Sunday, October 25, 2009

Selling Gold Jewelry

One of the great benefits of investing in gold is that it typically functions as a safe haven for investors in times of economic turmoil. During the current economic instability, gold has risen to record high prices as one would expect. Some people will keep hold of their gold stocks until the peak of the instability then try to sell it off when gold prices reach their highest. But other people who struggle during tough times have another option: selling gold jewelry or other gold items to get cash to get through the hardships. You can easily sell gold bullion coins and bars to a bullion dealer, but how do you go about selling gold jewelry?

Selling your gold jewelry is not a difficult task. You can find various companies either online or around your area that will offer you cash for your gold items and make the process quite simple for you. The gold buyers are looking to get their hands on as much gold as possible, so they can profit from prices that will likely rise even higher over the longterm, and profit from some price spreads or transaction fees. But their businesses are usually legitimite and you will get a fair amount of cash for your gold.

A well-known example of such a company is Cash4Gold. They are a mail-in gold refinery, meaning that they will buy your gold items and melt them down. Cash4Gold is a good option for people who own old or broken gold jewelry or other items that are no longer attractive or desirable to wear. If you wish to sell newer and more attractive-looking gold jewerly, you will likely receive more money by selling your items to a local jeweler in your area, or to a pawn shop. That is because gold jewelry is sold at a premium price that can be much higher than the value of the item's metal alone. The premium price covers things like quality of design and craftsmanship. But a refinery like Cash4Gold will simply melt down your items, so they don't care if your items are resaleable or not. They will simply pay you a price based on the official spot price of your jewelry's constituent metal (plus they will charge a transaction fee of some sort).

The things you should know about your gold before selling it are its karatage (which should be printed somewhere on the item, its weight in gold, and if possible also its resale value, so you can know whether to sell to a refinery or to a pawn shop or jeweler instead. Getting your item appraised by a reputable dealer might be a good idea. You should also be aware of the terms of your agreement with the buyer of your gold. If you have intentions to buy your item back, you should be sure to check how much time you have to do so, and the specific terms surrounding the buyback. When you are dealing with valuable items that might have special meaning to you, the last thing you want is any kind of disappointing surprise that deprives you of your cherished item.

Saturday, September 5, 2009

Choosing a Gold Mining Stock

Gold Mining Stock ChartOver the past couple of years while most investments have slouched and gold has held steady, the most profitable investment for me has been my gold mining stock segment, which have increased in value a fair bit. The returns may not be life changing, but making a reasonable profit is much better than losing a ton!

Since gold mining stocks are a good option and could be for some time, what makes a solid gold mining stock? The average person might just look at their stock price over the past few years, and if it's going up they think it's a good stock. But that's a bad strategy. You have to look at the value of the gold mining company's assets and compare that to the stock price.

You need to know the value of the company's proved gold reserves. Proved reserves means the amount of gold that has been determined, within reason, to be present and accessible through mining. These are the company's main assets. Let's say gold company A has $20 billion in proved reserves, and there are 10 million shares, and each share costs $100. But when you divide 20 billion by 10 million (the number of shares) you discover that the value of their assets is $200 per share. That means that this is an undervalued stock. You should buy this stock.

There is also the converse situation in which a company's stock is overvalued when you divide the number of stocks into the value of the company's proved reserves. As with all stocks, gold mining stocks can be under or overvalue but when they are, that means there will be a correction at some point not too far down the line. You want to buy undervalue stocks.

There is another way to measure potential value of mining stocks, and that is by probable reserves. Probably reserved are thought to be present, but their presence is not definite so they factor into the price of a company's stock at a discount rate. If you find a mining stock with a large number of probably reserves that turn out to be truly present, you could make a lot of money. If they turn out not to be present, you would lose a lot of money. So I prefer to be a little more secure and I only look at proved reserves.

This is a simple guideline and not exact. To find out the real value of the stock you would also have to factor in the cost of extracting gold from the ground.

Wednesday, June 17, 2009

Political Risk Of Gold Investing

Political risks affecting gold investment
One of the realities of investing is that political unrest or upheaval can pose a risk to your investment. This is true with a variety of investments, including gold investment. This can happen to your investments in foreign countries or at home.

The government and lawmakers can basically do whatever they want, and can change laws in a way that adversely affects your investment. One of the best examples of this in the US is the Gold Reserve Act passed by Franklin D.Roosevelt in 1934, which made private ownership of gold illegal. People were compensated for their gold, but then the dollar was immediately devalued rendering their investments less valuable.

Some people try to avoid this kind of scenario by diversifying their gold investments and having gold stored in various places around the world. This is probably a smart idea. It is best to understand the stability of the country where your investment lies, though. I would much rather have an allocated storage account in Switzerland or Australia than somewhere in South America or Africa, for example.

These political risks also affect companies, which are sometimes nationalized by governments or have their assets expropriated. If you own stocks in a gold mining company, it is important to be aware of these risks. Some countries are obviously risky, such as Venezuela where nationalization seems to be policy. Other countries may seem stable and pro-free market, but the reality could change with a new election or a military coup. Mexico, for example, seems like a safe bet at the moment but there is certainly no guarantee that it will be in the future.

Share prices often drop due to general instability that is not even related to nationalization. Instability inhibits free market activity, so even seemingly unrelated events can cause stock movements. Understanding the political situation
of the country you are invested in will help you navigate all the fluctuations and understand your investment's performance, and take action to minimize the risks when necessary.

Wednesday, June 3, 2009

Why Silver Will Be a Better Investment than Gold

The investment potential of silver is hugeWhile gold is and always has been money, and its status as the ultimate preserver of wealth is untouchable, in the coming years silver promises to be a significantly more lucrative investment than gold. There are a few reasons for this.

According to (fairly) recent surveys, there are around 400 million ounces of silver bullion in the world versus 2 billion ounces of gold bullion. That means there the supply of gold bullion is 5 times greater than the supply of silver bullion. If we include coinage that can be melted down into bullion, then the supply of gold is three times greater than the supply of silver, with 1 billion ounces of silver and 3 billion ounces of gold. So silver the amount of silver available for use is much smaller than the amount of gold available.

The global supply of gold increases by about 2% per year, largely because gold is normally recycled and reused. But silver has many industrial uses, and silver is largely not reusable, so every year there is a supply deficit. Even in years of low demand, the supply of newly mined silver falls short of demand by about 70 million ounces. In years of high demand, it may fall short by as much as 200 million ounces. These deficits need to be taken out of the existing silver supplies above ground, which are therefore being depleted. Demand for silver has been outstripping supplies for 15 years straight, and there is no sign of this reversing.

In addition to those simple realities of supply and demand, the case of silver is complicated by some of the financial funny business that goes on in this world (which we've seen plenty of over the past year and a half). One of those funny things is the existence of unbacked silver certificates. Silver certificates are like IOUs that indicate that you have paid for an ounce of silver, and these certificates are supposed to be redeemable for physical silver. There are one billion of these certificates out there. But remember -- there are only 400 million ounces of silver bullion in the world. So what happens when the price of silver increases and people want to convert their certificates? A big shortage will occur, and that will send the price of silver soaring even higher.

Another bit of funny business is that there is a massive short position in silver that greatly exceeds the supply of physical silver. When you short an investment, it means that you borrow it and sell it now while the price is high, and you buy it back later when the price is lower. The problem is that when everybody goes to buy back the silver they have shorted, there won't be enough! There are approximately 508 million ounces of silver shorted on NYMEX, but there is only 132 million ounces of supply. Remember that worldwide, there is only 400 million ounces of silver bullion in existence, less than the amount that is shorted on NYMEX. When these people all go to cover their short positions then the rediculous degree of the silver shortage will become apparent.

For all of these reasons and others, silver is destined to be an amazing investment opportunity over the years to come. While gold will protect you from currency devaluation, silver will help you multiply your wealth, if you are significantly invested in it.

