Gold and Silver should be a part of anyone’s savings and investings. My personal goal is to have it represent 10% of my retirement portfolio and up to a quarter of my emergency savings.
I didn’t start out believing in gold. It gets a lot of hype in sensational language, which always makes me skeptical.
My biggest obstacle to adding precious metals to my portfolio was is it is hard for me to imagine going back to using gold and silver as currency. It is just too out of place in today’s modern society and impractical in the digital world. If there were a dollar crisis, my power tools would probably be worth more than useless metals and I can use them in the mean time.
I knew their were some inherent physical properties to the metals that make them valuable in industrial and medical applications, but I still don’t think it would cost nearly as much if those were the only competitors for the metals. Only 12% of the gold out there is used industrially. It is mostly people just liking precious metals and speculating in the metals that keeps the prices so high. I didn’t want to invest in other people’s fancies.
Let me Change your Mind
Now I see gold and silver in a new light. A lot of the people who don’t like precious metals point to the S&P 500 and show that gold isn’t going anywhere, but the stock market is. Well, it may be true that US stocks have matched or out performed gold, but not by nearly as much as we are led to believe.
Gold as an Investment
From 1971 (when the US abandoned the international gold standard) through 2016, gold has actually tied the return of the MSCI US (large and mid cap US market) at a return of 10.6% annualized. That wasn’t all in the huge gold jump that happened at the beginning either. The last 10 years has returned an average of 7.7%, lagging the US stock market by only 0.5% (source with pretty pictures).
That is not a lot of missed gains compared to the risk of a major market correction any day. You might pay 0.5% in fees to your brokerage anyways. If you agree with Lewitinn in Yahoo Finance that 93% of the stock growth since November 2008 is resultant of Federal Reserve moves, then that is a lot of risk. You could see 93% of those gains come crashing down any day, especially if the Feds aren’t able to do the tightening and normalization they planned (rate hikes and unloading the balance sheet).
Precious Metals as Protection
Even with all of those investment benefits, I still see precious metals as the way to preserve wealth, not to invest. I suspect much of the gold rise is actually dollar weakening. No matter what any politicians or leaders do to the US dollar (and you know what they are going to do), precious metals will hold value. Jim Rickards once asked someone how their family preserved their wealth for 800 years. The response was a third in land, a third in art, and a third in gold. These are the things that last.
Another benefit to precious metals is they are individually and physically owned. I believe Jim Rickards’ “Ice-9” prediction (Road to Ruin). There will come a day when the government will be forced to freeze all digital money except for a small amount for gas and groceries, much the same way as they have done in Greece. Even if the money never is seen again, or inflation happens to an extent that it isn’t worth anything when I get it back, precious metals will preserve.
One question you might be asking: If you believe that much in gold and silver, why only 10%? One answer is I’ve seen a compelling prediction of a 10x rise in gold price. If that were to happen, your 10% would become 100% and even if you loose everything else, you’re insured.
The main reason though is the author of “The New Case for Gold” and world expert in currency wars recommends only 10%. Most precious metal companies recommend 10%. Maybe there is too much confiscation risk by a government stuck between a rock and a hard place.
In any case, I figure if people who do more research than me and are an even bigger believers in precious metals than me recommend 10% in gold, I should say the same.
What about confiscation?
When looking into gold as an investment, fingers are often pointed to Executive Order 6102 signed by President Roosevelt in 1933, which required gold to be traded in to the Federal Reserve for the official gold price of $20.67 per troy oz. The criminalization of “hording gold” in the US lasted all the way until 1974, after we left the gold standard. Other gold controls have occurred in Australia and much more recently in India. I’m not going to let fear of confiscation prevent me from buying for 4 reasons:
- There was a good reason for gold confiscation at the time. It is one thing for the government to confiscate items that cause destruction such as illegal weapons and drugs, but the confiscation of gold comes down to one thing: they needed it, so they took it. As terrible as it is to have the “land of the free” to secure themselves a discount on your savings, it was this confiscation that allowed us to keep on the gold standard for about 40 more years. Without this questionable move, we would have had a run on the gold reserves and it is impossible to say what that would have done to the American future we live in today. Was it the right thing to do? I doubt it, but I may be reaping the rewards.
