I should start with a disclaimer here: this article is based on my experience and opinions, this is not investing advice, and I am not compensated by anyone I mention in this article. I am a huge fan of Kinesis and I own some KVTs so I have a tiny financial interest in that platform, but that’s it.
So, let’s get in to it.
- First, figure out why you’re buying precious metals.
- Gold or Silver?
- Is Silver Undervalued, and a Better Buy?
- Cool! So what do I buy?
- Buying Physical Gold and Silver Safely
- Moving Beyond Physical Stacking
First, figure out why you’re buying precious metals.
It’s 2021, so you’re probably here trying to figure out how to protect yourself from inflation. It could also be that you’re a believer in sound money and want to put your money where your mouth is, or it may be that recent societal instability makes you think storing a bit of wealth where you can put your hands on it and not depend on the Internet or ATMs running is a smart thing. Maybe you like pretty shiny things and you want to buy a mix of designs so you can play pirate with your three year old and have real “booty” in your pirate’s chest.
Or maybe you’ve been looking at Venezuela, Cuba, South Africa, and other places in the world and you think “it might be nice one day to be able to put my wealth in my pocket and leave town.”
You’ve got a reason. Keep that in mind as you read on.
Gold or Silver?
There are other precious metals, but for the purpose of this article I’m leaving platinum and palladium out of the discussion. Those are rare, and they are valuable, but they aren’t easily recognized, and they don’t have a history of maintaining purchasing power over millennia like gold and silver do.
Worse, their value seems to depend mostly on industrial use. If automobile technology or demand changes drastically, how will platinum and palladium react since the primary use of these metals is in catalytic converters? I don’t know, but it seems to me that those metals are less of a hedge against economic uncertainty than gold and silver are.
Gold and silver both have a history as monetary metals, and both are well recognized as stores of wealth. Both seem like reasonable places to put your money if you are worried about growing inflation or uncertainty. The biggest difference, in my mind, is something I think of as “wealth density:”
That one ounce gold coin is worth the same today as those 71 ounces of silver. That’s because the gold to silver ratio is about 1:71 right now. So which makes more sense to purchase? Go back and look at your goals:
- If you are just looking to store your wealth for the future, and you believe gold is a good hedge against inflation as I do, then gold probably works best, as any sizable allocation to gold will be much easier to manage than the equivalent value in silver. If you decided to buy precious metals in September 2020 rather than paying cash for a new car, then that $38,723 was worth 20.5 ounces of gold, or 1,375 ounces of silver. Gold is simpler to store in small quantities.
- If you worry you might need to walk away from your life and start a new one someday, it’s a lot easier to drop that gold coin in your pocket and walk out the door than it is to carry the equivalent value in silver. If you’re talking about leaving town with a significant amount of money, it almost has to be gold or something like crypto (or both simultaneously – more on that later on) simply based on mass.
- If your concerns are about your local currency going the way Venezuela’s currency went, then silver makes more sense. Comments on the Internet from Venezuelans suggest that an ounce of silver there will feed a family for a month, and silver is much more useful as a day-to-day currency because it’s so much less wealth-dense than gold. It’s kind of like choosing to stockpile hundred-dollar-bills vs ones. If nobody is willing to make change and you don’t want to flash your wealth, you want the smaller denominations. That’s silver.
Is Silver Undervalued, and a Better Buy?
If you’ve come from Reddit’s WSS community, or you’ve heard about them, then you’ve heard the argument that silver is the better purchase. This belief is justified in a few ways:
The gold to silver ratio is abnormally high, and will revert back to something more reasonable: The gold:silver ratio is up around 70 ounces of silver to an ounce of gold, and historically it’s almost always been between 15 and 20. Even worse, most above-ground silver deposits have been depleted, and most silver produced today is a by-product of other mines, like copper mines. The gold to silver ratio coming from mining production is now about 8 ounces of silver per ounce of gold, which makes a high ratio look even more unsustainable.
Markets tend to revert to the mean, and if demand for silver goes way up there’s simply no way to ramp up silver production to make up the difference. If the gold to silver ratio reverts to the mean, then gold’s price needs to go way down, or silver needs to go up. By about 700%.
Silver prices are manipulated, and the manipulators will fail! Maybe. This is based on a few facts:
- Silver and gold are priced based on “paper markets.” What this means is a bunch of banks and funds determine the spot price, rather than the market itself.
