Don’t Get Fooled: 15 Things to Know Before Buying Bullion

You’ve been thinking about investing in precious metals. It’s been on your radar for a while, but you’re not sure how to go about it. Fear not. I’ve got 15 tips to share with you. These are things you should be aware of before you attempt to buy bullion. Bullion was once an investment that was limited to the wealthiest individuals. Now it’s something anyone can hold. And with the 24/7 availability of secure on-line markets, it has never been easier to buy or sell. Follow these tips, and soon you’ll be investing like a pro.

1. Gold is gold

There’s nothing like gold. It’s a foundational investment, not a piece of paper like a stock or bond that is a promise of future payment. Rather, it’s something you can hold in your hands that have intrinsic value. Banks may go bankrupt, governments may fall, but gold will hold its value. People were trading in gold millennia ago, and they will be trading in precious metals thousands of years into the future. Your great-grandchildren can inherit your gold coins, and rest assured that the metal will not have lost value. At the very least, the coins will be worth what you paid for them in terms of their purchasing power.

2. Let the buyer beware

Ignorance is not bliss when it comes to trading in gold, silver, platinum, or palladium. These are expensive investments to acquire, and unfortunately, there are people out there who will try to cheat you. Whenever I hear some blowhard at Starbucks touting the virtues of gold coins to a starry-eyed mark, I cringe. Education and knowledge are key to spotting a scam, and to avoiding the wrong kind of investment. If you don’t have the patience to learn the basics, do yourself a favor. Don’t bother.

3. Know yourself

Are you a safe-haven type investor? Do you want a hedge against inflation? These are both good reasons to buy bullion, and for many people, investment in gold can be part of a well-balanced portfolio. How you answer these questions should steer you to the right bullion investment. Seeking that safe-haven? You don’t want a leveraged or financed investment; you could end up losing more money than you were loaned. ETFs would also be inappropriate. Gold certificates are paper, and the whole point of getting into bullion for many is to avoid paper money. Gold shares are a speculative, high-risk investment. Own the gold outright. It’s the most conservative investment. Again, its purchasing power will remain stable over many years.

4. Know bullion

Bullion is sold as ingots or coins, by weight, and these ingots and coins come in different sizes. Gold bars start at the one-ounce size and go up from there in weight and price. The most popular one-ounce coins to hold (and also the easiest to liquidate) are the South African Krugerrand, the Canadian Maple Leaf, and the U.S. Gold Eagle. Coins with the numismatic value may command a premium. Jewelry may also be worth more than its weight in gold, but that’s unlikely unless Louis Comfort Tiffany produced it. But if you love it, and you want to wear your gold coin as a necklace, do so.

5. Consider your portfolio

Starting out, I would recommend that you invest no more than between ten and fifteen percent of your overall portfolio. Although gold is liquid, because its price can bounce around, and silver even more so, bullion is better to hold onto long term. Leave the day trading in precious metals to the professionals.

6. Understand the investment

Realize that bullion is an investment that won’t generate any income while you hold it; it’s not going to pay dividends or earn interest. But for the same reason, it also won’t subject you to any income taxes. Capital gains (or losses) only come into play when you sell. Before you do so, think about whether any potential gain will push you into the next higher tax bracket.

7. How to buy rare coins

Find a dealer you can trust. That person may be running the local coin store down the street, but do your due diligence. If you’re buying numismatic, historical, or collector coins—they have premium value for collectors over and above the melt value. Price depends on rarity and condition. You need someone who will give you a fair price. A guarantee to buy back the coin at the price you paid for it is a good sign. Check that the coin dealer adheres to the highest standards and holds a membership in the Professional Numismatists Guild. If you choose to invest in rare coins, as a novice, it might be wise to pick one coin to become an authority on. Be aware that the learning curve to become an expert is steep, but many people find coin-collecting fascinating and lucrative.

8. Understand how bullion is priced

The spot price is the current market price of gold that can be immediately delivered. The difference between the buying price and the selling price is the spread. The dealer pays a bid price to acquire bullion or bullion coins. The asking price is what you will pay. It is calculated based on the metal’s spot value, with an added-on premium. Because gold prices fluctuate constantly, gold bullion prices will as well.

9. How to buy bullion and coins without numismatic value

You want a low-cost purchase, so you need to find an individual or company who charges a small commission on the spot price. To vet any company you are considering doing business with, the Federal Trade Commission advises to check with the appropriate consumer protection agency—usually that’s going to be the Better Business Bureau—as well as the state’s attorney general’s office. Usually, the best price will come from an online company, one that does a high volume business; it keeps costs down. Silver Monthly recently profiled The Top 10 Online Bullion Dealers. Other considerations to weigh are how long the company has been in business and their communication style. When I have questions, I want answers, and I bet you do too.

10. Timing bullion purchases

Buy low, sell high. Trying to time the market can be a futile exercise. You might be better off smoothing out any price bumps by investing the same sum once a month or once a quarter, perhaps a thousand at a time. This technique is called dollar-cost averaging. Some precious metals experts pooh-pooh the strategy, saying wouldn’t you want to be all in when there’s a bull market raging, knowing that gold and silver are long term investments? It’s your call, and your decision, and it’s going to depend upon how risk adverse you are.

11. Know the lingo

If you were buying diamonds, cut, weight, and clarity matter. Gold is graded, coins are rated, and you need to know what you are buying, whether it’s a pure ingot or a centuries-old Spanish piece of eight salvaged from a shipwreck. Stick with top-of-the-line, nothing graded downward, because that precious metal will hold its value best.

12. Counterfeit bullion

Counterfeit gold and silver ingots, as well as gold coins, are currently being sold out of China. Some are high-quality, and to the inexpert eye, difficult to distinguish from the originals. By working with a dealer with a sterling reputation, one who’s been in business for years, this won’t be something for you to worry about. It’s definitely worth asking the question of someone you’re planning on doing business with: what kinds of tests do you do and what protocols do you have in place to ensure you’re not inadvertently selling fakes?

13. Storage

Gold is portable, and keeping it at home is possible. A personal safe provides peace of mind. If the bullion or coins are very valuable, your insurance provider may insist on a rider. Other than that insurance agent, no one should know that you keep gold in your home. Don’t let your home become a burglary target by showing off your darling Chinese panda coins to everyone who walks in the door. A safe-deposit box at the bank is another secure way to store the cache. Some gold investors recommend an independent depository as an even safer way to store bullion. If you have a lot invested in bullion, this is the way to go.

14. Avoid the deal of the day

High-pressure sales tactics abound among the unscrupulous. If a deal is only good today, no matter how good it appears, walk away. It’s likely that it’s only going to be a good deal for the seller. Remember, as with any long-term investment, you should take your time deciding what is right for you.

15. The future of gold

Gold is finite. There is a limit to what can be dug out of the earth, and thus I can predict future scarcity with certainty. Much of the gold that’s sold now is recycled, but not all of it can be. It’s Econ101: as any commodity becomes scarce, its price tends to rise. That bodes well for the future, and your investment. I hope this gives you enough information to enable you to begin investing in bullion, in a way that takes your investment goals and your own situation into consideration.