Thursday, May 28, 2009

Gold Fluctuations are a Recurring Pattern

It's been a while since I've updated The Gold Market blog. That's mainly because I know that the journey gold is on is not an overnight one, and I was getting a little obsessive about gold, reading about it every day and getting anxious for gold's inevitable rise to occur immediately. So I decided to take a break from thinking about gold for a while and work on some other blogs I keep up.

But this week I delved back into gold news once again. Things are much as they were before, with the public's confidence in the economy swinging back and forth. But the stuff seems to be hitting the fan a little bit with the bond market hitting its lowest point of 2009, and with US government warnings about the health of America's banks.

The short of it is that the price of gold has risen by around $75 per ounce since the beginning of this month. In fact it is rising in all currencies. People are realizing that the hope instilled by Obama's stimulus package was not a solution to our problems, and that the amount of debt caused will be staggering.

So basically, everything is progressing as normal. But since the same patterns keeps recurring, I've also left my gold investments on autopilot, buying the same amount of gold (and silver as well) each month. If there is a big drop (for example if the IMF sells off its gold) then I may buy a larger amount, but I know that the death of our currency will be a slow death so I think it's reasonable to enact a plan for your gold investments and automate that plan. Stressing over the minor swings in the gold market can be exciting, but at the same time it's unnecessary. Gold will hold its value, and its dollar value will skyrocket over the years to come. So just keep buying and trust that the daily fluctuations will not make or break you.

Tuesday, April 14, 2009

The Dow Jones US Precious Metals Index

The Dow Jones US Precious Metals Index
The Dow Jones Precious Metals Index is a composite index that reflects the performance of the stocks of companies involved exploration and mining of precious metals. The designation of "precious metals" refers to gold, silver, and the platinum group metals (which include platinum, palladium, rhodium, osmium, iridium, and ruthenium). The index does not track the physical metals themselves, only company stocks.

The companies in the index are required to be US-listed stocks or ADRs (American Depository Receipts). The companies also face scrutiny to decide if they are too small or too illiquid. The companies must also be listed in the Gold Mining Subsector
or the Platinum & Precious Metals Subsector of the ICB (Industry Classification Benchmark).

You can't invest directly in the index unless you have a lot of money and time to invest in all the stocks that comprise it. But you can invest in a index mutual fund or ETF/ETN that mirrors the performance of the index itself. One fund that tracks the Dow Jones Precious Metals Index but is leveraged at 150%, is the ProFunds Precious Metals UltraSector ProFund (PMPIX).

If any of you readers are familiar with other funds that track the Dow Jones US Precious Metals Index, please post the name of the fund in a comment and I will add them to the body of this entry. Thanks!

Monday, April 13, 2009

How Is Gold Mined?

The definition of gold mining is the removal of gold from the Earth, done through various techniques. There are three main types of gold extraction: placer mining/sediment mining, hard rock mining, and byproduct gold mining.

Placer mining/sediment mining is the extraction of gold from the ground with little or no excavation. Most other metals are not mined using placer mining techniques, but since gold is so valuable even in small quantities, placer mining has been used to obtain it, particularly during the California gold rush. It is still used to a limited extent today.

How is gold mined? One way is through gold panning.The main technique of placer mining is gold panning. A pan is filled with sand and pebbles that may include small pieces of gold. You add some water to the pan and shake it, and since gold is a very dense mineral it quickly settles at the bottom of the pan. This is done at placer deposits, stream beds where gold settles. Gold panning might have been viable for the independent miner during the gold rush, but is not viable for large gold deposits unless done in a place where labor costs are extremely low.

An aid to gold panning is the use of a metal detector, which the miner can use to locate gold below the surface.

Another placer mining technique is sluicing. A sluice box is a box placed in the water stream that collects gold particles as water washes through it.Gold prospecting with a sluice box

Hard rock gold mining in a pit.The next major type of gold mining is hard rock mining. This is what we most typically think of as "mining", with pits or tunnels dug into the earth to extract gold ore from the hard rock. The largest amount of new gold supplies come from hard rock mining.

Then there is byproduct gold mining. This means that the main metal being mined is not gold, but that some gold is extracted along with the main metal. For example, copper mining often results in the extraction of some gold. (It should be noted that silver is largely a byproduct of copper mining as well).

Once the miners have extracted the gold ore, how do they extract the gold from the ore? The most common method is gold cyanidation. The gold-bearing ore is finely ground, and then sodium cyanide solution is added to it. The gold and cyanide form a solution that can be separated from the rock. Then zinc is added to that extracted solution, which separates the gold from the cyanide. The zinc is then removed from the gold using sulfuric acid, leaving a gold sludge that is then ready to be smelted and refined.

That's quite a long process just to obtain gold. It is precisely because of gold's undying prestige and status as true money and preserver of wealth that we go to such lengths to obtain the precious yellow metal.

How much gold is in Fort Knox?

How much gold is stored in Fort Knox?
The Fort Knox Bullion Depository is in Kentucky, and was opened in 1937. In 1933 the US government expropriated privately held gold, and the increased gold reserves were stored in Fort Knox.

What is kept in Fort Knox?

The U.S. Department of Treasury claims that the Fort Knox gold vault contains 147.3 million troy ounces of gold.

It is also holds some important US historical treasures such as the Declaration of Independence and Abraham Lincoln's Gettysburg Address.

In the 1970s, because of conspiracy rumors that Fot Knox actually contained no gold reserves, an official of the US Mint led reporters and congressmen through part of the facility, showing the 8 foot tall stacks of gold, 36,236 bars in all. One Fort Knox bar of gold weighs 400 troy ounces. The problem is that this was not a real inspection, just a "glimpse" at the gold, and participants claim that they were only allowed to view one storage room, and that they viewed it only through small peepholes. This Fort Knox visit is largely thought to have been little more than a photo op.

Fort Knox Gold Missing?
Suspicion over the amount of gold kept at the facility persists. The last full audit of Fort Knox's gold took place in the 1950s during President Eisenhower's administration. Since then, partial visual inspections have been done, such as the above mentioned walk-through with journalists.

During the 1970s a wealthy businessman named Edward Durell alleged that most of the gold in Fort Knox had been secretly moved out of Fort Knox by President Johnson in the late 1960s in an attempt to keep the gold price suppressed at $35 per troy ounce (the price at which it was fixed under the gold standard). His evidence was mostly circumstantial and anecdotal, so it's far from definite, but it goes without saying that his claims were suppressed and that reporters covering his allegations were soon out of a job.

In 1982 President Reagan set up a gold commission to investigate the possibility of returning to a gold-backed currency. His commission's investigation concluded that the US Treasury now owns no gold, that it is now owned by the Federal Reserve - a private bank and non-government entity.

Theories similar to Durell's have been held by many, that the Federal Reserve has leased out its physical holdings of gold to suppress the gold price and keep the US dollar high. Chris Powell, chairman of GATA, the Gold Antitrust Action Committee points out that since 1995 the US Federal Reserve has been swapping gold with other countries' central banks to rig currency markets and keep the gold price low. The Federal Reserve is a private bank and not controlled by the US government, but as we mentioned before, the Fort Knox gold is now owned by the Federal Reserve. Perhaps this is because of the US's massive amount of debt to the Federal Reserve.

How could the Fed's gold swapping be affecting the gold market today? Chris Powell claims that in a free market environment for gold, prices per ounces would be thousands of dollars higher than they are now. The good news for precious metals investors is that price fixing and market manipulation never works in the longterm, and natural market forces always force a correction to the true level of value.

How Much Gold is in Fort Knox?

Wednesday, April 8, 2009

Gold vs Commodities Index

If you've been reading my blog regularly you have probably figured out that I like not only gold, but also silver. I call this blog the gold market because I see gold as something of a symbol of preserving your wealth against fiat currencies that are being devalued. But gold is not the only precious metal I invest in, and not the only commodity I invest in.

