Tuesday, October 27, 2009

A Gold and Silver Crash Course

Considering the interest in the topic, I thought I'd take a minute to write a little of what I've learned about gold and silver, and the precious metals market in general, over the past few years. I'll try to make it as succinct, but that is not likely for me! Everything below is talking real metal, I'm not talking about gold ETF's (exchange traded funds), gold ETN's (exchange traded notes), gold stocks (in mining companies), or any other "paper" gold, as we call it (you can read about the nonsense of paper metal here, here, and here). I can tell you enough about that market to make you run from it like the plague. What I'm mean is real, physical, hold-it-in-your-hands metal. I'll start with gold.

Gold Basics
As Rollye James succinctly says, gold is sold as products. You can't just say, "I'll take one ounce of gold, please." Instead, you purchase it in the form of a product, and basically all the various products fall into either of two groups. The first group is bullion, the second group is numismatic. Bullion gold is generally worth only the melt value, which you can determine by checking out the spot price of gold. Because metals are traded in international markets, the spot price is constantly changing, 24-hours a day. You'll notice that some sites will update the latest price--for example, www.apmex.com, while others will post only the New York (COMEX) close--for example www.kitco.com/market. You have to know the spot price when you go to buy, because you need to know what the premium is on the product you're purchasing. Unless you're taking delivery on a 100oz COMEX gold bar, you're going to pay a little more the product than the spot price. Bullion gold might look pretty, and be shaped into nice rounds or pretty little PAMP Suisse bars, but when the rubber meets the road, serious people will only ever buy it from you for melt value, which is the market spot price, plus maybe a small ($20-$50 per ounce) premium for some bullion products if you're lucky. Remember that when you're assessing the premium on whatever bullion you're interested in.

The other category of investment gold, numismatics, is rather different because it is much more subjective and includes the "collector" element. Numismatic gold has both a collector value and a "property value" that knowledgeable gold people will pay a premium for. This premium might be a couple hundred bucks, or several million bucks. More on this later.

Bullion Basics
First off, bullion gold includes bars of various sizes and rounds. Rounds are sometimes called "coins" because some/most are made by federal mints (like the US Mint, Canadian Mint, Austrian mint, etc), but they are not technically "coins" because they are not legal tender insofar as their face value or paying taxes, etc. For example, the US Mint has been making gold and silver bullion rounds since 1986 (they stopped making gold coins as tender in 1933), and these bullion "coins" have a "face value" of $50 for the 1 oz gold rounds and $1 for 1 oz silver rounds. Obviously, with gold and silver several multiples higher in market price than $50 and $1 an oz, the face value is irrelevant, and the Mint itself can legally sell them for more than $50 each. For bullion gold, the US Mint sells produces the following products:

American Eagle (since 1986, cannot be purchased directly from the Mint)
Gold Buffalo (since 2006, only special fancy proof editions can be purchased from Mint directly)
Ultra High Relief St Gaudens 1 oz round (could be purchased directly from the Mint in 2009, but not anymore. This is a special commemorative that is a 24kt replica of the 1907 circulating gold coin, the St Gaudens Double Eagle $20, that ran until 1933. While it is technically a "collector's" item because of the single-year pressing, it's really a bullion coin with a heavy premium.)
Other collectible gold (varies throughout the year, I consider this bullion but some people disagree with that because they say its collectible; I can tell you one thing--they'd never get much over spot from me!)

The largest (and most popular) bullion rounds available from the US Mint contain 1 oz of gold. The Buffaloes and Eagles are sometimes available in "fractionals," which simply means "fractions" of an ounce: 1/2 oz, 1/4 oz, 1/5 oz and 1/10 oz are available, but fractionals are hard to find. Fractional gold is usually more expensive than the 1 oz versions, but some people think it is useful because of its smaller size (for bartering, or a quick sale, and also some people who cannot buy a whole 1 oz at once will buy fractionals when they can). Whether fractional or not, bullion should sell very close to spot. There will always be a little difference between the spot price and the sell/buy (aka "ask/bid" price), but as a good rule of thumb, you should try not pay more than 4%-5% over spot for bullion, which at these high prices is $40-$50 per ounce. You can often find it at under 4%. If you find yourself sneaking over that mark, consider carefully whether you will be likely to get that back if you have to sell. For examples, American Buffaloes routinely go for 8-10% over spot, but they often carry that premium well when its time to re-sell. Be careful.

