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3 Important Points to Remember as a First Time Gold & Silver Investor

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3 Important Points to Remember as a First Time Gold & Silver Investor

 

Unless you’ve had your head in the sand or been sailing across the Caribbean without communication to the outside world, you’ve probably noticed that we have a full-fledged banking crisis (or at least panic) on our hands.

Over the past week and a half, we’ve seen Silvergate, Silicon Valley Bank (SVB) and First Republic Bank (FRB) become insolvent, placed in receivership, or receive a liquidity injection. We have also seen a spike in demand by new and old gold and silver investors.Gold and Silver investment

Concerned with a full-fledged banking crisis and a run on our banking system, the Federal Reserve has agreed to backstop all deposits (at least as of this writing) and has created a new program entitled Bank Term Funding Program (BTFP). The new program allows banks to pledge their collateral at par or face value as opposed to market value, which is substantially less, to obtain liquidity and maintain solvency.

Of course, if banks were forced to sell their Treasury holdings in the market, as SVB did, they would receive a fraction of what they would if they held their bonds to maturity. The reason being is that they purchased their Treasury bonds at substantially lower yields. Considering that yields are much higher now, the only way to incentivize a buyer to acquire the bonds is by offering them at a discount.

Concerns with our banking system has caused a run on our banks (at least the smaller and regional banks). Individuals are concerned that their banks may become insolvent, that they’ll lose deposits in excess of $250,000, and may be at risk of losing their entire savings if the FDIC becomes insolvent. These are valid concernsRepublic Bank,Bank Run March 11, 2023 considering that the FDIC only has assets of $125 billion to insure against a potential exposure of $9 trillion.

These concerns, among others, are causing individuals to liquidate their bank accounts and seek safe haven investments.

Historically, gold and silver have been among the most popular asset classes when investors become concerned about systemic risk, such as what we’re currently seeing in the financial services sector. Not only are long-term investors of gold and silver moving more of their assets to precious metals, but many individuals are becoming first-time gold and silver investors.

We realize that it can be a bit scary and even confusing for these individuals, so we thought we would take some time to provide three important points when investing in gold and silver to help navigate some of the unknowns in this often overlooked asset class.

Gold & Silver Don’t Trade at the Spot Price

Many first time buyers assume that gold and silver coins and bullion can be purchased at the prevailing spot price published on financial sites. For those of you who are brand new to the industry, the spot price of gold and silver, or for that matter, any precious metal, is the price per ounce. To be more specific, precious metals are calculated on a troy ounce basis, which is 31.1 grams as opposed to a traditional ounce, which is 28 grams.

silver war nickels
35% Silver War Nickels

While some of the red-headed stepchildren in the industry, such as silver war nickels and 80% Canadian dimes and quarters, can be purchased at close to spot, you should expect to pay above the spot price when you purchase a coin that is in high demand, liquid, and broadly traded. This means that coins, such as American gold and silver eagles, American gold buffaloes, 90% silver coins, and Morgan and Peace silver dollars, just to name a few, will trade for above their underlying precious metals value. We hesitate to provide a specific premium, as premiums can vary widely based on supply and demand in the market. The important take away is that you’ll pay above the spot or melt value when you purchase these coins.

This comes as a surprise to investors who have traditionally invested in digital investments, such as mutual funds and ETFs. However, the physical gold and silver market varies substantially from the electronic market.

For one, ETFs and mutual funds don’t allow you to settle or redeem in physical gold and silver. Secondly, these investments are oftentimes highly levered, which means that there’s not physical gold and silver fully backing the number of shares or contracts that have been issued.

This means that in theory, these “paper” investments conceivably could go to zero. Lastly, a physical coin is much different than a digital share, as there’s a cost to physically mine, extract, refine, and fabricate gold and silver coins. Not to mention, refiners, fabricators, mints, wholesalers and retailers all need to be compensated for their time and effort. There’s also market risk when a retailer has a good bit of inventory on hand.

 

Gold & Silver Should Never be Viewed as a Short-Term Investment

Many physical gold and silver investors view their investments as a form of wealth preservation, a store of value, a safe haven investment, a way to hedge against financial and economic crises, and as a way to protect oneself against a spend thrift government and a central bank that regularly shifts money printing into overdrive. It should not be used for speculation or as a way to make a quick profit. If this is your goal, we suggest that you consider one of the more risky investment options that we discussed above, namely ETFs and mutual funds.

This week we heard from an elderly individual asking for our buy and sell rates on some of the most popular silver coins that we deal in. She noticed that there’s a spread between the two, commented that it will take her quite a while to “break even” and that maybe her children will realize a profit when she passes. Our comment to her was that her children will likely be thrilled that she was able to purchase silver at such a low price considering the current financial situation and that they’ll be grateful that she made such a wise decision.

While we’re not going to speculate as to what the price of silver will be this year or next, we will share that at the time of this writing, the spot price of silver is less than half of its all-time high.

Considering our current financial situation, including a 40 year high

Monthly Inflation rate - why gold and silver investment
Monthly inflation rate

in inflation, national debt of nearly $32 trillion, annual deficits of over $1 trillion, mass layoffs beginning, and threats to the dollar as the world’s reserve currency, it’s a safe bet that we’re going to see higher prices in the future.

If the current price at which you can acquire physical gold and silver coins over the spot price is an impediment, keep in mind that the spot price you see published is a futures price and doesn’t necessarily reflect the price for physical gold and silver coins and bullion. While at times it does – especially when the economy is strong, and inflation and unemployment are low, it’s common to see a decoupling or a divergence between the two, as is the case at the time of this writing.

