Investment Bullion Portfolios 2
10 Key Points

In the previous articles we have examined this in fair depth and detail. As prices of gold and silver rise over the years, their rise has kept well ahead of inflation. Clearly, holding some gold and silver bullion is an excellent way of adding protection and stability to one's assets.

• Over the past 30 years, silver as an investment metal has been outperforming gold when purchased at the right time.
• Click here to scroll down to see how to find potential buy signals for silver investment.

Key points about bullion investments.

Commonly quoted bullion market spot rates for gold are for .999 (24k) and .995 purity. The .995 (also known as 24 k) is what you would usually get in the form of locally made gold coins. For silver, the quoted rate is for .999 and .995 purity.

1. Jewelry does not fulfill the standards of being an 'investment'.
   As discussed in the India Bullion article jewelry involves making charges, possible reduced gold content than stated at the buying end, and deductions while selling. Therefore jewelry does not meet the standard of value 'investment'.

   The only exception would be certified (hallmarked/tested) 22 karat pure gold only bangles without 'meena' or 'kundan' work or similar embellishments and additions that are charged at gold rate while being of very low value in themselves. Indian hallmarking is certified by the Bureau of Indian Satndards (BIS).

   • 'Meena' and 'kundan' work is basically enamel and glasswork. While the meena and kundan jewelry looks beautiful, paying gold rates for a significant amount of glass and enamel may be acceptable as a decorative item, but not as an investment of value. Ultimately all gold and silver jewelry has a break-up value of the metal content only--less the ever-present 'making charges' loss.

   22 karats is equivalent to 917 parts of gold per 1000 (22 parts out of 24). This is usually written as '22k' or '.917'. (See this India Bullion article for more on why jewelry is not an investment).

2. Buy commonly traded and easily available grades of bullion.
   Gold bullion is widely available as .995 (99.5% pure) bullion and as 22 carat (.917) grade. Silver is available widely as .999 or .995 quality. The .999 coins test out around .997--in fairness, most laboratories inform us that they cannot accurately test beyond .997. This is a negligible loss.
3. Avoid collector (numismatic) coins.
   Unless buying these for personal enjoyment, avoid collector and specialist coins, as you will pay much higher premiums than the actual gold content. For wealth building, initially buy only bullion coins or bars.
4. Do not pay high premiums for gold or silver bullion (coins or bars).
   A premium 5-7% over the day's spot price of gold or silver is an acceptable premium to pay. Many dealers offer premiums as low as 0.5% and 1% on select coins from time to time. It is a good idea to keep a lookout for such deals.

   The percentage premiums charged for converting metal bars to coins tend to increase with higher purity of metal even though the mechanical procedure of die-pressing the coins remains the same.

   Avoid paying high premiums for modern bullion coins from other countries. The South African Krugerrand is one of the most widely available and collected modern bullion coin because it usually is the lowest premium coin available in the market. As you can see it is not a very attractive looking coin, but it does contain exactly one troy ounce of pure gold.

   For American and European investors, the lowest premium 24 carat gold and pure silver coins would be the
   American Eagle

   

   and the
   Indian Head-Buffalo coins

   

   The 1.20 ounce Mexican 50 peso coins are also very low premium. The 50 peso can be got at for as low a premium as 1% or less from time to time.
   
   
   
   

   

   The 15 gram (0.4823 troy ounce) Mexican 20 peso coin is undoubtedly one of the most beautiful modern bullion gold coins. It features the Aztec calender on the reverse and an eagle capturing snakes in it's claws and beak. This is a modern version of the Mexican coat of arms. This can also be often got at 0.5%-1% premium over spot gold in American bullion markets.

   

   • The Indian bullion trader may offer coins such as these, including the Chinese Pandas or special minted coins from the Australian Perth mint at a high premium. Don't buy these unless you want to collect these for your own interest and you don't mind paying a premium.

   Fundamental ground rule: For savings investment purposes, don't pay more than 5-7% premium over spot gold price for bullion bars or coins.

   
5. Do not buy .999 or .9999 purity gold coins from banks or specialist suppliers.
   In practice, premiums for these are much higher--15% and greater, making such coins and bars in the nature of collector-coins. At this time the banks do not buy back the coins they sell you.

   Further, these are not easily tradeable at a fair price because re-purchasers of precious metals do not generally give you back this premium price.

   In time, as price of gold rises, the premium charged gets hidden from view in the price rise. However if you consider the price you would get if you sold it a few days later, you would lose that premium, so better not to buy such a product, when a lower premium product is available.