Some people collect bullion products, and there is a little market for this, but I think that is not wise, personally. People pay well over the spot price (and melt value) of bullion products in these cases, and I think that is risky, because gold is already super expensive, and paying more for the "collector value" of bullion has not been supported by history. Numismatics are a different story, but more on that later. You might be wondering about confiscation: bullion is absolutely subject to confiscation under the current laws. It was illegal for US citizens to hold gold from 1933 all the way until 1973, and most people didn't even have the chance to buy gold in the US even after it was re-legalized in 1973 until 1978. The original illegalization of private ownership of gold was "authorized" by the Gold Confiscation Act that President Roosevelt signed by executive order shortly after coming into office in 1933. The order required all US citizens to turn in their gold and instead get back worthless paper notes: gold in bank safe deposit boxes was seized and replaced with paper, and individuals caught in violation of the order were federally charged. This order was later backed up by an actual law when Congress passed, and Roosevelt signed, the Gold Reserve Act of 1934. This Act also re-valued the dollar price of gold from $20 an ounce to $35 an ounce--in other words, now that the government had all the gold, they decided to make it worth more and hence the dollar worth less, and then promptly vowed it to the Federal Reserve System as collateral. Obviously, this was great for the Federal Reserve and the owner/member banks who now had all the American people's gold through the paper exchange agreement with the Treasury, but it totally sucked for the American people now holding only paper. Internationally, holders of dollars (foreign central banks, commercial banks, and even individuals) were able to exchange $35 of their paper dollars for one ounce of gold from the Treasury all the way up till 1971, but the American people could not. In 1971, after the disintegration of the Bretton Woods agreement (another story, but related), Nixon had to remove the US dollar from the gold standard entirely--but now I have to stop because I'm getting into a whole big discussion, and that is not the meaning of this introductory post! However, it is important background to mention, in my opinion, because the bullion law was never changed, and the government under the current law retains the right to confiscate bullion gold. According to the law, we have bullion at their discretion.

Since 1986, the IRS has also allowed gold/silver/metals in tax-deferred IRA's. But everyone knows the government can "do" whatever it wants, whether its legal or not, and they can change their minds, because the original gold confiscation was a totally illegal and unconstitutional violation of private property rights in the first place! I mention this, again, because its something that fits into understanding the overall gold/metals market. Also, I mention this because now you'll understand where numismatics enter the picture.

Numismatics Basics
Numismatics (pronounced new-miss-mat-ticks) are "collectible" gold coins. Simply, they are old. The US "numi's" ("new-meese") are all pre-1933 gold coins: $20 pieces, $10 pieces, $5 pieces, etc. The single-most important quality of numi's to non-collectors is that they are currently not subject to confiscation on the whim of the government. I'm not saying the government couldn't get all crazy and pass a "law" making all gold illegal or something, because they can, but I am simply saying that they would have to change the current law. Under the current law, the president alone could order a confiscation of bullion, but Congress would need to be involved in the confiscation/illegalization of numi's because the Supreme Court has already determined that the numismatics--because they have a "collector" value--are not simply bullion, but are antique and numismatic, and therefore they are "personal property" and not government property as currency, and so they are protected by the 4th Amendment's prohibition of property seizure without due process. (But again, this is a totally out-of-control government, so don't think the Constitution, or that "G-D piece of paper," as Bush called it, would stand in the way of anything). Because of this perceived confiscation exemption, their collectible value, and their rarity, numi's command a premium. A few years ago, it was manageable: you could get a certified 1920 $20 St Gaudens for maybe 10-15% over spot, and it might be a good choice. Things are a little different now, as many numi's are commanding a much higher premium (30-40%), even on fairly common old coins (like the Gaudens).