We recommend that you don’t pay much attention to the spot price, but rather the physical price. Clearly, if all the dealers that you visit online or reach out to you locally are all selling gold and silver coins at a high premium, there must be a reason for it. As Bill Holter, a precious metals broker has mentioned in the past, at some point, you’ll be measuring your wealth in ounces of gold and silver versus dollars.

One other quick note regarding physical gold and silver prices. The price at which you were able to acquire gold and silver coins a few months ago, a year ago, or even in some cases, a week ago, may differ substantially with today’s prices. This is because the markets are constantly changing based on supply and demand. It’s just like any other industry or sector of the economy. When demand outstrips supply, the price goes up until you reach equilibrium. In other words, don’t outright discount purchasing gold and silver coins if your coin dealer quotes you a higher premium than you’ve received in the past.

Buy Gold & Silver Coins When You Can, Not When Prices Fall

In a previous post, we talked about the best time to buy gold and silver coins. One of our comments was that you should buy coins and bullion when you can – not necessarily when they go on sale. There are a few reasons for this.

The physical gold and silver market is much smaller than you realize. As we shared in a prior article, a large gold and silver investor, who is believed to be a Wal-Mart heiress, last year purchased $50 million in gold and silver coins. This individual initially wanted all American silver eagles, but when they realized that there weren’t enough available American silver eagles to fill her order, expanded into 90% silver coins and $20 pre-1933 coins. Even at that, the broker that helped fill the order had to place a special order with the U.S. Mint to fill the remainder of her order in American silver eagles.

While $50 million is nothing to sneeze out, you wouldn’t expect for this size purchase to completely dry up the silver eagle market, but that’s exactly what it did. Keep in mind that this was only one investor. There are plenty of multi-millionaires and billionaires in the United States. If some of these individuals moved just a small portion of their net worth into physical gold and silver, you could see inventory evaporate in no time at all.

The reality is that it doesn’t necessarily take eight-figure investments for the physical gold and silver market to dry up. It’s estimated that about 10% of the population owns physical gold and silver, but even then, most folks likely have limited holdings. In other words, we venture to guess that only about 1% of the population has any substantial gold and silver holdings. If the number of serious investors doubled from 1% to 2%, this would put a strain on the market. Increase it to 5%, and there likely would be very little inventory remaining. Of course, all it would take would be for a few “whales,” to make eight or nine figure investments, and we would see inventory evaporate.

gold and silver invesmtent

We don’t share this information to incite fear or panic. Rather, we want you to be aware that this is a relatively small market and that inventory is not always available. Even if you’re forced to pay a higher premium, it’s better to have gold and silver on hand than not. Not only do we run the risk of a full-fledged bank run and the dollar being replaced as the world’s reserve currency, but it’s only a matter of time before a Central Bank Digital Currency (CBDC) is adopted, which will greatly reduce your financial freedom. In fact, the Federal Reserve just announced that Fed Now will be live in July, which is the first step toward implementing a CBDC.

Again, the big takeaway is that it’s not always possible to purchase or invest in gold and silver coins, and may be even more difficult, if not impossible, in the future

It’s wise to move some of your holdings into gold and silver as a hedge for what’s coming down the pike.

Summary

In conclusion, we’re living through unprecedented times. We’re on the cusp of seeing a full-fledged bank run, like what our nation experienced during the Great Depression. People are losing faith in our financial system and are seeking safe haven investments, such as gold and silver coins, to protect their assets.

If you’re new to investing in gold and silver coins, it’s important to keep in mind that physical gold and silver doesn’t trade at the prevailing spot price. Rather, there’s a premium over the spot price based on the supply and demand of the items you’re interested in. Generally speaking, U.S. gold and silver coins trade at a higher price point than foreign coins and/or bullion.

We also recommend that you don’t view gold and silver as a short-term investment. It’s not a way to speculate, but rather to secure your financial position and independence. Don’t get caught up in premiums, buy/sell spreads and holding periods. Remember that physical gold and silver prices don’t always follow the spot price in the futures market.

Lastly, we recommend that you don’t wait. If you plan on waiting for a pullback in the price of gold and silver or premium relief, you may miss the boat. The physical gold and silver market is extremely small. It only takes a few large investors to cause the market to dry up. Not only that, but a mere doubling of the demand for gold and silver from current levels will put a strain on inventory and cause premiums to increase.

We hope that first-time, and maybe even somewhat seasoned gold and silver investors found this article to be helpful. We realize that you may still have questions, which we’re happy to answer at the time of your appointment. Whether you’re interested in investing in gold or silver coins or bullion, Atlanta Gold & Coin Buyers can help. We’re experts in the field and can help new investors navigate their way through this sometimes-confusing industry.

Give us a call today at 404-236-9744 or send us an email at sales@atlantagoldandcoin.com to reserve your gold and silver coins while supplies last.

Atlanta Gold and Coin Buyers

Picture of Tony Davis
Tony Davis
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Tony frequently writes on various economic and numismatic related topics affecting the coin and bullion markets and has been published on some of the industry’s leading websites, including Coin Week, the American Numismatic Association, Coin Collector, Coinflation, and Coin Auctions Help, just to name a few. Visit Atlanta Gold & Coin’s website at atlantagoldandcoin.com to obtain additional information on the products, services and educational resources offered by his company. Tony can be reached at sales@atlantagoldandcoin.com or at 404-236-9744

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