- There has been a lot of shady behavior in these markets, including a nearly $1 billion fine paid by a big bank for its behavior spoofing prices in these markets.
- Traditionally the COMEX has been used for hedging industrial production – if you’re a silver miner who will bring a lot of silver on the market next quarter but you need to buy fuel now, or you’re a retailer who’s about to buy a lot of silver to sell at spot+ markup, then you are exposed to potential losses should the price of silver change while the silver is on your books. You can use the futures market to make your position market neutral, so you make an acceptable profit regardless of where the price goes.
- Over time, the COMEX has turned into something of a casino, with big players betting on the market movements and collecting their winnings (or paying their losses) but never taking delivery.
- In the last few years we have seen huge abuses, where huge sales of “paper” (think the equivalent of months of worldwide production) happen in seconds at the sleepiest times in the market, that appear to have no purpose but to drive the spot price down.
- Lately, you can predict these: when options are about to expire (meaning, someone made as bet that the price of the metal would go up by X amount by Y day) we will see huge moves in the market to drive the spot price to the point where the banks writing the options make the most money, then the market will move back after the wins and losses are tallied.
There does appear to be some serious manipulation going on in the silver market. Some industry experts believe, based on interviews with market participants, that the silver market is so heavily manipulated that there are between 100 and 500 claims on every ounce in existence. If people thought Gamestop was a serious short squeeze, then silver will blow their minds if/when it blows up.
Others believe the shorts have mostly covered, and while there’s some malfeasance going on it’s not nearly as bad as people think it is.
Regardless, my observations lead me to a couple of relevant points:
- The physical market and the spot price have diverged. If you’re buying silver, the price per ounce is theoretically the spot price + a premium, but this year the price has remained steady compared to huge changes in the futures markets. Banks manipulating the silver price with their shenanigans no longer affect the physical price of silver like it used to.
- The palladium market used to be manipulated in a similar way, until the scheme couldn’t be continued. The price went from ~ $500 per ounce to around $3,000 within a couple of years.
- The silver market is much smaller than the gold market. Silver is consumed in production of cars, and smart phones, and other products, whereas just about every ounce of gold ever mined is still above ground in an accessible form.
- The more demand we see for physical delivery of silver (or PSLV shares sold, or purchases on Kinesis), the smaller the pool of available silver becomes, and the closer to the end of the manipulation we find ourselves.
- Once silver is allowed to be priced freely, we may see something like what we saw with Palladium:
So yes, I think silver is a better buy. But maybe I’m a conspiracy theorist – you should make your own decisions. I think the above is a good summary of what the “Silver Apes” are thinking, however.
Cool! So what do I buy?
There’s a bewildering number of options when buying bullion. Coins versus bars, in various sizes, from lots of mints, in a shocking number of designs.
Unless you’re a collector, in which case you should buy whatever you want, my belief is that you should buy based on premium. Buy the cheapest metal possible.
If you’re looking for smaller denominations, the smallest you should consider is one ounce rounds or coins, which are standard.
Note that precious metals are priced in Troy Ounces, not standard ounces. Why? It goes back to at least the middle ages, though it likely goes all the way back to Roman times. It doesn’t matter why – it’s like that because it’s always been like that – just be aware a troy ounce is something different than a regular ounce.
Rounds vs Sovereigns
Right now the “silver round” on the right (a silver round is essentially a coin not issued by a government) costs $29.98, while the Maple Leaf on the left sells for $32.18. That’s an 18.5% premium over spot versus a 27.3% premium. What do you get for your additional premium?
A few things:
- Recognizability. People recognize the coin on the left, even if the round on the right looks cool.
- Currency. The coin on the left is actually worth 5 Canadian dollars. This doesn’t mean much, other than counterfeiting these potentially incurs the wrath of the government, so it should be higher risk for fraudsters.
- The belief that the higher premium paid now will be recovered when selling the coin.
- Some features that make the coin harder to counterfeit:
If you’re in the US there may be some tax advantages to buying American Silver Eagles, but these are highly desirable and as I write this the premium on these coins is a whopping 43.3%. I’ve never been able to justify this myself.
For one ounce coins, I prefer rounds with the cheapest premiums.
Larger Bars have Smaller Premiums. Mostly.