In my opinion, certification for numismatics is essential! A "certified" coin is one that has been examined, graded, and guaranteed by a third-party numismatic professional group. There are a handful of certifiers out there, but the only two certifiers that I trust are Numismatic Gaurantee Corporation (
http://www.ngccoin.com/) and Professional Coin Graders Service (www.pcgs.com). These are excellent and well-respected. DO NOT PURCHASE COINS "CERTIFIED" BY ANY OTHER GRADER until you have some serious experience! It very easy for a "certifiers" (many of whom at have declared themselves "experts" on eBay) to access a coin at some really high grade (for example MS-66), only for you to learn when you take it to the real certifiers that the grade is much lower, or, heaven forbid, that is actually a counterfeit. Certified coins are sometimes called "slabbed" coins because as part of the certification and guarantee process, the coins are placed in sealed "slabs" that are about the size of a playing card and 1/4 thick, tamper-evident plastic that includes a registration number and verification information with the certifier's mark. You cannot pop open a slab and hold the coin: the coin is protected inside and its grade is guaranteed only as long as its inside there. The coin is clearly identified and labelled with a bar-code and certification number. You can check the certification number right on their websites (PCGS and NGC). Besides the authentication and before the slabbing, the other part of the certification process is called grading. Grading produces a "quality grade" for the coin, from poor (a really, really, really bad looking coin) to perfect uncirculated MS-70 (a perfect coin, no flaws). You can read more about grading on this link.

Personally, I think unless you're getting into collecting for collecting (which is ridiculously expensive with gold!), the finest slabbed coin anyone should be throwing money down on is a MS-63 ("mint-state 63, in a scale from 60 to 70 where 70 is perfect). At least at these prices, because it is ridiculously expensive territory. There is usually only a small difference in price from the MS-61 up to the MS-63's, but once you move from MS-63 to the MS-64's, you're getting into some serious price changes. Get up to 65 and 66's and 69's, and you're talking thousands of dollars over spot price. That is serious collector territory, not investor/survivalistic stuff. (That said--if you have the chance to get a high-grade, verified coin at a good price, do it!) For example, right now I just checked
the prices on random dates $20 St Gaudens. This is a coin with .9675 oz fine gold, and so a melt value of about $1008 at current prices. Of course, you would be out of your mind to melt a $20 Gaudens simply because they are beautiful and more valuable because they are old, more rare than bullion, numismatic (even if they are in poor condition) and people like them--but if you did, you're looking at $1008 spot. Here's the current (October 27, 2009) price difference for various grades on slabbed (PCGS certified) Mint-states of the same $20 St Gaudens Double Eagle:

MS-62: $1525
MS-63: $1655
MS-64: $1830
MS-65: $2230

As you can see, you're quickly up to over twice the spot price of the gold content of the numi's. If you are looking just for quantity, then you can have two bullion gold 1 oz American Eagles for the price of one MS-65 slabbed numi Gaudens, and have some change left over. The high premiums on these numi's is something that really started about 14 months ago, and its been supported by people apparently buying them, because they do still move quickly. That said, twice the price? C'mon. That's for collectors, and that is more risky that regular gold stuff too.

As you could see from the pictures in the links above, the obverse (front side) of the St Gaudens $20 pre-1933 coin looks like the obverse of the modern American Eagle US Mint bullion round. It is the same design, but the reverses are different. Don't mistake an American Eagle bullion piece for an old Gaudens when you're looking at things online. Make sure they are clearly identified. Other US numi's include the design on the $20 piece that came before the Gaudens design, which was called the $20 Liberty (by the way, its called a "St Gaudens" because that's the lastname of the man who designed it. The official name for a $20 US gold coin was a "double-eagle", a $10 was an "eagle," a $5 was a "half-eagle," etc.) There are $10 coins that contain about 1/2 oz of gold ($10 Liberty til 1907, and then the $10 Indian after), and $5 coins (about 1/4 oz). These are more expensive numi's, and also have a collector value that elevates their price. So that's some of what you need to know about numismatics. Now for something that applies to bullion and numismatics: purity.

