Gold & Silver: BUYING BASICS

There are two precious metals markets – the physicals market and the paper market. Pay attention to the physicals market. It is the real market for gold and silver in the same way houses and commercial properties —rather than mortgage-backed securities— are the true real estate markets.

The paper market does not represent
actual supply and demand for gold and silver.

The terms paper gold and paper silver refer to paper receipts that substitute for physical silver and gold. Examples are futures market accounts on the COMEX and shares of NYSE-listed Exchange Traded Funds (ETFs such as GLD and SLV).

Most people buy and sell on the exchanges without ever taking delivery of the precious metals. The paper market is easier than the physicals market – especially with silver. Investors do not have to pay for shipping or worry about storage. Gold and silver ETFs are leveraged to the hilt. Eventually, highly leveraged derivatives such as GLD / SLV will unwind.

Investors’ exposure to third-party risk is minimal with ETFs, until interest rates begin to move wildly (June 2013). Paper gold and paper silver trade like physical gold and silver until –suddenly– the music stops. Investors get hurt in the unwinding process.

If you own these ETFs, you have risk, rather than protection (the piece of paper is not backed by actual bullion). Most GLD/ SLV buyers have never read the fine-print on their contracts. In reality, derivatives investors own nothing more than highly leveraged certificates, and are exposed to the risks associated with Treasury Bonds.  

In general, people in the Middle and Far East (4 billion people) prefer actual gold and silver bullion to a promissory piece of paper. China is buying tangible assets such as gold and silver mines. The country is now the biggest buyer of physical bullion in the world. According to London traders the Eastern Hemisphere has been vacuuming physical metal out of the market since the 2008 crash.

Buy only physical gold and silver coins. Real money means real liquidity. If you take delivery of bullion coins, you have ultimate liquidity without third-party risk. No other thing is as easy to trade as gold and silver coins – under all market conditions. There is always someone else who wants to trade with you – even when New York trading is halted.

You need portfolio insurance. A paper certificate that represents debt is not good insurance in these economic times. We are witnessing the beginning stages of worldwide economic breakdown – in slow motion. When the contagion overwhelms markets in the United States, no paper currency or paper investment will be a sure thing. In an economic environment of capital controls, the liquidity of paper investments could be restricted – whether government paper or ETF paper.

Purchasing actual silver and gold coins
is much different than purchasing
paper gold or paper silver certificates.

What are bullion coins? In the 1970s, United States coin dealers began trading gold and silver bullion coins at market prices, rather than at government fixed prices. A bullion coin is a real coin from a sovereign nation or a private mint that will not be traded as a numismatic coin. It is unlikely a bullion coin’s date, mint-mark, or condition will ever affect its price because bullion coins are produced in such large numbers. 

In 1970, my brother began trading gold and silver bullion coins: British gold Sovereigns, Colombian gold Pesos, Swiss 20 Francs, Austrian Coronas and Ducats, Hungarian 100 Koronas, Mexican gold Pesos, South African Krugerrands, 100 oz silver bars (and smaller), and U.S. silver. The 24-karat gold Canadian Maple Leaf became available in 1979.

In 1985, the U.S. Congress passed the Bullion Coin Act, authorizing the sale of gold and silver American Eagle coins (first available in 1986). Platinum Eagle coins became available in 1997. Gold coins from many countries are available in 1 oz, ½ oz, ¼ oz, 1/10th oz, and smaller sizes. 

 Anyone can easily trade bullion coins. The best form of gold and silver to buy is the form that will be easiest to trade in chaotic markets. Get some small coins. Their divisibility will be well worth their higher premiums.

What is the spot price? Spot prices quoted by exchanges refer to gold and silver contract prices. On the COMEX, a contract in gold is for 100 Troy oz; a silver contract is for five 1,000 oz bars. In London, a  good delivery gold bar is .995 pure, and weighs between 350 to 430 Troy ounces. Quoted spot prices do not include costs for delivery of gold and silver contracts —100 to 430 ounces of gold, 5,000 ounces of silver.

Why do actual coins and bars usually cost more than spot? Think of the spot price as a “benchmark.” Premium is the difference between spot prices and current market prices for particular gold and silver products (before commission). The dealer’s cost includes the coin premium. Premiums for coins and bars are not fixed. Premiums above (and below) spot prices are a function of supply and demand and dictated by the marketplace.

Spot prices and coin premiums are based on
supply and demand, and constantly fluctuate.

Refining, minting, and shipping costs contribute to coin and bar premiums. For example: ten (1/10th oz) gold coins cost a dealer more than one (1 oz) coin. One hundred (1 oz) silver coins have higher premiums than one (100 oz) bar of silver.

Small coins command healthy premiums over the spot price. However, you usually get some premium back when you sell. A huge bar purchased at or near spot price might not be a very good bargain down the road. When you want to sell the giant bar, the bid price might be well below spot.

You get what you pay for. It is easier to
trade small bars and coins with individuals.

Gold and silver dealers provide a bid price and an ask price for a specific coin or bar. They are just as eager to buy from you as they are to sell to you because gold and silver are so liquid. Dealers are competitive on the buy side and on the sell side. They want to buy your gold and silver bars and coins.

The difference (percentage) between bid and ask is called the spread. Investors want small in and out costs. When trading physical gold and silver, you will find smaller spreads when you trade recognizable coins that are in high demand.

The price is firm when the trade is locked in. For example, when you place an order for U.S. 90% junk silver coins, a dealer shops the market to secure the actual silver coins. A customer’s price is locked in when the dealer purchases the coins for him. If the supply of junk silver coins is low and market demand is high, the premium is bid higher.

Rising premiums on gold and silver bullion coins are a red flag. Unusually high premiums indicate a short supply of physical silver and gold. Premiums rise quickly when supplies are scarce. When availability becomes a problem, dealers must pay much higher premiums over the spot price to acquire the coins.

Our research indicates there are serious shortages in supplies of physical gold and silver bullion. Whistle-blowers have compared bullion-bank warehouse receipts to the actual warehouse inventories of gold and silver.

Everybody is dipping out of the same supply. The COMEX, the Bank of England, the LBMA (London Bullion Market Association), and gold and silver ETFs (such as GLD and SLV) are all using the same physical inventory to cover the contracts for paper gold and paper silver. The exchanges are selling the same ounce of gold or silver – over and over again.

There are more than 200 claims to 1 ounce of deliverable gold at the N.Y. COMEX. The name for this shaky practice of shuffling warehouse receipts back and forth:

“Rehypothecation is the practice of using the assets held as collateral for one client in transactions for another. This allows the prime broker to re-lend client securities (or gold) held as collateral… (Collateral) is used by investment banks for their own purposes.”  Financial Times Lexicon.

The CFTC (Commodity Futures Trading Commission) knows customers’ physical gold and silver are being used as collateral for multiple transactions. China and the SEC (Securities and Exchange Commission) know this, too. In the future, this will become obvious to everyone. There is not enough available silver and gold in the world to cover short positions on the exchanges. 

Old U. S. $20 Gold Piece – St. Gaudens

Old U.S. $20 Liberty

Premiums are rising on old U.S. 90% silver coins and old U.S. gold coins. During the Great Depression, the $20 Gold Piece went up 69%.

By Denise Rhyne

Weights, Measures & Balancing Scales

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