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Thursday, December 20, 2007

Gold and Silver Buyer's Guide

I haven't made my first gold and silver purchase. It's on my "list of things to do". I don't see any particular urgency, since the collapse of the US government is still 20-50 years away. In the present, I don't know any employers willing to hire me and pay me in gold or silver. I don't know any businesses where I can buy things with gold or silver.

I have done my background research, and am sharing my conclusions.

I asked about buying gold on the Ron Paul Forum. That discussion is worth reading. I'm summarizing the details here.

The tax treatment of gold and silver is extremely unfavorable. If I buy gold and silver, it would be something to hold onto until after the US government collapse, unless I can find people willing to trade with me "off the books". It would also be a good inflation hedge. If you're investing in physical gold or silver, you're targeting an inflation-adjusted return of 0%. The bad news is that might really be the best investment out there! It's hard to compare gold and silver to other investments, because the gold and silver price is heavily manipulated.

Gold and silver are treated as collectibles, which means you pay a 28% capital gains tax rate, instead of the 15% rate on stock investments. Of course, if you have gold or silver, you may be able to find someone willing to buy and pay you in cash, without reporting the transaction. Legally, your options for using gold and silver as money are severely restricted. Fortunately, gold and silver are excellent choices for people who want to trade anonymously, without reporting their transactions to the government.

First, don't buy the GLD or SLV ETFs. They won't be trustworthy once the US government collapses. They loan out their holdings for short sales, and could be stuck in the event of a default.

Some people advocate buying gold and silver mining companies, but that is also risky. If you assume a complete collapse of the US government, stock in a mining company isn't going to be worth anything. Many mining companies have sold short their future production, which means that they won't fully benefit from a rising gold price. In fact, a rapidly rising gold price would force them to incur mark-to-market losses on their hedges, potentially forcing them into margin calls and bankruptcy.

I also don't trust electronic vendors like eGold. First, they are required to report all transactions to the government. Second, you can't be sure they aren't secretly practicing fractional reserve banking. In other words, they tell you they have physical gold equal to deposits, but don't really. Finally, there's no guarantee that the IRS or government won't seize their assets and shut them down. People who invested in electronic Liberty Dollars lost their entire investment.

The only gold or silver investment I trust is physical metal in my possession.

There are many regulations and reporting requirements for dollar transactions. If you want to make an anonymous purchase, the best bet is paying with gold or silver. Ironically, more privacy is given to gold and silver transactions instead of Federal Reserve Point-based transactions. My conjecture is that The Supreme Leader of Humanity is doing this on purpose. People who are smart enough to desire privacy and anonymity should be forced to use real money.

State sales tax laws discourage coin dealers from operating in many states. There is no coin dealer that sells at a reasonable price near where I live. Unfortunately, gold and silver are taxed as "collectibles". Gold and silver are not legally recognized as money.

Where to buy?

The Internet dealer most commonly cited on the Ron Paul Forum was Apmex. The second choice was Northwest Territorial Mint. The Tulving Company was the third choice, but I was disappointed with the quality of their website. A commonly cited information source is 321gold, but I don't think you can directly buy coins from them. I didn't find the 321gold site to be that interesting, but a lot of other people refer to it. I've also heard Kitco mentioned a lot.

On Apmex, I noticed the following things worth considering.
  • One ounce gold bars are sold for $14 over spot.
  • Gold shot is sold for $5 over spot. Gold shot is pure, uncast gold. Gold shot would only be useful if you had your own jewelry business. Gold shot would also be useful if you wanted to trade with gold and make small transactions, but I prefer to use silver coins for small purchases.
  • Apmex also sells gold coins smaller than 1 ounce, but I would prefer to use silver for small transactions.
  • One ounce generic silver coins, called "rounds", are sold for $0.55 over spot.
  • Apmex also sells 1/2 ounce silver coins, but I don't see any point dealing with silver coins smaller than 1 ounce.
  • Apmex sells 100 ounce bars for $0.40 over spot.
  • Apmex sells 1000 ounce "COMEX good delivery bars" for $0.20 over spot.
  • Apmex sells 1 kilogram gold "COMEX good deliver bars".
Looking at the offerings, 1000 ounce silver bars give you metal at the cheapest price. Unfortunately, a transaction over $10k must be reported to the government. I'd prefer to buy 100 ounce bars and stay under the reporting threshold.