- Gold owners were compensated. It is against the constitution for gold to be sized without just compensation. Sure, the government might do something sneaky like dump a bunch of gold supplies into the market to suppress the price just before they close the market so that they can buy at discounted prices. They also might not do something sneaky, but you’ll still miss out on some massive gold hikes in the event of a gold crisis. Either way, you’ll probably still be better off buying gold today and selling it to the government in a few years than just holding onto dollars. The shakier things get, the more gold will go up.
- Not all gold was confiscated. There were exceptions for industrial uses and some personal exceptions as well. Rare coins were exempt and individuals were even permitted the equivalent of 5 troy ounces of coins. 5 troy ounces is quite a lot.
- Owning gold is the patriotic thing to do. If there is going to be a future gold confiscation, wouldn’t it be much better for the United States to get a bunch of gold from it’s citizens than to have that gold sitting in India, China, and Russia? No, I don’t want to give away real money for fiat currency, especially when it is in a crisis, but at least it is going to someone who wants the United States to be strong. We want as much of the world’s supply of gold in our own borders.
Should I Buy Silver or Gold?
One of the first things to consider is what type of metal to buy. I’m only going to consider gold and silver in this analysis for 3 reasons.
- Other precious metals such as platinum and palladium are foreign to the average person. Yes, they are valuable. Yes large dealers know what their worth and you could probably sell them when ready. You’d have a much harder time selling them to your neighbor though. They look a lot like silver and most people have no clue what their worth is.
- Copper and other industrial metals have little value when compared to other things you could put in storage. At today’s prices, a pound of copper is only worth $3. The upside to copper is it is fun. For less than $2 extra on your gold coin order, you can get an extra replica (made out of copper, larger, and with a different reverse) just to play with. Or you can get designs you aren’t investing in just for fun.
- I’ve only studied gold and silver, so anything I say about other metals is unfounded.
In some ways asking if you should buy gold or silver is akin to asking if is it better to invest in $1 bills or $100 bills. Both operate by the nearly the same means, but have different liquidity and portability.
Silver is a great choice because it is more divisible. Although gold can be pounded to 0.000002 inches thick and easily broken down to less than a cent’s worth in value, the smallest bars major dealers circulate is 1/2 gram and rarely under 1 gram (that’s tiny and very thin!). At today’s $1,300ish spot price, 1 gram is worth about $42 USD. Silver, however, is at about $17.50/ toz and also can sell in 1 gram bars that’s $0.56 a bar! Smaller denominations make it much easier to actually use
The problem is, if you try and put some of your life savings into precious metals, that could amount to quite a bit of silver. You can carry enough gold just on your person to start a new life. It is also easier to hide since gold is much smaller than it’s silver equivalent. If gold were $1,300/toz and silver were $17.5/toz, the gold would be about 74 times lighter and about 119 times smaller than the same value of silver!
Another consideration is the two have separate markets and their relative prices vary. Right now, Gold is about 75 times the price of silver. Since 1995 (just before the dotcom boom), that ratio has averaged around 62. In other words an ounce of gold will buy more silver today than it has for most of the last couple of decades. Silver is “on sale” in terms of gold. Of course, there is always the possibility that this is the new norm.
Another thing to note is that silver tends to be more volatile than gold. If you normalize the two metals in 1995 like I did in this graph, you see that silver jumps to a higher percent than gold does on the upswings. If you are trying to play the market, buying low and selling high, silver might be the more useful vehicle.
One final market concern is found in monetary policy. Fiat currency is starting to fail on a global scale. No country is willing to admit this because they are desperately trying to keep confidence in their paper money, but the complex systems of national debt, supposed assets, and inflation have reached unsustainable levels.
