How To Buy Gold


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So you have decided that gold should be in your portfolio and you have a rough idea on how much you want to own. Before you go about procuring gold you should be aware of the options at your disposal, the costs and the risks associated with them. Also, remember that buying gold and storing gold are two completely different animals.

There are four main ways to buy gold:
 1. Purchasing physical gold coins and bars
 2. Purchasing unallocated gold
 3. Purchasing stock shares backed by physical gold
 4. Digital Gold

Purchasing Physical Gold Coins and Bars (i.e. Allocated Gold)

Buying gold coins and bars either online or in a store is the most straightforward and arguably the most gratifying way to buy gold. However, it is also the most costly way of obtaining and selling gold. Cost to consider here are price premiums and spreads. Price premiums, the difference between the price paid and the melt value, directly and immediate erode your savings so you want to keep premiums as low as possible. Price spreads, the difference between the price received for a sale and the melt value, are another cost to consider if/when you decide to sell your gold.

Gold is a game of ounces whereas you want to buy as much as possible for as little as possible. Do not get veered off course by higher premium designs and numismatics. I recommend having gold as generic and liquid as possible.

The risks associated with buying physical gold are mostly related to how you decide to store it. If you plan on storing your gold on your property there is obviously a high risk of theft and total loss. If you store your gold in a bank safe deposit box then theft risk is significantly reduced. Be aware however that deposit boxes are part of the banking system and subject to additional risks such as limited availability and exposure to legal challenges. In addition, deposit boxes are not typically insured so you may want to consider buying insurance with companies like SDBIC. Alternatively, there are third party vault companies domestically and abroad that are fully insured against most risks.

Purchasing Unallocated Gold

Allocated gold is gold that is owned outright by the buyer, regardless of where the gold might be held for storage. Unallocated gold on the other hand is gold that remains the property of a business, generally a bank, and the gold buyer becomes a creditor of the business in the amount of the gold purchased. The gold cannot be redeemed by the buyer since the buyer is not the direct owner. Unallocated gold is the most widely traded form of gold in the world.

The major advantage of unallocated gold is costs are typically very low. Gold does not need to be packaged and shipped nor does it need to be segregated by owner and accounted for. Price premiums and spreads are significantly lower than buying physical gold. Storage fees tend to vary.

Unallocated gold is generally considered bad and I tend to agree because of the additional risks involved can outweigh the benefits. Counterparty risk exists whereas the business might not honor the contract. Specifically that means the gold seller might not actually have the gold it claims to have. Insurance generally does not cover counterparty risk.

Purchasing Stock Shares Backed by Physical Gold

Companies can form trusts that issue shares to the public and use the proceeds to buy and store gold. Each share is representative of an ownership in the Trust, which is valued based upon the gold the trust owns. This structure is a form of unallocated gold. Examples of these trusts are Gold ETFs such as iShares Gold Trust (IAU) or SPDR Gold Minishares (GLDM).

Much like unallocated gold, the costs tend to be much lower. Annual expense ratios vary but can be as low as 0.18% which is lower than most storage fees for physical bullion. Premiums and spreads are minimal to non-existent (sometimes you can even buy a gold ETF at a discount). It is extremely easy, efficient and convenient to add or reduce gold to your portfolio using a stock ETF.

The risks are more or less the same as unallocated gold but with a few additional risks. Poor market liquidity could impact a purchase or sell. Since trusts store the gold with major banks, counterparty risk exists not only with the bank but also the trust. Trust management ads a layer of risk as well if fraud or mismanagement were to ever occur.

Digital Gold

Digital gold is a new form of buying gold that started in 2018. Digital gold is allocated gold bought online and stored at an insured, third party vault. Record of ownership is maintained via a cryptographically secure blockchain ledger. Provident Metals DGGold and Kitco VaultChain Gold are examples of what I call digital gold.

The advantages of digital gold appear to be vast. Since gold is allocated the buyer has title to the gold, unlike unallocated gold. Transaction fees are very low and there are no storage fees. Physical deliver can occur if desired.

Risks include counterparty risk and cybersecurity risk. Digital gold is also a very new form of buying and owning gold so the buyer would need to be comfortable with the technology and risks involved.

Recommendations

No right or wrong way exists in buying gold as long as you are aware of the risks and costs associated with the method or methods you prefer. There are certainly strongly opinionated individuals out there that evangelize on their preferred method and go into great detail why. At the end of the day it comes down to personal preference so do you own due diligence and get comfortable with how to proceed.

However, if you are looking for a recommendation, I prefer physical gold purchases stored in third party vaults that are fully insured. Buy in large enough quantities to qualify for low premiums. Also, buy highly liquid gold such as 100 gram or kilo bars. If you don’t have enough funds for larger purchases, or if you prefer a more convince alternative, buy GLDM using Robinhood to avoid transaction costs.

I highly recommend BullionStar as the company has a strong reputation and I like the fact that the premiums, spreads and storage fees are among the lowest in the industry. In case you want more information I have reviewed this vendor in detail here.


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