Right now we are in a commodities bull market that began in 1998 or 1999. The average length of a commodities bull market is 18 years, giving us plenty of more time to position ourselves to profit from it. Many think that the commodities bull market has ended, but what we are seeing is a mid-bull market correction. The current prices of commodities in general are extremely low, so now is an opportunity to buy.

I continue to buy gold, but during the current slump in commodities prices I am buying a lot more of other commodities than of gold. The main reason is simple: they have dropped in price while gold hasn't (speaking in general times). At the time of writing, gold is trading at $887.48 per troy oz. That is about the same as June of last year. Compare that to the Reuters-CRB Index (CRB stands for Commodities Research Bureau) that tracks the price of commodities in general, is way down, around 40% down. This is because of reduced economic activity as a result of the global economic recession. Gold has held relatively steady during this time as it is seen as a safe haven during economic crisis. So even though gold has dropped down from its highs, it is not as good of a buying opportunity as other commodities right now. In fact, when economic activity starts picking up again I think that gold will initially drop because it will lose some of its safe haven image, and we'll have a better buying opportunity at that time. Gold will continue to go up much higher when people realize how much the government has debased the currency, but this will be later on. Right now other commodities are cheaper and offer better opportunities for gains.

Gold vs other commodities
So what am I buying? Well, of course I love silver, because it has many of the benefits of gold as "real money" that can not be debased, but it is also much more of an industrial metal than gold. That's why the current industrial slowdown offers a great buying opportunity for silver. There is also a lot of data to show that silver supplies are much more limited than most people are aware of, and when shortages become apparent, the prices will skyrocket like crazy in the coming years. I am snatching up as much physical silver as I can afford to buy.

But I am also putting money into a diversified commodities futures fund, so that I can invest in commodities in general. This fund allows the managers to both short and long different commodities, so it normally goes up even when commodities have dropped, because the managers are shorting commodities. But due to the extra risk in that (they could make a bad trade) I chose a fund that deals only in cash and does not use leverage. Some funds that use leverage get hit very hard when they make some bad trades.

You can also invest in a simple commodities index tracker fund that involves no shorting. I would probably invest in one of these, but I don't have access to a good one where I currently live.

I am also putting money into an energy fund that invests mainly in oil companies. This one is a bit of a wildcard and I expect to sit on this for a while until oil reaches over $100 a barrel again, and then I'll sell it. I'm doing this as an opportunity to learn more about energy, so I can't really put my full weight behind this yet.

I also have a significant chunk of my savings in Australian dollars and Canadian dollars, since those are resource rich nations whose economies in general and currencies will benefit from the rise in commodities prices. I like investing in commodities currencies because I can buy and sell them very easily through online banking. I can sell them at a moment's notice. And the only fees are the buy/sell spread in the exchange rate. Easy. The only problem with currencies is that they can and will fluctuate like crazy in the short term, so I only put in money that I won't need until I'm ready to cash out further along in the bull market.

Those are my current interests, based on the low price of commodities. Commodities provide opportunities for exponential growth from their current levels. I expect that gold will initially drop as they rise. When that happens I will buy more gold, which I think will explode when the degree of currency inflation becomes apparent. Gold is the ultimate safe haven and preserver of your wealth, but commodities in general offer amazing opportunities at the moment.

For historical commodity price data, try here.

Tuesday, April 7, 2009

Mexican Fifty Pesos Gold

Mexican fifty pesos gold coin
The most popular gold bullion investment coins continue to be US American Eagles, Canadian Maples Leaves, and other widely available and very liquid coins. But another coin that continues to be a strong gold investment is the Mexican 50 peso gold coin. It has a number of features that are different from the most popular bullion coins. First off, rathern than containing exactly 1 troy oz of gold, Mexican 50 peso gold pieces contain 1.2057 troy ounces of fine gold (37.5 grams). It is also struck in 20 karat gold, in other words 90% pure gold with the remainding 10% being copper. This gives them an orangey color similar to a South African Krugerrand.

Because of their high gold content and additional copper, they are quite large coins, with a diameter of 36 mm and a total weight of 41.67 grams. Compare that to a Canadian Maple Leaf which has a diameter of 36.07 mm and a total weight of 31.65 grams, and to an American Eagle that has a diameter of 32.7 mm and a total weight of 33.39 grams.

The 50 peso coin was minted in two runs, from 1921 to 1931, and again from 1944 to 1947. The earlier series sells for a somewhat higher premium, but the later restrikes sell at a low premium above spot, similar to the low premium of South African Krugerrands. They therefore make a good bullion investment. I was surprised when I first learned about their low premium, assuming that their age would give them more numismatic value.

50 Mexican gold pesos coinMexico gained independence from Spain in 1821, and the 50 peso coin was produced for the centennial celebrations of Mexico's independence. The obverse of the coin features "El Angel de la Indepencia" (which you can probably guess means "The Angel of Independence"), an image of the statue erected in Mexico City for centennial commemoration. On the reverse of the coin is the Mexican coat of arms.

Because of their relatively large size and captivating imagery, Mexican gold peso coins are striking and enjoyable coins to have as part of your physical gold stack. But they are also solid bullion investments. Just don't let their beauty prevent you from selling them when the price is high! Don't fall in love with your investments or you'll make unwise decisions. But with some self discipline you can enjoy both the coins and the money they will eventualy yield for you.

Friday, April 3, 2009

IMF Plans To Sell Off Gold

This week gold prices have been dropping, hitting a low of $893.24 per ounce on Thursday, April 3rd. This is partly due to the rally in equities, with the Dow rising back up above 8000 points, with investors hopeful that the G20 meeting will help implement solutions to the global economic recession. The second reason is that on Thursday the G20 summit participant countries endorsed a plan by the international Monetary Fund to sell over 400 tons of gold. With this gold being seen as additional supply entering the market place, demand naturally dropped. The IMF's selling of gold, however, has been planned for some time now and Thursday's affirmation by the G20 didn't indicate any new plans to sell off gold.

G20 supports IMF plan to sell gold

What does this mean for gold prices? Well, the price of gold will likely remain down in the short term, as stocks rally. Also, I imagine the prices will fall somewhat when the IMF sells off 400 tons of its reserves, simply because the selloff conjures up images of excess supply flooding the market and will scare some investors into selling. However, the gold market will most likely bounce bank when it becomes clear that the buyers are mostly the central banks of countries who want to increase their own gold reserves. Particularly in emerging economies like China, Russia, and India, there is a desire to acquire more gold for their reserves and reduce US dollar reserves. So even though this selloff may cause a shockwave, I think it will actually improve the fundamentals of gold, because the dollar's value will fall as it is sold off by these countries' central banks. There won't be an immediate rush out of the dollar, but they will gradually reduce the amount they hold.

As for the equities rally, I think this is another short term rally, and I don't think we've seen the market's bottom yet. This recession (I'm being nice and avoiding the "D" word, even I think that's what we're entering) is far from over. And even when the stimulus finally kicks in, we may see stocks rally again, but with inflated currency - making it an artifical rally, essentially. I have little doubt that gold will outperform stocks over the next couple of years. We are, after all, in the middle of a precious metals bull market that is far from over. Equities are in a bear market. I wonder if people have forgotten that markets are cyclical. They seem to think that equities can be in a bull market forever with only minor short term interruptions. These people are still in denial of what is really happening.

I'm still holding onto all my gold. In fact, when the IMF sells off gold, if the price drops I will be buying more.


