Tuesday, February 3, 2009

Buy Silver Bars For The Long Term

Buying Physical silverToday I made a purchase of 2 kilograms of silver bullion, and I was once again reminded of one of the necessary evils of precious metals investing: the buy/sell spread. The buy/sell spread refers to the different between the price you pay when you buy the metal, versus the price you will be paid if you are selling your metal back. You've probably experienced something similar if you've ever changed money into a foreign currency for a trip. The buy and sell prices are different. This is, of course, to the benefit of the dealer and essentially amounts to a service charge.

All precious metal bullion bars and coins are sold with some kind of spread, because this is what keeps the dealers in business. The spread depends on the kind of metal, and also on the size increment that you buy. The smaller the unit, the larger the markup. A tiny 5 gram gold bar can have a spread of 25%, and 1 ounce bullion coins can have a spread of around 15%, while a 1 kilogram bar currently worth around $30,000 may have a markup of just 1 or 2 %.

But compared to the other precious metals, the buy sell spread on silver is very wide, exceeding 10%. Today I purchased my silver at Ishifuku Metals in Osaka, Japan.
The silver spot price in Japanese yen was approximately 35,000 yen (currently 392.962 US dollars) per kilogram of silver. The sell price was over 39,000 yen (currently 438.156 US dollars) per kg, while their buy price was either the spot price or very close to it. That's a spread of around 11.5%!

Buying bulk silver ingotsOn top of that there are service charges. At Ishifuku Metals there was a service charge of 5200 yen per 1 kg bar, so in total 10,400 yen. So to obtain 2 kilograms of silver whose spot price was around 70,000 yen, I wound up paying close to 90,000 yen, or around 28.5 % more than the spot price. So to turn a profit on my silver purchase, silver will have to increase in value by over 28.5 %. So why did I buy it? Because it's an investment that I intend to hold for the future, and I am confident that the price of silver will grow exponentially in future years. I have no intentions of trading silver and buying and selling it regularly. For that I would focus on silver stocks or silver ETFs (electronically traded funds). But for a secure investment in my future wealth, I want to own physical precious metals. By the way, you don't always have to pay these extra transaction costs, but in Japan they seem to be the norm unless you buy 30 kg bars or more.

Why does silver have a much larger buy/sell spread and higher transaction feeds than gold? It probably has to do with the low price of silver for its weight. At current prices, an ounce of gold costs about the same as 2 kilograms of silver. Even though an ounce of gold and 2 kg of silver sell for somewhere around the same price, it costs a lot more to store and transport the silver because of its size and weight. Hence the higher transaction fees. I suspect that the wide spread is also a reflection of the current silver shortage, and growing investor demand for silver which results in the dealer having to run around and order some for you rather having it on stock.

Gold buying selling bullion bars at Ishifuku KinzokuWhen buying gold the buy/sell spread and fees are much lower than for silver. But you should still be aware of them when you buy physical gold, and you should think twice if you intend to buy gold, silver or other precious metals in order to quickly sell them when the price swings upward. The spread and transaction fees make this impractical. If you want to trade precious metals, buying on the dips and selling on the peaks, a precious metals ETF or mining stock may be the way to go instead.

1 comment:

TSR said...

Yes...the spread is rough, but with massive deficits and money printing here, and the Chinese and other foreign countries taking steps to eventually cut their reliance on the dollar for transactions, it is only a matter of time before silver and gold take off...with my favorite being silver. www.silvermonthly.com