves...
This truly does reflect the way people think and act. Whether we would like to admit it or not, humans (as a group) have a herd mentality, just like sheep. You can be significantly better off if you act ahead of the majority.
If the shift toward hard assets and sound money in Gold or Silver continues, working ahead of the herd can greatly reward those early to the scene. Jim Rickards was even recently quoted as saying that less than 1% moving in a specific direction could set the trend given the fragile nature of our markets:
Rickards doesn't think chaos and collapse are inevitable but says that in today's nervous and interconnected markets, it may not take much for events to spiral out of control. "You don't have to change the minds of 20 per cent of the population in such a dynamic system," he said. "A fraction of 1 per cent can start a stampede that everyone else follows." SMH
I don't think that he is wrong. At the same time, we must be cautious as the bull market and wealth shifts into Gold and Silver are already around ten years old. Over the past 100 years, the wealth shift from stocks into Gold and Silver, as measured by the Dow to Gold ratio, has only lasted around 13-14 years, as recently pointed out on Pragmatic Capitalism:
Given the nature of the current crisis, it could be "different this time," especially if we return to sound money that somehow includes the metals, for example, a return to a Gold backed currency which is improbable, or inclusion of Gold in a new global monetary system such as the proposed SDR (basket of currencies) could result in a more permanent revaluation of the metals.
The above has only started to scratch the surface of why you might want to buy Gold and Silver. Hopefully, it kicks your mind into gear and gets you thinking like current Gold and Silver buyers. From there, you can start researching and decide why you buy the metals.
Before You Buy Gold Or Silver
There are a couple of things you should take into consideration before you decide to buy GOLD or Silver.
Let's review them:
Tax on Gold and Silver
Before making any investment purchase, you should consider the tax implications of buying and selling the asset.
GST (Goods & Services Tax)
Investment grade Gold (99.5%+ Fine) and Silver (99.9%+ Fine) bullion is not subject to GST. Bullion products of a lesser grade (for example, 22k Gold coins like Sovereigns & Kruggerands or 92.5% sterling Silver coins) attract GST when a bullion dealer sells.
You can avoid this additional premium by buying affected products privately, where GST does not need to be charged. Numismatic coins are not considered 'investment grade,' so they will also attract GST even though they might have the required finesse.
CGT (Capital Gains Tax)
CGT applies to capital gains made from Gold and Silver. This is from the ATO: A capital gain - or capital loss - is the difference between what it costs to get an asset and what you receive when you dispose of it.
You pay tax on your capital gains. It's not a separate tax, just part of your income tax, although it is generally referred to as capital gains tax (CGT). ATO.gov.au
For example, if you buy an ounce of Gold for $1900 and sell it for $2800, then you will be liable to pay income tax on the $900 profit (there are exceptions, such as if you've held the asset for 12 months then you only pay tax on half the gain). Consult your accountant to see how CGT might affect your investment in Gold and Silver.
Tax rules could change throughout the bull market (after you have purchased Gold and Silver or related investments). A few commentators have suggested this is how the metals will be confiscated from the people via a windfall tax (rather than direct confiscation, they will tax precious metal investors a much higher percentage on their gains once they sell). This is something to keep in mind.
The Greens also suggested that Gold miners should be included in the MRRT (Minerals Resource Rent Tax), which has the potential to impact their profitability (and, in turn, share price if you hold any Australian Gold miners).
Spot Price / Physical Premiums
The spot price of Gold and Silver is derived from active intraday trading that occurs on multiple markets across the world. Generally, the largest moves happen in the most established markets during US and London trading hours. Consider the spot price as a base rate for the metal.
When you buy retail-sized bullion bars and coins, you will pay a premium to the spot price. This premium covers the cost of production and distribution. Generally speaking, the smaller the product you buy, the larger the premium will be (as a % of the products underlying spot value). If the spot was at $30, then a 1oz Silver round might set you back $34.50 (15% premium to spot price), whereas a 10oz Silver bar might cost $315 ($31.50 per oz, 5% premium to spot price), a lower premium than the coin.
Depending on the product, the premium may hold or even rise if sought after (e.g., if it has a limited mintage). It's a good idea to keep a mix of larger bullion (to stack as many ounces as you can for as little as possible) and smaller bullion (for liquidity purposes and to take advantage of limited mintage bullion coins, which can rise in value), I talk more about what to buy later in the guide.
