What’s The Best Way To Buy Gold?
As a continuation of the Fee-Only Financial Advisor blog sharing group, this month’s post comes to us from Joseph J. Alotta, a Financial Advisor in Oak Brook, Illinois. He shares his thoughts on how to purchase gold and silver coins for those investors preferring a small allocation of physical gold and silver.
Admit it, you like it. You want it. You want to touch it, feel the coldness in your hand, feel the weight, it is too heavy for its size. It makes you feel good.
Prince, the rockstar – the man who only has a first name — he liked gold. Prince didn’t have any name for a while, he lost even his first name. They called him “the entertainer formerly known as Prince.” But he got his first name back, and he died owning lots of gold bars.
It is okay. I understand. I am a professional financial advisor and I bless your desire to own physical gold in the name of National Association of Personal Financial Advisors.
Three reasons: (1) It is what you want! (2) It can’t do you much harm (3) It may do you some good. So why not?
Will it make you happy? Probably not, but you can keep it as a paperweight on your desk and play with it when you make phone calls. It may give you some security. You may have a ready gift to give to someone if you need an emergency gift.
Can it do you harm? Not in the quantities I am suggesting here. A small amount. One percent, two percent of your total. No more.
When Prince, the rockstar entertainer died in 2016, he had 670 ounces of gold on hand. This was worth approximately $840,000. It sounds like a lot, but Prince’s estate was worth $300 million, so this is just 1/4 of 1 percent of the total.
There is a difference between gold on paper and gold in person. Maybe your advisor recommends a gold mutual fund or an ETF. Not the same. Some people want it near them. Some people like to touch the gold. It gives them a sense of security and privacy. Remember Prince had gold bars. Alan Greenspan said, “[Gold] is the only currency, along with silver, that does not require a counter-party signature”.
Gold gives you some options that you may not have had otherwise. There is a famous story about Augustine Dupré. He was arrested in 1789 by soldiers in the French Revolution. They made him wait in line for his chance at the guillotine. Suddenly, in the midst of despair, he remembered a little gold coin in his pocket. It is called a Gold Angel because on the face of the coin is a picture of an angel. He bribed a soldier to march him to a private alley and release him from certain death. Afterward Dupré would tell about his guardian angel and always carry one in his pocket. Other people followed his example. Napoleon Bonaparte always carried a Gold Angel in his pocket.
How to buy gold and silver:
Important Step #1.
Find out what the spot price of gold is. The spot price is for 1-ounce of gold. It changes minute by minute. You must know what the spot price of gold is before you buy any form of gold. It is the price large dealers are paying for gold around the world.
How do you find it? Google “what is the spot price of gold”. Google knows. Siri doesn’t. Google told me “Gold Price Per Ounce = $1,202.20″.
Important Step #2.
Figure out the premium charged over spot. Nobody will sell you gold at a loss. If it costs them $1,202.20 for an ounce, they are going to charge more for making the gold into a bar or coin and shipping it to you. Focus on the premium.
For example, I just looked at a dealer and they were selling a 1-ounce gold coins for $1,262.75 and a 1/10-ounce coin for $136.85.
Subtract the actual price from the spot price. The first coin 1262.75 – 1202.20 = 60.55. This is the premium
The premium for the second coin is 136.85 – (1202.20 / 10) = 16.63.
So if you buy the smaller coin, you will need to buy 10 to get an ounce and your premium per ounce would be 166.30.
So it is always better to buy 1-ounce coins than smaller coins because the premiums are lower.
Important Step #3.
Fake gold abounds. Avoid anything weird. Buy common items. Do not buy gold bigger than 1-ounce. Counterfeiters have economy of scale with more expensive items. Government-issued coins are less likely to be fake.
Important Step #4
The best place to buy gold and silver is via the internet from large respectable bullion dealers who offer discount prices. These websites compare web prices and give you the best price. You should use this as a starting point for negotiations with any other dealer or coin shop.
I recommend Coins rather than bars. Coins are minted by governments. And I would only recommend 1-ounce coins.
