Gold & Silver... How Do I Own Thee?
... Let Me Count The Ways
(Part 2)
March 2009
James Macfarlane
Low Premium Coins
Category: Safety/Maintenance of Wealth
Low premium coins are probably the safest way to own gold/silver. Such coins are an excellent vehicle both for protecting your wealth, and possibly increasing it as well. Any premium attached to such coins is normally recaptured at time of sale, minus a commission. In the event of an emergency, low premium gold/silver coins would be an excellent form of money to purchase goods.
Note: It should be noted that the phrase "low premium" is relative. The premium on gold/silver coins jumped dramatically late last year commensurate with the drop in the price of spot gold and silver. In other words, dealers were not tempted to part with their inventory at such "low" prices, and the premiums attached to coins therefore rose from an average of 2-3% up to 15% or more.
Here are some examples of low premium coins:
A full bag of junk coins ($1,000 face value) costs several thousand dollars. Those with a smaller budget can purchase individual coins through a local dealer or on EBay. Pictured at left is a Mercury Dime. These dimes were issued between 1916 and 1945 and contain 90% silver. Look for low premium, circulated coins that still show the engraving marks. Someday these coins may once again buy a loaf or two of bread.
Note: Although once readily available, many low premium coins are getting harder to find, and the premiums are trending upward. The market changes fast, so be sure to comparison shop when seeking the lowest premium coin.
Numismatic Coins
Category: Speculation
A numismatic or collectable coin has some special attribute that causes the coin to sell for well over the value of the gold or silver it contains. While all gold & silver coins sell for some amount over the price of bullion bars, numismatic coins sell for a significant premium, usually due to the coin's age, scarcity, and/or quality.
As a general rule numismatic coins should be avoided. The premium attached to these coins is substantial, highly variable, and there is no guarantee that such a coin will sell for the same premium it was purchased for. You can lose money investing in such coins even if the price of the underlying metal goes up. In the event of an emergency, where coins would be used to purchase goods and services, it is unlikely a numismatic coin would be worth anything more than the actual amount of gold or silver it contained.
Although this 1914 $20 Saint-Gaudens Double Eagle pictured at left looks similar to the 1999 Gold Eagle shown above, the two coins are substantially different in terms of the premium attached to each. Both coins contain exactly the same amount of gold, and each depicts Lady Liberty on the front of the coin. However the Saint-Gaudens sells for a substantial premium over the contemporary Gold Eagle, and is therefore a higher risk coin to own, as one cannot be guaranteed that buyers will be willing to recognize the numismatic value when the coin is sold. In some circumstances premiums on numismatic coins do of course rise, but you have to be an expert, or be lucky. Most people should stay away from numismatics.
Be advised that the standard argument dealers use to entice customers into purchasing numismatics is that collectable coins were the only form of precious metals that people were allowed to continue to own when gold was confiscated from US citizens in 1933. This is true, and confiscation could happen again. But there is no guarantee that numismatics would be exempt, as we live in very different economic times. And unlike in 1933 we are no longer on the gold standard, which was germane to the confiscation.
Bullion Bars 6
Category: Safety/Maintenance of Wealth
Gold and silver bars often carry lower premiums than coins; partially because of lower manufacturing costs on conventional bars, and partially due to the ease of recognition of coins. A variety of weights are available, from 100 gram bars to 400oz. bars. Smaller bars often carry premiums close to coins. Always check the premium on all gold/silver bullion products, as it is in constant flux with the constant changes of supply/demand.
This completes our discussion of Physical Gold. It's a pretty quick study, really. You determine the ratio of gold to silver you want, the mix of coins and/or bars you wish to buy, and you phone a reliable dealer for a quote (see links at end of article). You take receipt of your bullion, hide it somewhere safe, and keep your mouth shut. Seriously. If you ever discuss owning gold with another human being besides your spouse, make a reference to any holdings you admit to as being held in storage by a trusted third party. Better yet… just keep quiet. Now you are about as safe as you can get. From here we will work our way up the risk ladder and look at other forms of gold/silver ownership and investment opportunities.
BEWARE OF SAFE DEPOSIT BOXES
One alternative to storing your precious metals yourself is to make use of a paid storage facility. Most third Party storage is actually a form of Paper Gold, and is discussed below. The only form of third party storage within the realm of Physical Gold is a facility that you can physically walk in to, open a locked box that only you have the key to, and retrieve your precious metals holdings (and even here we are stretching the definition).