Those are Kilo bars sold by APMEX (9 Fine Mint is one of their in-house brands). When I purchased these the premium was about half what it was for one ounce rounds. Right now, though, things have inverted. The best price for APMEX Kilo bars as I write this is $3.99 per ounce over spot, while the APMEX branded rounds can be had for $3.89 over spot in quantity. Note that these prices assume a large purchase – for the Maple Leaf vs Asahi Round comparison I used single ounce quantities for the comparison.
In general, larger bars have a smaller premium associated with them. Compare prices though, as this will vary based on market conditions.
The best premiums are on 1,000 ounce bars
If you’ve got $27,000 you want to put into silver, and divisibility isn’t a problem, and you can store 68 pound bars, this is generally the cheapest price. For comparison, right now APMEX is selling these for $3.19 over spot, though traditionally anything more than $1 over spot was very expensive for these big bars.
What About Gold?
With gold it’s still an issue with choosing premiums, but there are a few differences:
Most people should be buying one-ounce bars or coins. The premiums on smaller coins are hard to justify, and bigger bars aren’t something most people can afford, and it should be easier to find a buyer for a one ounce bar of gold than a kilo bar.
Coins are all going to be sovereign coins. The “bargain” is typically Austrian 100 Corona coins, which typically are restrikes dated 1915. Prices for the various gold coins will be all over the place based on desirability, but there are two basic options as far as the categories of the coins:
- There are pure, 99.99% gold coins. These are attractive and are generally recognizable, but they were never designed to be used as currency as gold is too soft. The Canadian Maple Leaf is typical, as are the American Gold Buffalos.
- There are also coins made of gold alloys, designed to withstand use as currency. These include the Austrian Restrikes listed above (which contain .9802 troy ounces of gold), as well as American Eagles and Krugerrands (which each contain 1 troy ounce of gold.)
Bars come in a variety of forms, most of which will be in tamper-proof packaging. Most will have serial numbers on each bar, which is a good or bad thing depending on your point of view. Some are more trustworthy than others (like the Pamp Suisse Veriscan technology) but if you buy from a reputable vendor you shouldn’t run into any problems. In general, the premiums on bars are lower than the premiums on coins, so this is my default choice.
What about Constitutional Silver and Pre-1933 Gold Coins?
I’m the wrong guy to ask, unfortunately. My interest is in bullion and getting the most gold/silver for the price. While 40% and 90% silver US coins are often the cheapest way to go, I don’t know enough about them to guide you. Sorry.
The gold numismatic coins – stuff that used to circulate as money like the $10 Liberty Gold coins – are priced based on rarity and condition in addition to the value of the gold they contain. If your goal is to accumulate some precious metals at the lowest cost, then collectibles probably aren’t the way.
Collectible coins are something worth looking into though – I’m just not your guide for that.
Buying Physical Gold and Silver Safely
Buying from eBay or Craigslist is riskier than you probably assume, as counterfeit precious metals are a real thing.
Be aware, and don’t go bargain shopping. You should buy from a trusted online retailer, or from a local coin dealer who has the tools to verify the authenticity of what you’re buying.
If you’re buying from an individual you trust, there are a number of ways of testing metal purity, but I like the Sigma Metalytics tester myself, but it can be hard to justify $900 for a tester unless you’re buying a lot. In my mind, it’s easier to buy from a legitimate dealer. (Of course, I eventually bought a tester and tested them anyway.)
Where to Buy
This contradicts what I wrote above, but sometimes eBay can offer good deals if you’re an experienced buyer, and if (and only if) you’re buying from the eBay account of an established retailer. Some dealers offer periodic sales on inventory they have too much of, but here in 2021 that’s not nearly as common as it was five years ago. It wasn’t uncommon for APMEX, for example, to put out a flash sale on a coin they had too many of where you got the lowest premium regardless of the number you purchased.
Dealers I trust:
- APMEX. The largest dealer in the US – premiums can be from great to terrible, so shop around a bit. Service, shipping, timeliness, and selection have always been excellent in my opinion. Before I discovered Kinesis this was my go-to dealer.
- JM Bullion.
- SD Bullion.
- Miles Franklin. I have never bought from this company, but I like the outreach their CEO does online, and the way be tries to help the community. Where the other dealers listed here have extensive online shops, Miles Franklin is built on a “call us and explain your needs and we’ll do the research to meet your needs at the best price” model. There’s a place for that, and I trust them.
