2024 02 04
When looking to buy and/or invest in gold the question you should pose to yourself is, "Why?" Specifically, why are you wanting to invest in gold? Do you want to invest in gold as a purely monetary investment? Do you want to invest in gold as a gift or inheritance for others? Do you want to invest in gold so you can make things with gold? Do you want to invest in gold as some type of diversification of your other investments? Do you want to invest in gold as a means to trade should there be a financial collapse of some kind? What is motivating you to invest in gold?
The next question is your gold investment going to be completed in one or two transactions or are you planning to continue making future purchases?
Then perhaps one of the most overlooked questions you should ask yourself when investing in gold is how do you plan to cash out your gold investment? If you are investing for yourself and plan to sell, how exactly do you plan to sell, and who would be your target market? If you are passing the sale on to your children how do you want them to be able to cash out your investment? If you are investing as a means to trade if there is a financial collapes how do you plan to cash out your gold investment?
Gold bullion is gold in a bulk form before it becomes a coin. It should have an extremely low premium (more on premiums in a bit).
Gold is measured by weight. The standard weight unit is called a "troy ounce." The abbreviation for troy ounce is "ozt." Once everyone in a conversation knows we are talking about troy ounces it is acceptable to just say "ounce."
Gold is also measured in kilograms, grams, pennyweight, and on some rare occassions imperial pounds (even when this rarity happens most people just convert it to kilograms or troy ounces).
Precious metals have what is called a "premium." One way to look at a premium is as an original cost of labor and profit put into the gold in whatever shape or form it may be. To melt 1 ozt. of gold into a blob would be low because it is very easy to do this. To melt 1 troy ounce of gold into a specific shape requires more skill, work and ultimately a higher premium.
Coins tend to have the highest premiums associated with them due to the high standards and specifications placed on each coins design and quality, and that a government commissioned the coins be made. If the gold is in a round shape and looks similar to a coin but was not commissioned by a government it is called a "round." Rounds tend to have a lower premium than coins. There are also "bars" and "ingots" which are typically rectangles of some sort and they usually have a lower premium than rounds.
Professional sellers add the premium when selling, and professional buyers subtract a premium when buying.
Premiums are usually either a percentage or a fixed amount. This premium is added, or subtracted, to/from the spot price of gold.
The "spot price" of gold is the price that gold is currently being traded. There is a bid price and an ask price. These are slightly different prices and vary on who is asking. The spot price is per troy ounce, as we mentioned early this is the measurement we use for gold, and other precious metals.
Sometimes the spot price is just called "spot."
A huge unknown for those interested in holding gold as a method of currency in case of a financial collapes is what will the value of gold be in such a situation? Currently gold is priced through a complicated global market. In a financial crisis situation these markets may be paused or otherwise non-existant. If there is not gold market sharing a spot price, then who is to say what an ounce gold is worth? This is an unknown variable that we cannot predict.
Let us pretend the spot price of gold is $100 per troy ounce. (This would be a great time to buy!)
Next let us say our pretend seller has a 5% premium over spot. In this example, that 5% premium would be $5.
So our seller is asking $105 per troy ounce of gold.
Now let us say you bought one ounce of gold for $105 and you hold onto it for one year. In that one year let us say gold went from $100 per ounce to $115 per ounce. Now you want to sell this ounce of gold. When you sell the gold, if you are selling it to a professional buyer they will then buy at a set premium below spot. Let us say they are buying at 5% below spot. This means they will be buying at $109.25 per ounce when gold is at $115 spot. You bought at $105 and are selling for $109.25 meaning your gross profit for this troy ounce of gold is $4.25.
There are several often overlooked aspects of overhead costs involved with precious metals.
Storage and Security
Often it does not make sense to purchase a safe or invest any large amount of money for storage and security of gold if you are buying a few ounces. Consider a safe may cost you anywhere from several hundreds to several thousands of dollars. If you bought three ounces of gold at $1,000 per ounce, and held it for ten or so years until it reaches $1,500 per ounce you would have an approximate gross profit of $1,500. If your safe cost you $1,000 that is 2/3 the cost of your gross profits and drops your net profits down to approximately $500.
If there are any subscription based fees for storing and securing your gold, these costs should be outweighed by the profit you will make when you sell.
Gold is not really a short term investment. If you are dealing with a lot of gold and are very very knowledgeable on the markets then perhaps that is your preferred method of investing, but this is highly unlikely. Gold is considered a long-term investment. It can be a five year investment, but even that may be a little short-sighted. Usually, gold is a ten or twenty plus year investment. Gold is something you purchase, set into storage, and mostly forget about.
Earlier we asked how you intend to sell your gold investment. There are a lot of options available for this, but what form your gold is in will determine/limit which of these options are available to you.
If when you were buying gold you had a lot of capital available and you purchased a 400 ounce gold bar (this is the standard gold bar held as gold reserves by central banks and traded by bullion dealers) you could have invested approximately $800,000 in 2023-2024 prices. This is for one single bar of gold. The issue with this is who do you know that has more than $800,000 to spend on one bar of gold when you want to sell it? The answer is far and wide usually no one or very few entities.
On the other side, if when you were buying gold you still had around $800,000 to spend, or if you had far less, perhaps just $2,000, and you bought 1 ounce ingots or bars, when the time comes to sell finding people with more than $2,000 available to buy gold is a much easier task than finding someone with $800k+ to spend.
If you run in circles or know of businesses that are usually open to buying gold at large quantities, then maybe buying larger forms of gold is a plausable plan for you. Most people do not have this type of access.
WJ Gold PMI usually recommends people look at buying 1 ounce increments of gold, even if they want to buy hundreds of ounces of gold. As the troy ounce is the standard of measurement for gold, it is easy to weigh and generally easy to transport. Having gold in one ounce increments tends to offer an acceptable premium and fits into both the investor, the gifter, and the prepper.
Ask yourself why you are investing, what do you want to get out of this investment, and then consider the options available looking for the best fit for your investment needs.
Back to Articles
Disclaimer: Investing is a personal choice. You make your own decisions on when and how to invest. You can make money and you can lose money investing. The statements made on this website are opinions and past performance is no indication of future performance or returns. Precious metals, like all investments, carry risk. Gold, silver and platinum coins and bars may appreciate, depreciate or stay the same depending on a variety of factors. WJ Gold PMI cannot guarantee, and makes no representation that any metals purchased will appreciate at all or appreciate sufficiently to make customers a profit. The decision to purchase or sell precious metals, and which precious metals to purchase or sell are the customer's decision alone, and purchases and sales should be made subject to the customer's own research, prudence and judgement. WJ Gold PMI does not provide investment, legal, retirement planning, or tax advice. Individuals should consult with their investment, legal or tax professionals for such services.