Australian Price of Gold and Silver
In Australia, you will pay a different price to our American counterparts as the local price is a derivative of the US spot price and AUD/USD exchange rate. For this reason, Gold and Silver purchased locally is a play on the US spot price of the metal and a currency play (what the AUD will do relative to the USD). This has resulted in some fascinating local dynamics; for example, the price of Gold in Australia didn't fall by nearly as much as the US price in the middle of the GFC (2008) as the falling AUD held up the price.
To determine the AUD price of Gold, we divide the US spot price by the AUD/USD exchange rate. So, for example, at the time of writing this post, we have a US spot price of US$1680 and an AUD/USD exchange rate of .9714: US$1680 / .9714 = AUD$1729 Of course, there is no need to manually calculate the price this way whenever you want to check the local price, as some websites display the spot price of Gold and Silver in AUD.
It's essential to understand this pricing. Many suggest the US will enter hyperinflation and Gold/Silver will go to the moon. If this were to happen, it wouldn't necessarily reflect in astronomical prices here as we could see our dollar appreciate against the USD.
If we have a second credit crisis like that seen in 2008 and the USD strengthens (against the AUD) along with Gold (as opposed to the fall it saw in 2008), the local price of Gold could soar much higher than the US price. Hopefully, this gives you a basic understanding of how the AUD price of Gold and Silver works.
ID Requirements When Buying Gold or Silver
When you make a bullion purchase (either in person or online), you may be required to provide identification. Depending on the purchase size, the business you buy from may be required by law to view a particular ID, or it may simply be an in-house rule.
Under the Anti Money Laundering / Counter Terrorism Financing legislation, customer identification procedures must be followed for specific transactions by designated service providers. This means that when a bullion dealer provides you with $5000 or more worth of bullion, they are legally required to take appropriate identification from the buyer.
Furthermore, where a $10,000 or more transaction is made with cash (e.g., for the purchase of bullion), the dealer must lodge a significant cash transaction report to AUSTRAC (for Australia). As these laws aren't specific enough to cover every type of transaction that might occur, some dealers may interpret the legislation slightly differently (hence different requirements between dealers). Some dealers even ask for ID (even if not required by law) on transactions less than $5000. It would be best to familiarize yourself with the identification procedures that the dealer you buy from adheres to.
If they don't have the information readily available on their website or in-store, ask before handing over your cash. In general, if you keep your transactions to less than $5000 and purchase infrequently, you should be able to build a position in Gold and Silver without an accompanying paper trail. Buying/selling privately can also result in the same.
Postage of Gold and Silver
I thought a section covering postage of bullion items would be prudent to include. Importantly it should be noted that AUSTRALIA POST DOES NOT INSURE BULLION. That is the case even if you have purchased insurance for the package. The terms and conditions on their Express/Platinum/Registered services exclude bullion. If you are sending valuable items, Express Post Platinum offers additional peace of mind with automatic compensation of up to $100 should loss or damage occurs. If your item exceeds $100 in value, you can purchase Extra Cover up to a limit of $5,000 from your local postal outlet. Extra Cover does not apply to bank notes, bullion, or negotiable securities. Australia Post
This poses a significant risk when buying from either dealers or privately when their postage method is via Australia Post. I have heard it suggested that some insure their packages as "metal parts" or something else rather than specifying it's bullion to cover themselves if it goes missing. It's not a strategy I would recommend relying on.
Some dealers post via other couriers who can ensure the product or claim to self-insure when sending via Australia Post. Be sure to have an understanding with the Gold/Silver seller (whether private individual or dealer) before making a purchase, and know and understand their policy on what happens if they are sending via an uninsured method and the package goes missing.
Buying From Overseas
Purchasing Gold and Silver from overseas definitely has its risks. Still, with premiums in the United States and elsewhere sometimes much lower than locally, it can be worth importing Gold and Silver if doing so in large enough quantities.
Most products, when imported, will incur customs duty/GST if they are over AUD$1000 in value. Investment-grade bullion shouldn't be subject to GST. However, some courier services do not recognize this, and you may have a fight on your hands to get the bullion through without paying the tax and then applying later for a refund.