Securing Your Precious Metals
I am not going to give you any particular recommendations here, as you know your situation better than anyone else. I will offer a few guidelines though:
- Precious metals are anonymous stores of wealth. Even the fanciest serial-numbered bar of gold can be melted down into an anonymous chunk. This makes it an appealing target for thieves.
- The fewer people know about your metals, the less risk that you’ll be targeted.
- If you’re going to buy a safe (which I think is wise), buy a real safe. This means a safe that weighs hundreds of pounds, that you’ve bolted down to concrete. Something you bought from Amazon is best avoided. Gun safes aren’t that secure. Google is your friend here – if you buy an old safe for cash off Craigslist and reset the code or buy a new mechanism for it you’re probably getting a decent safe as cheaply as you can.
- Precious metals can be hidden. Be creative. Do you have a Rottweiler that lives in a dog house in the yard? When is the last time someone checked under the doghouse for a buried cash box full of gold and silver?
This is more of a “don’t be an idiot” thing than anything else. Roommates, people at the bar you brag to, and family members with substance abuse problems need to be defended against as well.
Moving Beyond Physical Stacking
Recognizing when Enough is Enough
Again, refer back to your reasons for buying precious metals. At some point, you don’t want to store more locally.
Let’s say you live on $50,000 per year, and your salary is twice that after taxes. You’re buying precious metals to:
- Protect against inflation
- Diversify your investments
- Give you some insurance against societal failures
These are all good reasons to own precious metals, but only the last one requires you to secure your precious metals yourself. So, how much gold and silver do you need to have in your possession before you have “enough?” Is it $50,000 equivalent – a year’s expenses? Is it $75,000?
Whatever your number is, you may choose to invest more money in precious metals than you’re interested in having to secure physically. What then?
“If you don’t hold it you don’t own it” fails at scale
It’s important to realize that you are trying to protect yourself against a number of risks. “If you don’t hold it you don’t own it” protects against counterparty risk and insures you have access to wealth should a cataclysm occur, but that’s it. You may also need to factor in:
- Future confiscation. Private ownership of gold in the United States has been outlawed before. What do you do if this happens again? Wouldn’t it be better if some of your holdings were in a different legal jurisdiction than the one you live in?
- Sometimes, the best thing you can do is leave your country. Immediately. There are dozens of examples of this happening in the last 80 years, and when it happens those fleeing often leave with nothing more than the clothes they are wearing. Another argument for holding your wealth overseas, or at least in another jurisdiction.
- Disasters. Do you worry you may need to leave in a hurry due to mandatory evacuation due to fire, hurricane, or another cause?
- How about theft? Does your homeowner’s policy cover theft of bullion? I’m guessing there’s not even a rider available that covers you in case of theft.
- Let’s say you hit the lottery, and walk away with $20 million of precious metals as part of your haul. Do you secure this at your house? Do you buy a building? Build a vault and secure it yourself? Or do you hire a company that’s been doing this for 100 years, has the best vaults in the world, is audited regularly, and is so trusted you can insure your holdings cheaply?
At some point, having your wealth held by a third party makes more sense than holding it all yourself.
The most basic option is to simply open a safety deposit box and store your metals in your local bank’s vault. The problem here is you’re not insured in case of theft, and in some cases the government might just take your property and offer no compensation. This happened this year, in one of the richest enclaves in the wealthiest country in the world. Safety deposit boxes may be a very poor choice.
There are companies that will happily store your metals for you for a fee – I’m not even going to mention recommendations because I have no experience with any of these companies, and there are many that are looking for your business. The basic rule here is this:
Only Buy Allocated Storage. Allocated is a way of saying the metal exists in the vault and is allocated in your name. Maybe this is physical segregation of serial numbered bars in the cubby with your name on it, or maybe it’s an entry on the blockchain that proves your ownership of your share of the total metal. You want a bailee relationship where your counterparty is responsible for vaulting your gold and silver. Avoid any situation where the underlying metals are legally owned by your counterparty and can be used by them as collateral.
Search and you’ll find options. You can generally choose the jurisdiction(s) you want to secure your metals in, and there’s at least one company in Singapore that has an option where the company will refuse to turn over your precious metals if private ownership is outlawed in your jurisdiction. They will not surrender your metals on order of your government, and they will refuse to deliver to you regardless of your orders until you show up in person to arrange to take delivery.
