So you want to buy precious metals & could use a primer. Or maybe you're considering it and are looking to be swayed. Or maybe you have nothing better to read.
Well today's your lucky day.
Precious metals have been an interest of mine for decades. I don't own much but I've done my research. What follows is my unscientific personal thoughts on the subject. I have no credentials and goodness knows I'm not getting paid so any ideas you get from me are your fault. It's on you.
Alright so let's talk about silver and gold.
What Are Precious Metals?
"Precious metals" (or PMs) are a category of metals used to store value. They cost a lot.Precious metals include a number of metals, some of which you know and others you don't. Platinum is a PM but it is a historical anomaly. It gained much of its value from catalytic converters and the growth of the electric car market has dented its value. Palladium is also a PM but it's industrial and I'm not going to talk about it. I'm interested in talking about silver and gold.
Silver vs. Gold
Silver may be billed as the poor man's gold but the truth is more complicated. Both may be a store of value but their production and use are on different tracks.Silver is usually produced as a biproduct of other mining operations. Miners are happy to extract and sell it but they make their real money off other metals and minerals. As a result the production of silver suffers when industrial metals drop in demand. If the price of copper drops neither copper nor silver are extracted in the same quantities.
Silver's primary use is industrial. Investment & jewelry demand is less than industrial demand.
Gold on the other hand is mined deliberately and is used primarily for investment and jewelry.
Gold's value density is much higher than silver's. An ounce of gold is both smaller than an ounce of silver and may be traded for far more money.
Gold's price is also less variable than silver's. Silver prices change faster than gold prices percentage-wise.
Gold & silver are exposed to different market forces and fill different roles.
Before deciding what to buy you must decide why you're buying it.
Top Reasons for Owning Precious Metals
Inflation Hedge
The value of the dollar drops in the long term. This is a consequence of how our money system works. Precious metals are expected to retain their purchasing power in the long term.Wealth Storage
Precious metals are a compact way of holding lots of portable wealth away from prying eyes. They are not bound into any one economy or set of market rules.Barter
Just because money stops working doesn't mean people stop needing stuff. Precious metals are broadly recognized and will stick around when the banks don't.Collecting
Old coins are a concrete window into the past that appeal to many.These different reasons are best addressed by different products. There are a lot of solutions being sold out there. Some are good for multiple categories. Some are not that good for any.
Top Precious Metal Products
Our amazing capitalist society has & continues to develop a myriad of ways to buy precious metals.Ingots
No state used the gold standard any more. Central Banks don't act like it though -- they still stack and trade ingots of gold. Pretty to look at and nice to have but if you're reading this article you're not playing on that level.I believe Central Banks most commonly use 400 oz gold bars. That is 25 pounds each.
Silver may be purchased in 1000 oz ingots. This is primarily for industrial purposes.
Paper
One popular way of owning PMs doesn't actually involve owning precious metals at all. The precious metals marketplace sees a lot of 'paper' transactions. This includes buying and selling claims to metals that never leave the vault, trading unallocated PMs, and dealing in the futures market.It's complicated stuff. The two elements that matter for you are that:
- this is the easiest way to invest in precious metals using brokerage accounts because you can buy & sell ETFs and the like.
- this is several levels of abstraction away from tangible metals. This abstraction results in a price difference difference between the paper market and the physical market.
The advantage of 'paper' is that it is easy to buy and sell. The market is huge so it is easy to sell it at any time without much of a discount. The disadvantages are that the markets must exist and be open when you want to sell. Market dysfunction can wipe your holdings out because you don't hold actual metals, just a ledger entry with your broker recording an abstraction on a gamble on a commodity price.
Be wary of leveraged ETFs. The math behind their valuation doesn't favor long-term holding.
Analogy: the difference between a futures contract for an abstract gallon of crude in a North Slope pipeline vs. a gallon of gasoline in your tank. Related but different.
- The paper price of a precious metal is known as its 'spot price.' The prices of most other forms of precious metals are compared to this spot price.
Stocks
Precious metals don't create value on their own but the companies that mine them can. Mining stocks provide exposure to the metals market as well as possible profits.The advantage of owning stocks is that you can see actual earnings. The disadvantage is that companies can be dealing with big problems that aren't related to the market price of the metals. Also silver is a biproduct of base metal mining so silver miner stocks are less available.