Important Step #5
Buy only these coins.
Gold Coins Recommended.
- Canadian Maple Leaf, 1-ounce gold. Any year is fine.
- American Eagle, 1-ounce gold. It usually costs a little more than the Maple Leaf.
- American Buffalo, 1-ounce gold. Costs the same as the American Eagle, the difference is that the American Eagle is 22 carat gold and more durable than the Buffalo which is 24 carat. The Eagle is slightly heavier, but both coins contain exactly one ounce of gold.
- South African Krugerrand, 1-ounce gold. This was the first gold 1-ounce coin to be made. It is usually the cheapest option and a very popular choice. I have listed it here as my 4th choice because some people have ethical problems with the South African government.
Silver Coins Recommended.
- Canadian Maple Leaf, 1-ounce silver.
- American Eagle, 1-ounce silver. Usually costs a little more than the Maple Leaf
I recommend only these coins. First, they are popular and can be bought and sold easily. Second, they are less likely to be fake. Many fakes exist, so only buy from a reputable dealer and only the popular items.
As I write this, gold is approximately 70 times the cost of silver. Don’t let this confuse you. Buy gold and silver in dollar amounts. For example, buy $20,000 worth of gold and $10,000 worth of silver. Yes, you will get more silver. The major constraint is your storage space.
Important Step #6
Where should you keep your stash? Keep a few out on your desk. You want to touch them when you are talking on the phone. Coins are made to be touched. You want to have them handy in case a grandchild comes. You’ll have a ready gift. Tell them to keep it for college.
Just remember, if you touch a coin, you are decreasing its value. It is no longer uncirculated. For the coins I recommend, it doesn’t matter. They are just valued by their metal content. But all the same, just touch a few, and the rest, keep in plastic. If you buy ten coins, they will come in a tube. Single coins will come in a plastic “flip”. Never put your coins in a plastic bag. It is a different kind of plastic, a soft plastic, that can react with your coins and leave a green film.
But the rest of your stash, where do you keep it? Do you have an Emergency Records file cabinet? You should. That is the subject of another blog. Do you have a home safe? If you buy a substantial amount of gold, then you will need to rent a safety deposit box at your local bank. They come in different sizes and cost about $30 a year for the smallest box. (The smallest box is good for about 100 ounces of gold.)
About the author
Joseph J. Alotta, MBA, CFP™, a member of NAPFA, is a financial advisor in private practice in Oak Brook, Illinois. His gold holdings are limited to three Suisse Misses, (20 Swiss Francs, containing .1867 ounces of gold each) his father gave him, one St. Anthony medal (9.6 grams of 18 karat gold, .2315 ounces) also from his father, and one gold rapper chain, (36.8 grams of 22 karat gold, 1.0846 ounces) which his ex gave him and he doesn’t wear. Also, a gold Rolex watch worn by the Apostle Paul, (only kidding), a 1909 Honus Wagner baseball card worth $3.2 million (I wish!!) and a 1804 Silver Dollar, (fake unfortunately) (The real one was auctioned for $10.8 million in 2016 and the seller declined the offer). All these items are kept in a small safety deposit box at the Bank of America, (Costing $75 a year, deducted from his account automatically). His important papers are also in the box including deed to house, wills, and power of attorneys and a flash drive containing a backup of his computers. If you have a collectible question, please contact him at firstname.lastname@example.org. He likes to help people and he finds collectibles interesting.
Two Key Benefits of Portfolio Diversification
Now that eight years have passed since the S&P 500 bottomed in March of 2009, I thought it would be a good time to revisit portfolio diversification. It’s easy to become complacent toward risk when the stock market keeps generally moving up from year to year. When times are good it is common that the average investor begins to take on more and more risk. In the short-term, markets are completely unpredictable and risk will show up when you least expect it. It has been my experience over the last 20 years while working with high net worth investors that excessive risk taking/lack of diversification is probably one of the greatest common mistakes I see investors making.