Understand karats. The karat system refers to gold purity, and you might encounter it in your research. You have heard of it before when you hear "24kt gold" or "14kt gold", etc. Karats are an ancient unit of measure originally based on seeds, and the karat system is meant to show how much of the weight of any "gold" item is due to gold, and how much is another metal. For example, a solid gold item is 24 karat gold because it is pure gold, nothing else added. You can take a 24kt gold item and place it on a scale to see its weight, and you don't have to subtract anything for the alloy metal because it is 100% gold. You will also see 24kt gold marked as .999, which is how you'll see it on bullion usually. Gold purity moves down from 24Kt if another metal is added, making the gold an alloy. Because gold is so soft and malleable, it is very common to have another metal, usually copper or silver, introduced in small amounts to strengthen it. This is where the karat system comes in. For example, a 14kt gold ring that uses silver as an alloy will have 14 parts of gold for every 24 parts of weight: so if it weighed 24 grams, then you'd know that only 14 grams of that is actually gold, and the other 10 grams would be silver. That 14kt "gold" ring is actually only 58.3% gold. A ring of 18kt gold would be 75% gold, etc. In bullion, nearly all bars are 24kt and most rounds are 22kt (91.6% gold) or better. The US Mint makes one 24kt gold round, and that is the
Gold Buffalo, which is a solid ounce of gold. The Ultra High Relief St Gaudens replica is also 24kt, but that is a limited time thing intended for collectors. This is where you should not be decieved by the size of a coin unless you know the karat. For example, the very popular US American Eagle gold is 22kt (91.6%) gold, and its bigger than the American Buffalo. BUT, since it is 22kt, it is 91.6% gold and 8.4% alloy metal, the bigger size and heavier overall wieght is from the additional mass of the alloy metal, not from more gold. The American Eagle does not contain any more gold than the Buffalo: they both contain the same amount, 1 troy oz. This is not super important, because even without physically wieghing the coins, you can be assured of their content if you have US gold coins (whether numi's or bullion), but I think that people should know about karats.

The US Mint is the most trusted mint on the planet. Other good mints are the Canadian (they make the gold Maple Leaf), Austrian (Philharmonics), and then the Chinese and Australian mints. US gold is the easiest to move. As far as karats and purity, all US numismatic gold US coins (pre-1933) are alloys of gold and copper because they were meant for circulation, and 24kt gold would not have been strong enough. Also, the alloy makes them easier to strike a fine image on them that will stay. These US coins are 90% gold and 10% copper, and therefore have a gold purity of 21.6kt (24kt x 90% = 21.6kt). Again, that means that when you weigh the coin, you must realize that 90% of that total wieght is gold, not 100%. So, for example, a 1930 $20 St Gaudens will weigh more than 1 oz on the scale, but only 90% of that weight is gold. While these coins are generally referred to as "one ounce" coins, they actually contain a little less than 1 oz, .9675 oz gold, but since they are numistmatic, most people aren't looking at them simply for the melt value. The coins are bigger than any modern US bullion coin, such as the American Eagle and the Buffalo, and they are bigger than the "replica" verisons currently being made by the Mint because that coin is 24kt. Now you understand karatage, and a bit about gold generally.

Silver Basics.
And now for silver. This is much more simple. Silver was in US quarters, dimes, halves, and dollar coins until 1965--these coins were 90% silver. Coins dated 1965 and higher do not contain silver, with the exception of 1965-1967 Kennedy halves, which were 40% silver. Nickels do not contain silver, with the exception of "wartime" nickels dated 1942-1945, which contain 35% silver. Your choices for silver purchases are US or foreign coins (called "junk silver" because it is 90% coins in circulated condition) or bullion.