Wednesday, April 1, 2009

Washington Mint 4 Oz Golden Eagle

In some recent entries I've written about some silver rounds that are replicas of officially-minted classic coins. Today I'll show you an example of a replica coin, or silver "art round" as they are sometimes called. This is a "Giant Quarter Pound Golden Eagle" produced by the Washington Mint (note that this is a private mint, not the US Mint). The quarter pound Golden Eagle is a replica of the American eagle gold bullion coin, approximately copying its design of St. Gaudens' Lady Liberty and the American Eagle. However, it is not a gold coin, it is a silver round containing one quarter pound of .999 fine silver, and 24 karat gold plated.

Washington Mint $100 4oz silver coin

A quarter pound is equivalent to 4 oz. troy, and this silver art round's price is based on the spot price of silver. The gold plating is pretty thin (in the certificate of authenticity it says "layered with" gold), so the gold layering doesn't really affect the price, it seems, since it's such a small amount.

Washington Mint 4oz gold layered silver art roundThe thing that immediately distinguishes this item from an original American eagle is its size. Its diameter is 3.5 inches (89.8 mm), while a 1 oz American gold eagle's diameter is 32.7 mm and a silver eagle's diameter is 40.6 mm. Its name also does not include the words "American Eagle" but rather "Golden Eagle". But you will see people selling these under the name "American Eagle" to give the impression that they are officially minted. I bought this one on Ebay, and it was referred to as a giant American Eagle. I knew what it was, so I wasn't fooled, but other less-informed buyers might be misled by such mislabelling.

The Washington Mint also produced giant 1/2 pound golden eagles and 1 pound golden eagles, as well as silver eagle replicas and platinum eagle replicas of the same giant sizes. The silver and platinum versions are also silver rounds containing .999 fine silver, with the platinum eagle replica being layered in platinum.

Even though these rounds are replicas of official bullion coins and may not be as liquid as officially minted eagle coins, they are indeed fine silver bullion and I expect to have no problems selling mine for at least the spot price of silver. I'll have it melted down if necessary. I wouldn't pay too much of a premium above spot price for this kind of replica though.

Sunday, March 29, 2009

Buffalo Silver Rounds

Buffalo Silver bullion round coins
Buffalo silver rounds are some of the most popular silver investment items being sold today. Like American gold buffalo coins, their design is based on the Indian Head nickel, also known as the Buffalo nickel, which was minted between 1913 and 1938.

Buffalo silver rounds are not produced by the US Mint, but rather by a private mints, with the most popular version being produced by the Wall Street Mint. They have no official connection with either the Indian Head nickel or the American gold buffalo coin, but is rather inspired by their design.

Buffalo Silver 1 oz rounds reverse sideOn the obverse of the Wallstreet mint issued round is a portrait of a Native American man along with the word "LIBERTY" at the top right edge. On its reverse is an image of a buffalo, along with the purity and fineness listing of ".999 FINE SILVER" along the top edge above the buffalo, along with the weight description "ONE TROY OUNCE" below the buffalo at the bottom of the coin. It has a diameter of 37 mm.

If you don't buy directly from mints or reputable dealers, be careful of fake buffalo silver rounds. I have heard reports of fakes made of silver plated copper, which can be spotted by their marking of ".999" or ".999 FINE" instead of ".999 FINE SILVER". Real silver 1 oz. rounds weigh 31.103 grams, but the fakes weigh 3-4 grams less than that.

Since they are not officially minted bullion coins but rather silver rounds, silver buffalos can be bought at significantly lower premiums than officially minted silver coins like the American silver eagle. They will, of course, sell for a lower price to, and since they are not world famous like silver eagles they may not be as immediately liquid. But silver bullion is silver bullion, and buffalo silvers are an efficient way to invest in silver at prices close to spot.

Friday, March 27, 2009

Investing in Gold Certificates

How Do I Buy Gold Certificates?
What are gold certificates? They are certificates that indicate you are the owner of gold that you do not physically possess. Normally, these certificates are issued by financial institutions from whom you buy gold, and those financial institutions physically store the gold for you. At least that's how it's supposed to work.

Possessing certificates of ownership is like having your money in a gold pool account. You give your money to the company who runs the program, and when you cash out they pay you whatever returns you may have accrued according to the current gold price. But they may not store any physical gold for you. Rather, they are thought to take your money, and invest in whatever they expect to get the highest returns rather than in gold, pay you the returns on gold, and keep the rest of their gains for themselves. That begs the question of what happens if they make some poor investment decisions and lose your money, and are unable to pay you your returns on the gold price? I don't know. What happens if the institution goes bankrupt what happens to your investment? If it's not a physical asset, I suspect it would vanish.

There are some positive aspects of gold certificate programs. One is that you can essentially invest in gold at the official spot price without having to pay any premiums for physical metal or pay any storage fees. Those premiums and storage fees can cut into your profits quite a bit, so gold certificates represent
an alternative that gives you the most efficient returns.

The Perth Mint, AustraliaOne option for gold certificates is the Perth Mint's gold certificate program. The Perth Mint's program is full backed by the government of Western Australia, which affords somewhat more of a sense of security than possessing gold certificates from a private institution that could go bankrupt and watch your non-physical gold vanish. The Perth Mint's gold certificate program charges 1.75% fees on all purchases plus a $10 certificate fee, plus a 0.75% fee when you sell. This is much lower than the current premiums on physical bullion which have skyrocketed during the current bullion and coin shortage. There are no storage fees. There is a minimum initial investment of $5000 Australian dollars. The Mint claims that every ounce you buy remains on the premises of the mint that can not be removed. Your investment is both government backed and insured by Lloyds of London. This is for basic unallocated storage (though again they do claim to have gold on premises for you, in some form).

The Perth Mint also offers allocated gold storage accounts, though this requires both storage fees and a fabrication fee (to mold the gold into whatever form
you choose to have set aside for you).

You can find more information on the Perth Mint Certificate Program here

Whether or not you invest in gold certificates will depend on how much faith you are willing to place in an institution to store your purchased commodity for you. I am personally someone who is prepared for the worst while simultaneously not paranoid, and seeking the best returns possible. That has lead me to the conclusion that holding a stack of physical bullion as the base of your portfolio is important, but that on top of that base it is fine to diversify and hold certificates or other kinds of gold accounts that do not have allocated storage. I personally do not take part in the Perth Mint program or similar ones, but I do have an e-gold account. I think those are fine as long as you know that there is some degree of risk, and watch the markets with the willingness to sell your certificates or digital gold if gold market demand really heats up. I would personally feel very little stress in investing in the Perth Mint's program, though I would probably avoid a financial institution's certificate program.

Thursday, March 26, 2009

How will $1 Trillion Dollars of Inflation Affect The Price of Gold?

Gold as hedge against inflation and collapsing dollarA little over a week ago we heard of plans for the US Federal Reserve to buy $300 billion in US Treasury Bonds as well as $750 billion in mortgage-backed securities. You do the math, this amounts to the printing of over a trillion new dollars to be pumped into the US economy. This is separate from Obama's stimulus plan which will spend $787 billon dollars into the economy this year and next, money for which will also need to be borrowed from the Federal Reserve.

The intention here is to stimulate markets and getting them moving upwards again. But remember that "stimulate" is a euphemism for "inflate", so even though we will see market prices going up, the value of everyday goods will also be going up as the dollar becomes devalued. It is impossible to pump 1 trillion dollars into the economy without prices inflating, unless people start saving all their money without spending. But that's the whole point - for people to spend and for this money to circulate. The government wants inflation. They want to avoid deflation at all costs, even at the cost of our buying power. Why? I suppose because deflation causes immediate problems that are politically unpopular, while inflation, if it can be controlled, wreaks its havoc slowly without the public really noticing. If it can be controlled.

I think the significance of this for gold and silver investors is pretty clear: while the US moves out of deflation and into inflation, the dollar will become devalued and lose much of its buying power, while the gold price will rise as its role as a safe haven and as real money will become solidified. With the inflation will come rising commodities prices in general, as economic activity creates demand. Oil prices will likely skyrocket once again, and since silver's function as an industrial precious metal makes its price somewhat follow the price of oil, silver will once again rise in price. This is not really new information, but the Federal Reserve's plans give a new indication that these conditions are just around the corner.

