Deciding to add gold, silver, or other valuable metals to your investment portfolio is one thing, knowing how to do so is a different matter entirely. Before you do any kind of actual investing, you’ll need to learn the basic in-and-outs of the precious metal marketplace and its fluctuations. It is also necessary to know how much of your portfolio should be made up of these physical currencies, which form of the metals you would like to keep, and other such details. We’ll begin with a small intro to gold investments and how to get started adding this form of money-making into your portfolio.
Before giving your accountant a call and setting yourself up with a gold IRA or purchasing an ounce of gold ingots, there’s some information you need to know. Firstly, the different forms that gold comes in and which ones are worth buying, what metals are approved to implement into an IRA, who to buy the metals from, and what to do with the gold (or whatever precious metal you invest in) once you own it.
Firstly, the term “gold IRA” is the most commonly used term for any type of Individual Retirement Account in which a physical form of any approved precious metal, by law is, held by a trustee for the benefit of the investor. The IRS is in charge of deciding which of the metals are accepted and which forms of bullion (gold bars, silver bars, and other bars of precious metal; sometimes referred to as ingots) are allowed for investment in IRAs. The IRS is also responsible for drafting the policies for IRAs (such as the “must be held by trustee” law).There are four different types of IRA-approved precious metals: gold, silver, platinum, and palladium. Within these four categories, only certain forms of the metals are allowed. There is a list of eligible precious metals for an IRA investment.
Once upon a time, the only forms of gold that investors could purchase and sell were physical bars, coins, etc. Nowadays, there is another method of making gold investments: Gold ETFs, or exchange traded fund. There are also gold certificates; we’ll discuss those in just a little bit.
A Gold ETF is issued by a trade exchange company, who backs the amount of the ETFs it issues with its reserve of physical gold. Gold ETFs are frequently traded across global stock exchanges, with a commission being charged during the trade. A gold ETF can insure your portfolio when the dollar is down. They can be used to decrease the overall risk factor in a well-maintained portfolio. Gold ETFs are never actually converted into physical gold; rather, they represent an amount of gold. They’re basically an updated, more-thought-out version of Gold Certificates, which are…
Gold Certificates are held in lieu of physical gold. They sound a lot like ETFs, but they represent how much gold you own, not a trade exchange business. Originally, this form of gold investing was the basis of American currency. In 1863, the certificates were recognized as official paper currency in the United States. Back then, and for 70 years afterwards, this method provided certificate holders with a title to an amount of gold rated at $20.67 per ounce. In our modern world, banks can issue out allocated or unallocated gold certificates. What is the difference there you may ask? You sure are lucky I’m here! The difference between allocated and unallocated gold certificates is…
…is pretty simple to understand. Here’s how the allocated/unallocated system works: Allocated gold is the investor’s property, he owns the gold the certificate represents; unallocated gold is not property that belongs to the investor, he does not own the gold that the certificate represents. When an investor has unallocated gold, it means that when they deposited their gold, they did not execute an agreement between the bank and themselves; they entered into a loan agreement. If you were to take your gold down to the bank and make an unallocated storage deposit, you would be lending that gold to your banking institution. This also means that the gold is not covered by deposit protection. Doesn’t sound like the best financial move to make, right? Well, you are right. Don’t do it. There are also private companies that offer gold storage, both allocated and not.
Now that we’ve gone over the different types of gold investing, what is better? Physical or paper gold currency? Well, first let’s examine what physical form of gold is the most intelligent financial move: gold bars, gold coins, or gold ingots?
I’m sure there are a few people out there that aren’t sure what the difference between gold bars and gold ingots. The answer is more complicated than you’d think. An gold ingot is a type of gold bar, but there is a lengthy list of criteria to consider a bar an ingot. An bar must have at least 95% purity to be considered an ingot; this is oft considered the most important difference between the two. Another main difference is that ingots are cast while “regular” bars are stamped. Lastly, there is a major size difference between ingots and the rest of the precious metal-bar family. Gold ingots (and all of the other ingots, for that matter) are generally thicker, longer and wider than the other gold bullions in the “bar” category. Most people cannot tell the difference between the two, with good reason. Overall, they look the same, they’re made of the same material (gold, silver, platinum, etc.), and have the same physical structure. The difference is in their exact properties and the composition. Normally, gold bars do not have any kind of quality specification, but ingots do. As previously stated, ingots must be 95% pure, meaning that 95% or more of the ingot’s chemical make-up is pure gold.
