How To Buy Gold

How To Buy Gold
June 14, 2012

(This item originally appeared in on June 14, 2012.)

More people are thinking about gold as an investment. With banks in distress, bonds paying zilch, and “easy money” the operating principle for currency managers around the world, it makes sense.

Unless you want to trade actively, I suggest owning physical gold bullion. This is a lot easier than it may appear, and the costs are nearly as low as various “virtual gold” alternatives like ETFs.

For basic bullion products (as opposed to collectible coins), I suggest a well-established dealer that does large amounts of business at low prices. For small size, I suggest The Tulving Company, which, despite its barebones website, does a lot of volume. Tulving lists both bid and ask prices for common bullion products. At this time, they offer to sell 1 oz. Krugerrand coins for $27.95 over spot, and they offer to buy at $6 over spot, for a spread of about $22. With gold around $1600/oz. recently, that’s a spread of 1.4%, which is not too shabby at all. Plus, they offer free shipping.

The most popular and liquid 1 oz. coins are the Krugerrands, Canadian Maples, and U.S. Eagles. Apmex also offers a wide selection of bullion products at reasonable prices.

If you want to go larger, the next common stage is the one-kilogram bar, or kilobar. This is about 32 troy ounces, and they are popular in Europe. The 100 oz. bar is the standard delivery size for the Comex futures contract. However, for large size, the most common format is the 400 oz. ingot, which is about the size of a construction brick and weighs about 28 lbs. This is what you usually see in the pictures of “a vault full of gold.”

Dealers like Apmex sometimes carry these larger sizes, but for large volume, an institutional dealer like Scotia Mocatta is a good source. Scotia is a division of the Bank of Nova Scotia, and is one of the largest bullion dealers in North America.

The most common forms of silver bullion are 100 oz. bars, 1000 oz. bars, and bags of pre-1965 U.S. dimes and quarters, which are 90% silver. A dollar of face value (for example, four quarters or ten dimes) contains about 0.72 of a troy ounce of silver.

For storage, I would not recommend using any storage facility affiliated with a bank or other financial institution. There are too many horror stories. Also, don’t ask your dealer to store it (any good dealer will refuse). I would look for an independent depository. If you are in the Northeast, you might try First State Depository Company, which is located in Wilmington, Delaware. They will allow you to audit (visit) your holdings on 24 hours’ notice. Any good depository should do so. Like any good depository, their holdings are insured. If Delaware is too far away, you might have a similar alternative in your region.

Storing some bullion at home is not a bad way to go, as long as you can maintain secrecy. Even today, people are finding hoards of gold coins stored by Roman families nearly two millennia ago.

As for transport, it is easier than you think. Your dealer and your depository are experts in this, so you just have to do what they say. Probably, they will just send the bullion via Fedex – insured, of course, probably under the dealer or depository’s umbrella policy. For larger amounts, they may be able to offer armored vehicle service.

Some hybrid options are also available, which allow something like direct physical ownership of bullion with much of the convenience of an online brokerage account. These are GoldMoney  and BullionVault. For large accounts, BullionVault has some whole-bar services which might be a good alternative to setting up an independent vaulting arrangement. Although these solutions can’t, in my opinion, be considered as safe as bullion directly held, nevertheless they offer much more independence from the financial system than various ETFs and closed-end funds available through your brokerage account. Also, costs are lower than for owning physical metal directly.

People have been trained to be comfortable with only the most abstract kids of assets. The typical broker margin account really just makes you the beneficiary of some stocks via a broker, which can go bankrupt (MF Global? Bear Stearns? Lehman Brothers?). The broker, in turn, is a beneficiary in the Depository Trust and Clearing Corporation, whose subsidiary, Cede & Co., actually owns almost all the publicly traded equities in the United States.

Even if you could establish ownership of an ETF, what do you own? It is an equity holding in a trust, which, by way of convoluted legalese, obligates the trust to … do nothing for anyone at any time.

For some reason, people are more comfortable with this than a gold coin in their hand. However, there is a remedy to this disease: buy some coins, even if it is only one or two. Take delivery yourself, hold them, and hide them. You will understand just how abstract and tenuous most investments are, which is particularly relevant today when banks and governments are one the verge of failure across Europe, and perhaps, in the U.S. too before long.