[Last updated January 2015]
Whether you are just starting out or are topping up the final ounces of your physical precious metals portfolio there is always the issue of what to buy. The question of what to buy is more than just about minimising costs. We recommend 1oz gold coins as the backbone for physical precious metal investment portfolios up to 500oz gold (or equivalent combined value of gold and silver). Large portfolios (>500oz) should have most ounces in bailment.
Many investors make poor buying decisions resulting into lower profits down the line. They buy gimmicky or obscure coins that will be difficult to dispose of later. They over-pay on premiums because of mistaken beliefs in rarity or lack of basic information about the precise gold or silver weight of an item (the ‘melt value’). They mistakenly believe that certain coins protect against government confiscation.
When it comes to storage many investors don’t diversify or take advantage of full-service or online bailment services. And all too often investors simply don’t do their homework on how to legally side-step sales and value-added taxes.
In this section
Buy-side taxes are easily avoidable
See our tables in the Taxes section where we outline sales and value-added tax rates. It’s generally easy to avoid most sales and valued-add taxes. Savvy investors incur buy-side taxes only because they want certain items in their portfolio for strategic reasons such as exemption from Capital Gains tax (CGT). It’s even possible for investors to get around paying the high value-added tax (VAT) on silver within the eurozone. See our section on Minimizing buying taxes for more details.
Minimize your premiums
Buying items with the absolute lowest premium is not automatically the best strategy. Smaller or lower precious metal content coins have bigger premiums but are more portable and easier to use for small transactions. The chances of loss or theft are reduced by having your total gold and silver ounces divided across different sized pieces. And investors often accept higher premiums for CGT-exempt coins. For example, UK tax residents often pay very high premiums on 1oz silver 2 Pounds “Britannia” coins.
For silver, premiums vary hugely. A large 1,000oz bar can have a very low premium but later on you may not wish to dispose of 1,000oz all at once. On the other hand, a thousand 1oz silver coins will cost more in premiums but will be far more liquid. Because of silvers smaller value-to-weight ratio it poses a greater storage problem than gold. Bailment storage services are an obvious solution. Many will also be precious metal dealers themselves, offering combined buy/sell and storage services. However bailment services come with their own special considerations.
See our tables in the Premiums section where we show you what to expect in the real world of dealer premiums. For common investment grade items, and in normal market conditions, you should not have to pay more than the ranges shown. Avoid paying by credit card as most dealers will make you pay the merchant fee in addition to the premium. Regardless of the country or state you’re buying in, it pays to shop around and to ask for discounted premiums if buying in large quantities. We cover bailment premiums separately here.
Some precious metal investors seek anonymity as their over-riding concern, and this heavily influences where, what and how they buy. This mentality means never giving out an address or ID, always buying in-person with cash, parcelling large purchases into several smaller ones, or never using a storage or bailment service.
To the government it also suggests a motivation to evade taxation. For example, deliberately buying metals via a series of smaller transactions to avoid scrutiny is called structuring or “smurfing” and may come with stiff penalties. Dealers in the US are wise to cash buyers using these tactics as they’re responsible for filling out IRS Form 8300 (see Reporting requirements).
While we can appreciate the security benefits of anonymity everyone faces the tax authorities eventually. If you’re not tax compliant how can you safely and legally convert possibly hundreds of ounces of gold and silver into income-producing assets such as a business, dividend paying shares, or rental property? At PRECIOUSMETALTAX.com we don’t believe buying anonymously makes much sense. There are ways to legally avoid much if not all taxation on your profits. A good starting place to find out more is our section on Minimizing capital gains tax.
Avoid numismatics and commemoratives
Unless you are a professional or an expert hobbyist we suggest avoiding numismatics. These are rare collectible coins that trade well above their actual precious metal weight. Another reason to avoid is that many so-called numismatics are not rare. There is an entire category of coins called “semi-numismatics” that are simply hyped up to extract the maximum premium from gullible buyers. In turbulent economic times you are unlikely to get back the buy-side premiums paid on these coins.
In addition, some sellers perpetuate the myth that particular coins will be treated differently by governments in the future. The story goes that some coins will be taxed more than others, or are less likely to be confiscated. We believe this is pure speculation on the part of sellers designed to extract the highest premiums from buyers.
You should also avoid commemorative coins. These are usually produced in limited quantity to artificially create rarity. One exception is the US Mint who has produced millions of modern commemorative coins, mostly 50 Cents silver (Half Dollars). Commemoratives tend to come in confusing weights and fineness, and often have gimmicky designs. Many government owned mints in places like the Isle of Man, Singapore, and France churn out these types of coins charging massive premiums to the actual precious metal content. There is no compelling economic reason to buy these coins for their precious metals value. Buyers of these coins could find it difficult to sell them in the future.
Scams and dishonest dealers
It goes without saying that you should do some basic research before parting with your money. A quick web search will reveal the Los Angeles Better Business Bureau (BBB) has received numerous complaints about a Newport based dealer involving missing shipments. Also in the LA area, the city of Santa Monica has filed a lawsuit against another dealer for allegedly engaging in bait-and-switch sales tactics.
Reputable dealers have many satisfied customers and high ratings from the BBB or similar organizations. Reputable dealers will also provide a clear and transparent price list of items available for immediate sale. They have ‘skin in the game’ so to speak, with large inventories, and physical premises you can visit. Often the principals are industry veterans, well-regarded as speakers and commentators.
Many shady dealers entice customers with promises of low premiums only to be told later these items are “out of stock”. This is typically followed by a hard sell to get you to buy over-priced numismatic coins. Of course products do get sold out, but dealers who are repeatedly out of stock on their low premium items should be avoided.
Buying metals online and having them shipped is a very common approach and works fine when dealing with reputable companies. If you are doing business with a small local dealer or one that has just opened shop we suggest visiting in person, where you can pay and obtain a receipt, and take physical possession of your items on the spot.
Focus on 1oz bullion gold coins
We recommend that 1oz gold bullion coins be the backbone of every physical precious metal investment portfolio up to size of around 500oz gold (or equivalent combined value of gold and silver). This is valid regardless of the percentage of total net worth invested in precious metals. Large portfolios (>500oz) should have most ounces in bailment.
See our recommended coins here.
Once you’ve started building your core stash of 1oz gold bullion coins you can consider accumulating a spread of smaller gold coins and bars, other gold coins with strategic value, silver bars and rounds, and 1oz bullion silver coins, previously circulated / pre-decimal silver coins, as well as storing some ounces in bailment. For example, we believe GoldMoney and BullionVault are two online bailment services that are especially good for storing silver ounces. If you personally store bars make sure to retain the original packaging complete with assay certification.
Other gold coins
See our examples of other gold coins worth accumulating. You may want certain coins because they’re legal tender or exempt from taxes in your country. Perhaps you might live or own property in a country where particular coins are readily accepted for payment or popular with local dealers. We’ve selected our favourites, but there are many coins worthy of your consideration. Remember, at the end of the day gold is gold and there will always be buyers for genuine gold coins and bars.
Evaluating actual gold content
One of the key benefits of coins is the protection from counterfeiting. Fraudsters generally stick to counterfeiting gold bars of 10oz and above. While counterfeit coins do exist, the ones we’ve seen are very poorly done and easily spotted. It’s uneconomic to make believable fake coins. This of course might change if the gold price has a major move higher. Mitigate counterfeit risk by buying from reputable sources as well as educating yourself on the actual gold weights, sizes, dates and designs of the coins that interest you.