Investing in Gold - Pros and Cons
Where To Buy Gold & Silver
There are now many online dealers available to purchase bullion from in Australia. The last couple of years have seen many new stores spring up, and no doubt, as more investors turn to precious metals, this number will only increase. Pricing has become highly competitive amongst online dealers cutting to excellent margins and relying on volume/turnover to make up for the lower profits.
I suggest finding a dealer who can be recommended by the bullion-buying community (e.g., search or ask for feedback on dealers at SilverStackers.com). I have purchased from and can recommend Bullion Money. I have also purchased from the below online dealers and can recommend their services (fast delivery, good communication):
Some online dealers also have a walk-in office or store (Bullion Money now does). Don't let the fact that some dealers don't have a walk-in store deter you. Many of them have established long-lasting relationships with their customers and can be trusted (but please do your reading, especially on any newly established stores).
Direct From Perth Mint
Gold and Silver bullion can be purchased from the Perth Mint in several ways. You can walk in and buy it across the counter, place orders over the phone, or buy via their online portal (Perth Mint Bullion). The most significant criticism of Perth Mint is its cost. Most dealers undercut Perth Mint with their products by buying in bulk at wholesale prices and selling for less than Perth Mint sells to the public.
Furthermore, Perth Mint's shipping/insurance costs are pretty substantial (costs listed here). That said, you aren't going to find a more secure business to purchase your bullion through, given that they have the backing of the Western Australian Government.
Suppose a dealer goes bankrupt while holding your funds for an online order (not likely, but you can't rule out the possibility). In that case, you will likely become an unsecured creditor chasing the funds from the administrators. No such event could occur when buying through the Perth Mint. It would be best to determine whether the additional security is worth the extra cost.
eBay & Auction Sites
From my observations, eBay rarely provides a good platform for buying bullion. The excessive eBay and PayPal fees mean dealers can't remain competitive, given the low margin % on bullion sales.
Where a dealer sells bullion on eBay, you can often visit their external online store for much better prices. Along with legitimate bullion, eBay allows many fake/plated items to be sold. Some of these products are clearly labeled (for example, items listed as mills or plated), while others (such as fake Chinese Bullion Panda coins) are not marked and are sold as legitimate products when they are fake.
Sometimes bargains come up on eBay; for example, less well-known coins will sometimes go for very close to or even under the spot. As I mentioned on the blog, I even picked up some PAMP 1 Kilo bars for undermark when a dealer started dumping them en masse over a few nights. However, these finds are the exception, not the rule, so avoid eBay, but consider scouring it for good deals once you are more confident about prices you should be paying for specific products and can tell real from fake. Although I only specify eBay above, the same is also relevant to most online auction sites.
There are many bullion dealers all over Australia. At least several in each capital city. The benefits include walking in and talking to someone face to face about your purchase, more easily asking questions, seeing what you are purchasing, and in most cases, walking away with the product in hand once you've paid for it.
A bullion dealer who runs a shopfront will likely have larger overheads than an online store; this may reflect in the pricing of their bullion (e.g., in some cases, you would pay more in a walk-in store than via an online purchase). There is a list of Australian bullion dealers on this site, which may come in handy (unsure of how current the list is) to help you find a nearby store.
Privately (From Individuals)
Buying and selling Gold and Silver privately is easy. Silver Stackers is a forum where a predominant percentage of the user base is Australian, and they have a trading section expressly set up for facilitating transactions between individuals. Public and private forums provide more privacy if you only want registered members of the forum to see the items you have posted for sale. Trade feedback gives you a history of member transactions to decide better which members you feel comfortable transacting with.
Extra care should be taken when purchasing metals privately. When signing up on Silver Stackers or any other site, ensure you are careful about your username; for example, I wouldn't recommend signing up with your real name (make up a handle/nickname). Also, ensure you leave the hide email address option default (hidden), especially if you are signing up with an email that contains your real name. If meeting face-to-face for a private transaction, I would suggest doing so in a public/high-traffic space where a discreet transaction can be made.
For example, a Cafe/Pub table might be suitable for facilitating trade. If you buy from someone privately and in public, then you probably have little recourse if what you buy is fake, so be careful who you choose to deal with and ensure that you are confident what you are buying is the real deal.
