The Four Best – and Safest – Ways to Own Gold Today
Editor's note: Longtime readers know we've espoused the merits of owning gold for years.
But when it comes to buying the precious metal, investors are faced with many decisions.
Today's Masters Series essay comes from a May special report in The Defensive Portfolio. In it, portfolio manager Austin Root shares the four forms of gold we recommend – as well as a "one click" way to gain exposure in the stock market...
The Four Best – and Safest – Ways to Own Gold Today
There are four basic forms of gold we believe you should own.
The first form is simple bullion. Bullion coins are plain vanilla gold coins. They're not rare and they don't have collectible value. You can buy them and sell them for a few dollars more than the spot price of gold.
Most gold coins come in one-ounce increments. The premium dealers charge for bullion gold over the market – or "spot" – price varies depending on supply and demand. The price of gold is currently around $1,530 per ounce. One-ounce bullion coins currently go for around $50-$80 more than spot gold. For example, an American Eagle or American Buffalo is trading for around $1,580. A Canadian Maple Leaf is trading around $1,565.
You can also buy bars, if you've got deep pockets. It's fun to keep a bar of gold on your coffee table.
"What's that?"
"Oh, that... it's a bar of gold. Try to pick it up."
Gold bars come in one-, 10-, and 400-ounce denominations. Usually, bars are the cheapest way to buy physical gold bullion. You will pay about $35 more than the spot price for a one-ounce bar and $5 more than spot for a 400-ounce bar. In general, the bigger the bar you purchase, the cheaper the gold per ounce.
You can buy bullion coins from most any local coin dealer. We recommend calling several shops to find the one charging the lowest markup over spot price.
Then there are online services that enable you to buy bullion and hold it in a secured physical vault.
One way is through BullionVault. At BullionVault, you can buy gold and have it held in "good delivery" form. BullionVault charges a commission rate of 0.5%, which falls progressively to 0.05% the more you buy. Discounts start at $75,000. There are also currency transfer fees, plus storage and insurance expenses to consider, which will depend on your purchase amount and requirements.
The next form of gold we recommend is rare or collectible coins. These coins – known in the industry as "semi-numismatic" coins – are old. They're gorgeous. And they have collectible value. In good condition, they sell for thousands of dollars more than the spot price of gold.
One of the most famous collectible coins – and the best one to purchase – is the $20 Saint-Gaudens. The proper name for this coin is a $20 Double Eagle gold coin. But coin experts call them "$20 Saints" because legendary American sculptor Augustus Saint-Gaudens designed them.
To give you some history, people in the late 19th century used gold coins as currency. They bought steamboat tickets with them. They purchased houses with them. They even paid bills with them. The vast majority of the gold coins from this era that exist today are in "junk" condition. They're worn down and scratched up, like most of the coins in your pocket. Few uncirculated gold coins exist from this era.
In the early 20th century, America became the largest economy on Earth. As a result, America's $20 gold piece became the world's most important coin. The U.S. Mint produced 70 million $20 gold coins between 1907 and 1933.
As paper money took over as currency for day-to-day transactions, gold coins became a savings instrument. Savers kept these coins in sock drawers, safety deposit boxes, and bank vaults. Hundreds of thousands of uncirculated gold coins are still in existence from this era.
Coins are categorized by year, type, and grade. The grading rates the coin's condition on a scale of one (lowest) to 70 (highest). Most coins you will find in a coin shop will range from AU-55 ("almost" or "about uncirculated") to MS-67 ("mint state" or "not circulated"). Obviously, the higher the quality, the more you pay for a coin.
Truly uncirculated, pristine $20 Saints are so beautiful and rare that collectors pay tens of thousands of dollars for them. Those aren't the kinds of coins we're focusing on here.
With low-premium semi-numismatic coins, you are looking for the AU-58 to "Mint State" (or "MS") 62 range. This will give you historic coins in beautiful condition with the lowest premium for numismatic value.
Right now, you can purchase the MS-62 for as little as $1,620. That's $150-$300 more than a bullion coin. For the additional money, you get some historical value – which is unlikely to go much lower.
Specifically, look for $20 Double Eagles in the MS-60 to MS-62 range. They have more upside potential than any other gold bullion investment. Over the last 40 years, these coins have commanded a significant premium over gold bullion coins. During the 1960s, when gold was trading at $32 per ounce, these $20 Saints sold for almost $65 per coin... a 100% premium over gold. In 2001, when gold was trading at $300 an ounce, these $20 Saints traded for $710-$750 each... as much as a 150% premium.
Right now, you can buy a pre-1933 Saint-Gaudens in that grade for a couple hundred dollars more than a Krugerrand or an Eagle. The premiums are close to all-time lows.
To get started, we encourage you to look over the excellent price guide put out by Professional Coin Grading Service (PCGS). These are good estimates as to what you should expect to pay.
