Precious metals come in many colors, have many uses, and experience an incredible range of prices during any given time period. Further, they are pretty and shiny, and that can pose a problem of its own, but I’m getting ahead of myself. For my purposes, I am going to limit the discussion to gold and silver, as they are the most commonly-sought metals for investors. There are nearly as many opinions as there are investors, and those opinions cover many topics: what to own, when to own it, when to buy, when to sell, form in which to own, including physical coins (old, new, collectible, and/or commemorative) or bars and bullion, allocated or unallocated, insured or not, and IRA or individual ownership.
With so many variables, I will attempt to cover each point, although not in a great deal of detail. If you’d like to know more, there are many precious metals experts. Be a little wary, though, as most of them are actually commissioned salespeople who only make a living if they can convince you to buy or sell.
Let’s start with What to Own, which in itself has several decision points, and then we’ll move along through the other considerations:
Gold or Silver (What to Own) – Gold is much more expensive than silver, but has a more limited industrial use component. Both are consumed in the making of fine jewelry, and silver used to be the primary component of our coinage, but is no longer is used for new American money. Silver also has a variety of industrial applications, and needs to be replenished as manufacturers consume existing supplies, so demand is fairly steady. The “what to own” decision is easy for me, as I advocate spreading metals investments approximately equally between gold and silver.
When to Own – Unlike most core portfolio investments, with precious metals I believe that there are times when ownership makes sense, and times when I would rather not be holding metals for investment. There are some people who believe that metals should be held long-term, and there are other folks who would never invest in such risky assets as precious metals. This obviously requires a discussion on a touchy topic – timing. Market timing in general is a losing proposition, usually leading to under-performance by investors engaging in the practice. Metals can be different. The cycle of precious metals pricing tends to be long and dramatic in magnitude.
Why is this asset category different from most investments? The fundamental reason is that most of us do not consider precious metals an investment, per se. Metals, now that they are no longer a primary medium of exchange, are mostly a storehouse of value for uncertain times. Of course, the investor may realize gains at any given time, but the reverse is true as well. Volatility (advisors call this investment risk), is far greater in commodities (including metals) than in most other asset classes. Since their cycles tend to be lengthy, the old expression, “The trend is your friend” seems particularly appropriate.
When to Buy, When to Sell – Only the luckiest investor will ever buy or sell anything at the exact high or low market price. Anyone trying to make the case that he or she can tell you the “perfect time” is someone to be avoided. Technical analysts use price and volume charts to determine buy and sell points, and many are reasonably successful using these techniques. Fundamental analysts use more in-depth measures of intrinsic value and conditions. No one analysis has any guarantee, but we pay attention to both. If an investor tries to buy at the absolute bottom, or fears buying when the trend has been up for a while, he or she will inevitably fail. The same goes in reverse for selling. Make the best analysis you can, and keep your purchases appropriate for your financial situation, and you will have a fair chance of success. Don’t try to make a killing or get rich quickly.
There are a few people who practice “buy and hold” for metals and/or coinage over the long haul. Some are merely trusting in long-term appreciation for metals, and others are provisioning for an economic interruption, where only “old fashioned” money will be readily acceptable for necessities of life. I make no judgment about any of these strategies.
Form of actual metal ownership – Two fundamental forms of ownership are available for precious metals. First is actual metal, which has several variations, and the second is electronic shares backed by physical metals. There are, of course, plusses and minuses of both, and I do have an opinion I’ll share after a discussion. Physical gold and silver takes several forms for investors:
- Bars, rounds, and smaller formed weights of the metals with excellent purity
- Coins minted for circulation, domestic and foreign, old and new
- Coins produced for commemorative purposes
- Coin-like representations of measured weights and purity
Electronic ownership takes several forms, as well:
- Shares of stock in mining companies that bring the metals out of the ground
- Mutual funds that own stock in mining companies or bullion
- Exchange-Traded Funds (ETFs) that do either or both
- Certificates representing ownership in bullion held in vaults (allocated shares mean that your portion is specifically identified for you; unallocated means that a group of owners have collective shares, but are not readily identifiable)
- Shares held in a vault can be insured for a very reasonable cost
IRA or individual ownership – There is no one way to invest in precious metals, which should be obvious by now. But there are far more considerations than we have touched on so far. One of the big ones is taxes. Precious metals are considered by IRS to be in the category of “collectibles,” which carry a special tax rate of 28%. This is neither the highest nor the lowest tax rate, and it applies to everyone. So one person’s bargain may be another person’s rip-off. You should know your own tax situation before making these decisions. Another lesser-known tax provision allows capital gains on metals to be offset by any capital losses, not just losses on metals. Properly applied, this gives investors some flexibility from a tax standpoint.
IRA transactions are not taxable during the ownership of precious metals, or upon sale within the account, but withdrawals from Traditional IRAs are taxable at your own marginal tax rate. Buying and selling is not penalized within the IRA. If you are a trader of precious metals, this makes IRA ownership somewhat beneficial from a tax standpoint, at least for the electronic forms of ownership. There are limitations, however, as the IRS prohibits some forms of physical precious metal assets from being owned in an IRA, and most IRA custodians will not hold the actual metals. Lately, there is a lot of advertising, particularly on the Internet, about a “loophole” that allows IRA investors to hold physical metals in an IRA “at home.” Do not do this. It is very suspicious, and most likely the so-called loophole is not going to withstand IRS scrutiny. IRS has no language that I can find at this time to make any reasonable person believe that “at home” ownership of IRA precious metals will be allowed. The penalty would be full taxation of the account, plus 10% if the IRA owner is under age 59-1/2. Don’t risk that loss.
Perhaps a more reasonable alternative for IRA owners is ownership of shares in a precious metals mutual fund or ETF. We prefer ETFs for their low cost of trading and ownership, immediate marketability, and flexibility in purchase and sale quantities, plus one more often-overlooked feature; sentimentality. Owning a shiny object is pleasing to the eye, and its weight in your hand can be comforting. This may result (we have seen it over and over) in a reluctance to sell, even when many signs point to a downward price trend. An electronic share has no glitter, no heft, and no sentiment. That is a plus for most investments and investors.
“There is a time and a place for everything,” the saying goes. This certainly applies to investments in precious metals. Another cliché seems appropriate, as well; All that glitters is not gold.” When someone makes money on ownership and sale of gold and silver, it is entirely likely that someone lost money on those shares or objects. Be smart and do your homework, and listen to the Van Wie Financial Hour every Saturday morning.