Gold & inflation of currency supplyHow much will a 1 trillion dollar injection inflate prices? To be honest, I don't know. The reason I don't know is because there used to be something called the M3, a wide measure used by the Federal Reserve to indicate how much currency is in circulation. In 2006 the Federal Reserve decided to stop publishing the M3. My guess is that they knew they would soon be pumping trillions into the economy, and seeking to hide the currency inflation they stopped publishing the M3. But in 2005 the M3 was around 10 trillion dollars. This doesn't account for all US money, since there are so many lines of credit and electronic dollars created through fractional reserve banking and other kinds of fancy "money", but the M3 was some kind of reliable measure. If the M3 was 10 trillion dollars and you added an extra 1 trillion dollars, you can see how big of an effect there could be. But what if this new money fails to stimulate the economy? People are scared, and may save all their dollars. Well, I predict the Federal Reserve will print more and more in desperate attempts to stimulate the economy. And eventually, all of those desperately printed dollars will make their way into the economy. And when they do, we'll see big inflation.

I think with all the economic news coverage we've become desensitized to just how big a number "trillion" is. Trillions do not even fit on the display of my calculator, the number is too big. With such a mindboggling number of new dollars being printed into existence, be weary of the gains you are going to see in the stock market. Those gains will be offset by highly inflated dollars. Gold will be your ultimate safe haven against this inflation. And as economic activity speeds up, commodity prices will skyrocket. I just shifted more of my money into the gold market, particularly the gold mining sector, into energy, and into agricultural commodities. And I'm continuing to stack gold and silver with the expectation that much of the value lost by the falling dollar will shift to precious metals.


Wednesday, March 25, 2009

What's the difference between coins, rounds, and medallions?

When shopping for bullion coins you may have encountered something called rounds, and been confused about the term and what it means. Similarly you may have encountered medallions and wondered how they differ from coins. The basic difference between a coin and a round is that a coin is officially minted and is legal tender, while a round is not legal tender, and is usually privately minted. In its most standard usage, the word "medallion" refers to a metal piece that is, similarly to a round, not legal tender. But the word "medallion" tends to be used for a lot of commemorative coins aimed at collectors, whereas "round" tends to be used for bullion coins aimed at investors.

An example of a bullion coin is an 1 oz. American gold eagle or American silver eagle, since they are legal tender and officially minted by the US Mint.

An example of a silver round is this North West Territories (NWT) Mint one ounce silver round. I can't give you an example of a gold round, because even though I know they exist they are rare. Gold is so much more valuable than silver that investors prefer the safety of officially-minted and well-recognized coins.

An example of a gold medallion is this Winston Churchill commemorative medallion.

It should be noted that while the above definitions are the most common specific definitons, the word "coin" is often used in a general sense to refer to all
coin-shaped items. But a true "coin" will have a clearly marked face value in the currency of its country of mintage. For example, a 1 oz American Gold Eagle has a face value of $50. A generic silver round will not have a face value indicated, but just the precious metals weight and purity. For example, "1 troy ounce .999 fine silver" as printed on the NWT silver round. Commemorative medallions sometimes don't even have the precious metal content and purity written, so to determine that information you need an appraisal or certificate of authenticity.

Are there any advantages of coins over rounds and medallions?

Well, as mentioned before, officially-minted coins are easier to trust and feel secure with, since you know that your bullion purchase was made in accordance with all laws and regulations. In addition, officially minted coins, especially major ones like Maple Leaves, American Eagles, Krugerands and the like, are highly recognizeable and very liquid because of their visibility. The downside of officially minted bullion coins is that they carry a relatively high premium, partly because of higher demand but partly because they are not sold directly from the mint to individual investors, they first go through middle men. The US Mint for example sells its coins to distributors called "Authorized Purchasers". The authorized purchasers then mark them up and sell them to bullion retailers, who also mark them up before selling them to you. So in the case of an American silver eagle, you pay a significant premium over the spot price of silver to pay for the operations of distributor and bullion retailer.

In the case of a silver round, you can order directly from the mint, or retailers order directly from a mint, so you pay a lower premium over the spot price. This difference in premium can be quite hefty, for example the current spot price of silver is around $13.50, but an officially minted 1 oz bullion coin will probably command at least $18 while a silver round could be bought for as little as $15. If you are buying in large quantities, silver rounds could help you accumulate a significantly larger stack. When selling your silver rounds, they will of course command a lower price than officially minted bullion, but you should be able to get at least the current spot price. If you are living somewhere where your round is not recognized (or in my case, the silver ingots I bought in Japan), then you may have to sell your metal to a melter at less than spot. But you can always sell back to the mint you bought it from, at a small price spread. So basically, while officially-minted coins have the benefit of immediate recognizability and liquidity, rounds are more of a direct investment in physical bullion. When it comes to silver I personally prefer to hold about 1/3 of my stack in widely recognized bullion coins, and 2/3 in silver rounds. That way I have some guaranteed liquidity for emergencies, but still have the benefit of buying at lower premium rates.

As for medallions, if they are not in high demand then they can be treated like a round. But if they are sought-after by collectors then they will likely command
a numismatic premium well beyond the spot price of gold or silver. I personally stay away from almost all numismatic coins because I'm much more of an investor than a collector. But if I find a medallion at close to the spot price, I might buy it. The problem is making sure that you know its constituent metals, weight, and purity which are not always indicated.

A note of caution: there are a large number of rounds and medallions that are replicas of officially-minted coins. They are legally allowed to reproduce the images of officially minted coins, but they can not be the same size and dimensions as the original. You may encounter some 1 pound or 1/2 pound "American Eagles" for example (see the example below). If you buy them from a legitimite private mint, then you can trust that their precious metals content is genuine. The weight and purity should be written on the round. Please be aware that such replicas exist, and understand what you are buying. Some of the private mints have names that sound official, like "Washington Mint" or "American Mint", so novice investors may assume they are buying an official proof coin. And there are vendors, especially on Ebay, who will avoid telling you that these are replicas. Be sure to examine the pieces you are interested in buying, check for a face value, and if the coin is of an unusual size, do your research to see if such a large version was ever officially minted. You can quickly find out a lot of this information online, as long as you know to look.

Tuesday, March 24, 2009

How to Spot Fake Coins and Replicas on Ebay

In my last blog entry I talked about buying silver on Ebay, and over the past couple of days I've been looking through a lot of Ebay and Yahoo Auction listings. Despite online auctions presenting a unique opportunity to trade precious metals from peer to peer, there are dangers of fraud that you need to be aware, most notably fake coins and replicas being passed off as official coins. What got me looking into this issue was a listing about a 2002 1 kilogram Silver Panda coin. Immediately I thought "Wow, the Central Mint of China must have produced some large size proofs of the Silver Panda! I have to get one!" Then I clicked on the listing and had a look at the photos and desription. My instincts alerted me that something was wrong, and I didn't bid on the item. Something about the coin didn't seem right. Here's the photo of the "Silver Panda" on Ebay.

Fake 1 kg silver Panda coin on Ebay

The reverse of a fake Silver Panda or replica on Ebay

Real Silver Panda 1 Oz coinI went straight to Google images and searched for a 2002 1 kilogram Chinese Silver Panda, but couldn't find one. So I looked at some 1 oz silver pandas, and right away I noticed a few differences that confirmed by instinctive feeling. The 1 kg giant Silver Panda was not a Silver Panda at all, it was either a legal replica of a silver Panda and struck by a private mint, or an illegal fake. Either way I was highly suspicious that this coin was made of real silver, at least not pure silver. The obvious differences between the 1 kilogram item and a 1 oz Silver Eagle's design are the lack of a face value in Yuan, signifying that this is not legal tender, and the lack of the purity indication "1 oz Ag .999" (instead it simply reads "1 oz"). The implications of that are most certainly that this replica is not made of silver at all, but probably nickel or a cupronickel alloy. My guess is that because those markings are removed, this coin is a legal replica in China but that the vendors are fraudulently passes these off as real silver bullion coins when they are not.