In the background, India and China are buying up immense amounts of gold. There have been whispers in the last month about backing the dollar with gold again (to some extent). A few months ago I heard one about indirectly backing the Chinese yuan with gold. Both of these seem like far fetches, but what choice do we really have? With Donald Trump’s nominating 5 of the 7 Federal Reserve Governors in the near future and Trump’s history of “stirring the pot”, who knows? Maybe he could actually pull something off.
Regardless, I think it is clear that countries know that gold is their best chance for a favorable end game, but it is a very delicate game since there is a lot more money than gold and no one wants to loose the confidence of their currency.
If any country does make the jump, it will likely put a huge upward move on the gold price and not have the same amount of force on silver.
Of course, that also means a higher confiscation risk, especially with the historical precedent. I don’t think silver will be confiscated.
Which type of Gold and Silver to Buy? – Pros and Cons
Once you’ve decided to get some silver, there are a multitude of options, each with their own advantages and disadvantages.
Buying Gold and Silver Bars/Rounds
These are simply gold or silver that has been refined and pressed into tokens or bars by private mints.
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 less than a dollar over spot.
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 and maybe you shouldn’t either.
Buying Junk Silver
Junk silver is a deceiving term for old coins that have silver content. Most of the 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.
In a time of crisis, survivalists have deemed junk silver the currency of a collapse. I don’t think it will become the standard (why), 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 old silver dollars. 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.
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 .715 troy ounces of silver.
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 face value of the US coin. 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. It also means that these are a poor investment choice since they are likely not to increase in value 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 premium for fancy coins, these are not showroom pieces and have been through may years of abuse. If the coins are extremely worn make sure to price in weight, not face value as some silver has rubbed away.
Buying Fine Gold and Silver Coins
99.9% (or even 99.99% in the case of Canadian Maples and Australian Kangaroos) gold or silver coins minted by a government and has a monetary face value.
When you hold a silver eagle, it makes all the generic rounds feel like a toy version. They even feel heavier in my hand. I know it is just an illusion by pressing them a little wider and thinner, but it’s nice.
Another benefit of coins is their weight and purity is guaranteed by the sovereign government. Although, reputable private mints are defending their reputation too, so I wouldn’t worry.
The American Silver Eagle is the most popular silver coin in the world, so it is easily recognized globally and has a very liquid market. 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.
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”. Currently worth 352 times it’s face value!
The premiums are very high on Silver Eagles, currently about 14%. The cheapest round is only about 3.5% over spot. For gold, however, this is not the case. For a Gold Eagle, the premium is only 3.1% and the cheapest round is still about 2.3%. I’d pay the extra $11 and get the coin. It will probably be much easier to sell in the future.
Buying Collectibles: Nuggets, Numismatic, Proof, and Graded coins
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 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.
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.
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 derived from the metal content.
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 metal allocation. They belong 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.
How to buy Precious Metals
Once you know what you want, now it’s time to go shopping in one of the following locations:
Pawn / Coin Shops
This one is, of course, the funnest. It’s like a treasure hunt to drive between several shops looking for gold and silver. You also have the advantage of seeing what you buy, holding it in your hand, taking it home that same day, and looking at the shiny proof coins that you shouldn’t buy.
Probably the best reason to go to a coin shop is you get to talk with people who have been watching the market and touching the coins for decades. Some of the things I’m sharing with you right now came from talking with these experienced businessmen.
The biggest problem is that you’ll end up paying a lot more for these precious metals. Local shops have a hard time competing with online companies operating all over the nation and even internationally. Their expenses are much higher and so are their prices.
Other problems include low volume and often poor quality. These are odds and ends that have been sold by individuals. Some of them are found cleaning out their grandparent’s house, some are reluctantly given by people scrapped for cash, and others are flip sold as spot prices increase. There isn’t going to be several rolls of brilliant, uncirculated, matching, rounds and many have been sitting in a drawer for years.
