Traditionally, access to physical bullion for the private investor was limited to buying jewellery or coins, while professional investors purchased investment-grade bars. A London Good Delivery Bar, which is the investment-grade bullion accepted in the professional markets, weighs 400 oz (troy ounce). With the gold price currently trading at 1,650/oz (on the 16th of April 2012) the cost of an investment-grade gold bar is approximately 660,000 US Dollars. Most private investors cannot afford such a high investment so they are forced to invest in precious metals by purchasing jewellery or coins.
The purchase of coins and jewellery has inherent costs associated with it. The mark-up for a gold coin is usually between 5-10% on the buying price plus another 5-10% on the selling price, compared to the spot price of a London Good Delivery Bar. So for a gold coin investor to just go break-even on his gold investment, the gold price has to gain between 10-20%. For gold and silver jewellery the case is even more dramatic as jewellery tends to cost between 20-100% above the real London spot gold price.
How to Buy Gold and Silver
In order to open the doors for private investors to the gold markets, a number of ETF's (Exchange Traded Funds) were created. Since they have low minimum investment requirements and closely track the price of gold, they have been attracting many private investors from around the globe. The issue with ETF's are that they are rarely, and sometimes not at all, backed by physical precious metals, which is the main reason why one should be exposed to precious metals.
ETF's are financial instruments that generally just "track" the price movements of gold and therefore don't have the same attractive qualities as out-right gold ownership. In the end, it is only out-right physical gold ownership that provides protection from Credit, Inflation and Currency risks.
During recent years, thanks to a group of bullion market entrepreneurs, allocated investment-grade bars and the professional bullion markets are now accessible to retail investors under the same terms as for professional traders. Investors can now enjoy improved prices without expensive markups, with commissions as low as 0.02% for bullion purchases as small as one gram. What is most important is that the price investors purchase metals on are close to or the same as the spot price on the professional bullion markets. This new transparency in the markets creates an opportunity for private investors to protect their capital with the same methods that large institutions have done for centuries.
Private investors can now either trade via online trading platforms or over the phone, without having to pay the high mark-ups traditionally linked to private gold ownership.
How to Store Bullion
Another aspect to take into account will be security and storage of precious metals, these costs will usually be in addition to the purchase price. Storing gold and silver at home or "under-the-mattress" carries a great risk and the insurance of it can be quite expensive. Another down-side with "home-stored" precious metals is that the value of gold and silver drops when it is held at home or outside an accredited vault. When investors purchase ETF's, whether it is backed by physical gold or not, there are usually management fees associated with the investment of around 0.4 - 0.5% per annum.
The smartest option available today is to store physical bullion with a bank or an accredited vault. Banks and accredited vaults normally have high minimum investment requirements and charge between 0.5% to 2.5% per annum for storage and insurance.
Some online bullion dealers have simplified this process by using their wholesale rates with banks and accredited vaults to provide storage and insurance to their clients for as little as 0.12% per annum, with storage of bullion either within or outside the banking system in the main precious metals trading hubs around the world.
It is possible now for investors to buy bullion safely and easily with insurance and storage costs incorporated in to the tight competitive prices.
Allocated or Unallocated Bullion
Finally, when a private investor considers investing in precious metals and having it stored, the investor must consider whether an Allocated or Unallocated Account is suitable.
Allocated Account means that whoever is storing your precious metals, is doing it as a custodian and that you are the out-right owner of the bullion. You, the private investor, hold title to the gold or silver, which is generally identifiable.
Unallocated ownership means that the metals are on the balance sheet of a bank or bullion dealer and that counter-party "owes" you the amount of metals you hold with them. Investors do not own a specific bar, but rather a specific amount of metals.
The main difference between these two type of gold accounts is mainly cost and counter-party risk. With Allocated Accounts, private investors are protected in case of bankruptcy of the bullion custodian or vault, because the metals are in the investors' name; however investors have to pay a premium in order to have the metals Allocated.
With an Unallocated Account, investors can in case of default of the custodian lose their bullion, although a very rare event, Unallocated Accounts are mainly attractive due to the efficient infrastructure, low costs of trading and storage. The low costs mainly attract professionals and institutions to Unallocated Accounts.
Summary
Regardless how an investor decides to invest in the bullion markets and protect their assets from confiscation from inflation, one must look at all available options and decide which option is most suitable. What we can all however agree on, is that the days of private investors purchasing coins and jewellery just for the sake of investment are long-gone. Private investors are now discovering alternative, cost-efficient ways to tap into the physical bullion markets.
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