Bullion
Precious metals are sold to consumers in a number of forms. Small amounts are sold in standardized sizes. These are usually bars or rounds (which look like coins but are not legal tender).Dollar for dollar bullion is the most cost-effective way of holding physical metal, especially for multi-ounce bars.
The average Joe does not have enough money to make gold bullion a good purchase. The price break on gold is attractive but buyers must consider the increased hurdles associated with eventual sale. Who do you expect to sell to who can pay for a ten-ounce bar of gold? That's a lot of money.
In addition gold bars are popular to counterfeit. The details are beyond the scope of this article but if you intend to deal in that world you need knowledge and some specialized equipment to avoid getting in trouble.
Silver bars from respectable mints enjoy common circulation.
The advantage is that you get the most bang for your purchasing buck. The disadvantage is that the people you sell it to get the same deal. Another disadvantage is that selling requires you to sell in large chunks. If you only need to sell a little or your market can't absorb that much without a discount that's on you.
Silver bullion is commonly available in 1, 5, and 10 ounce bars or 1 ounce rounds. Gold is the same but includes 1/2, 1/4, and 1/10 ounce rounds.
Metric forms are also available.
Modern Coinage
Many government mints produce gold & silver coins that are technically money. This can have tax advantages but the big benefit is aftermarket recognizability. American Silver Eagles are globally recognized as having 99.99% purity and a weight of exactly one ounce. A commemorative ten-point buck medallion from Billy Bob's Refinery and Tackle Shop will have to endure a lot more scrutiny.The advantages of modern-day coins come at a price; they will possess a moderate mark-up above the spot price of the metal.
Commemorative coins look cool but they cost a lot for the underlying metal and the secondary market is thin.
Silver coins are commonly available in 1 ounce forms. Gold coins will usually be 1, 1/2, 1/4, or 1/10 ounce.
Junk Silver
So-called "junk silver" is composed of silver coins with no collector's value. These coins were minted for circulation & most of them exhibit wear.Junk silver coins are alloyed with base metals to ensure durability in circulation.
The premiums on junk silver are about the same as on bullion.
The advantage of junk silver is that is exists in very small denominations. The disadvantage is that coin face value does not easily convert to ounces. Coins with lots of wear contain less silver which is a consideration when selling or bartering.
Jewelry
The precious metals in jewelry are alloyed with base metals to improve durability and the price is always much higher than the value of the metal content. Jewelry does have the benefit of making you look fancy and may be less likely to be confiscated by a desperate government.What to Do, What to Do
With these options in mind we will take another look at the reasons to buy stated above.Inflation Hedge
Purchasing PMs as a hedge against inflation is served well by paper, stocks, and bullion with an emphasis on gold over silver.Each of these represents a different corner of the market. As long as the market is functional the first two will be there. Bullion has the lowest premium of physical metals and is easy to move in a healthy market.
Wealth Storage
Preserving wealth through economic or market failures is served well by bullion and modern-day coins.Bullion has the advantage of low premiums thereby maximizing metal / money. Coins are well recognized and make it easier to sell small quantities when markets are small & have low 'mass.'
Barter
Most barter transactions are for day-to-day amounts of wealth so junk silver and modern-day coins in both silver & gold are a good choice.Junk silver offers the smallest sizes for convenient transactions. Coins are standardized & recognizable.
Collecting
This is such a wide field with so much personal preference you will have to figure it out on your own.What's Right for Me?
The good thing is certain products are valuable for multiple strategies. Mixing allows for good coverage.People interested in working in the existing market will lean towards paper & stocks with some bullion. Paper and stocks are more speculative. Bullion is more for hedging risk.
People concerned about economic or political dislocation will lean towards bullion, modern coinage, and junk silver. Bullion is for after the dislocation. Junk silver is valuable during the dislocation. Coinage is good for both.
How Much to Buy?
It's not the end of the world. Don't put all your eggs in one basket or all your money into PMs. Breathless marketeers will tell you that the dollar is going to be worthless. If they really believe that why do they want your dollars?%5-%10 of your wealth in PMs is probably good enough. If you are designing your life correctly they are just a few of the arrows in your quiver.
Note: the markets are crazy as of the date of publishing due to the Chinese virus. Paper PMs are down and physical PMs are up. I personally will not be purchasing any physical metals until people chill out a little and the markets become more sane.
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