Northwest Territorial Mint charges $0.50 over spot for 100 ounce silver bars and $18 over spot for one ounce gold bars.

Assuming that both Apmex and Northwest Territorial Mint are trustworthy sellers, Apmex looks like the better deal. Northwest Territorial Mint appears to be slightly more expensive than Apmex. I didn't analyze Tulving here, because their prices are higher and their website is poorly designed.

Kitco seemed to be slightly cheaper than Apmex, but I found their website to be inferior to Apmex's and Northwest Territorial Mint's. If you're buying from an Internet dealer, you would expect them to have a nice website. Kitco sells laminated gold slivers, like I mentioned in Protect Your Gold and Silver Coins.

I'm thinking of buying 100 ounce silver bars and 1 ounce gold bars. I'm planning to hold onto them until after the US government collapses. If necessary, I can "get change" for a 100 ounce silver bar with 98-99 one ounce coins. 100 one ounce coins cost more than a 100 ounce bar because of the effort required to cast individual coins. Once I start, I'll make small purchases every few months until I've reached my "target" holding of gold and silver. I'm thinking of putting 5% of my savings into physical gold and 5% of my savings into physical silver.

That handles the first issue. If I'm going to buy gold or silver, I'll buy online from Apmex. I'll probably start with a 100-ounce silver bar purchase to see if they're trustworthy. Northwest Territorial Mint is also worth considering. Enough people have said Apmex is decent, so I'd try them first.

Unfortunately, I have no idea if Apmex is reporting my transactions to the red market. If I keep my purchases under $10k, there's no reporting requirement. I probably won't find out if my privacy is being protected until it's too late.

I heard that some people had success with eBay. I wouldn't try that unless I found someone who lived in the same city as me and was willing to trade in person.

Where to store your gold and silver?

The consensus is that banks are for dumbasses. If you store your metal in a bank safe deposit box, it's like begging to be robbed. There were stories where the contents of bank safe deposit boxes disappeared, and the bank denied responsibility.

Further, the bank may be required to report safe deposit box contents to the government. In an economic crisis, you may not be able to get into the bank and recover the contents of your box.

People told stories where safes in their house were broken into or stolen. Apparently, it's only safe to store metal in your house if nobody knows it's there.

The best solution I can think of is to store some of my metal in my house, and have friends and relatives hold the rest for me. If your metal isn't all in the same place, then you're at less risk for being robbed.

There are two types of criminals who can steal your metal. There's the ordinary criminal. There's also the criminals wearing shiny badges and uniforms. I'm not sure which represents the greater threat! If you're planning to operate an off-the-books business, you're at risk for a red market raid.

The issue of "where to store your metal" is a huge problem. If you store it in a bank safe deposit box, you risk having it stolen by the bank or the IRS. If you store it in a bank safe deposit box, you risk that the bank will report your box contents to the red market. If you store the metal in your house, you risk theft by common criminals and you risk theft by red market bandits. There is, literally, no safe place to store metal coins.

There is one creative solution. You can practice full-reserve banking! If you are a participant in an agorist economy, you can lend your metal coins to other people who want to start agorist businesses. Individuals have a hard time borrowing from a bank, especially if they're borrowing small sums of money. The fees charged for small uncreditworthy individuals make it impractical to borrow from a bank. If you only make small loans to each individual, your risk is low. You would be charging interest rates of only 0.25% or 0.50%, but you would be getting security by spreading your wealth. You would be making metal-denominated loans instead of Federal Reserve Point-denominated loans, so you would be guaranteed to keep your purchasing power if there is no default. The IRS may seize the metal in your possession, but the IRS won't be able to seize metal owed to you by others.

The reason that you might be able to find willing borrowers is that borrowing from you would be more attractive than borrowing from a bank, for uncreditworthy individuals. Plus, you would be encouraging the growth of an agorist economy. If you found enough willing borrowers, you could start accepting deposits from others and start an agorist banking business. In a truly free market, banking is not exploitative.

How do you know you weren't cheated?

I haven't come up with a good answer for this one. If you buy gold or silver bars or coins, how can you be sure you're getting the genuine metal? I've heard of specific gravity tests and chemical tests, but I haven't heard any stories of people actually testing their metal after purchase. It would be nice if I knew some assay service that would help me verify that I didn't get ripped off. The only test I could perform easily myself is a specific gravity test.

