October 25, 2010
How to Buy and Sell Physical Gold and Silver, Part 1
A few weeks ago I read a copy of Buy Gold and Silver Safely: The Only Book You Need to Learn How to Buy or Sell Gold and Silver by Doug Eberhardt. I LOVED it! It was the only book I have read on gold and silver investing that gave specifics on the how tos (most gold books cover the why tos) in a way that even I could understand. I contacted Doug and asked if he wanted to do an email interview on the subject and he agreed.
I'll be running the interview over three days in three separate posts. I'll include my questions in bold/red and Doug's answers below each one. And at the end of each post, I'll add in some commentary to add perspective to why I asked the question and/or what I think of the response.
Here we go.
Let's start by having you tell us all a bit about your qualifications and experience.
I am originally from Illinois and a graduate of Roosevelt University. After college I moved to California where I was a financial advisor for just over 20 years and subsequently worked for one of the largest gold dealers in the United States. I took some time off to do research from an economic perspective and expose from an investment perspective what I believe to be flaws in our financial services industry, primarily dealing with the Prudent Man Rule and the adherence to Modern Portfolio Theory and the "risk free" asset; U.S. Treasuries and the U.S. dollar. This research has led to my writing a blog which I have been posting articles for 2 1/2 years and subsequently my book; "Buy Gold and Silver Safely," published September 2, 2010 and available on Amazon.com. It has also led me to start my own company as a broker/dealer selling strictly gold and silver bullion at the lowest prices available.
I have been a guest on blogtalkradio's "The Optimistic Bear" a couple times, have been covered in the Chicago Tribune. and I was interviewed for an upcoming NY Times article.
The media attention seems to be taking off for me, which I am happy about. Of course the media that won't allow me a platform is the kind of media that rakes in the profit from the gold dealers I expose.
Your point of view is that physical gold and silver should be held as a safety net/insurance policy in case the economy/government collapses, correct? And you recommend 10% of a person's net worth allocated this way, correct? Do you advocate buying gold/silver for any other reason and if so, why? (simply to earn a good return?)
While no one has a crystal ball and can predict the future, we do know it doesn’t matter who is in congress as to whether or not they will curtail their spending. If you really sit down and crunch the numbers as to how unsustainable big government has become, including the city implosions that will surface more and more, as well as states, the question you have to ask yourself, is how can the Federal Reserve, U.S. Treasury and our government possibly reverse course? The answer is, all they can do is delay things a bit with their quantitative easing, which like Japan’s lost decade plus, is only a temporary fix.
As such, this is going to play out longer than people expect. One shouldn’t go overboard with their investments into silver and gold thinking the sky is falling just yet. There will always be pullbacks, just as there was in 2008 when the junior mining stocks fell 80%. But physical gold and silver actually was higher that year. Holders of physical gold and silver care not that it falls 20% on its way to 100% or more in gains. That’s why I prefer the physical to the paper trades; less volatility.
A 10% allocation to physical gold and silver is good. Another 10% to trade the ups and downs is fine whether physical or through the various paper vehicles like ETFs or mutual funds. Even leveraged accounts can be used for the aggressive
traders, although I don’t think this is wise advice after nice runs in the metal like we have just had. Anything more than that, is at your own risk. But I can change this allocation recommendation at any time based on what I see happening. There’s always the threat of war, a country like Ireland for example losing its grip, or even the U.S. changing the rules as they did in 1971 when Nixon took us off the gold standard. Expect the unexpected and there’s nothing wrong with being in cash waiting for the right opportunity, as long as you are hedged with some gold and silver.
I am conservative with my recommendations. I choose the tortoise approach over the hare. Greed is something that can get in the way of common sense. Can someone put more than 20% into these paper and physical vehicle’s? Sure. But they have to realize what risks go along with that.
When buying physical gold or silver, what are the main options you suggest investors consider (coins, bars, etc.) and why? What are options I should NOT consider?
There are different answers for this question, depending on whether you are buying gold or silver and whether you are using money from an IRA or money outside of an IRA.
Gold: The only gold I recommend are 1-oz American Eagle Gold coins. The reasoning stems from first the fact they are easily recognizable and have a low premium above the spot price of gold. With bars there is the possibility of having to assay them when it comes time for use (barter economy). If one is wealthy enough though, the larger bars of gold can be held in storage and liquidated at a moment’s notice or taken in delivery if we get to the point of a barter situation. But of course there is the issue of converting the bars to a form of gold that can be used for barter. I don’t recommend any rare coins, including St. Gaudens or the European coins like the Swiss francs. The premiums are too high in most cases and good luck getting what you paid for the St. Gaudens in a barter economy or using foreign coins here in America for purchasing goods and services.
Silver: For an IRA, I recommend the 1,000 ounce bars and for physical possession, the 90% silver bags. The 1,000 ounce bars offer the lowest cost to spot price and the 90% bags of silver also give a good price over spot, but at the same time I believe these coins will be the major bartering coin should our economy devolve to such a state. The American Eagle silver bullion coins have too high a premium over spot to be considered.
Obviously there are many different products out there with varying levels of gold content/value. What's the difference between them, how do I value one over the other, and how do I know I'm buying one versus the other?
I like sticking with the lowest premium to spot American coins as they are recognizable and the silver coins were once money in the U.S. Bars have to be assayed and one other issue is the place where you bought the bars may not even buy them back from you. If that is the case, then where will you sell them? How will you prove they are real gold or silver? It may have a stamp on them from a reputable company, but I like keeping things as simple as possible.
We'll stop here today because I'm about to get into a new line of questioning and I want to include it all in one (the next) post.
Not much for me to comment on so far other than to say that the 90% bags of silver he refers to are what his book calls "90% junk bags of silver." These are 90% silver US coins (aka circulated silver coins) minted before 1965. According to the book:
"A 'bag' ($1,000 face value) contains approximately 715 ounces of silver and generally tracks the spot price of silver. These are circulated dimes and quarters that were used by citizens until the government found the silver content to be worth more than the price on the coins."