The most well known form of such a facility is a safe deposit box in a bank. Believe it or not though, safe deposit boxes at the local bank may not be as safe as they used to be. A number of articles have appeared reporting that money starved states have confiscated the contents of active safe deposit boxes for no other reason than they had not been accessed for a while (in one case only six months, and the person had an active checking account). ABC News reported a class action lawsuit against the state of California for this activity. Additionally, safe deposit boxes are not insured by the FDIC, and are vulnerable to theft, flood, and fire.
Paper Gold
There is sometimes good reason to augment your stash of physical gold/silver with Paper Gold. Paper Gold is any precious metals ownership that entails the issuance of a receipt, certificate, brokerage statement, online statement, or a rock with writing on it. If you are ever in doubt as to whether you own Physical Gold or Paper Gold, just look down at your hand. Is there something shiny there or a just piece of paper? If it's not bullion, you own Paper Gold. Anything with writing on it is simply a claim check. The claim can vary from a promise of bullion stored in some remote location, to a mining share certificate. Some forms of Paper gold may be worth investing in…other forms should be avoided. Just remember that Paper gold is never a substitute for Physical Gold.
Third Party Storage
The first step up the risk ladder of Paper Gold is entrusting a stranger to hold your physical gold for you. There are vaults in various locations around the world that specialize in storing precious metals, most notably in Zurich, London, and New York. Although some may consider this form of bullion storage still in the realm of Physical Gold -after all it is supposedly physical gold stored in the vault- we are going to classify such storage as Paper Gold, because… again… look down at your hand. Storage of bullion through third parties though can be a great way though to diversify your holdings… or not…. depending on how you set up the account.
The third party storage of precious metals takes on two distinct forms, generally referred to as unallocated and allocated. There is a massive difference between the two types. Unallocated storage involves what's called a pool account, whereby your holdings are commingled with the holdings of others. An unallocated account gives no title to any specific bullion. Your purchase receipt is in essence a "promise to pay". You are actually just a creditor of the holding institution. If the dealer goes bankrupt you are simply a general creditor and stand in line with all the other general creditors in hopes of what will likely be a cash settlement, at best. Another weaknesses of unallocated bullion accounts is that there is no real guarantee that the dealer actually has the same amount of gold in storage that it has issued receipts for. Think about that. Just as the US banking system is fractionalized -there are always more deposits then there is cash on hand at the banks to satisfy those deposits- there is a temptation for the bullion dealer to do likewise. The dealer, certain that not all of its customers will demand delivery of their gold at once, is tempted to lend some of the bullion out, greatly leveraging its holdings, and thus its revenue stream. Sounds like a good deal for the dealer, huh? What's more, there is a growing fear that unallocated bullion has become more leveraged then ever, with each bar of gold and silver in storage having a significant number of claims against it. Sounds like musical chairs to me.
An allocated account is very different. In an allocated account the bullion must exist, and the amount you purchase is stored in your name. You hold actual title to your precious metals. The dealer in this case is guaranteeing that it has the same amount of assets in bullion as there are claims against those assets. If the dealer has 100 customers each holding title to 100oz. of gold bullion, the dealer is guaranteeing to have 10,000oz. of gold bullion in the vault at all times… and free of encumbrance by any other party.
So, an allocated account sounds a lot safer than an unallocated account, right? Right. But it still comes down to the fact that you have to trust that the dealer is honest, right? Right. So how do you know who to believe? Who has the most trustworthy pieces of paper? Fortunately, with an allocated account you don't have to worry quite as much about the bank or dealer who sold you the bullion. The dealer is more of a middle man, as the holding facility itself records your name as having title to the amount of bullion you have purchased. Although you haven't taken physical delivery of your bullion you have taken legal delivery (legally known as bailment). If the dealer -or even the holding facility- goes bankrupt, you still have legal title to the bullion in storage and therefore do not need to stand in line with creditors. In essence you are eliminating what is known as "counterparty risk"; the risk that a party to a contract is unable to live up to its contractual obligations due to say, bankruptcy. Now having said all that, you of course still need to trust that the dealer and storage facility will do what they say they say they are going to do, right? The dealer must be trusted to place the gold in the vault. This is known as "performance risk". So, the customer must still discern who to do business with, even in the case of allocated accounts (see below).
Third Party Storage - Store Your Bullion in a 'Bank'
Category: Safety/Maintenance of Wealth/Flexibility
Here is the first of three common ways you can employ a third party to store your gold. Store your gold in a 'bank'. No, not a safe deposit box in a conventional bank. We covered that option earlier. I'm referring instead to a newer class of institutions that have established the concept of Digital Gold Money or Digital Gold Currency. This particular category of third party storage is characterized by how readily you can buy and sell gold, as well as the ease of converting that gold/silver to currency.