Yesterday I saw at least a dozen identical items listed on Ebay, all originating in Hong Kong or China, several having the exact same photos and description page but different user names. Today it seems that all of the listing have been removed as complaints come in and Ebay closes the offending accounts. After looking around the Ebay forums I discovered that there is a huge problem with counterfeit coins and misrepresentations coming out of China. There are items like the above misrepresented replica, but there are other items which are the same as real bullion coins in size and design but have either reduced precious metals content or no precious metals content.

How can you prevent falling for fake precious metals scams on Ebay? Well, the first step I would take is to avoid purchasing from anybody in China, or in any other country where I think that regulations are lax. But beyond that there are signs to watch out for. Many of the fake Chinese Panda coins and others have a very low starting bid, often less than $1 US. But they have exorbitant shipping costs, which the seller keeps for himself. In the case of the 1 kg Panda replica above, the starting price was $89 US, but free worldwide shipping was being offered. Would a legitimite individual vendor really offer free worldwide shipping on a 1 kilogram item? I really doubt it. Another sign was the vendor's sales page, which looked like a desperate attempt to seem like a professional page but totally missed the mark. And another key indicator was that the vendors often had 0 previous transactions or a small number of previous transactions. That's because they're constantly getting banned and signing up with new accounts.

In addition to intentional fraud, there must be a lot of sellers out there who unknowingly bought fake bullion and are now reselling it without bad intentions. I read on the Ebay forums that one man bought a lot of American Silver Eagles, exclusively from vendors with excellent feedback scores, yet still 10% of his coins turned out to be fake when he sold them to his local bullion shop. The way to avoid this is to determine whether your purchase is authentic upon receipt. You could always have the item appraised by taking it to a local vendor and acting like a potential seller. Another simple way could be to weigh the coin, since a 1 ounce silver coin should weigh 31.1034768 grams, or 1.097142857 ounces (remember that troy ounces and Avoirdupois Ounces used for weight are slightly different). Nickel and copper for example are lighter than silver, so a cupronickel fake Silver Eagle would weigh less than a real Silver Eagle, assuming they were both the same size. There are also acid test kits you can buy. You apply a drop of acid to the bullion, and depending on the resulting color you will know the purity of the precious metals content. These are widely available through online shopping, such as If your bullion does turn out to be fake or of a different quantity or purity than you were led to believe, then you should contact Ebay immediately to file a dispute. If you pay by Paypal it is supposed to be easier to dispute purchases and get your money back. Though in the case of fraudulent vendors who make one sale then vanish, I'm not sure you will get any money back.

I don't want to discourage you from using online auctions to increase the size of your gold and silver stack, but I hope you take precautions and don't let the
ticking auction clock prevent you from doing your due diligence when shopping.

Monday, March 23, 2009

Precious Metals on Ebay

Maple Leaf auction and Silver Eagle dollars auction on Ebay
It's normal that gold and silver coins fetch a premium above their spot gold price, and that's to be expected since it does require money to manufacture, deliver, and stock the items. But lately the premiums have been increased because of ballooning demand for physical bullion. Lately I've been more interested in buying silver than gold, and I've been pretty surprised by the premiums especially on silver. It seems that there are almost two separate spot prices for silver, one official spot price which takes into account all silver that is accounted for on paper and on computer screens (ie. silver that may not physically exist but is simply owned as a promise to deliver), and a separate, unofficial market-driven spot price for physical silver bullion. Buying silver coins online in the USA, 1 oz bullion coins typically cost around $18 before shipping. I hear reports that buying in store costs over $20 in the US. Privately-minted silver rounds seem to be a couple of dollars cheaper.

At first I felt I was being ripped off when paying such premiums, that the shops were trying to gouge me. But when looking online at Ebay and other auction sites Y (Yahoo Auction is popular in Japan and some other parts of Asia) I saw that the going rate on those sites is just as high as the premium price charged in shops. I thought that this was a result of overzealous aution bidding, which might be partly true, but the prices are quite consistent, which suggests that on Ebay we can determine the real market value of physical bullion. And investors know, either consciously or intuitively, that physical bullion as a tangible asset has more value than a paper promise to receive bullion. That's why the market value of physical bullion is above the official spot price.

Unrecognized silver rounds and bars (unrecognized meaning that they are produced by private mints that are not as widely known as the state-run or other major mints) seem to go for around $17-$18 on Ebay, and well-known bullion coins like American Eagle Silver Dollars and Canadian Silver Maple Leaves seem to command $20-22. That is relative to the current silver spot price of approximately $13.85. Most of the sellers seem to be offering free shipping within the US, or a small shipping fee even on an order of a single coin.

Let's compare those price trends with the prices on a big online bullion dealer. At you can order 1 oz Silver Maple Leaf coins for $18.13 right now, and the somewhat less recognizeable but still popular Vienna Philharmonic silver coins for $16.28. These are obviously cheaper than the price trends on Ebay, but you have to pay shipping at a flat rate of $30, no matter how much you buy, plus insurance ($24 per $1000 of silver, but only $4 per $1000 of gold). So when buying small quantities of silver, the higher premium price on Ebay is made up for by cheaper or free shipping. It seems like here the market has naturally determined what individual investors are willing and able to pay for small quantities.

Perhaps the most important feature, though, of online auctions is that you can recoup the premium when you sell. When you sell back to Kitco, you get hit by the buy-sell price spread. For example, even though they charge you $16.28 for a Vienna Philharmonic silver coin, they will pay you only $13.66 to buy it back. But on Ebay or another auction site, there is no spread. Every transaction is independent of all others. And since the premium price trends seem very consistent, you can sell your bullion at a similar premium to the one you bought it at. I'm no expert in online auctions, but in the future when I am ready to sell some of my precious metals stash, I will look into selling via auction to get the full market value of the coin without paying a shop's overhead through spreads and fees.

After doing some shopping on ebay I appreciate its peer to peer quality so much more than before. When trying to order from a large vendor I'm asked to use a cashier's check or send a wire transfer and pay a large fee for the wire transfer, fill in all kinds of personal information, get faxes and verification forms and other things to make sure I'm not an international criminal or terrorist or whatever. On Ebay you simply decide how much you're willing to pay for the bullion item, and enter your paypal address then presto. The goods are on their way. This is the way the free market should be.

Sunday, March 22, 2009

2009 Ultra High Relief Double Eagle Gold Coin

2009 Ultra High Relief Double EagleThe 2009 Ultra High Relief Double Eagle Gold Coin's release was anticipated with a hype verging on mania. Demand for the Double Eagle has been so high that the US Mint currently has a backlog of orders that will take up to 9 months to deliver. Over 40,000 of the coins were ordered during the first five days of sales. Undoubtedly the current gold coin shortage is affecting the production time of the High Relief coin, because most gold stocks are being set aside for American Gold Eagles, whose production is legally obligated to meet public demand.

Reverse of High Relief Double EagleThis coin recreates the design of the old Double Eagle gold coin which was struck between 1907 and 1933. The old Double Eagles contained .9675 oz of gold, which on the gold standard of that time equaled $20.67, giving double eagles a face value of $20. The design was created by Augusts St. Gaudens, a renowned American sculptor. His design for the Double Eagle is a classic and is considered one of the best coin designs in American history. St. Gaudens' design was originally struck into the coins in high relief, giving depth and stunning clarity to the images on the coin face. However, the coin was quickly changed into a low-relief version, because the high relief coins needed to be repeatedly struck to bring out their details properly, and their high relief made them awkward to stack. St. Gauden's high relief work of art had to be compromised for the sake of practicality.