Also, if you are buying by the ounce, make sure the scale reads in troy ounces. Troy ounces are slightly larger than regular ounces, ridiculous, I know. So if you are reading in standard ounces, you won’t go home with as much weight as you think you are buying.
One more thing to consider is don’t buy anything you don’t recognize. It is hard to know if something is solid or just plated. I have a 1 oz gold-plated copper “Bitcoin” round that I bought for under $2. It looks a lot like gold.
This is where to get the bulk of your investment. It is cheap, in abundant supply, and clearly state the actual silver weight (ASW) in troy ounces to avoid confusion. Not all companies are created equal though. You will want to look up a list of reputable companies and work from there. Here are my recommendations and comments:
- Silver Rounds: JM Bullion often has excellent specials.
- Junk Silver: APMEX is usually the cheapest
- Silver Eagles: BGASC cannot be beat, especially when they have “any quantity” sales around holidays
- Gold Eagles: SD Bullion, usually has a price slightly lower than anyone’s on everything, but it isn’t worth it unless you are ordering several thousand dollars worth or you have a free shipping coupon. Gold Eagles are usually cheapest here though, even with the shipping. They are also a pain because you have to set up an account.
- Anything else: BGASC, usually. You’ll have to check on a piece by piece basis.
The disadvantage of buying from these companies is you have a bit of a run around with payment and slow delivery. They will usually make you lock in your price with a credit card, but send a paper check in the mail. You have to wait for your check to get to them, for the check to clear, then for your order to get to you. It will take a couple weeks, but unless you plan on giving away or flip-selling the coins quickly, it really doesn’t matter.
Note: If sales tax is added to your order, look up your state laws. There may be a threshold you can buy that eliminates sales tax on precious metals. In California buying from a California company (such as BGASC.com) you’ll have to purchase at least $1,500 in precious metals (not gift boxes or other products) to avoid the investment-crushing taxes.
I actually really like Ebay. It is faster than online stores, you don’t have to send in a paper check, often competes in price when you shop with the wholesale dealers, and so far I haven’t had to deal with the weird sales tax laws on precious metals.
One gem I’ve noticed is that APMEX actually lists some gold cheaper in their Ebay store. Right now, they are selling a 1 oz Gold Buffalo for $1,336.49 on Ebay, but at APMEX.com, it costs 1,359.49. Even SD Bullion is selling it at $1,343.79 (plus $7.77 shipping). A few weeks ago, their special was on Gold Eagles. Since I am fairly confident it is actually APMEX (based on high reviews, US location, an old store, and enormous volume of sales), I don’t have to worry that I’ll get some weird fake in the mail. In this case, Ebay is the way to go.
The thing to watch out for is Ebay is the perfect place for conning people. Check reviews, how long they’ve been selling, etc. Again, don’t buy anything you don’t recognize. Also, be very careful to read the description of what you are buying. Make sure your 1 oz coins aren’t actually 1/2 oz coins with the same design, your 1 lb of junk silver doesn’t have any war nickles, note any discrepancies between ounces and troy ounces, and that your rounds aren’t just plated copper. Actually, two of the sample entries in my spreadsheet came from the same suspicious Ebay listing. They said 1 lb of 90% silver coins, but the coins they list don’t add up! If they list two different things, check both methods.
If you are tempted by some weird mixed lot, PLEASE PLEASE PLEASE use my calculator to know what you are actually getting. I’ve seen so many things that look like great deals, but when it adds up, it is $11 over spot per ounce of silver. People love to list in standard ounces (not Troy ounces), throw 35% silver War Nickles or 40% silver half-dollars in with 90% silver coins in a “Junk Silver by Weight” listing. Don’t pay silver prices for copper!
When you are ready to buy, here are some calculators that can really help to compare apples and oranges to know if you are actually getting a good deal.
…and if you want one for jewelry or nuggets or a simplified one for non-mixed purity by the weight listings…
And here’s an online one I created (so proud of myself!), but you can only display one calculation at a time, so it’s not as easy to compare shop and stay organized:
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