What kind of Gold & Silver To Buy
Bars & Ingots
Gold and Silver
When looking at Gold or Silver bars and ingots, you often choose between cast or minted bars. Cast bars where the metal is poured in liquid form (after being heated) into a mold. Generally, these bars will appear less refined and may have uneven surfaces.
Minted bars are pressed in a machine with minting dies onto 'blanks.' Visually they are more attractive, and some manufacturers add an extra level of security by putting minted bars in plastic security cards. A premium is paid for minted bars. Whether it's worth the premium is something that you will have to decide for yourself, but I believe the security cards that Perth Mint and PAMP put some of their minted bars in are a welcome addition and will make it easier to sell them when it comes time to do so.
Gold bars and ingots come in many shapes and sizes. There are many different hallmarks and brands. Where possible, you are best sticking with those easily recognized in Australia; for example, brands such as Perth Mint, ABC, PAMP, or Ainslie are well-known and widely accepted.
To provide maximum liquidity, buying bars and ingots that are 2oz or less would be worth aiming for 10g to 1/2oz, where you can get them for a reasonable premium.
If Gold heads to $3000 an ounce, you have to ask how many people would have more than $6000 (2oz) to spend in one go to purchase it from you. A larger bar limits your stack's liquidity if you intend to sell privately (the liquidity risk of larger bars is smaller if you want to sell back to a dealer).
As well as cast/minted bars, a recent addition to the famous Silver bar lineup has been a CNC Milled bar. These bars have grooves cut out of them with a particular machine, and in the case of the 'stacker' series bars (of which there are multiple branding), they can be stacked in an interlocked format, one on top of the other. Once again, I would try and stick to the well-known brands and formats to ensure they are quickly sold when the time comes.
I would stick with 1kg Silver bars or smaller ones to provide maximum liquidity. 10oz Silver bars are trendy and can be purchased for only a small premium to the spot price. Although 100oz bars and larger can be purchased for smaller premiums, if we were to see Silver head to $100 an ounce, you are left trying to shift a single bar worth $10,000.
Coins & Rounds
Sovereigns and half Sovereign coins are popular with Gold investors. Sovereigns are a 22k Gold coin (.916 Fine). A full sovereign has a .2354 AGW, and the half sovereign contains a .1177 AGW. Being so close to a 1/4 Troy Ounce of Gold makes the Sovereign a handy coin for trading. Some less common years command a higher premium, but generally, Sovereigns will be sold for around 12% over the spot price of the Gold.
Sovereigns are sometimes copied by jewelers, in which case they would typically have an additional hallmark to indicate that this is the case. Some jeweler's copies will be less fine (at 18k rather than 22k), so you are best to stick with the original coins where possible. You can read more about Gold Sovereigns here.
Uncirculated Coins (Gold & Silver)Government-minted coins are generally more expensive than generically minted rounds (as described below). Coins are produced in government-owned mints and usually have a face value (and legal tender status). Bullion coins include the Perth Mint Kookaburra and Lunar coins, the United States Gold & Silver Eagle, the Canadian Maple Leaf, the Vienna Philharmonic, and the Chinese Panda. Some of these coins are relatively low in mintage so they can achieve a high premium once no longer available from their source (mint or official distributors).
Circulated Coins (Silver)
When I say circulated, I refer to coins that either were or are circulated as legal tender in Australia and contain Silver. Such coins include the 1966 Round 50 cent piece and older predecimal coins such as florins, shillings & crowns. These coins all have different Silver content, which can even change depending on the year;
For example, predecimal until 1946 was coined in Sterling Silver (92.5%), but the following were only 50% Silver. The 1966 Round 50 cent piece is 80% Silver. Silver in this form is inexpensive and should be purchased for a spot or only a few % higher. Given the small content of Silver in each coin, these coins would become very practical if the need ever arose for transactional-size bullion.
Rounds (Gold & Silver)
Bullion rounds are similar to bullion coins, except a government mint does not issue them as legal tender. Popular Silver rounds include Buffalos & Scottsdale Omnia rounds. Stick to common/well-known coins to avoid difficulty in selling. Many different obscure generic round designs might be attractive to you but more difficult to sell later.
