Gold has a centuries-long history of serving as money because of several key characteristics: it is durable, scarce, divisible into smaller units, easily transported, and readily hidden or stored.
As discussed in this month’s cover article, we think the best approach for most SMI investors is to invest in gold using the guidance provided by our DAA strategy. But some investors may desire to have a small amount of physical gold in addition to their DAA holdings.
The more concerned a person is about the debasement of the U.S. dollar, the more attractive owning some amount of the actual metal becomes. With that in mind, here are three ways to buy physical gold. (Because owning physical gold is more involved than trading a gold ETF, the options described below are best suited for longer-term holdings.)
For most investors who want a relatively small amount of physical gold, we recommend buying coins over bars or digital gold (discussed later). Investors often wonder which type of coin is best, but the answer is really any of them, because you’re paying for the actual gold content with any such coin. That content just happens to vary slightly from type to type. (We’re excluding from this discussion numismatic — i.e., collectible — coins. Their value depends on their rarity and condition rather than their gold content.)
A South African Krugerrand, for example, contains one “troy ounce” of gold (precious metals usually are measured in troy ounces; a troy ounce weighs about 10% more than a regular ounce). A Krugerrand actually weighs more than one troy ounce due to the addition of a small amount of copper to add durability. As a result, the coin is only 91.67% pure gold (22 karats).
Don’t let that confuse you — a Krugerrand (named for 19th-century South African leader Paul Kruger) still contains a full troy ounce of gold. As the table shows, while fineness of the Krugerrand is lower than the prettier (due to its purity) Canadian Maple Leaf, the gold content in the two coins is nearly identical. These are best left to those with specialized knowledge and experience. (Both Krugerrands and Maple Leafs are available in silver versions as well.)
Pure gold coins, such as the Maple Leaf, the American Gold Buffalo, and others from various countries, normally sell at higher premiums due to their popularity. So be aware of this as you evaluate the options. (The premium is the difference between the spot price and the price dealers charge — in other words, their markup.) American Gold Eagles, although not pure, also tend to be popular enough to command high premiums. Krugerrands usually are the best deal in terms of actual gold per dollar spent, sometimes dramatically so.
As a general rule, the smaller the coin, the higher the markup over the spot price. (The “spot” price, which can change minute-by-minute, is the current market price of gold where it is being sold for cash and delivered immediately. The terms “spot price” and “cash price” are used interchangeably.) A 1 oz. coin typically will have a lower markup than a ½ oz. coin, which will be lower than a ¼ oz., and so forth. The smallest generally is a one-tenth ounce coin, which will normally carry the highest markup over gold’s spot price. This is because smaller coins aren’t as profitable for dealers, so they charge a larger premium to compensate.
The most popular gold-bullion coins are shown in the table below. Under normal conditions, premiums for 1 oz. gold-bullion coins are in the 2%-4% range, but lately some markups have topped 6% as the demand for coins has increased and supplies have dwindled. At times, demand may be so heavy that certain coins are unavailable.
As you begin your price research, you need to know at least three important things about the market for gold-bullion coins:
- Gold coins can be sold by anyone. Dealers are not regulated, and there are no licensing requirements. So it’s “buyer beware” all the way.
- Gold coin prices aren’t standardized. This means it’s not uncommon for inexperienced investors to overpay. Make sure the price you pay is competitive (i.e., shop around!).
- Gold coin prices fluctuate throughout the day along with the spot price of gold. On a volatile day, this can make it challenging to compare dealer prices for the same coin. It’s better to focus instead on a dealer’s premium, which doesn’t change as frequently.
Importantly, you don’t necessarily want to use a dealer offering a significantly lower price than everyone else! Focus on reputable dealers offering reasonable prices instead. Monex and Fidelitrade are two good places to start your search.
Gold bars tend to be more complicated to buy and harder to resell than gold coins, so we don’t consider them as attractive as coins. An exception would be if you intend to make a substantial purchase.
The standard industry unit for gold bars is 10 troy ounces. At current price levels, that would be about $18,000 per bar. Bars sell at a smaller premium (i.e., markup) than coins do, so there’s an opportunity for some savings when making a sizable investment.
(Click Chart to Enlarge)
“Digital” describes the method of making transactions. You take direct ownership of actual physical gold
by making purchases online via a brokerage-type account set up with a digital-gold company. The company stores your gold holdings in secure vaults. Your online account shows how many grams or ounces you own, along with any cash balance available to make additional purchases (you can add cash to your account via a bank transfer at any time).
Buying gold in this way is as convenient as using an online brokerage account to invest in stocks or mutual funds. However, making sense of the account statements can be tricky and the monthly storage fees add up.
There are several players in the digital gold market, but the leaders are GoldMoney (which SMI has reviewed before), SmartMetals, OneGold, and the United Precious Metals Association (UPMA).
Here are the main features of GoldMoney’s service — details may vary at other firms:
- Ownership Rights
The gold in your account is legally your gold held in your name.
- No Counterparty Risk
Your direct ownership rights mean you are not dependent on GoldMoney’s financial solvency for protection. If for any reason the company failed, your gold would be delivered to you.
- No Minimum Purchases
You can buy and store in amounts that fit your particular strategy (whether little or much). This ability to make “fractional” purchases frees you from the standard denominations found with gold coins/bars, and makes the accounts ideal for dollar-cost-averaging.
- Low Commissions
The fee for each purchase or sale is 0.5% of the transaction amount (or 1% if you use a limit order).
- Storage Fees
The gold is stored in your choice of high-security vaults (located in North America, Europe, and Asia). The fee for this is as low as 0.12% of the value of your gold holdings per year, but the minimum is $10/month (includes the cost of insurance).
- Fully Insured
All metals holdings are insured against theft through a policy with the well-established Brink’s Company (Brink’s also handles vault security).
- Regular, Mandated Audits
Quarterly reports from the vault operators and database auditor (companies independent from GoldMoney) verify that the amount of gold shown on your statement is, indeed, in the vaults. Further, a “Big Four” accounting firm (KPMG) provides an annual audit and report.
- Option of taking physical possession
At any time, you have the option to pick up your gold from a vault or have it delivered to you (fees may apply).
These services have a lot of appeal. However, be sure to carry out your own careful investigation of GoldMoney (or any of the other digital gold companies) to gain a satisfactory comfort level.
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