Diversifying with Precious Metals: 6 Different Ways to Buy Gold and Silver

by Jerry Robinson | FTMDaily Editor-in-Chief

HOUSTON, Apr 18

Friends, welcome to a new week. I especially want to welcome all of our brand new FTMQuarterly subscribers. Our office had a busy weekend as we released the brand new Spring 2011 issue of our newsletter. (Those posts that you see as “protected” that require a password are for our FTMQuarterly subscribers only.)

Additionally, we added a brand new stock to the FTM Investment Portfolio today that I believe has great long-term prospects. (To become a subscriber and get 100% access to this stock and our entire site, click here.)

Now, let’s continue our financial teaching series entitled: The DSL™ Savings Strategy 101. Today, I will begin explaining how to diversify one third of your six-month liquid savings reserve into precious metals.

The DSL™ Savings Strategy 101: Diversifying with Precious Metals

As I stated in our last article, my preferred savings diversification model, one-third in foreign currencies, one-third in precious metals, and one-third in U.S. Dollars, often brings many questions.

I won’t use this article to explain why precious metals are a good idea when it comes to diversification. We already have numerous articles, interviews, news stories, and audio clips explaining why gold and silver can be excellent hedges against times of economic uncertainty, especially inflation. So I will assume that you are already convinced that gold and silver are worthy of your consideration.

When it comes to precious metals, I like to split one third of my six-month liquid savings between gold and silver. Usually 65%-70% in gold and 30%-35% in silver. I prefer holding more exposure to gold with the six-month savings reserve, as its price tends to be less volatile than silver. When it comes to investing, in Level Four, I prefer a more aggressive ratio towards silver. But remember, this is just your six-month liquid savings reserve. You don’t want to gamble this money. You simply want to protect its purchasing power. And few asset classes have historically done that better than precious metals.

The two most common questions that I am asked about precious metals are: 1) What is the best form of gold and silver to buy? and 2) Where is the best place to buy gold and silver?

In today’s article, I will answer the first question. And tomorrow, I’ll answer the question regarding where each of these different forms can be purchased.

6 Ways to Buy Gold and Silver

When it comes to gold and silver, there are at least six common ways to gain exposure to price appreciation in precious metals:

1) Buying physical gold and silver bullion. Don’t let the word “bullion” scare you. Bullion simply refers to coins and bars that are officially recognized as high quality (this is usually defined as being at least 99.5% pure.) It also means that you are buying gold or silver that is valued by its mass and purity — not by its face value as money. Understanding “bullion” is especially important, as there are many gold dealers today who are making big mark-ups and commissions (from 15%-75%) by promoting “numismatic” coins. And this brings us to the second way to buy gold and silver.

2) Buying numismatic gold and silver coins. If you watch much television or listen to the radio often, you know that precious metals companies are spending a pretty penny on advertising. What many investors do not understand is that many of these companies train their sales representatives to “upsell” you from the cheaper bullion coins and bars to more expensive numismatic coins.  The market for these coins is determined by their rarity, condition, mint date, and marks. What is important to note here is that the value of a numismatic coin is not based upon their precious metal content, but instead on their “collector’s value.”

It is very unfortunate to hear stories about new precious metal investors calling some of the major gold companies simply looking for inflation protection, and then getting upsold to numismatic coins for a much larger premium by some call center representative.

Numismatics are promoted under the auspices that they are “confiscation-proof.” In essence, those who attempt to sell you these collector’s coins at inflated prices tell wonderful tales of how back during the gold confiscation act of 1933, only numismatic coins were safe. I believe that I have even heard some of the major TV and radio entertainers, like Glenn Beck, promote numismatics for this reason.

However, those who attempt to sell you numismatic coins usually fail to tell you at least three important facts.

• #1… In 1933, most Americans held their wealth in gold, making it a target. Today, less than 2% of Americans own physical gold. If the government wants to confiscate something, don’t you think that they would rather come after the $20 trillion locked up in IRA’s and 401(k)’s than they would the $1 trillion in gold?
• #2… In 1933, when gold was made illegal to own, not a single person was ever prosecuted for not turning in their gold.
• #3… The final thing that the numismatic salesman is not telling you, while he is selling you, is that the commissions on these types of coins run anywhere from 15% to 75%. Compare that to the paltry 4%-8% that he may be able to make on bullion coins and you will quickly understand the motivation to sell numismatics.

