invest in silver

Gold & Silver Bullion - Get Physical

May 16, 2012, 5:00 PM

We suggest keeping 30% - 40% of your capital in physical gold and silver in your possession. Diversification is the way to go – we prefer from 25% silver and 75% gold to 75% silver to 25% in gold, depending on your:

  • age (the older you are, the more gold and less silver is suggested)
  • risk preferences (the more risk-averse you are, the more gold and less risk is suggested)
  • inflation / deflation beliefs (the more you believe that deflationary scenario is likely, the more gold and less silver you should have. Before you ask, we don’t think it is likely – read here for more information.

If you are unable to or do not want to hold it near you, we suggest being very careful as to where you send your money. You need to make sure that your physical silver / gold / platinum / palladium does indeed exist. You want to purchase the physical metal, not somebody's promise to pay you some money based on the price of the metal. Theoretically there should be no difference... Unless this other party files for bankruptcy. Why would you want to take that risk, when you don't have to? By purchasing your physical silver / gold from wrong source, you may end up with a non-leveraged derivative on silver / gold that does not trade on a regulated market. You probably do not want that to happen, so please be careful when it comes to purchasing long-term holdings.

Things you should be careful with include unallocated accounts, pool accounts, ETFs, electronic silver / gold, and certificates (Perth Mint guaranteed certificates are better than the rest of the proxies listed earlier, but we would still suggest purchasing metals also in some other way in addition to these certificates to minimize the risk) and similar, when you cannot hold your silver / gold in your hand. Derivatives (mostly options) have their own uses, and are great for speculation, but we don't recommend using them when it comes to purchasing bullion products. Sure, it can be very convenient, but so is driving without a safety belt - it is simply prudent in both cases to take a little more effort. Besides, purchasing real, physical metals can be convenient too, given that you know where to buy.

So, what are the consequences for silver and gold investors? This means purchasing precious metals only from trusted, reliable sources. If you want to know which sources we consider reliable, here’s a short list:

  • GoldMoney (we use it ourselves; it seems to be the most attractive electronic form for purchasing precious metals, as many people in the business have confirmed the authentication of the system. Disclaimer: we participate in GoldMoney's affiliate program which means that a small portion of GoldMoney's commission from your order will benefit us)
  • BullionVault (we use it ourselves; it seems to be the most attractive electronic form for purchasing precious metals, as many people in the business have confirmed the authentication of the system. Disclaimer: we participate in BullionVault's affiliate program which means that a small portion of BullionVault's commission from your order will benefit us)
  • Central Fund of Canada (50/50 diversified physical gold and silver held securely for you.) The company trades under the symbol CEF. Visit www.centralfund.com for more details
  • Bullion Management Services Inc. (http://www.bmgbullion.com/ ) - an open-end mutual fund that invests in physical silver, gold and platinum. The platinum share is not bad, if it is the diversification that you seek (retirement money?). This one is generally not available to US investors

Naturally, there are many reputable precious metals dealers, and we are not able to include each one of them in the list above.

You may also check Ebay.com and seekbullion.com. We did not use these services to purchase bullion; however, we realize that many people prefer to purchase goods through the auction system.

If you want to profit on rising precious metals prices, purchasing numismatic coins / rings / other form of gold/silver-plated art is a bad idea. It decreases your leverage to the metals that you want to profit on. You can read more on that topic here.

If you want to purchase a large amount of bullion, it might be a good idea to keep it in many forms / places. For example - you could keep half of it in your possession and spread the rest: some outside of your state, some outside of your current jurisdiction (perhaps you have a relative abroad?), some in an allocated account, some in GoldMoney, some in CEF, and so on.

It might be a good idea to start with coins and small bars, and move on to bigger bars later. About 10% of bullion in coins should be enough to provide you with significant liquidity, should the financial system collapse at some point. In other words, the smallest denominations could be easily used as payment for goods and services. Once you have secured this "liquidity insurance", we suggest bigger bars, as they allow for smaller premium over the spot price. This means that they are cheaper and that you can buy more of the metal with the same amount of cash.

As far as purchasing physical bullion with retirement in mind is concerned, you might want to read this answer posted in the ‘Editor answers’ section.

We know that many of our colleagues advocate using the dollar cost averaging when making your purchases. This means buying bullion for the same amount each time over a defined period – for example $1000 each month for 6 months. We don’t. The final decision is always up to you, however there is no clear evidence that this strategy increases one’s profits. On the contrary – there are studies that show that this strategy decreases one’s profits and reduces the standard deviation of returns (some define that as risk). For us, precious metals investors, the real risk is to be out of the market, not to be in it, because of the extremely favorable fundamental situation.

Other studies also confirm that the dollar cost averaging does not work, and should be viewed as marketing aiming to sell particular asset to nervous investors. Think about it – the value of almost all assets rises in the very long term, therefore why would it make sense ON AVERAGE to wait with one’s purchase? In other words - isn't it strange when someone tells you that gold/silver are going MUCH HIGHER and in fact they can explode any day, but then suggests you that it is a good idea to wait with purchasing metals (because dollar cost averaging means that you don't purchase PMs right away - you wait for instance a month to purchase some, then again you wait another month, and so on and so forth)? Generally, this might suggest that this person doesn't really believe in the bull market in PMs but if that is the case why suggest buying PMs at all?

The stronger the bull market in a particular sector is, the more costly the dollar cost averaging becomes. It may be more difficult from the psychological point of view for one to purchase all of their bullion at once, but in the end it should prove profitable in most cases. Remember that saying ‘the harder the decision is, the more profitable it is’?

Besides, this is a secular bull market in the precious metals and during its last phase gold and especially silver will move up very fast. Do you want to risk not-being fully invested when that happens?

Dear Sunshine Profits,

gold and silver investors MARCH 15TH, 2011
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