Simulation of investment cycle of metals: retail versus accounts.
There are many ways to invest in metals, but they are not equal. When one decides to own physical metals (as opposed to the pseudo-ownership afforded by ETFs and certificates), there are two investment vehicles: Bullion accounts and retail products. This page attempts to focus on an often overlooked aspect of metal ownership: the fact that the investor needs to eventually sell the metal back to recoup his invesmtent and hopefully profit. With retail products, (i.e. bars, coins, and jewelry) the investor finds a reputable seller and purchases the metal at spot plus a premium. This premium includes the costs of manufacturing, testing, and marketing the product, but does not really form part of the intrinsic value of the metal.
Under the best possible conditions, if the spot price of an ounce of gold is 1,530, an investor wishing to buy a .9999 fine 1 oz Gold Buffalo from the US Mint would have to pay 1,623: a 6% premium. For the investor to recoup his or her investment, several thinks have to happen:
- The coin is not damaged or stolen
- The offer of that specific type of coin does not increase
- The coin is not a forgery
- The coin is shipped and processed at a dealer's warehouse
If everything goes as planned, even a reputable dealer such as Kitco.com will not pay the investor more than the spot price of 1,530. Add to this shipping and insurance fees, and the price of gold would have to go up by 8% just to break even. There are two reasons individual investors are forced to pay these margins: First, the real costs of small transactions: The mint spends time and money designing, manufacturing, and marketing each coin. The dealer who purchases from the investor must protect him or herself from forgeries, and invests time and money testing and certifying every coin he or she purchases from the investor. The second reason is less evident, but just as practical: They know the individual investor doesn't have many options. Bank tellers will draw a blank when presented with gold coin.In a bullion account (comparison): gold is purchased in the investor's name, and becomes his or her property. He or she can take delivery at any time, regardless of any market crises or gold runs. The investor doesn't own a share, or a promise, he or she owns the actual physical metal. However, the investor receives these benefits:
- No risk of theft.
- No shipping delays.
- No uncertainty as to the quality of the metal.
- Wholesale prices.