Investment Bullion Portfolios 2
Key Points

In this Investment Bullion Portfolios 2 article we review the key points of sound investing.

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.

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' work or similar embellishments and additions that are charged at gold rate while being of very low value in themselves.

   • 'Meena' work is basically just glass. Paying a portion of the jewelry price at gold rates for glass may be acceptable as a decorative item, but not as an investment of value.

   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. 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. 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.
4. 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.

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 jewelry. This is not a good transaction anyway because jewelry is not an 'investment'. On exchange for cash there is a significant deduction and they do charge a high premium for their 'Swiss quality' .9999 gold bullion.

6. Avoid buying St. George sovereigns or similar-Buy local gold.
   There are many fakes and forgeries of this well known British coin. 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.

• 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 charge up to 100% premium on these coins. One on-line home shopping mall offers a one gram Laxmi gold coin with a 'free' 5 gram silver coin for 1850 rupees less a discount of Rs. 93 for a price of Rs. 1757. The 'free' silver coin and discount are an expensive joke, because the cost of the gold coin allowing for all cash and silver discounts is at a full 40% premium over the end-March 2008 spot gold prices.

  Another online store offers a 22k, 10 gram gold coin for a 55% premium over spot gold prices. I wonder if people really buy from such retailers. It would take about three years on average to recover the premium cost if the price of gold increased at about 17% annually.

• Such premiums are justifiable only for rare high in demand and short-supply collector coins. 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 much higher premium per coin as the cost of minting smaller coins is higher. This a reason why an exchange-traded fund (ETF) for gold is a better buy for small purchases as there are no extra charges for buying small quantities. Unlike holding physical gold, holding ETFs do not attract wealth-tax liabilities. However, buying physical bullion is preferred as you would hold the actual gold.

8. First buy silver and then buy gold
   Get gold and silver bullion in small quantities according to your comfort zone. Add to your stocks gradually.

   Silver is easier to buy as it needs less money.

   For example if a 10 gram .999 silver coin costs around Rs. 250/-, a 10 gram gold coin of .995 purity would cost anywhere from Rs. 12,500-18,000/- if the gold-silver ratio at the time is between 50 and 70. (A ratio of say, 50, means 1 gram of gold costs as much as 50 grams of silver.)

   Here are 2 charts for the current gold-silver ratio. 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.)

   • So, generally, if the gold-silver ratio is close to 70, it would be advantageous to buy silver instead of gold because silver is relatively cheaper.

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