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How to Buy Gold

By Edited Jun 23, 2015 0 0

People usually need to know how to buy gold and silver whether it is to diversify a portfolio or to hedge against U.S. dollar inflation. Markups on precious metals range from nominal to outrageous depending on the form you purchase, so it is important retail investors and buyers know the various methods available to them before spending their first dollar.

In some circles, gold and silver are considered an alternative currency. To others it is only an inflation hedge. Many economists consider it only a commodity with limited uses and used mostly for speculation.

Gold and silver are commodities that are denominated in US dollars and often used as a US dollar hedge. As the US dollar goes down, the price of gold usually goes up in perfect correlation. Some people purchase gold bullion coins as insurance in case of financial panic or economic calamity.

Some studies funded by the World Gold Council show that a 5% allocation of gold to one's portfolio tends to decrease volatility of portfolio returns. Indeed, if one had purchased gold in the year 2000, their allocation would have handsomely rewarded their portfolio. If purchased in 1980, gold returns would have been flat. Silver is a more volatile precious metal, but unlike gold,it has many industrial uses. It is also cheaper and more affordable, so historically the precious metal of choice for those who could not afford to own gold.

Regardless of your where you stand on the debate or whatever your reason, there are several ways to purchase gold and silver and you should be informed before taking the first step.

Things You Will Need

Before making your purchase, you must decide in what form you want to own gold. Do you want to own it in physical or paper form? Gold bugs and armagedon survivalists only purchase physical gold and silver in the form of coins and bullion. Investors, gold fans, and most other people buy gold in the form of jewelry, gold coins, or through paper claims on gold.

If you want to buy physical gold, the cheapest form is buying gold bars from a reputable coin dealer or a precious metals broker Kitco. Markups on gold and silver bars are the lowest, because they are the cheapest to make, weigh, assay and store.

After bars, bullion coins are the cheapest and most easilly tradeable products. The best way to buy physical gold and silver is to buy coins from a coin dealer. Markups on non-numismatic gold coins range from 3.6% to 5%. Numismatic coins may cost much more because of their rarity and limited quantity. You should buy numismatic gold coins ONLY if you are a collector and know what you are doing – not if you are a retail buyer seeking diversification. Purchase your coins from a national mint or a reputable dealer, and do not pay more than 5% over the price of the gold spot market. The best forms to own are American Eagles, American Gold Buffalos, Canadian Maple Leafs, and South African Kruggerands.

Jewelry is the worst way to buy physical gold as the markups are outrageous. One does not pay for the gold itself but for the craftsmanship and marketing costs of the jewelry. Try selling your jewelry back to a jeweler and see if you get even half your money back.

There are several options for those who want do not want to go through the hassle of buying, transporting, storing and securing physical gold, and/or want to buy it in large bulk (gold is heavy, so buying a $1 million worth of it cannot easily be carried in a suitcase). That is where you go for gold certificates and 'digital' gold.

Investors may purchase Electronic Traded Funds (ETFs) such as GLD, SLV, or IAU. These are traded on international bourses/exchanges through brokers and the only commission you pay is to the broker. The cost of the ETFs are close to spot prices and reflect fees used for storing the physical gold and other administrative fees. Because anything traded on an exchange is highly regulated, you can be sure that there is an underlying physical asset backing your investment. Stay away from futures contracts, as they are speculation and hedging vehicles with a finite life, and are not buy-and-hold instruments.

Some people prefer to own a claim on pooled gold. Pooled gold is where a gold dealer pools money from buyers and stores the gold in its vaults. Owners are given a claim to a portion of the purchased gold. The gold claim is in the form of a paper certificate, such as Perth Mint certificates. Other reputable dealers such as Kitco also offer pooled gold accounts.

Some gold dealers, such as Gold Money, sell gold and let you store it in their vaults. The gold is purchased with a pool of money, but each gram of gold is allocated to the buyer. There is a fine line between pooled gold and that offered by Gold Money, but the difference is that the former is a claim on a portion of the gold in a vault, whereas the latter specifies which part of a specific pool of gold is owned by the buyer. Gold Money and E Gold use this form of gold ownership to create a different form of payment mechanism, similar to a banking system, but instead base it on gold and not a fiat currency.

Buying pooled gold usually has a markup from 1% to 2.9% based on the amount of gold purchased (the more you buy at once the cheaper it is). Perth Mint Certiciates are sold through dealers, and have a 2.5% markup, plus service fees of the dealer. Again, the more you buy the cheaper it gets.

People buy precious metals such as gold and silver for cultural, economic, or investment reasons. Whatever the reason one should buy the form of gold or silver that can be easily purchased, sold, and stored at the least amount of markup and commission. Gold bars, bullion coins, ETFs, certificates and pooled accounts are the best and cheapest methods to do just that. Stay away from jewelry and numismatic coins and you will be sure to get a good deal on your purchase and be able to resell it quickly should you need to.

Tips & Warnings

Do business with reputable dealers who list their prices and provide you with the spot price of gold. Check the spot price of gold on sits like Google, Yahoo, or Kitco. Buying gold on the internet is safe if you buy from established companies or national government mints. They purchase the gold from the London Bullion Market Association (LBMA), and their gold is assayed and guaranteed to be pure. Any gold through the LBMA is guaranteed to be pure.

Most dealers also have some form of pooled accounts. Talk to your advisor or trusted dealer to get information if you prefer to purchase gold in that form.

Make sure that you are buying .99 in fineness when purchasing gold or silver bullion and bars. The American Eagle gold coins are .91 in fineness so that they are more durable than .99 pure coins, so dont be alarmed. Some dealers are selling gold plated products for cheap so do not be fooled. Gold and silver bullion and bars should be .99 or more in 'fineness' and at least 22 karat gold (silver is not measured in karats).

When it comes to purchasing electronic or digital precious metals there are a few trustworthy options. Be sure to review the company's governance, audit, and security practices. Make sure that they are audited by independent third parties, purchase their gold through the LBMA, are accountable to or regulated by a national body, have a physical address, and insure their deposits. A reputable digital gold company will usually have anti-money laundering practices and require you to provide identification and a bank reference before you do business with them.

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