3) Buying Gold and Silver in the Futures Market. A precious metals futures contract is a legally binding agreement for delivery of gold or silver in the future at an agreed upon price. The futures market can involve substantial risk and I do not advise or recommend that anyone use this track, unless they are well educated on how the futures markets work. We will talk more about futures trading in Level Five. Trading futures would not be an appropriate financial move in Level Three. (For more on our Five Levels of Financial Freedom, click here.)

4) Buying Option Contracts on Gold and Silver. Options can be an excellent way to gain a large amount of exposure to gold and silver prices without having a large amount of capital. Again, however, this would be a Level Five investment strategy, and not an appropriate financial move in Level Three.

5) Buying Gold and Silver futures through ETF’s. ETF’s (exchange-traded funds) have truly revolutionized investing. ETF’s are securities that can  track a specific index, commodity, or even a basket of assets. However, unlike a mutual fund, they trade like a stock on an exchange. With the rising popularity of gold and silver with investors over the last several years, the “Pirates of Wall Street” (as my good friend Barry James Dyke calls them) have swooped in, trying to get in on the action. Wall Street has created several different ETF’s that claim to give investors exposure to gold (think GLD) and silver (think SLV.) However, problems have arisen with these funds making them suspect. I would suggest that you do your research before launching into one of these funds. While they certainly make gaining exposure to precious metals an easy process, they may not be the right choice for someone who is seeking inflation protection. However, for short-term trading, these funds can be ideal.

FTM does not invest in the above mentioned funds in our portfolio. And I believe that they are inappropriate for Level Three.

6) Buying Precious Metals Mining Stocks. One final way to gain exposure to gold and silver is through the companies that mine for precious metals. This is a risky way to invest in gold and silver because not only are you betting on metal prices going up, you are also betting on a particular mining company’s balance sheet, management, and mining capability. This would not be an advisable way to gain exposure to gold and silver in Level Three. Those who wish to invest in gold and silver mining companies should do so only after speaking with a trusted financial advisor and doing their own due diligence.

Conclusion

Taking physical possession is my favorite way to gain exposure to precious metals. Our generation is so accustomed to owning “paper” claims on assets, it may seem that purchasing, and physically holding, hard assets like gold or silver is antiquated. This is because it is antiquated — 4,500 years to be exact.

For millenia, individuals have stored their wealth in gold and silver. And while it is true that they would often allow a goldsmith to store the gold for them, they did take possession of the physical metal. Today, our modern-day marvels of financial engineering have created hundreds of trillions of dollars worth of “paper” assets which have no real intrinsic value.

For this reason, I like physical metal. I can hold it and I can touch it. It’s real. And its not paper.

You can buy physical metal bullion in the form of coins or bars. I’ll explain this, and our very own precious metals strategy here at FTMDaily, in greater detail tomorrow.

(For those of you who are interested in learning more about precious metals investing, visit our precious metals education page.

Here at FTMDaily.com, we are working hard to create solutions for you during these difficult times of economic crisis. We invite your feedback and comments on how we may serve you better.

Why So Serious?…

It’s time to laugh a little. Here’s a sampling from some of the late-night jokers.

“There’s a new iPhone app that will do your taxes for you. At this point, I don’t trust my iPhone to make a phone call.” –Jay Leno

“President Obama is slated to appear on one of Oprah’s last shows. He’s hoping it’s the one on which she gives away 14 trillion dollars.” –Conan O’Brien

“Pakistan says they are slowing down their hunt for bin Laden. Slowing it down? What is it, 10 years now? Could you go any slower?” –Jay Leno

“Burger King overseas has started selling a burger with two beef patties, cheese, three strips of bacon and a chicken breast. They tried selling it here, but Americans said, “Get that health food out of my face.” –Conan O’Brien

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