One of the golden rules of investing is to diversify your assets, or as you have probably heard, “don’t put all of your eggs in one basket.” Taking on too much risk and not properly diversifying your investments is one of the quickest ways to derail the success of a long-term financial plan. When designing your portfolio, our objective is to create a mix of assets that will provide you with a high enough expected level of return to meet your long-term financial goals while taking the least amount of risk possible to obtain that return. It just so happens the two key benefits of diversification are:
1) increasing your expected return while allowing you to take less risk
2) helping you avoid frequent and large losses
Every investor has a unique personal risk profile. Through the power of diversification we can maximize your possible future return given the specific level of risk you are willing to tolerate. When many investors first start accumulating assets they tend to believe the sole focus of investing is to generate large returns. But to generate large returns, you need to take concentrated risk. Like a coin, there are two sides to risk – the upside and the downside. Many are on a great scavenger hunt looking for the one great investment that will change their financial destiny. Investors that focus solely on the upside of risk (large returns) are many times negatively surprised when the downside of risk shows up. When the markets become extremely volatile, those that have taken excessive risk sometimes panic and liquidate investments at a large loss.
Downside risk and investor behavior
One of the greatest stumbling blocks to many investors’ long-term success is their own emotions. By diversifying, we can control the risk in a portfolio and reduce volatility. If we can manage volatility, an investor can sleep at night and let their portfolio stay on track for the long run.
I have created the chart below to help visually explain why avoiding large losses are so important. The key learning point of the chart is to realize that the larger your loss, the greater your money has to work to rebound back to where you started. As you can see below, a 20% loss requires a 25% gain to grow back to your starting point. However, a 50% loss requires a 100% gain! That’s a difficult hurdle to overcome, which can become impossible if the loss causes an investor to panic and exit out to cash.
|Percentage Loss||Percentage Gain Required to Rebound|
I think we all know someone who took too much risk during the tech bubble and/or the housing debt bubble, only to panic and sell out during the large downturns of each respective crash. It has been my experience that the majority of investors become increasingly uncomfortable as their loss approaches 20% or more. Sadly, taking on too much risk is one of the biggest mistakes an investor can make. Your only chance of gaining your principal back is to ride through a downturn and transition back into the positive as the market eventually recovers.
Diversification as a tool to balance your risk and return profile
One of the most efficient ways to simultaneously avoid frequent and large losses and maximize your portfolio return given your level of risk tolerance is to diversify your portfolio. At Wealth Engineering, we use a global diversification strategy that reflects the global economy. We diversify across the two main asset class categories of stocks and bonds, and then we further diversify within each particular sub asset class. Here is a quick review of the many sub asset classes your portfolio may own:
|U.S. Large Cap (S&P 500)||Short-Term Bonds|
|U.S. Small Cap||Intermediate-Term Bonds|
|International Large||Corporate Bonds|
|International Small||U.S. Treasury Bonds|
|Emerging Markets||International Bonds|
|Real Estate Investment Trusts (REITs)||Inflation Protected Bonds|
|Municipal (tax-free) Bonds|
|Alternatives||High Yield Bonds|
|Commodities, Gold and Energy|
We further diversify the above sub asset classes on the Stock side by equity style and size of companies. Overall, we favor a tilt toward the “value” style and “smaller” size of companies within stock funds. Much of the academic research we follow documents a compelling long-term outperformance by those stock funds with a slight investment tilt toward smaller companies (more aggressive) and the value style of companies (instead of growth). Think of the value style as investing in companies that based on certain metrics (such as price to book), indicate that certain stocks are underpriced relative to their intrinsic value.
Combining non-correlated assets
As you can see in the above chart, we invest in approximately 15 different asset classes. The purpose of so many asset classes is that we are seeking to find asset classes that are “non-correlated.” This is a fancy way of saying we want investments that do not all move in the same direction at the same time. An economist named Harry Markowitz brought forth the idea of combining non-correlated assets via his research at the University of Chicago. He won a Nobel Prize for his development of “Modern Portfolio Theory (MPT).” We find tremendous value in MPT and it is at the cornerstone of how we build portfolios today.
