Sunday, January 28, 2024

How to Buy (& Sell) Gold

 How to Buy (& Sell) Gold

Buying gold as a store of value and protection against inflation seems like an easy thing to do, if you know how to do it correctly. Buying gold is only one side of the proverbial coin though, with selling proving to be the challenge many holders face. Thus, it is important to "begin with the end in mind," because it is far easier to buy gold close to spot price than it is to sell it near spot price.

First, it is important to understand some terms in the gold market. Chief amongst them is spot price. Spot price is the price paid for a certain weight of gold on the global exchanges with New York and London being the primary pricing markets. Gold is almost universally quoted in dollars.

Gold generally trades 24 hours a day, 7 days a week. The vast majority of this trading is via contracts for future delivery of gold. Spot pricing is for a certain moment in time. The spot price also refers to a certain fineness of gold, typically 24K. 

24K implies 99%+ pure gold. Other common measures of fineness include 22K, 18K, 14K, and 10K. An easy rule of thumb to mentally figure out what those different fineness benchmarks mean is to divide by 24K. So for example, 10K gold would be 10/24 or 41.67% gold.

There are many schemes to swindle the uneducated gold buyer out of their hard-earned cash involving spot price, weight, and purity. That is usually done on the selling side, but buyers need to be aware of what they are really buying.

Generally speaking, retail buyers should attempt to buy physical gold in liquid known instruments. That is a fancy way of saying gold coins and gold bars minted by either governments or the handful of private commercial mints.

To get the best pricing a buyer should shop around on several of the largest exchanges, eBay is a good starting point. There you can find hundreds of different sellers, many of whom have their own stores outside eBay. Companies with thousands of positive transactions with decades of experience are generally a safe bet.

Depending on what state you live in, there may or may not be sales tax on gold. In California for example, purchases UNDER $1500 are taxed, while those OVER are not. This is meaningful when you purchase say a 20 gram gold bar for $1450 and another $120 is tacked on for sales tax. Imagine if you were charged sales tax every time you bought a stock!

If you don't have $1500 or more to buy physical gold, or if you don't want to buy physical gold, there are other good options. Multiple companies have sponsored holdings called Exchange Traded Funds. These ETFs store gold in audited physical vaults with each share of this ETF representing a portion of that gold. 

The advantages of a gold ETF are significant. First they are very easy to buy and sell at close to spot prices. Second, you don't have to worry about storage or security for your gold. Third, the sales tax problem goes away. The downside is you don't physically have your gold in hand. There is an old saying in the gold buying world, "if you don't hold it, you don't own it."

Along with ETFs there are gold mining companies whose common stock can be readily bought and sold on most exchanges. This offers investors the upside of owning companies with gold mines. The downside is you have to be right twice; once on gold itself and second (perhaps more importantly) on management of these companies. In the Gold Rush era, it was extremely common for investors to own "feet," or literally the measured foot of a gold mine and be paid on that holding quantity every Sunday in dividend.

Buying coins, bars, and nuggets are all ways to physically buy gold. And generally the closer you get to the source, the closer you get to spot price. Dealers typically tack on a 2-5% premium ABOVE spot. If you contact a miner directly it is possible to get nuggets at up to 10% below spot. A lot depends on who you buy from and in what quantity.

One of the great conundrums of buying gold is that to get close to spot price on the buy you typically have to purchase larger quantities, unless you decide to go the ETF route. The real danger to an investor who has properly sourced a purchase of gold and perhaps needs to sell a portion down the road is SELLING it.

Of all the years I have been active in the gold market I have successfully only sold gold ONCE for above spot price, and that was for a gold bar still inside its protective plastic case. Barring that, you can expect to get a significant haircut SELLING gold; anything from 5-10% (or more!) depending on who you sell to. Seller beware!

Who you sell to is important. There are all types of schemes to lighten your load. They include trying to confuse you with different weights (pennyweights, grams, troy ounces, etc.) Then there is the old acid test where a piece of your gold is scraped against stone and different acids are applied to determine the fineness of the gold. Of course fineness is then called into question.

To help avoid these situations, physical gold like 1 Oz U.S. Gold Eagles, 100 Gram Gold Bars, and similar well-known instruments are best. For scrap gold or unknowns, it is almost always best to work with a smelter, but identify ahead of time what your estimated gold content is before a melt. Know the value before you sell!

This obviously is where ETFs have a significant advantage over physical gold. Liquidity is as easy as hitting "Sell" on the computer screen. The ETF shares are sold and funds deposited into your account immediately. Another advantage is that since ETFs trade as stocks rather than actual commodities any taxable implications are also treated favorably. 

As Johnny Cash said, "This world is rough, and if a man's gonna make it he's gotta be tough." The same can be said of the gold market. There still is tremendous friction in buying (and especially selling) gold. Scams and cheats abound, a little of the Wild West remains in every gold transaction. But if you know what you want to buy, can identify it precisely, and "buy smart" adding gold to your portfolio can be a smart move.