First Post: Setting up our gold and silver investment

(Foreword)

I’m going to launch right into some numbers. I know there are probably a lot of you who (think that you) hate math, but try to bear with me. After I get the numbers out of the way, I’m going to explain how to buy gold and silver, what to look for, and what you can expect. Hopefully this will help make some sense out of the number that I posted. For now, don’t concern yourself with trying to understand everything that is being presented. Just try and follow along…


(Glossary)

First off, I should explain what “spot price” means. Spot price basically means the current (immediate, right now!) price of a commodity (a commodity is simply some physical good for which there is demand, such as gold, oil, corn, wheat, soybeans, etc) which is available for immediate delivery. Spot price is determined by the ratio of buyers to sellers. When the commodity market is heavier with buyers than sellers, then the spot price of the commodity rises. Conversely, when the market is heavier in sellers than buyers, then the spot price of the commodity falls. It’s the law of supply and demand: When demand is greater than supply, the price increases, and when demand is less than supply, the price decreases. With that in mind…


(Prices)

Today’s New York closing spot price for gold was $1,428.80. So, with the hypothetical $50k we’ve set aside to invest in gold, and with our broker charging us a 5% commission, we have bought 33.3 imaginary ounces @ $1,500.24 per troy ounce, for a total of $49,958. Silver closed today at $35.94 per ounce, and with our broker charging us the same 5% commission, with the hypothetical $50k we have set aside for buying silver, we have bought 1324 imaginary ounces @ $37.74 per troy ounce, for a total purchase of $49,964. Thus, the initial value of our precious metals is the spot price of gold times the number of ounces bought plus the spot price of silver times the number of ounces bought, which comes out to $95,164.

Represented mathematically, the calculation of our precious metals investment value would be:
 

($1428.80 per ounce of gold * 33.3 oz) + ($35.94 per ounce of gold * 1324) = $95,164 total dollar spent


(Panic!)

Some of you may be wondering: “Where’s our other $4k plus change? We had $100k to start with, right?”
That went into our broker's pocket as commission...

“What, are you kidding me? It’s only the first day and we’ve already lost nearly $5000?!?!”
Well, there are two answers.

1. Unfortunately, yes.

AND

2. Don’t worry about it, because we’re in this for the long-term! If we anticipate first-year annual returns of at least 5% in our precious metals investment (as a point of reference, silver returned more than 80% last year and gold returned just under 28%), then we have nothing to worry about, because, there would be no net loss.

I know, I know, a lot of you out there are shaking your heads in disbelief… “Gold and silver have topped! The time to buy was years ago when they were cheap” Stick around here long enough and I promise you’ll start seeing things differently.


(Acquisition)

We’re now going to discuss the acquisition of our physical precious metals for our investment. There are many ways to purchase these, but the most straightforward is to simply place an order with a broker, either online or in person. Most brokers charge a premium (commission) ranging anywhere from 3% to 10% (or more) for precious metals, depending on the specific investment vehicle being purchased (coins, bars, etc). There are benefits and drawbacks for each instrument -- bars and coins. Bars usually have a lower premium than coins, but coins tend to have better liquidity. Additionally, bars are worth considerably less than their spot value if a certificate of assay is not included which matches the serial number on the bar. For the most part, we will only be concerning ourselves with bullion bars, except for the fraction of an ounce we'll need to top off our investment...

For those who are unfamiliar with gold bullion bars, all gold bars are stamped with the manufacturers name, the weight (in troy oz) of the bar, the purity of the gold (ideally 99.9999%, also called “four-nines”), and an individual serial number, on the bar. Generally, these bars come in sealed packages also containing a certificate of assay -- this is a document certifying that chemical tests have been conducted on the gold used in the bullion bar, which qualify and quantify the purity of the gold. Bullion bars are available in a variety of weights, from 1oz all the way up to 1kg, and from a number of bullion manufacturers. For this scenario, we’ll pretend that we have purchased 33 Pamp Suisse 1oz gold bars, and 3 Canadian “Maple Leaf” 1/10oz gold coins, for a total of 33.3 troy ounces. (Tip: Most reputable dealers will charge a higher premium for coins than for bars, often around 8-10% or more, but they will often waive the extra if you're placing a large order for bars and only buying a few coins -- ask for the discount!)

Pamp Suisse 1oz .9999 Bar (We've paid an imaginary $1,500.24 for each of 33)

Candaian "Maple Leaf" 1/10 oz .9999 Coin (We've paid an imaginary $157.53 for each of 3)

Aside from the obvious differences, silver bullion is a little different than gold. For starters, gold, being essentially inert (“non-reactive” with most chemicals), can be refined to a very high purity. Silver, however, because of its high chemical reactivity (it readily donates electrons in redox reactions, in case you were wondering), is usually only 99.999% (“three-nines”) pure. Silver bars are also often found with a coating of silver oxide -- a result of the reaction between silver and oxygen present in our atmosphere. This is simply what is referred to as “tarnish”, and is usually manifested as a grayish color. Thankfully, “tarnish” does not affect the value of silver.Secondly, silver is much harder than gold. Gold coins and bars can be damaged by rough handling and generally need to be protected in a clear, hard plastic case of some sort. Silver can be handled without worry, and in fact it's not uncommon to see some large (100oz or greater) bars with small dents from being accidentally dropped on a hard surface.

Engelhard 100oz Bar (We've paid an imaginary $3774.00 for each of 13)

Engelhard 1oz Bar (We've paid an imaginary $37.74 for each of 24)

Like gold, silver is available as both bars and coins, but for the purposes of our hypothetical investment and for the sake of simplicity, we’re only going to concern ourselves with silver bars and not coins. This is just for the sake of simplicity. In all fairness, silver bullion coins are just as valuable as their bar counterparts and have the added benefit of (usually) greater liquidity. Like gold, silver bars are stamped with the manufacturer’s name, the weight of the bar, the purity, and a serial number. With our imaginary $50k, we’ll be purchasing 13 Engelhard 100oz bars, and 24 Engelhard 1oz bars, all of 99.999% pure, for a total of 1324 troy ounces. Again, as with gold, dealers will often charge higher premiums for smaller weight bars. If you’re buying a large quantity of silver with just a handful being small bars (or coins), then ask for the discounted price.


(Conclusion)

Now that we have our imaginary metals, we're going to sit tight. And while we're in this for the long-term, it certainly doesn't mean that we don't get to enjoy the occasional thrill of a day where gold gains 2% and silver gains 4%. Of course, there will also be days when gold loses 2% and silver loses 4%. I guess my point is not to get too worked up about daily movements -- think long-term. All that matters is that gold and silver have more up days than down, and if the past 10 years are any indication, they most certainly will.

Tomorrow after the NY closing bell, I'll post the numbers for gold and silver, and we'll see where we're at with our hypothetical investment. Keep in mind that gold and silver need to gain 5% before we breakout and turn profitable, but fear not, because I see that happening before the 2nd week of April.