You’ve probably already seen that there are a variety of alternatives for your gold and silver investment. Each investor has their own reasons for investing in gold, and your reasons should inform your choice of how to invest. Here is our list of the 3 most important questions you need to ask to narrow the alternatives and make sure you make the best silver or gold investment decision.
Question 1: What is your goal with this investment?
Every investor has their own reasons for considering an investment in gold or silver. Do you see your reasons in one of the categories below, or a combination of them?
Short term, tactical
You anticipate that the gold or silver price will rise in the next few days or months because of a geopolitical event you view as likely. These events could be anything from a sharp decline in stock or bond markets, an unexpected election result, or rising rhetoric between major economic powers. If the event does happen you anticipate, you see a rush towards safe haven investments like gold as a likely outcome and you want that upside.
You are concerned about how inflation steadily and inexorably grinds away your purchasing power. Maybe you’re concerned with the massive buildup in government debt in recent years and see higher inflation rates as increasingly likely. You want to hold some of your wealth in a “currency” that has a superior track record of holding its purchasing power compared to “soft money” currencies issued by central banks.
Preparing for the worst
You see significant events coming and want to be prepared. You are concerned about a possible stock market crash, currency devaluation, a major economic power defaulting on its debt, or a military event. To protect your wealth, you own physical gold and silver, instead of paper money. Maybe you want to have some of your gold and silver where you can get your hands on it quickly in an emergency.
You have a diversified investment portfolio. You own stocks, bonds, ETF’s, real estate, and other assets. Maybe you already own precious metals as part of your holdings. You don’t try to time the market or bet it all on the next big thing. Rather, you see building a portfolio of assets that each act differently in different circumstances as key to earning sustainable returns with reduced volatility. You’re considering gold and silver now because the price of these metals tend to perform in an inverse manner to other things you own.
Understanding your goals for your precious metal investment clarifies how much gold or silver you are looking to buy and how long you expect to own it. Knowing these factors are key to the answering the second question.
Question 2: What will it cost you to buy, sell, and hold this investment?
The answer this question can really vary depending on the nature of the metal you buy and how long you plan to own it. First, let’s look at the three different costs you face when looking at gold and silver investments. These costs include the cost to buy or sell, and carry costs (what it costs you to hold your position).
The cost to buy and sell depend on the form you chose. Let’s have a look at a few of the popular alternatives.
Exchange traded funds, or ETF’s, are traded in a brokerage account, just like stocks. The commission to trade ETF’s in most brokerage accounts is pretty low (usually under $8 in America). You can buy or sell just about any size position for very low brokerage commission.
Coins and bullion bars are sold through numerous retailers, both corner shop coin dealers and online retailers. These coins are sold at a markup over the price of the gold or silver the coin contains. The markup over the metal price needs to cover the fabrication costs of making that shinny silver American Eagle coin, as well as a profit margin for the dealer. The amount of the premium varies depending on the coin or bar you want to buy. This markup is significant relative to the value of the metal. For example, a few reputable dealers are currently offering current year gold 1-oz American Eagles at a $73.00 premium. The same dealer is offering silver American Eagles for $3.69 premium over the current silver price. This means that on those silver eagles, an astounding 23% of the money you invest isn’t going into silver! But wait you say, won’t I get this premium back when I sell the coins later? The more reputable dealers do buy back coins from their customers. However most don’t post their bid prices. Hmm…. Maybe check the price you’d get if you already had coins and wanted to sell them before buying.
Bullion storage programs or “digital gold” platforms offer relatively low spreads to buy or sell gold or silver, usually around a half of one percent (0.5%) of the value.
Precious Yield offers metal at similar spreads to bullion storage programs but offers substantially smaller spreads for larger transactions.
Carrying costs are the ongoing fees you pay to own the metal. These costs (or yield earned in the case of Precious Yield) can really vary.
ETF’s charge a management fee. This can vary from fund to fund but the most popular offerings charge 0.4% per year on gold and 0.5% per year on silver. The ETF doesn’t actually send you a bill. Instead, they just slowly sell down the pile of metal backing the fund and use the proceeds to pay your fees. So, over time, there is less and less metal in the fund.
Coins pretty much just sit there. Which is great, so long as no one steals them. Prudence would suggest that you think about a safe place to store them and some kind of insurance too. Cost will vary depending on whether you’re just putting them in your safe, renting a safety deposit box at your bank, or opening an account at Brinks.
Digital gold platforms charge ongoing fees for storage and insurance that are less than ETF management fees. These are generally about 0.15% for gold and 0.40% for silver.
Precious Yield actually pays you to hold your gold or silver. So instead of having your investment eroded by ongoing costs, you can actually use your yield to buy more metal.
Question 3: Ok then, so what are the best gold or silver investment alternatives for me?
As you can see the costs can really matter the performance of your gold and silver investment. If you’re planning a quick in and out trade then your trading costs matter the most. Here, the clear winners are ETF’s and digital gold. If you’re preparing for the worst, you probably want your metal right where you can put your hands on it “when it hits the fan”. Costs and returns are a secondary concern to you.
For those longer term players concerned with inflation protection and portfolio diversification, Precious Yield is the clear choice. Why? Because the biggest impact on your returns will come from the cost of carry, or in the case of Precious Yield, the yield you earn. Albert Einstein reportedly referred to compound interest as the second most powerful force in the universe. Longer term gold and silver investors would do well to put this principal to work.
The bottom line:
The bottom line is that there are a number of great alternatives for gold and silver buyers. The one that is right for you depends on what you’re trying to accomplish with your silver or gold investment. Like all investments, the costs can meaningfully change your returns. Consequently, it is vital that you understand how these costs will impact you. Finally, for investors with a longer time horizon, earning a yield on your investment is a powerful way to enhance your returns.