Please remember... with collectible coins, it's crucial to go to a reliable and trusted coin broker. While it's extremely rare to buy a fake, the bigger problem is paying for a grade higher than what the coin truly is. Paying a little extra in premium to a trusted coin dealer is worth it. This way, when you're buying an MS-62 coin, you can be confident that it's really that grade and not lower.
There are many reputable dealers. One we know well and who has treated our subscribers well in the past is David Hall Rare Coins. To get the latest quotes – and the latest expert advice on where to find the greatest values in gold and silver coins – contact David or his business partner Van Simmons at (800) 759-7575 or (949) 567-1325 or via e-mail at info@davidhall.com.
Finally, look for coins graded by reputable services. Collectors and dealers send their coins to grading services to have them assigned grades. The services have experts who grade and put the coins in a case... But not all grading services are the same.
PCGS is the most respected and reliable grading service. NGC – Numismatic Guaranty Corporation – is the probably the second-most respected. If you ever want to sell your numismatic coins back to a dealer, they usually pay a premium for ones graded by PCGS.
The third form of gold we recommend is the Sprott Physical Gold and Silver Trust (CEF).
The Sprott Physical Gold and Silver Trust has a simple mandate. Its commitment is to hold physical gold and silver bullion. The fund is currently around 60% gold and 40% silver. This fund doesn't do anything fancy with the gold and silver it holds. It doesn't buy, sell, or trade its precious metals in an attempt to improve returns. It simply holds physical gold and silver. In short, it holds a vault of physical metals so you don't have to.
Two things make the Sprott Physical Gold and Silver Trust one of the best ways to buy gold and silver today. The first is that we can sometimes buy these precious metals at a discount to melt value.
The market value of CEF's gold and silver can get out of whack. If demand for CEF units increases dramatically, the fund can trade for more than the value of its gold and silver. If demand is incredibly low, the fund can trade for a discount to the value of its precious metals.
Today, for example, the market value per unit of the gold and silver CEF holds is about $15.41. That's what investors would receive – per unit – if the fund sold its metals right now. But that's not what you have to pay to buy a unit of CEF right now...
You can buy that $15.41 of value for just $14.93. Units of CEF trade for about a 3% discount. With the gold price at $1,530 an ounce, that's like buying gold for $1,484. That's $46 per ounce less than melt value.
After a brutal bear market in gold, the trend has reversed. But the discount in CEF still persists. What happens when sentiment turns positive? The answer is simple... Units of CEF could move from a discount to a big premium.
The Sprott Physical Gold and Silver Trust actually spent most of the last decade – during the gold bull market – trading for a big premium. CEF traded for an average premium of 7.8% from 2001, when gold's bull market began, to 2011, when it ended. A move from today's 3% discount to an 8% premium would mean a share increase from $14.93 to $16.64. That's an instant return of 11.5%.
Don't expect CEF to move from today's discount to a premium overnight... But could it happen over the next year or two? Absolutely! The ability to buy CEF at a discount makes this one of the best ways to own gold and silver right now.
The main reason the fund trades at a discount is that it doesn't offer delivery of its physical gold for small investors. But it makes up for it by having a significant tax advantage... which most investors don't know about.
If you buy gold and hold it for many years, you might think that you'll pay long-term capital-gains rates on your profits (15% for most investors). But that's NOT correct. Your true tax rate is nearly double that – 28%. The IRS treats most gold investments as collectibles. Even gold ETFs – like the SPDR Gold Shares (GLD) – are taxed as collectibles.
This can be an unhappy surprise come tax time. But the Sprott Physical Gold and Silver Trust provides a loophole in the law... which cuts your tax bill by nearly half. You see, CEF qualifies as a passive foreign investment company ("PFIC"), which means the IRS taxes your gains at normal capital-gains rates. So for most investors who hold CEF for a year or more, that's a 15% tax rate. (You will have to fill out an extra form at tax time. But for a nearly 50% savings on your tax bill, it's worth it.)
The fourth form of gold we recommend is gold stocks.
Be careful with gold stocks... Gold mining is terrible business and very, very few gold mining stocks do well for investors.
But we recommend some exposure to the highest-quality gold mining assets because it's a very cheap way to own a lot of gold (in the ground) and these stocks can turn out to be incredibly good investments – especially when stocks in general do poorly.
Think of your gold stocks as "lottery tickets" that will probably be worthless in 10 years... but just might end up making you 10 or 20 times your money. (If that happens, don't forget to sell!)
Regards,
Austin Root
Editor's note: Gold prices are breaking out... But we think the bull market is just getting started. If we're right, nobody is better at navigating the gold market than our friend and colleague John Doody. Since 2001, his proprietary gold-trading strategy has trounced the returns of gold, the XAU gold index, and even the S&P 500. Learn about his approach – and the incredible guarantee he's making today – right here.