Suppose you are buying numismatic coins at a significant premium to Gold/Silver. In that case, you are speculating on the demand for the coin rather than on the underlying value of the metal.
If you are specifically buying Gold and Silver to take advantage of the rise in spot prices, then you are best-avoiding numismatics. However, some new release bullion coins are minted in limited quantities providing an opportunity to buy them at bullion prices and holding the potential they will achieve a numismatic premium later down the track. This premium can take years to develop, or like the recently released Perth Mint 2012 Lunar Dragon, the premiums can develop practically overnight once sold out at the mint.
In my opinion, you are better off paying a little extra for the Perth Mint limited mintage 1oz bullion coins (particularly in Australia where Perth Mint coins are highly sought after) rather than American Silver Eagles, Maples, and other unlimited (or high limit) mintage coins & rounds.
Examples of bullion coins that can achieve a numismatic premium down the track are the Perth Mint Lunar Series, the Kookaburra Series, and the Koala Series. Make sure you do your research, as generally; only some sizes will have a limited mintage making the demand for these specific coins somewhat larger.
Jewelry made out of Gold and Silver is one way of gaining exposure to the metals if you can buy it reasonably (note that most jewelry retailers will sell at a considerable premium, so generally should be avoided). However, it is not as quickly checked for authenticity (for example, unlike coins, no universal size/weight can be checked against).
When selling jewelry back to a jeweler or gold buyer, you would expect to receive less than the spot price in most cases. One perceived benefit of holding Gold/Silver jewelry is that they would likely be excluded if governments ever confiscated the metals. However, in my opinion, unless you have the appropriate resources to test the pieces you buy thoroughly, the risks far outweigh the potential benefits.
What not to buy
Unfortunately, many items sold (particularly on auction sites like eBay) are not real Gold/Silver and should be avoided at all costs. Some examples include:
- German (Nickel) Silver: This copper alloy with nickel and often zinc. The usual formulation is 60% copper, 20% nickel, and 20% zinc.
- 100 Mills/Mils: Refers to a Silver (or Gold) plated product. While the very thin exterior layer *might* be real Silver or Gold, the inside will be something else (usually copper).
- HGE Gold: Stands for Heavy Gold Electroplate and consists of a base metal plated in Gold.
- Gold Flakes: Often sold in vials, this alloy is unlikely to contain significant amounts of (if ANY) real Gold.
- Columbium (Niobium) / Molybdenum Bullion: Other metals may be manufactured into bars and coins and sold as a "precious" metal, but ultimately they are of little value to the investor.
Other keywords to look out for when avoiding products that are likely fake and contain little or no real Gold/Silver: Copy, Replica, Plated, Layered. The easiest way to avoid fake, replicas, or otherwise worthless metals is to buy from a reputable source (such as a well-known and respected dealer).
Further reading: Top 10 Dangerous Mistakes When Investing in Gold
What Mix Is Best
The three largest factors that weigh in on what you should buy are liquidity, recognition, and premium. Some questions you might need to ask yourself would be:
- Liquidity: How much will each piece be worth at my target sale price, and will a buyer be easily found?
- Recognition: Will a buyer easily recognize the brand of bullion that I've purchased?
- Premium: When reselling what I've paid for each item, will I get the premium back?
For example, suppose you have a million dollars to sink into physical Gold/Silver and intend on selling back to a dealer. In that case, you won't want to be messing around with predecimal coins, and likely the best solution would be to stick with large, widely recognized/accepted bars, such as 10oz to 1 Kilo Gold bars and 1000oz Silver bars.
Those of us with a smaller bankroll who intend on selling Gold and Silver privately will need to find a balance of smaller products that will be more easily sold.