But 2009's reincarnation of the Double Eagle comes closer to St. Gauden's original vision, featuring a high relief design with stunning depth and contrast between foreground and background images. The images were reproduced by digitally mapping the original coin plastes from 1907, following St. Gauden's design with amazing accuracy. A couple of small modifications were made to make the coins current, including an increase in the number of stars from 46 to 50, to reflect the current number of US states. And of course the date was changed to the current date of 2009, written in Roman Numbers as "MMIX". The original DOuble Eagles were some of the only US coins to have ever had the date written in Roman Numerals. One other modification is the addition of the motto "In God We Trust" at the bottom of the reverse side.

Despite the overwhelming similarity of design, this 2009 can not be considered a replica or reissue because there are some important differences. While the original Double Eagles were struck in 90% gold and 10% copper, with a gold content of .9675 oz, the new 2009 incarnation is a 24 karat (.9999 fine gold) bullion coin, containing exactly one troy oz. of gold. And because they are struck in high relief, the coins are double thickness, measuring 4 mm thick rather than the normal 2 mm thickness of an old Double Eagle or standard bullion coin. They do, however, contain the same amount of gold as a standard low relief coin so its diameter is reduced to make up for its extra thickness. Its diameter is 27 mm instead of the standard 34 mm. One probably reason for striking the coin in 24 karat gold is that it is soft, and easier to strike in high relief than the old 90% gold alloy.

The 2009 High Relief Double Eagles are of uncirculated quality with a special finish. They sell for a higher premium above the gold spot price than standard bullion coins, but in my opinion unlike proof coins uncirculated coins are not prohibitively expensive. It looks like this coin sells for around 25% above the spot price of gold. If you are looking strictly for an investment, then a standard American Eagle is a better bet. But if you are looking for both an investment and a beautiful, precious collectible, then this uncirculated masterpiece may be a good balance between the two. I have hear nothing but rave reviews from owners of this coin. I guess the only thing left to do is to decide whether the beauty and uniqueness of this coin is worth a wait of 9 months!

Below is a photo of an original Double Eagle from 1908. Notice some of the differences in design mentioned above. Also notice the color of the coins, which is somewhat orangey, similar to a krugerand. This is because of the copper alloy used in the coin, as opposed to today's pure bullion version.

US Double Eagle 1908

American Gold Buffalo Coins

Obverse of American buffalo 24 karat coin
The America Buffalo Gold Coin is a gold bullion coin produced by the US Mint, which started being sold on June 22, 2006. The most notable difference between US American Eagle coins and American Buffalo coins is that the American buffalo is 24 karat bullion gold bullion, in other words 99.99% pure gold. The flagship American Eagles are 22 karat gold, in other words .9167% pure gold, with the remainder being a silver and copper alloy. Buffalo gold coins were introduced as a result of increasing global demand for 24 karat gold coins, and the popularity of Canadian Maple Leafs, Chinese Gold Pandas, and other 99.99 pure gold bullion items.

Reverse side of Gold Buffalo Coin 1 oz.The 1 oz gold buffalo coin has a face value of $50. But as with other coins, this amount simply denotes that the coin is legal tender and has no real connection to the coin's true value, which depends on the current gold spot price. The design of Gold Buffalos is based on that of the Buffalo Nickel, which was minted from 1913 to 1938. The design, by James Earle Frase, features an image of a Native American man on the obverse, and an image of an American bison (buffalo) on the reverse. The obverse face also includes the date at the bottom left, and the word "Liberty" along the top right. The reverse face features the words "United States of America" along the top edge, below that to the righthand1935 Buffalo Nickel Indian Head Coin( side are the words "E PLURIBUS UNUM" which is Latin for "Out of many, one" (a motto used in many official American symbols). It also reads "In God We Trust" at the bottom left, and at the bottom the face value, and below the face value the coin's weight and purity of ".9999 Fine Gold".

The American buffalo gold bullion coin is also available in fractional sizes of 1/2 oz with a face value of $25, 1/4 oz with a face value of $10, and 1/10 oz with a face value of $5.

Buffalo gold coins have also been minted in uncirculated and proof versions of higher production quality (and high premium pricing), but these have been cancelled for the year 2009 because of unprecedented demand for gold bullion coins. In addition, 2009 production of the standard bullion buffalo coins have been delayed until further notice. Most of the increasing investment demand is for American gold eagles, so the US Mint is setting aside most of its gold stock for their production.

American buffalos struck in previous years can be found in coin shops and bullion shops. But you may have to shop around to find one because there is no supply of new coins this year.

Friday, March 20, 2009

Paying Tax on Gold

In some countries, a sales tax is charged on the sale of investment-grade gold bullion. I think this is thoroughly rediculous, since investments are normally taxed upon liquidation, with the capital gains being the taxable income. In the USA and in the European Union, there is no sales tax on gold (but in Europe there is VAT tax on purchases of silver). I have heard reports that in some US states the state government tries to collect income tax on gold bullion coins such as the American Eagle, since coins are seen as more of a taxable "product" than bullion bars, but I haven't been able to confirm this. Basically, there is no sales tax on gold in the US. As is the case for silver in the US.

There is, however, a gold capital gains tax, just as their is for profits you take from selling anything else in the US. The rate of capital gains tax on stocks and typical securities is 15%. But, and this is a big but, in the US gold is taxed as a collectible. The rate of capital gains tax on collectibles is 28%! The government gouges us on gold. This does not apply only to collectible numismatic gold coins, this also applies to investment bullion coins as well as bars. It also applies to mutual funds and ETFs that purchase gold on your behalf, and also to gold futures.

The one way to get around this high rate of taxation is to invest in gold mining stocks. These are taxed at a rate of 15% of capital gains, because you are not investing directly in gold, but rather in the company that produces the gold. I'm no tax expert, but maybe those taxes are paid at the company level so they do affect the company profits and your returns, but basically you don't have to worry about it. You pay 15% of your gains.

One interesting thing to note, however, is that in the US there are no requirements for either the buyer or the seller of gold and silver to report the transaction to the government. The only reporting required is for cash transactions of more than $10,000. This applies to any purchase, and not just the purchase of precious metals. If you buy less than $10,000 worth of gold, or if you pay by some other means, then the government will not know that you have the gold. When you sell the gold, the dealer is only required to report the sale for some larger quantities of coins and bullion bars, and not at all for American Gold and Silver Eagles. I suppose this means that you could easily sell your gold without paying taxes on it, especially if you sold it abroad. But I won't recommend this, because who knows what the government really knows about what you do. They may have ways of watching your transactions even without official reporting.

Basically, when you buy physical gold there should be no sales tax, but there will be a tax on selling gold, of 28% of capital gains, that you are legally obligated to pay, as rediculous as it is to classify investment bullion as a "collectible". This is the basic information. But please look into detailed professional advice when determining how to pay taxes on your gold.

Monday, March 16, 2009

Gold Shortage Discontinues Proofs

Shortage of American Eagles. US Mint stops proofs and uncirculated.
Today I was browsing the website of the US Mint (by the way, do not mistake this with "American Mint" which is a dealer of high markup numismatic coins), when I noticed something very interesting. Production of proof and uncirculated editions of the American Gold Eagle coin have been suspended because of an overwhelming demand for bullion investment coins. If you don't know what proof and uncirculated coins are, the basic idea is that they are struck at a higher quality without blemish and are intended to be collectors items, rather than investments. Their value is partly determined by their metal content, but also by their limited minting status and rarity, their superior image striking and absolute mint condition. Thus they are sold at a significant premium over the spot price of their constituent precious metal. Bullion coins, however, are priced based on their precious metals content alone, plus a small premium.