"Junk silver" is not junk at all, and it's often more preferrably called "coin silver," but you'll see "junk silver" online a lot. The hardest part of buying coin silver is paying $120 dollars for a $10 role of 1960 quarters! But that's what happens. In my opinion, coin silver is important to have, because you can have dimes, quarters and halves that are in a small fractionals should you ever need to use it to barter or trade in an emergency. It is easily recognizable, and you cannot counterfiet the sound of coin silver without silver, nevermind the US Mint stamps that made the coins 45 or more years ago. Another quality of US coin silver is that, of course, the coins are still legal tender in the US, so they are "worth" at least their face value, say, for example, the government outlawed silver or something. (And you answer your next question--yes, I'm that crazy.)

US silver coins are a good way to investment in silver, in my opinion. But like I said, it feels strange to pay $120 for $10 roll of quarters. It makes you think, too, exactly what the Federal Reserve has done to our currency. Anyways, when you're wheelin' and dealin', you need to be able to confidently determine the silver content of what you are buying, because there are different methods for selling. For example, if you purchase by "face value" or by a certain weight (ie, five pounds of silver coins), you need to be able to know the silver content so you can set your price parameters. Here's how to calculate that.

For coin silver purchases based on the face value, the industry standard for circulated coins is 0.715 oz silver/$1 face for quarters, dimes, and halves (they contain .723 by statue, but it wears down a little during circulation). In other words, $1 of quarters, dimes, or halves (in whatever combination: 2 halves; 4 quarters; 2 quarters and 5 dimes; 10 dimes; etc) in circulated condition contains 0.715 oz of silver. So, $10 face value would have 7.15 oz silver. If the price of silver is $17/oz, then you multiply that out: $17 x 7.15 = $121.55. The silver in $10 face of silver coins is worth $121.55. (The silver content in the dollar coins is a little higher: its about .77 per $1 face, which would be one coin, and they are also worth a little more because people like them better and they are less common). The industry will use .715 for a mixed assortment of dimes, quarters, and halves.

For coin silver purchases based on the weight, it is usually because you're buying several pounds. First and foremost, make sure that you and your seller agree on your unit of measure, because in metals there are two types of "pounds." The regular pound, which is the standard, or avoirdupois pound that we are all used to which, has 16 av ounces, while the troy pound, which is unique, contains 12 troy ounces. You will see the word "troy" in reference to metals because it is the official unit for gold and silver and other metals. A troy ounce is a little more than a regular ounce, but a troy pound is less than a regular pound. Make sure that you have the deal set on regular pounds, and if for some reason your seller doesn't want to do that, I would just walk away right there, because he's being stubborn. The troy pound is no longer used in metals, only the troy tounce, so if someone starts talking troy pounds, you can guess that they are trying to short people and fool them. Anyways, so have the deal set in regular pounds, so you know there are 16 ounces per "pound" you're buying.

In the weight-based purchased, you use the 90% silver rule, because remember, only 90% of the wieght of the coins will be due to silver. For example, 20 lbs of silver coins will be 90% silver, or 18lbs silver. Don't worry about pricing the other 2 lbs because that's mostly zinc or nickel, so you should be concerned only about the silver content you're getting. Since there are 16 ounces to a pound, you take the pounds of silver and multiply them by 16 to get the total ounces: 18 x 16 = 288 regular ounces of silver. You then have to account for the move from regular (avoirdupois) oz to troy oz, which is 9.11% heavier than the av oz, because the pricing for silver is in troy oz. Because the troy oz is heavier and the av oz, if you do not compensate for this change, you will be shorting yourself because you'll think you're getting more silver than you are (but your av ounces will convert to less troy ounces). Therefore, simply reduce your 288 regular ounces by 9.11% and you'll have the troy oz equivalent: 288 x .0911 = 26.24 oz to reduce, 288 - 26.24 = 261.76 troy oz. Round up to 262 ty oz.