A reasonably balanced stack with a mix of low premium and quickly sold & recognized products might look like this (example only, not advice): $20,000 spent
- Gold Spot Price: AUD: $1595
- Silver Spot Price: AUD: $29.25
- $3290 - 2 x 1oz Perth Mint CertiCard bars ($1645 each)
- $4200 - 10 x Sovereigns (.2354oz, $420 each)
- $5450 - 10 x 10g Perth Mint CertiCard bars ($545 each)
- $1425 - 5 x 5g PAMP CertiCard bars = ($285 each)
- Total Gold: $14,365 (72.5% of spend)
- $2124 - 60 x Perth Mint 1oz Silver Koala ($35.40 each)
- $3350 - 10 x Perth Mint 10oz Silver bars ($335 each)
Total Silver: $5,474 (27.5% of spend)
Grand Total: $19,839
The above is based on today's spot price and premiums from a dealer, but it gives you an idea of what a well-recognized and easily liquidated stack looks like with a mixture of low and higher-premium products. Depending on your outlook for Gold or Silver, you might more heavily weigh your buying in one direction.
Storage of Physical Gold
You will need somewhere safe to store any physical Gold and Silver you purchase. Your situation may limit your options (e.g., renting/buying, house/unit). Here are the main options:
Safety Deposit Box
These are provided by some banks and private companies (for example, Guardian Vaults in Melbourne). They provide an offsite storage option, usually with an establishment fee and ongoing monthly fees.
- Pros: Generally safer than home storage.
- Cons: If Gold is confiscated, you may get locked out & forced to hand over your Gold. Banking holidays could restrict access in case of urgent need.
Gold is owned outright by an investor and stored under a safekeeping or custody arrangement in a bullion vault. It is the property of the investor. Some dealers offer this as a free service to their customers. Make sure you read the fine print on any arrangement.
- Pros: Potentially a cheaper storage option for the small-time stacker who doesn't want to pay for a safety deposit box.
- Cons: At the mercy of the dealer to access.
Home Installed Safe
If you own your own home (or have permission from your landlord), you could install a safe. A safe will set you back anywhere from $100 to $ 1000's. Depending on the size/weight, it may need to be bolted to the floor, or if large/heavy enough, some are free-standing.
- Pros: Easily accessed.
- Cons: If someone knows you have a safe, they could threaten you with a weapon to get it open. Depending on the model, it might be cracked or removed in a break-in. Fire risk (depending on the safe rating).
Some choose to hide their physical metals. This may be inside the home in obscure locations. A burglar could guess the problem with this being any hiding spots you can think of. Others hide the metals underground, digging a hole to bury them.
- Pros: Probably the safest way of home storage. No risk of fire damage.
- Cons: They might never be found without telling anyone and meeting an unexpected end.
You should consider insuring your bullion if you keep it at home or in a safety deposit box. Safety deposit box providers won't always provide insurance for their boxes by default, so see what is provided and organize it externally where required.
It would be best to store physical metals in a clean, dry location with a constantly moderate temperature (especially for Silver which can tarnish).
Non-Physical GOLD You can purchase
While this guide was written with the physical buyer of Gold and Silver in mind, I am not oblivious to the alternatives (I have used some of them myself short term at times), and it's a good idea to consider these when looking at exposure to Gold and Silver.
Depending on your particular circumstances & reasons for investing in Gold, exposure to the price of Gold or Silver via external storage with a company or in electronic form may be more convenient and safer. Below is a brief description of some alternatives to physical metals:
ASX Listed AUD Gold/Silver Alternatives
- PMGOLD: The Perth Mint security listed on the ASX is PMGOLD. You can read more about the product here. It can be redeemed for physical Gold, but ideally, it is suited to traders who want exposure to the price of AUD Gold or those who don't want the hassle of buying, storing, and then selling physical. There is a low management fee; ensure you read the PDS and are comfortable with the costs, terms, and conditions.
- GOLD: The other AUD Gold proxy on the ASX is GOLD. You can view the fact sheet and more information about this product here.
- ETPMAG: This is the Silver equivalent of the above-listed GOLD; it tracks the AUD price of Silver. Further information is here.
ASX Listed USD Gold Alternative
QAU: This security hedges the AUD/USD exchange rate to expose Australians to the movements of the USD price of Gold. I like the idea of this product (although I haven't yet used it myself). The US price of Gold has outperformed the AUD price of Gold over the past ten years; this product allows exposure to US$ Gold price movements without the difficulty of hedging the A$ exposure yourself.
Allocated and Unallocated Accounts
I'm not going to go into detail on either of these products. Terms, conditions, and your rights will vary between Allocated or Unallocated accounts providers. Generally speaking, an allocated account would be where the service provider stores Gold or Silver on your behalf in their vault.