Think of these digital gold institutions as kind of an online bank, except that your holdings are stored not as currency, but rather as bullion. The account balance is unaffected by the fortunes of a particular currency, and instead rises and falls in value with the price of gold. What's more, your bullion can be stored in overseas vaults, and you can access your account from anywhere in the world. And if you like you can convert your bullion into a variety of currencies at any time. It's a very flexible system and a pretty cool idea. Here are two popular digital gold banks: BullionVault.com and GoldMoney.com.
If you choose to investigate such a vehicle for storage of your bullion you of course know the Big Question to ask about the account, right? Allocated or unallocated? Only allocated accounts are offered by the aforementioned institutions. But even with an allocated account there is still that nagging question of validating your holdings. How do you know your gold is really there? I am going to use GoldMoney.com here as an example to hopefully shed some light on this question. As it happens, GoldMoney has put a lot of effort into substantiating its holdings, and in doing so has created a benchmark of sorts for the industry. GoldMoney employs a five part process to insure the purity, weight, physical safety, verification of holdings, and verification of ownership of the customer's bullion.
- GoldMoney is regulated by the Jersey Financial Services Commission, Jersey, British Channel Islands. This in part means that GoldMoney is careful to identify its customers to avoid being used for money laundering. This in turn helps keep the institution sound.
- GoldMoney is regulated by the Jersey Financial Services Commission, Jersey, British Channel Islands. This in part means that GoldMoney is careful to identify its customers to avoid being used for money laundering. This in turn helps keep the institution sound.
- All bullion meets the London Good Delivery Standard established by the London Bullion Market Association. This insures weight and purity of your holdings.
- GoldMoney employs the Swiss company VIA MAT to store its holdings. VIA MAT also meets the London Bullion Market Association standards. This insures physical safety of your holdings.
- Holdings are insured by Lloyds of London. This insures against losses by the vault.
- Most importantly, the holdings of GoldMoney are periodically verified by one of the "Big 4" auditing firms. This insures sufficient bullion exists to match the claims in GoldMoney's customer database.
The fifth element in the system is critical to insuring that no one else has claim to your pile of gold. Not all allocated accounts have this independent assurance. Additionally, GoldMoney has pioneered a gold based payment system that allows electronic payments of grams of gold to private parties. What I find particularly interesting is that you can actually take delivery of your gold (this of course incurs additional expenses). By the way, GoldMoney is also qualified for IRA accounts. An IRA is a good reason for using Paper Gold, as gold coins buried in the backyard certainly don't qualify for an IRA.
BullionVault is another digital gold bank that provides allocated, audited accounts. There are differences between BullionVault and GoldMoney in terms of the way the companies are structured, the validation and audit procedures, as well as services provided. A full comparison is beyond the scope of this article, but in brief GoldMoney operates under a higher degree of regulation, a more strenuous audit procedure, allows for purchases of silver as well as gold, and employs a payment system for sending "goldgrams©" to others. GoldMoney also has the flexibility of wiring funds from your GoldMoney account to any bank of your choice. BullionVault has less regulation and audit procedures, and has fewer bells and whistles than GoldMoney, but it too is structured to insulate its customers from counterparty risk. In addition, BullionVault only allows you to wire funds to the same linked account you funded your BullionVault account with (the linked account can be changed but it's an elaborate and time consuming process). This can be construed as an additional safety measure in the event your digital gold account was to be hacked.
BullionVault also has a "burglar alarm" feature that sends a message to your cell phone when your account is accessed.
Finally, costs vary from one digital gold bank to another. A commission is charged at the time of purchase and sale of bullion, storage fees are incurred, as well as fees for other types of services.
Third Party Storage - Store Your Bullion With Your Precious Metals Dealer
Category: Safety/Maintenance of Wealth2
In this next flavor of third party storage, we have precious metals dealers that not only buy and sell bullion for delivery, they will also store your holdings for you in a vault. These companies differ from digital gold money institutions in that they are primarily bullion dealers who also happen to offer storage, but don't offer the additional services of the digital gold banks. Some examples are: kitko.com, monex.com, and fsdepository.com.
Naturally you will want to ask any bullion dealer you store your precious metals with the Big Question, understanding that unallocated storage is simply getting more and more risky these days. And even when the answer to the question regarding allocated storage is "Yes", you still want to dig further. Does the facility uses mechanisms similar to those employed by GoldMoney, especially the all important independent verification of ownership. I cannot emphasize this point enough, as my research indicates a vast game of musical chairs may be underway with unverified bullion holdings in storage. The music is going to stop one day and some folks may find a pile of something other than gold bricks in their seat.
(Part 3 will be posted shortly)
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