   A partial exception is the Tata 'Tanishq' brand, who advertise that there is no deduction on current gold rate on exchange of the gold bullion for their jewelry.

   This is not a good transaction anyway because jewelry is not an 'investment'. On exchanging jewelry for cash there is a significant deduction, while Tanishq does charge a high premium for their 'Swiss quality' .9999 gold bullion. So buying high- premium-to-gold-cost jewelry, or exchanging their bullion for jewelry is a losing proposition.

6. Avoid buying St. George sovereigns or similar-Buy local gold.
   There are many fakes and forgeries of this well known British coin. Some of these are pretty obvious copies, while others are quite good.

   Avoid these or imported coins/bars as they usually have a higher premium. It is better to buy locally made gold bars of standard weights and reliable quality. (Technically coins are 'bullion bars'.)

   The Laxmi and Ganesh motif coins are quite popular and auspicious as well.

• In India, always buy from an actual store you can visit and check out the products and prices. Be warned that some stores, and online internet shopping malls can charge from 40% to 100% premium on spot prices for these coins. It is difficult to understand why anyone would buy these. There are also shopping portals such as Carat Lane that offer high quality bullion at relatively low premiums designed for the Indian market.
• A reasonable premium for bullion coins is up to 5% or 7% over the spot price for the actual silver or gold content.
• Calculate the premium on gold content--if you take the quotation of .995 spot gold apply it to a .995 coin. For a 22k (.917) coin, the 24k (.995) quoted rate would have to be proportionately reduced to calculate actual gold content.
7. Buy coins and bars of at least 10 gram weight.
   Smaller weights carry a higher premium per coin as the cost of minting smaller coins is higher. (A trader with a large turnover may be able to offer low premiums).

8. First buy silver and then buy gold and be guided by the gold-silver ratio
   It is easier to put small savings money into silver without the higher premiums of 15-40% that would apply to buying a gold coin of small size--say a 1 or 2 gram coin. Get gold and silver bullion in small quantities according to your comfort zone. Add to your stocks gradually. Accumulated silver can be exchanged for gold when the gold-silver ratio is favorable. The gold-silver ratio simply means, the quantity of silver at a particular price required to buy the same quantity of gold at the particular price of gold. To get the ratio simply divide the gold price per gram or 10 grams by the silver price per gram or 10 grams.

   For example, and not considering premiums, if a 10 gram .999 silver coin costs around Rs. 500/-, a 10 gram gold coin of .995 purity would cost about Rs. 25,000/- if the gold-silver ratio at the time is 50. (A ratio of 50 means, 1 gram of gold costs about as much as 50 grams of silver at current prices.)

   Here are 2 charts for the current gold-silver ratio that will help to calculate a silver or gold buy signal. One shows the trend for the last 2 months while the other is very current showing the past few days fluctuations. (Refresh the page for latest data.)

   

   
   
   

   Potential buy signals for silver So, generally, if the gold-silver ratio is close to 60 or higher, it would be advantageous to buy silver instead of gold because silver is relatively cheaper. A ratio closer to 50 or less would favor buying gold over silver at that time. An additional factor in favor of silver would be to see if silver is near its 50% midpoint of its 1980 high of near $50 and its low the same year of around $9 ounce ($20.50), or its lowest point in the following bear market of around $5 ($22.50). Silver has a tendency to fall back, or retrace its price from volatile highs to its 50% midpoint or lower price in a cycle of rise and fall of silver prices, and these cycles can span decades. Combining the 2 factors-- gold-silver ratio near or better than 60, and silver near it's midpoint of highs and low, gives an indicator that the time would be good to buy silver. If, in addition, there has been a recent significant fall in gold prices (10%+) from its high point, then these 3 factors would signal a really good buying opportunity for silver as a long term investment. Extreme silver volatility is a historical fact and should be expected in future as well. Some analysts have a long-term target of silver at over $150 an ounce, but again, there is no telling when this might happen. Therefore it is better to keep the relative cheapness or otherwise of silver in mind along with the other factors mentioned.

   
   
   
   
   
9. Avoid buying coins simply on the 'personal guarantee' or 'buyback guarantee' of a particular jeweler or bullion dealer.
   The bullion bars should be certified/tested or hallmarked reliably. There is a small premium for hallmarked items, and if you buy bullion in bigger weight sizes--25 grams or 50 grams, it averages out quite reasonably.

10. Know your bullion dealer and his products and prices.
    Test them both from time to time. Do not think you are 'only' buying a coin or two and the premiums don't matter, and do not accept the idea that you are bound to get cheated in quality as a matter of routine.

To 'Attract Wealth' Article from Investment Bullion Portfolios 2