The bars should be set aside and not leased or changed; they should operate simply as a storage facility. Unallocated accounts are where you have a claim to Gold, but it is not explicitly set aside. It might be leased/loaned out (depending on the company providing, Perth Mint doesn't do this).
Idoesn'tompany providing the service goes into administration, you may become an unsecured creditor. I would steer clear of unallocated accounts personally. If you open an allocated account, ensure it is with a reputable business and familiarise yourself with its product offering. You can learn more about Perth Mint depository programs here.
Other Forms of "Electronic Gold/Silver"
Several other for"s of Gold or Silver can be purchased and stored in an online account. For example, Digital Gold Currencies, such as Bullion Vault or GoldMoney, were founded by well-known industry player James Turk. Many of these digital Gold or Silver accounts are reputable. Still, they do not hedge the A$ currency exposure, so from an Australian perspective (which this guide is about), you are probably best to stick with the ASX-listed products or go with physical. Gold Money does allow you to trade in AUD. However, Bullion Vault only allows trade in EUR, GBP, or USD.
Mining companies are more speculative than holding physical metal. Still, they are potentially highly leveraged to a rising Gold price which means if the price of Gold increases, then the profitability and, in turn, the market cap of the related miners should increase by an even higher percentage.
How does that figure?
Consider a Gold miner with a cash cost of $1000oz to pull an ounce of Gold out of the ground. Further to the $1000, they also have admin and other development costs ($250oz), which increase the total cost per ounce to $1250. Gold at $1750 leaves them with a profit margin of $500 per ounce.
If Gold was to increase by $500 to $2250, it's only be an increase's 28.5% in the spot price of Gold, but it should result in a 100% increase in profitability for the company (profit increase from $500 to $1000 per ounce). Many things can go wrong with a miner, though. Their costs might increase, such as energy and labor. The project might be poorly managed. Grades of the resource might not meet expectations. They may need to raise capital in an unstable market, causing the share price to fall and resulting in more dilution than otherwise. The list is endless. An ounce of Gold in hand is an ounce of Gold in hand. There is a couple of old sayings that come to mind:
- "A gold mine is a ho"e in the ground with a liar at the top."
- "A bird in the hand worth two in the bush."
I wouldn't suggest avoiding Gold or Silver miners altogether, but I would place them secondary to physical metal exposure. I would consider the physical metals a wealth preserver and buying mining stocks a speculative way to take advantage of any rises in the price of the metals (as long as you pick the right ones and buy/sell them at the right time, which is undoubtedly a challenge!).
If you're a novice investor, your first question is probably, "what is an ETF?" The answer to that question is that it's an exchange-traded fund. From the name alone, you should understand that buying into gold ETFs means buying your way into the stock market - and so you should also know the risks.
For all the glitz and glamour that sometimes accompanies it, the stock market is just a planet-wide game of online slots which offer free spins with no deposit.
A little knowledge about how it operates can help you to tilt the odds in your favor in just the same way that knowing the 'return to player' rate and the volatility of a game at an online slots website can improve your chances there, but there's still a lot of luck involved. We know that stock traders might not appreciate being compared to online slot players, but it's a fair comparison.
Nevertheless, the route is available if you want to take it, with more than 30 ETFs specializing in gold and an increasing number of people pair gold ETF investments with property investments as a preference to currency holdings. Ask your adviser to go through the pros and cons with you.
ETPMPM: This ETF is a basket of precious metals exposure that includes Gold, Silver, Platinum, and Palladium, with the largest component being Gold.
Further reading: 5 Ways You Can Invest In Gold
Have an Exit Plan
An exit plan is essential to your strategy and should be considered before purchasing Gold or Silver. You may not need one if you intend to save in Gold and Silver as an alternative to fiat money (and only exchange it when required). Still, if you plan on speculating on the price appreciation and selling when you believe it's reaching peaks, you better understand what circumstances you will be doing so.
Perhaps you intend to trade Gold and Silver in for another asset class (e.g., once they reach an overvalued state against property or blue chip shares), or maybe you have a price target (or Gold/Silver ratio) that you believe will mark the peak. Whatever the case, ensure that you have a plan and you will be ready to execute it when it comes.