How to Buy Gold and Silver Bullion

The WealthCycles Staff

So you have decided to convert some paper banknotes into alternative money such as silver or gold.

The process is simple; it is just like converting dollars to any other currency.

The first order of business is to select a dealer. In some countries, commercial banks can perform this service, but all over the world, it is coin shops or dealers who are the banks. In order to keep inventory, take on short-term price risk, and provide varying levels of service (hours of operation, market analysis), the dealer charges a fee for the conversion. The fee is called a premium, and it is usually a small amount over the quoted exchange rate (sometimes dubbed the spot price). This premium is common to any type of exchange: whether exchanging dollars for groceries, or dollars for yen, or dollars for gold, the retailer must make a fair premium to remain in business.

As an aside, the amount it costs you to exchange between different types of money should encourage you to seek payment, and write contracts in, the money you prefer. The gold-clause contract is quite common and is the basis on which one could buy a home or vehicle with silver or gold coin.

Determining which dealer to do business with is a function of price, speed, security and privacy. We detailed these variables in How to Sell Gold and Silver Bullion, a free premium article. When getting rid of paper, you can take stacks of it to a local shop, or exchange out the paper using a debit or credit card. It is important to remember that no paperwork is required in order to buy silver or gold, in any amount.

As discussed above, the price–or premium–that you are willing to pay for the exchange should be a function of services the dealer offers you, such as speed, convenience and hours of operation (much more flexible than a typical commercial bank). Price also should account for flexibility of dealer inventory and crucial intangibles such as market analysis and accountability. Here are some pros and cons of using different types of dealers.

  • Local
  • Immediate ownership, but necessitates physical travel, so convenience may be degraded.
  • Security and privacy are degraded, as parking lots near any ATM, bank, currency exchange, jewelry store or coin shops may be targets.
  • Privacy is degraded, as the seller and other patrons see you making your purchase.
  • Online (Shipped)
  • Immediate ownership, but obtaining the hard money physically means waiting for delivery.
  • Shipping is secure and can be insured, and speed should be considered in price as a part of service. The dealer inventory and relationships impact this factor.
  • Security is heightened, as robbery at the point of exchange is impossible.
  • Privacy may be heightened, as no one observes the exchange.
  • Online (Vaulted, Individual Retirement Account, or IRA)
  • Immediate ownership; metal is shipped to or segregated within your vault.
  • Security is heightened, as robbery in a parking lot is not possible; vault is insured, but at a price. When considering the value of vaulting, ease of selling should be considered.
  • Privacy may be heightened, as no one observes the exchange except the private vault operator.

Once deciding who is best suited to execute your exchange, the question becomes what type of silver or gold is best—bars or coins, and the answer depends on the intent of use. Smaller denomination coins are easier to carry and create accurate payment, and coins are trusted more readily than bars due to minting. Bars are commonly stored in vault storage, but coins are also an option and are common in IRAs. Vault operators are able to physically deliver your money should you ask for it. As coins will always be preferable in exchange, it may be prudent to plan appropriately for anticipated purchases. Coins are preferred for their benefits such as recognizablilty and portability, and investors are willing to pay slightly more for coins than for the same amount of silver or gold in a bar.

Any exchange-traded fund (ETF) that delivers physical gold or silver upon redemption of shares does so in a large bar. The bar format cannot be divided and is less trusted or desirable in exchange. The vast majority of ETFs, such as GLD and SLV, do not hold segregated silver or gold, and are simply a bet on the exchange rate. This type of investment is also known as a derivative. We go further into detail on the derivative-based ETFs in Beware of Fools Gold, a premium piece.

Even if you buy a fully backed exchange-traded silver or gold fund, there is the grave issue of counterparty risk. What if it is your broker that collapses, as MF Global did. The primary concern regarding counterparty risk is that brokers and banks use your assets, reselling them as their own in a process called re-hypothecation, in which your assets are pledged as collateral for short-term loans that sustain daily operation. This dependent and highly unstable practice is common to the industry, and the release language that allows a broker to do it is buried deep in the contracts most sign.

When saving money, the decision to exchange the Fed’s co-opted paper dollar for silver and gold coin is an easy one. In Utah, and according to the Missouri Sound Money Act of 2012, “gold and silver issued by the federal government is legal tender.” American Eagle silver and gold coins fit that description. With more than a dozen states in varying stages of legislation allowing use coins as legal tender, part of a movement to protect against what North Carolina called an “event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System,” best advice is to hope for the best but plan for the worst. U.S.-minted coins are the best value if one intends to take advantage of what will soon be a precedent-setting, multi-state movement other states are likely to imitate. In Utah, one depository is already developing a system to allow customers to use debit cards linked to their gold and silver savings. For more color on how North Carolina legislators see the issue, part of the bill is excerpted below.

“…for which the State is not prepared, the State's governmental finances and private economy will be thrown into chaos, with gravely detrimental effects upon the lives, health, and property of North Carolina's citizens, and with consequences fatal to the preservation of good order throughout the State; and
Whereas, North Carolina can avoid or at least mitigate many of the economic, social, and political shocks to be expected to arise from hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System only through the timely adoption of an alternative sound currency that the State's government and citizens may employ without delay in the event of the destruction of the Federal Reserve System's currency.”

Don’t leave your wealth and the security of your family at the mercy of political whim. Michael Maloney further discusses how the current system relies on properly functioning electronic networks and differences between paper-currency based assets and hard money in this 3 ½ minute video. It is time to take action. 

Exchange-Traded Funds (ETFs) are securities that trade like stocks but are supposed to track the price of an index like the Dow or S&P 500 instead of an individual company, or they may be designed to track the price of a commodity like oil, gold, or silver.

Hyperinflation is when extreme inflation spirals out of control and confidence in a fiat currency falls. Usually, hyperinflation is characterized by a negative feedback loop, in which people, fearing the falling value of their currency, buy hard goods in order to preserve their purchasing power. This drives the prices of goods up, which creates price inflation, and drives the purchasing power of currencies down—creating a feedback loop.    

Don;t forget that you can also get gold by purchasing scrap gold from broken or unwanted items. Lots of ways you can do this in order to get a good
gold bullion price by buying gold from friends or relatives or by advertising for it in local papers.
You can even build relationships with pawnbrokers to purchase any of their scrap gold. You will often find that scrap gold sells for a lot less than the value of its weight.

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