So, now that we’ve covered the difference between ingots and bars (ingots are bigger, thicker, and more pure), which is better to purchase as an investment?
If you are going to get gold bullions, it is important that you fully grasp all of your solutions, and the different styles of gold that you can trade. Gold ingots, coin, and bars are the three main kinds that you will find on the market, but what are the variations in working with these different forms? If you do not educate yourself on the matter, you’ll end up losing a boat load of money. Also, because of the natural fluctuation of the precious metal market, you must be knowledgeable on the actual asking price. Here’s how to avoid getting ripped off:
The price of a 1Kg bar should be just a few percent above the price of gold but the smaller ingots do not compare so well. They are often sold up to 50% higher than the spot price.
You buy the gold over the counter and then what? Ideally you should store it in a vault for security. This protects the integrity and value of your investment because it never leaves the professional circuit and there are no unnecessary transport costs to eat away at your investment. It also makes resale very simple because the gold does not have to move.
Remember that your bar or ingot will lose value immediately if it has left the professional circuit.
So, now that we’ve gone over the bar and ingot issues, what about coins? Are all coins worth their weight in gold, or are there special coins worth more due to rarity?
Like everything involving gold, the answer is not so simple. The list of approved IRA coins listed in this article are all worth their weight in gold. These are the simplest coins to invest in. If you want to invest in the more rare, more valuable coins, there’s a whole other set of rules.
Rare coins with a value differing from their weight value are known as numismatic coins. These coins are not approved for IRA investing, but you can add them to an investment portfolio that is not involved with your retirement funds. There are many companies who will assist you with your choices in this market.
As I stated, it is much simpler to invest in regular, minted coins. They are easier to obtain, have a clear value, and have a larger market. So now that you’ve decided what form of gold to invest in, ETFs, coins, bars, or ingots, how do you know the value of the gold you own?
Well, considering the era we live in, with uncertain economic situations and such, selling gold is much easier than buying them. People want to have a physical gaurentee of their wealth. Currently, gold is at a very high price. Gold investors use a “premium” to calculate the worth of gold (they use the same method for other precious metals). The premium can be zero or close to it, which is when coins are being sold at the price of the gold they contain (so, selling the coin for how much gold it is made of).
The premium of a gold coin is the difference between its actual selling price and the price for the gold it contains; the premium is expressed as a percentage. Right at this moment (the day this article is written) gold is priced at $1,081.50 per oz. So, theoretically, if you had a one ounce gold coin (yeah, right!) that was worth $1,200.00 per oz., the premium would be $118.50. Note that the premium on a gold coin can rise dramatically without the price of gold moving at all. This occurs when buyers are seeking the coin more aggressively.
The benefit of coins is just that; they can rise in price with the gold price or because their demand is high. Basically, there are two ways for coins to gain value, and they rarely will lose any value.
The last factor we’ll talk about is location. That’s right, where you live (or where you purchase and sell your precious metals) can affect the value of your possessions and your portfolio. This is especially true with coins, but is true of all forms of gold.
The premium for gold coins can be different depending on location because of the differentials in demand from one place to the next.
The benefit of Gold coins is that they can rise in price with the gold price (reflecting the pure gold content they contain) and because demand is high (their premium increases).
The premium can be different depending on location representing a differential in demand. This difference can be illustrated and calculated by taking the price difference between a one ounce Kruggerand in the UK, for example and the same in the USA or Australia. These two coins have the same weight and the same quantity of gold (Law of 900 °/oo) and yet the price can be different given that the Kruggerand is much more in demand in one country or in limited supply.
These differences in price for the same coins are known as the Premium differential and they can be used as a measure of supply and demand but also as a means for judging the value of a gold coin investment. Remember that 2 factors change the price of a coin, the gold price and the premium.
So, in conclusion, gold investing can be vastly beneficial to your wealth. It can also be very confusing, but hey, that comes with the territory of finances, doesn’t it?