Someone said that "drilled out bullion" is a problem. For example, if you buy a 100 oz silver bar, the core could be drilled out and replaced with other metals. If you use an alloy of metals, where one is less dense than silver and one is more dense, you would not get caught. Some people said that trick was more common in the early 1980s, when the price of silver was very high relative to other metals.

I don't understand why that same trick won't also work for 1 oz coins.

There also are professional assay services, but I didn't notice any specifically recommended.

Someone mentioned that there are services that will take your 100oz bars, melt them, and re-forge 100 1oz coins. If you were suspicious about your bullion collection, you could take a random sample and have them melted and re-cast.

Instead of buying silver, maybe you should buy the cheapest metal available. That way, you know you aren't being cheated with alloys of other metals! However, gold and silver are generally recognized as money; other metals are not. If you use cheaper metals, you need a larger volume of metal to store the same value. On the other hand, if you're storing iron or aluminum bars in your basement, who's going to steal them?

Does gold and silver outperform the stock market?

I've been considering this issue, and find it to be really disturbing. Central banks are selling/leasing their gold and silver reserves to drive down the price. There is downward manipulation of the gold and silver price, although it's hard to say how much exactly.

Some people have performed studies where they analyzed "stock market price" divided by "gold price" over time, and gold came out favorably. It's hard to be sure if that's a good indication for the future. If central banks are selling off their gold and silver to keep the price down, they will eventually run out of metal. The analysis I saw didn't consider the effect of dividends, which adds around 2%/year to the stock market returns. Gold and silver are the best inflation hedges. Gold and silver investments have storage costs and transaction costs.

If gold and silver really do outperform the stock market, I find that to be incredibly disturbing. That would mean that, even with their massive government subsidies, large corporations lose money for their shareholders relative to an investment in gold or silver.

Gold and silver can also be used to dodge estate taxes and other taxes. If you buy metal and give it to someone, that's practically untraceable. If you want to do an anonymous large transaction, it may not be practical to launder a large quantity of Federal Reserve Points. Large transactions by check are reported to the red market. If you withdraw or deposit a lot of cash, your bank is required to report you to the red market. If you hand someone 20 ounces of gold, that is practically untraceable. Plus, by holding the physical gold, you have an inflation-hedged investment.

Other Metals

I'm seriously considering investing in other metals, in addition to gold and silver. For example, if you invest in platinum or palladium bars, they might not be recognized and seized by red market looters raiding your house. Platinum is currently more expensive than gold, and gives you more value per unit of mass. The platinum market isn't manipulated like the gold market.

I'm also considering investing in cheap metals. If I buy gold or silver, I risk being cheated and buying alloys of cheaper metals instead. If I buy the cheapest available metal, such as aluminum, I'm at much less risk for forged metal. There's no cheaper metal available to use as a substitute! Further, thieves would recognize and steal gold and silver. They may not recognize other metal bars in my basement as being worth stealing.

8 comments:

Kimochi said...

Before you buy, make sure your seller has good reviews on the Gold is Money forums. Northwest Territories does not have good reviews, and it is common knowledge in the business that they sit on your dollars and often delay delivery.

I recommend Colorado Gold. It's a two-man shop with a great reputation, and my metal was delivered within a week. We can talk about this in private if you want, but in my experience there is no need to worry about taxes and government reporting.

Great blog, it's at the top of my list! :) I thought you would appreciate this piece of legislation recently introduced by Dr. Paul. I wonder if there is a way to track the support of this act?

LibertyLu said...

Kimochi,

Go to www.govtrack.us

You can track sponsorship, upcoming votes, status, etc... It's a great site.

Anonymous said...