In this unstable economic climate, investor demand for gold, platinum, and silver has has exploded, leaving the US Mint scrambling to fill public demand. The interesting thing is that the mint is required by law to produce enough bullion coins to reasonably satisfy public demand. From the United States Mint's website:

the United States Mint is required by Public Law 99-185 to produce these coins “in quantities sufficient to meet public demand . . . .

Being legally bound to produce bullion investment coins, the mint has suspended all minting of proofs and uncirculated coins because all available gold blanks are being allocated to bullion coins. This applies to silver and platinum versions of the American Eagle coin series.

But this shortage does not affect only proofs and uncirculated editions. Even bullion platinum coins are behind on their deliveries. Here in Japan Platinum American Eagles are nowhere to be found. The same is true for Platinum Canadian Maple Leafs. Gold Maple Leafs are available, but an increased premium is being charged over the spot price. My most recent coin purchase (a Maple Leaf) had a premium of nearly 20%. That's probably double the standard premium. From what I have read and heard from fellow investors online, this is the case all over the world (though in Japan premiums do tend to be higher than many other places).

What this shortage of physical gold and the subsequent increase in the above-spot premium tell me is that the economic climate is convincing a lot of non-investors
to buy gold. By that I mean people who don't buy mutual funds or stocks or anything but usually keep their money in cash are seeking safety in gold. It could also be that people have grown weary of invisible electronic investments that send their money off somewhere to potentially vanish. With the Dow falling so hard, and with people losing their life savings to scumbags like Bernie Madoff, people are realizing that if you can't hold it in your hand, it can potentially vanish.

Real physical gold in your own possession is the safest and best way to invest in gold. The proof is in the demand.

Friday, March 13, 2009

1/10 OZ Gold Maple Leaf

With the gold price dipping below $900 per oz. on March 10 and 11 this week, I saw a buying opportunity and made sure to put some money into e-gold and buy some physical bullion. But not wanting to overextend myself and run out of cash, I bought a small denomination of bullion, just a 1/10 oz Canadian Maple Leaf coin. 1/10 ounce of gold equals 3.11034768 grams of gold.

I bought this coin at Ginza Tanaka, the retail store of Tanaka Precious Metals which sells precious jewelry and bullion, mostly gold and platinum. They normally sell Platinum American Eagle coins and Platinum Maple Leaf coins but they were sold out, which seems to be happening across Japan. There was a notice on Tanaka Precious Metal's website stating that Platinum investment demand has exploded recently and that mints around the world are struggling to keep up with the demand. They also state that while they are happy to continue buying and selling platinum, the specific products they offer may be limited. If you can read Japanese, have a look at the Tanaka Precious Metals website.

I had planned to buy a platinum coin yesterday because the platinum prices are low but starting to rise again. But I really wanted a coin, and all they had were bars. So I stuck with gold. Have a look at my purchase in the video.

Monday, March 9, 2009

Gold Outperforms Whole Mining Industry

Commodity Recommendation: buy commodities in general, but especially gold.
The metals mining industry is preparing itself for a protracted period of low prices as industrial demand for metals has slowed along with the world economy. Prices of copper and aluminum for example are down approximately 60% since last summer.

For several years, booming metals prices were the result of consumption in the developed world and in rapidly industrializing China. But with both undergoing an economic recession, consumption has slowed. Particularly in China, where massive government investment in infrastructure projects pushed commodities prices higher. But this has slowed during the current economic crisis.

The mining companies were hoping that government stimulus packages would prompt a quicker recovery of economic activity that would increase demand for industrial metals, but this looks like a bleak prospect for now and they aren't expecting a rise in commodity prices until late 2010.

Commodity price gold highest of all.But despite the huge drop in industrial metals prices, gold has for the most part retained its high price. It has come down from its peak of over $1000 per troy oz, but will likely rise again soon. Its resilience is due to its status as "real money" and a "safe haven". So even when industrial demand for gold declines, it retains its status as a store of value and a real medium of exchange. And as I expect the current economic situation to get worse and continue for quite some time, I know we will see greater movement of investors into gold.

I personally see low commodities prices as a blessing because it gives me an extended buying opportunity. The fundamentals of commodities in general are very strong, and if you buy now on these lows you have a definite chance to make big gains. But I will also continue buying into the gold market because despite the commodities bull market (which is not over but interrupted), I think the fundamentals of the US economy are so bad that gold's value as a safe haven is still vastly underrecognized.

Reference: Reuters

Thursday, March 5, 2009

Are Gold Stocks Good Investments?

Are gold and silver mining stocks good investments today?
Owning physical gold is the single best way to invest in gold and benefit from increasing gold prices. But one way to diversify your gold investments is to own gold mining stocks, which are a solid investment. They have the reputation of being risky ventures that can collapse and make your investment evaporate, but that fear only has a basis if we're talking about junior exploration companies. These junior gold companies which have little or no gold discoveries yet can see their share price absolutely skyrocket when they do make a discovery, offering huge exponential returns. But these companies are also huge risks. When we look at the established major mining companies who already control extensive gold deposits, it is a different matter. It is those established players that I'm concerned with.

What are the pros and cons of major mining stocks?

One of the benefits of gold mining stocks is that they perform extremely well in deflationary environments, because the gold price rises during deflationary times but
the costs of the company's operations decrease due to deflation. Because of this diverging movement of costs and earnings, your return on investment can be much greater than on gold bullion. As the United States seems to be headed into a deflationary era, gold mining stocks will likely perform very well. Gold stocks
performed extremely well during the deflationary period of the 1930, also known as The Great Depression.

However, a drawback of investing in gold mining companies is that they may not perform as well as physical bullion during times of inflation. That is because even though the price of gold will certainly increase during times of inflation, the costs of production will inflate, and if the cost of production increases more sharply than the price of gold, profit margins will narrow. Such inflationary costs include the price of oil, but also other materials, labour, etc. In the case of a slow grinding inflation, the gold stock may underperform physical gold, but if the rate of inflation increases to the point that it worries investors into seeking a safe-haven, then the price of gold may rise sharply enough to make up for the increase in operation costs.

So gold mining stocks are a good bet in general, but an amazing catch in deflationary times. The key is to guess whether the US government and federal reserve's measures to inflate (AKA "stimulate") the economy will be successful. I tend to think they won't be, if we look to the 1930s as a model. When the US government threw piles of money into the economy, credit was still scarce and the economy still deflated. In fact, the extra money injection created more debt that
prolonged the deflation. This will quite likely be the case again. If this is the case, gold mining stocks will be the place to have your money.

Some industry insiders report that labour costs, at least in North America, have been falling in the gold mining industry, because of mine closures in the base metals industry, particulary copper mines. With an oversupply of laid-off mining workers, labour costs are coming down, increasing the profitability of mining companies. This is a deflationary sign. The price of copper is commonly viewed as an indicator of which direction the economy is going. With the price of copper having dropped drastically and copper mines shutting down, we know that the global economy is in the beginning of a deflationary period, which is resulting in less industrial demand for copper.

I personally don't own any individual gold stocks. I do, however, invest in the Blackrock World Gold A2 fund which consists of a basket of the top gold producers (around 70% of the fund's total), along with a certain amount of exposure to producers of the other main types of precious metals: silver and platinum (around 30% of the fund's total). I like this fund because it's diversified and thus limits the risks to individual companies or countries due to labor disputes, complications with environmental regulations, etc. So I can invest in the general movement of the gold mining industry. And even though this is an investment in companies, and not in gold itself, you can see from the comparison below that these companies' stock prices more or less follow the price of gold, at least its general trends. It's no match for the physical gold bullion that I'm holding in my hand, but it is a way to invest in precious metals inside my retirement fund, which currently does not have an option for physical gold.

This is a 5 year history of the Blackrock World Gold A2 fund.
Blackrock World Gold Fund A2 - diversified gold mining fund

And here's a 5 year history of gold spot prices.

5 year gold price chart, compared to gold mining stock prices above