Through the science of MPT we can create a globally diversified portfolio that balances risk and return. Some of the asset classes we use are high octane, high risk and volatile (for example, small cap value and emerging markets). But by combining a wide mix of risky and volatile assets with very conservative and less-volatile assets (for example, high quality bonds), we can smooth out the risk and return profile of a portfolio and maximize your possible return relative to your ability to handle risk.
Asset class charts
If you click on this hotlink it will take you to an asset class chart from JP Morgan – Asset Classes – JP Morgan – 12-31-2016. The chart illustrates annual performance for many of the asset classes we use. Those in the top rows are the highest annual performers and those in the bottom rows the lowest annual performers. This is a great visual replication of the benefits of diversification. The key takeaways from this chart are:
- Asset class performance is completely random. Last year’s winners are many times next year’s losers.
- The more volatile stock asset classes, such as Emerging Markets, consistently swing from having high double digit positive performance to high double digit negative performance.
- JP Morgan outlined a mock “asset allocation” mix on the chart (the solid line connecting the allocation mix dots from year to year). You can see the benefit of the diversification mix as the allocation portfolio tends to consistently perform in the middle of each respective chart, thus avoiding frequent and large losses!
If diversification is so great, what are the downsides?
There are two issues around diversification that I would like to point out. I wouldn’t necessarily call them downsides, but they will cause an investor to take notice occasionally depending on market conditions.
- A diversified portfolio will never be at the top of the “asset class chart” when ranked by performance. This doesn’t mean you can’t have strong overall performance from your globally diversified portfolio. It only means that your portfolio is by nature a mix of the performance of every asset class you are invested in. Thus, mathematically if you average a mix of high performance asset classes and low performance assets classes, the average (your portfolio), is likely to fall somewhere in the middle. But keep in mind, our goal by diversifying is to create a portfolio with more consistent performance, thereby providing you with the highest probability of meeting your long-term financial goals. For a baseball comparison, when pursuing investment returns, we are seeking “singles” and not “home runs.”
- It has been my experience that investors can become restless when they see the S&P 500 outperform their globally diversified portfolio. Our media loves to focus on the performance of the S&P 500. In 2016 the S&P 500 was the third highest performing asset class, while international stocks were one of the lowest performing. Thus, a globally diversified portfolio did not experience anywhere near the same level of performance of the S&P 500. This happens occasionally, but it is my experience that the home country index out performance is usually short-term. The S&P 500 is only one of many assets classes we invest in. It’s also important to know the S&P 500 is 100% in stock, while your portfolio is a combination of stocks and bonds. Although four out of the last five years have been favorable to the S&P 500, it is a great reminder that this media darling also lost 55% during the 2008/2009 housing bubble crash and 43% during the tech bubble collapse in 2000/2002.
Rebalancing your portfolio
When we first start working together, I design a global strategic allocation for your unique portfolio. Each quarter I refer back to that allocation when rebalancing your portfolio to make sure you are still on target for the long run. Some of my clients are in the “accumulation phase” and adding contributions on a regular basis, while many of my clients are retired and in the “distribution phase.” For those in the distribution phase, this means a monthly or quarterly withdrawal from one or more of your investment accounts. By following a disciplined quarterly rebalancing strategy, it ensures that I am constantly maintaining your global diversification posture, while simultaneously maximizing the balance of potential risk and return, regardless of whether you are adding or withdrawing from your portfolio on a systematic basis.
Hopefully all of the above information has given you some additional insight as to why we believe so strongly in global diversification and our disciplined portfolio management process. As we move forward, know that we will continue to pursue additional asset class opportunities if we have a strong conviction it will help us further balance risk and return in your portfolio, minimize frequent and large losses, and most importantly, help us guide you to your long-term financial goals.
About The Author
Dave Fernandez, CFP® is a native of Arizona and has over 20 years of experience in the financial services industry. He started his financial services career in 1995. As a NAPFA Registered Financial Advisor, Dave owns a fee only financial planning and wealth management firm, in Scottsdale, Arizona called “Wealth Engineering, LLC.”