Before you decide to purchase gold or silver bullion from others, consider creating it for yourself.
You need a chemical tester kit for sterling silver ( 92.5% ) and gold of different karat percentages. Said kit can be purchased online
Here's one http://www.mineralab.com/GoldTest.htm
Google will give you hundreds of others. Then you go prospecting through the classifieds and the local flea markets, auctions and house sales.
You will face a lot of competition from scrap buyers but they are buying for resale to smelters, you can always smelt your own. Most folks are not stupid about gold but they are not so careful about sterling silver.
It's not as easy as buying a few bars from someone somewhere but it is private and mostly anonymous.
Do it for a year you will have several ounces of pure gold and several pounds of pure silver. Do it regularly for 20 to 50 years and you will need a large vault for the bullion but then noone will know you have the bullion.
Any transaction you make with a third party over the interent is neither anonymous nor private. Any payment with a Credit card can be gathered immediately you make it without your knowledge. FRN's are king; trade them for real metals and get some exercise and some really greasy food at the same time.

Anonymous said...

I just finished reading the whole posting, cheap metals: copper is a prime theft target, the other cheap metals take up too much storage for unit value. Aluminum takes up ten times the volume of gold for the same weight of metal.
Aluminum is about $0.065/oz gold is about $801.000/oz. So ten times the space to store 1/12,000 of the value. Lead might be an alternative but it does have its own issues regarding storage. The palladium market is entierly controlled by the auto industry demand for catalytic converters for cars. Platinum is beautiful stuff but half the market is for autos also.

gilliganscorner said...

This is a subject I know very, very well.

Hands down, the best dealer I know of is cmigs.com,.
They are located in Phoenix, Arizona. I recommend you strictly deal with Bill Haynes (the owner). He has been at this for 30+ years. Talk to him about Ron Paul, the Fed, Rothbard. He gets it. In fact, he ships out Rothbard's "The Case Against the Fed" if he thinks of it and finds you of that mindset.

Bill has a blog you can read about here.

Confidentiality? From Bill's site:

CMIGS strives to ensure client confidentiality. We do not sell or share our customers' names, and we do not computerize transactions. Not putting transactions on a computer protects our clients from record theft. It also makes it difficult for someone to come in and demand to see who has bought precious metals from CMIGS.

Furthermore, CMIGS does not even put clients' names on invoices, thereby providing even more investment privacy. This became policy in the mid-1970s as CMIGS pioneered the bullion precious metals industry in Phoenix. One day a detective from the Phoenix Police Department's Burglary Division visited our offices.

The detective asked, "Do you know what a nightmare you're going to create for the Police Department - and your clients - if copies of your invoices fall into the wrong hands?" Because of that policeman's visit, CMIGS quit putting clients' names on invoices and started writing their names and addresses on 5" X 8" cards that are stapled to the invoices. After clients receive their gold or silver, the cards are detached and destroyed.


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If you have questions for me FSK, you know how to get a hold of me.

A.B. Dada said...

Excellent post!

I started a small gold/silver barter group in my area (within 20 mile radius). We communicate over email, and use a microforum to post buy/sell needs. We meet about twice a month, and our group buys and sells AT spot, with no transaction fees ($10 a year to membership fees).

We have about 70 people in the group. It works well. For 2 years, we've almost all accomplished the tasks we've set out to do each month: those who need cash sell their bullion, those who have cash buy the bullion, and if there are left-overs of any, we have a deal with 3 local coin shops to purchase or sell gold/silver below their usual markup.

I have a new site, www.fullreservebanking.com, which will soon detail how to start your own group.

As to verifying gold or silver, I use a system called the Fisch that works wonders. Check it out at http://www.fisch.co.za/ HIGHLY recommended!

I've detected only 2 underweight coins out of thousands over a 2 year period. I've weighed thousands of coins for other people. 1 of the underweight coins was mine (silver eagle) and 1 was another person's (gold eagle). They were both underweight by fractions of an ounce, so they were most likely just clipped very well.

Anonymous said...

CMIGS are typical bullion swindlers. Fast talkers and arrogant s.o.b's. Buy your bullion at APMEX. Don't believe a word Bill says about confidentiality. Nepotism abounds in that company. Maybe Gilligan from the previous post is a son in law that works for him and now shills for him on sites like this. Beware.

Matt said...

Do not lend out precious-metal bullion! Legal tender laws force you to accept repayment in paper money if it's offered. If you refuse repayment in "Federal Reserve Points" of a debt owed to you (regardless of the medium by which you originated the loan), a court can discharge the obligation. This is why the legal tender laws must be repealed before gold and silver can function as an alternative currency.

This Blog Has Moved!

My blog has moved. Check out my new blog at realfreemarket.org.