It's amazing the power it holds on our society. The California gold rush in the late 1840s and early 1850s has been the stuff of lore (if you have a chance to read about it, it's fascinating). Even today, you can turn on Discovery Channel and watch a show about guys in Alaska mining for gold (I've taken a lot of Southwest flights and seen quite a few episodes!).
Gold also tends to appear in the news whenever there's some economic or political upheaval. The price per ounce reached a nominal high in the summer of 2011, breaking $1,900 an ounce, which was staggering.
If you've been tempted by the yellow stuff, and you're thinking about picking up some gold bullion as an investment, I'm here to suggest a different way of thinking.
Physical gold bullion isn't an investment. It's an insurance policy.
How I Think of Gold Bullion
Gold has long been called a store of value. That's a fancy little phrase to mean that it never depreciates. Gold doesn't old, it doesn't break down, it doesn't need repair – it just is.
It provides no dividends or other payments. You can't do anything with it. And it's kind of heavy to lug around.
That said, even without any other financial benefits, the fact that it's a store of value makes it a useful financial instrument.
It's disaster insurance.
Think about the Syrian refugees who are trying to escape Syria and get into safer havens like the United States – they have little more than the clothes on their back and few worldly possessions. Seven years ago, the Syrian pound conversion rate was 57 SYP to 1 USD. Today, you'd need over 514 SYP to get 1 USD. The value of their currency has been decimated.
If things hit the fan and we were in a similar situation, the value of the United States dollar would plummet. Perhaps to zero. In that case, you better make sure some of your worldly possessions have value in the country you're escaping to.
That's where physical gold plays a huge role.
As weird as it sounds, if there is a stable government somewhere, there's a place you can go and turn your gold into the local currency. If the USG collapses and you're left fleeing to a country like Canada or China or Russia, you can go there with gold and do more with it than worthless Federal Reserve Notes.
It's not a pleasant thought but that's what insurance is for. You don't want it to happen but you also don't want to be unprepared.
How to Buy Physical Gold Bullion
When you view it as insurance, you don't care what it looks like. I don't care about fancy coins. I just want gold as close to the spot price as possible.
It's impossible to buy it exactly at the spot price, which is the current market price because you're buying it from a company and they have to make money.
To make sure you aren't ripped off, you need these three steps:
- Step 1 is to know the spot price, I like to use GoldPrice.org because it's quick. Kitco has a live chart too, which shows a little more information like the bid/ask spread (but you won't need that).
- Step 2 is to understand the spot price is shown in troy ounces and for .999 fine gold. A troy ounce is not the same as a “regular” ounce (it's known as the avoirdupois ounce after the avoirdupois system of measurement), it's 31.1 grams vs 28.35 grams in an avoirdupois ounce.
- Step 3 is to buy it from a place that will only put a premium of 5% on the gold and offers free shipping and insurance.
Where to Buy Gold
The simplest way to buy gold is through an app called Vaulted (full review of Vaulted here). Vaulted is an app run by McAlvany Financial Group and International Collectors Associates (short name is McAlvany ICA) based out of Colorado. The app lets you buy fractional gold that is then stored at the Royal Canadian Mint. By purchasing it fractionally, you don't have to buy it by the coin (which is expensive per ounce) or wait until you can buy an ounce (which is expensive, period). When you get up to an ounce, you can request delivery for a small fee.
Another alternative, and I don't know much about this company so do your due diligence, is Acre Gold. Acre Gold is like a layaway program for gold where you pay a monthly fee of $30 or $50, accumulate gold, and get a 2.5-gram bar sent to you when you've reached the price threshold, minus shipping and fulfillment fees. They periodically stockpile gold and each bar is then set at the price they buy it. If the price goes up in the meantime, you still get the old price. If the price goes down, you would get a bar after your next payment. There's a one-time $12 membership fee. It's not a super clean way to buy gold but it's another option.
If you want delivery immediately, you can go with a merchant. It's like ordering precious metals online.
But I'm liking JM Bullion (APMEX is good too). I like it because on every product page they show you the current live Gold ask price, the prices are fair, and there's free shipping.
With gold at $1,219.68 an ounce (as of early February 2017), you can get this gold coin for just a premium of $34.99 – or 2.86%. (the higher credit card price is exactly 4% higher, which seems like they pass the credit card transaction fees onto you… fair enough)
You can buy other gold coins:
But don't. Don't be a sucker.
Companies like JM Bullion and APMEX routinely run sales where coins will be just a small premium over spot. That's what you want to get.
Here's a listing on APMEX:
I screenshot it a few days later, which is why there's a difference in the spot price compared to the JM Bullion price. This one is a ~$22 premium over spot. That makes it a better deal than the gold coin from JM Bullion. (and they also have free shipping on purchases over $99)
If you're going to use these, the person taking it will not care if there's a Maple Leaf, Lady Liberty, or a kangaroo on it. Don't pay extra for it.
How to Avoid Being Ripped Off
Sadly, there will always be scams in the world. If there's money to be made, there's the risk of fraud.
There are two ways to get screwed:
- The person you buy from fails to deliver the metal.
- The person you buy from gives you a fake.
Failure to Deliver
Years ago, I heard about a company called Tulving from a friend of mine. My friend had purchased large amounts of gold bullion from them and had a good experience. Their website was awful but they had good prices on gold — which is what matters.
While I never purchased anything, I was saddened to hear that the company collapsed in 2014 and still owed customers $40 million!
Am I worried that a purchase at JM Bullion or APMEX might end up this way? No, but you have to do your homework. Read that article and see how the warning signs are all there. Delayed shipments, complaints on BBB, and other huge red flags.
There are a lot of companies selling gold so if one triggers your Spidey-sense, move onto the next one. There are plenty.
As for the gold itself, how do you know it's legitimate? How can you protect yourself, especially if you use a check or wire transfer to save money on the purchase? (credit cards offer more protection)
If you purchase something from a private seller on a marketplace, like eBay, you need to do your homework. Study what they're selling and see if you notice anything out of the ordinary. I wouldn't buy something from an individual off eBay, it's not worth saving a few dollars on a transaction where the purchase price is $1200 an ounce.
If you purchase it from a reputable dealer, you still need to do your homework but you can be reasonably assured they're legitimate. Read the Tulving story I linked to above and then read reviews of the different merchants to see if perhaps you're looking at a company in trouble. Read the complaints on their BBB listing and see if they apply to you (a lot of the ones for these gold companies involves selling transactions, where the customer sells gold to the company).
What about silver?
You can buy silver too, under the same logic, but it's less valuable. An ounce of gold is ~$1200 and an ounce of silver is ~$18.
It only makes sense to buy silver if you want some protection but you don't want it in units of ~$1200. You'd need 66 ounces of silver to have the value of 1 ounce of gold!
Also, you could purchase gold in grams on some sites. There are 31.1035 grams in a troy ounce so when APMEX sells a 1 gram gold bar for $45.28, you're paying $1408.37 for an ounce of gold. That's too high of a premium.
Have you purchased physical gold bullion before? Any suggestions for a novice buyer but a seasoned researcher like me? 🙂