You then take the current price of silver (we'll use $17/oz again) and do the math: 262 ty oz x $17/ty oz = $4,454. You would expect to pay $4,454 or less for that 20lbs of 90% silver coins. In case you're wondering, there is a way to convert that information back over to an estimate of the face value using the information above: you take your troy oz of 262 and divide it by the industry standard 0.715 ty oz silver content per $1 face US coins, and you'll get an estimate that your 20lbs of silver coins will have a face value of about $366 or so when you get around to counting it. Just for perspective, 20 lbs of silver doesn't take up much space. A $1000 face-value bag of silver coins weighs about 54 lbs and is about the size of a football, but will run you $12,155 or so (715 ty oz x $17/ty oz = $12,155) at today's prices. Junk/coin silver is also good because it the most likely form of silver to be priced at or near spot, and sometimes you can bargain for below spot, especially if the person bought it when silver was at $6 an oz! I like US junk coins, personally.

As for silver bullion, it is much easier than calculating all that, because you just buy what you want in troy oz and that's it. Silver bullion is usually .999 silver, and will be marked as such. "Sterling" silver is 92.5% silver, and this is not used in bullion that I have ever seen--But if you find real silverware at a thrift store, by all means, get it (its usually marker "sterling" or ".92" or something)! The bullion products vary from 1 oz bars, to 5 oz bars, to 10 oz bars, to 100 oz bars, to rounds, and all kinds of stuff. There is really a lot of great bullion silver to choose from. You'll notice as you look (for example,
APMEX has a great silver selection) that there is bullion from federal mints, including the US Mint and Canadian Mint, as well as bullion in bars and rounds from private mints, such as Sunshine Mint, APMEX, Englehard, Wall Street Mint, etc. These private mints are simply places that buy silver (and other metals) and make their own rounds to sell. It is a good way to buy silver, I think, because often you can get something from a private mint for $.49 over spot, which is a good deal. Be sure to mind the price over spot, because that premium is so important. Don't go buying some bullion and paying $5 over spot because you think its pretty. This is business--if you are serious and you are buying in bulk, don't worry about what it looks like, worry about getting as much as you can for your money before the banksters take over!

There's nothing wrong with maybe buying one coin that's cool or whatever (I have a couple that I just thought were cool, but I still didn't pay $5 over spot!), but don't make that an investment strategy because you'll be shorting yourself. I've seen places trying to sell 1 oz rounds for $4 over spot, or more. That is insane--that means you pay the $17 for the spot price (or whatever it is that day), and then have to fork over another $4 to get the product. What--a 23% premium on bullion?! Keep it as close to spot as possible to get as much silver as you can when you make a purchase. There are often sales at places like APMEX that will have some silver bullion item at a very low price over spot. In fact, a few weeks ago, APMEX was selling the junk/coin silver US coins for $.10 under spot, which they were able to do that because of the big move silver made. Bars and regular rounds from good private mints are fine. The US Mint American Eagle Silvers (which look like the Walking Liberty lady on one side but have a different design on the other) are very popular, but they will have a little premium. Right now they are $1.89 over spot at APMEX, which is about as low as you will find them anywhere. Those rounds are good because, like the junk/coin silver, they have instant recognition with anyone who knows silver, as well as those who don't, because they are extremely nicely stamped coins that bear the US's name on them, and while they are always a bit over spot, they do seem to hold onto that premium even when people are selling them on ebay (which is a good place to gauge the market's resistence to any premiums). But realize that you're paying a premium, so you might want to look around for something else that might suit your needs. There are many choices, and I personally do recommend
APMEX for silver bullion, but I think you can get a better deal on junk/coin silver on ebay or through a dealer. Don't be pressured by dealers: hang up on them if they start doing the pressure business!

Well, I hope this was helpful for you. I was going to write a little about platinum and palladium, but this is already way too long! I'll follow-up with that some time later. Please make sure to research this stuff and get confidence about it before making any kind of major moves. Do not let dealers pressure you--period! Know your stuff, and look out for yourself.


  1. Very well written and very informative. Thanks

  2. Excellent blog you’ve got here.. It’s difficult to find high-quality writing like yours nowadays. I really appreciate individuals like you! Take care!! You can visit this site. yourbuygoldguide.com