Diving into the world of bullion investing can be a scary trip. You have some doomsayers who gasp at the thought of money that’s only as good as the government’s word as they dig another hole in their yard for a few more 100-ounce silver bars. At the same time, you have Wall Street just beginning to respect precious metals as they slowly make their way onto the trading floor in the form of exchange-traded funds.
It is important to understand how one can acquire bullion easily and safely. Here is where the water can get murky, and the true dichotomy of bullion investors is revealed. One of the two subcultures consists of buyers who purchase precious metal in its true physical form, be that one-ounce gold coins or 10- or 100-ounce silver bars. This group of investors takes physical possession of the metal.
The other subculture consists of those who stick with exchange-traded funds (ETFs) or the stocks of mining companies. One of the more popular ETFs is SPDR (S&P Depository Receipts) Gold Shares (NYSE: GLD), which holds enough physical gold in its vaults to back up its shares. These investors do not assume physical possession of precious metals immediately, if at all. Nevertheless, most such ETFs give you the option to call for your bullion if you desire.
There are many educated men and women who stand adamantly on one side or the other on how to invest in bullion. Both sides do an amazing job of selling themselves as being better than the other. Through all of my experience and research, one thing has become clear: Both sides are right, and both are wrong; there undoubtedly are pros and cons to both forms of investing in gold and silver. Knowing this, we need to go back to the beginning of our investing lives and touch base with the word that has been beaten into our heads to ensure the security of our wealth since we began to accrue it… DIVERSIFY.
Financial advisers recommend that their clients maintain a balance of different investments in their portfolios to minimize their exposure to the risk of any one category falling off a cliff. Many advisers suggest putting 10 to 20 percent of one’s portfolio in precious metals. Of this portion, we at DSS Coin & Bullion in Omaha recommend a 70-30 split between physical bullion and metals ETFs. And of the bullion portion of your portfolio, we suggest weighting it more heavily in favor of silver because of what we see as this metal’s tremendous upside potential.
Why the bullish outlook on silver? It’s a simple matter of supply and demand. In each of the last 16 fiscal quarters, industrial and commercial demand for silver has exceeded the amount of metal pulled out of the ground. Over the past two years, this high demand has led to a drop in silver inventories worldwide of more than 85 percent, writes Ryan Fitzwater in the Investment U e-newsletter. In addition to the positive fundamentals, a key technical factor also weighs in silver’s favor: The ratio of the price of gold to that of silver is approaching 70-to-1. Twenty years ago, the spread was half that. So, either gold is due for a correction in price, or silver has some catching up to do. Based on the expectation of demand continuing to outweigh new supplies, we agree with Fitzwater’s view that a run in silver prices is likely.
Research and experience show there is strong potential in bullion-backed ETFs. However, it is important to know the downside as well. ETFs are sold in units or shares, but unlike traditional stocks they are considered “collectibles” and therefore are subject to a 25-percent capital gains tax after one year, rather than the standard 15-percent tax that applies to stocks. Also, from time to time there are rumors that some of these ETFs may be oversold, and the company may not own enough physical metal to back all its outstanding shares, which can lead to panic selling. This myth, however, is contradicted by the “standards of inventory upkeep” that ETFs must maintain. Despite these drawbacks or concerns, the three major precious-metals ETFs are still earning more than 10 percent for the year as of this writing.
Taking physical possession, of course, does not make your investment impervious to market variables—or theft. Typically, when purchasing bullion in physical form, it is done either through a trusted local retailer or a bullion seller via the Internet. When purchasing gold or silver this way, it is likely you will run into higher premiums. This means you may be able to buy an ounce of gold cheaper on paper than if you were to walk into your local dealer and buy a one-ounce gold coin. It is also important to note that some states charge sales tax on top of the dealer premium, which can boost the cost of your purchase. When you decide to sell your metal, you of course will not get a dealer premium. So the appreciation in value must be enough to offset the premium and any tax you paid, or you would lose money.
Each form of investing clearly shows its advantages. If you decide to go with exchange-traded-funds, you can find yourself paying lower premiums. Buying physical precious metal shows you great advantages as well. You hold your product from the moment your transaction is complete; you have the comfort of not only owning but also possessing your bullion. At the end of the day, it is up to you, the investor, to do the proper research and put your wealth where you are most comfortable having it.
Brian James Markel is Director of Internet Sales for DSS Coin and Bullion of Omaha. Brian, owner David Schroeder or other members of the staff can be reached at (866) 864-2646.
Tags: bullion, exchange traded funds, gold, silver