All of these companies should offer allocated, insured, audited storage for an annual fee that’s a percent or two of the value of your metals.
Precious Metals Funds
If you’re trying to allocate part of your investment portfolio to physical metals, you can invest in Sprott’s PSLV very easily to invest in silver. This takes silver off the market efficiently and is deliverable in large quantities. PHYS is the same for gold, and PPLT invests in platinum and palladium.
All of these are investment vehicles I consider trustworthy, and all make it easy to invest in precious metals from your brokerage account. The only negative is that they are based in Canada, and some who worry about a currency “reset” worry that Canada might nationalize these assets as Canada’s central bank no longer owns any gold. Well, they own some, but I own more gold than all of the Canadian government, which is kind of sad.
These Sprott funds charge an annual fee that’s a percentage of your holdings.
Do not invest in SLV or GLD. These do not hold metals; rather they are derivatives that provide exposure to the spot precious metals price.
Why I Chose Kinesis for Precious Metals Storage
This is hard to summarize – I built this site in part to try and explain a brand new business model. Here’s the summary.
- Offers allocated/audited/insured/deliverable storage of precious metals.
- Is headquartered in Lichtenstein, where the blockchain is legally recognized as a way of establishing ownership of assets.
- Allows delivery in small quantities – the minimum is 200 ounces of silver or 100 grams of gold – about $5,800 as I write this. The total premium for silver seems to be around 8.1% delivered, which is cheaper than any other option.
- Vaults your precious metals in 9 vaults spread across 8 countries, which counters risks that a government might choose to seize the metal.
- Pays a yield on your holdings rather than charging a fee. This is a fee paid in metal, and is generated from transfer fees rather than something risky like lending the metal out.
- Allows you to spend your metal, either by sending directly to another user in 1-2 seconds, spending it on a VISA debit card, or converting it into cryptocurrencies to send that way.
- Offers low fees – purchases on the Kinesis exchange (where you buy KAU and KAG – the digital gold and silver tokens) cost 0.22% of the purchase, topping off your VISA debit card costs 0.22%, and sending to another user costs 0.45%. This means if I pay you $20,000 of metal for your used car using Kinesis, the total fee is $90 of metal. Not bad when the metal was purchased for 0.3% above spot, on average.
- Allows for purchases up to $20,000 per transaction on the physical VISA debit card, and/or up to $920 per day in cash withdrawals at ATMs.
- If, like me, you want to hold silver now but move to gold if there’s ever a correction in the silver price, this is easier in Kinesis than anywhere else. It costs 0.22% to sell the KAG and another 0.22% to buy the KAU. Done, at very close to spot prices.
Kinesis is storage that pays you, and represents something new and exciting (if you consider “money” exciting). It’s also a system that allows you to step on a plane or ship now to flee a jurisdiction, and still have access to all your wealth when you arrive at your destination.
I personally think Kinesis is the future of precious metals ownership – it’s essentially a gold and silver based savings account that earns a yield in metal, and has a debit card attached. It’s a wonderful model that couldn’t exist before the blockchain existed.
The downsides of Kinesis are:
- It’s just leaving its start-up phase. Sometimes growth brings hiccups. As I write this only one of the five yields is active, though all are accumulating.
- It’s hard to transfer funds into Kinesis, currently. Options are expanding, though.
- You give away your anonymity, as Kinesis requires you to comply with Know Your Customer regulations before you have access to the whole system. If you’re a money launderer or fugitive this system is not for you. If you want to purchase your precious metals anonymously and maintain that anonymity, Kinesis is a bad choice.
- It requires the Internet to make transfers, and in situations where power and internet aren’t available, Kinesis isn’t available. So…
Build your physical stack first, in silver and then gold. Once you’ve amassed “enough,” consider Kinesis, unless you’re investing your retirement account in which case PSLV and PHYS probably make more sense. Kinesis takes a while to wrap your head around, but it’s an amazing concept.
Gold and silver are easier to understand – they’ve been stores of wealth longer than writing has existed. I predict their ability to store wealth will be more relevant in the next ten years than they have been for the last fifty.
If you’ve been on the edge about buying precious metals, now is the time. I hope this essay has been helpful.