For years, wise investors

IN TR ODUCTI ON
have known that if they
want to invest in precious metals, they should do so through
direct ownership of physical coins, bars or rounds. When you
decide to invest in precious metals, one of the challenges you
will have to address is determining the specific metals to buy.

There are four main precious metals in the market; gold, silver,
platinum and palladium. Some dealers have multiple products
across these precious metals. When working with these dealers,
it can be confusing to know the metals you should invest in.

Read on for five steps you can follow to end up owning physical
gold and silver.
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STEP

1 CHOOSING THE PRECIOUS METAL YOU PREFER

Gold has been the preferred monetary metal for millennia.

The first step is to decide which precious metal you want to buy. Gold and silver
are the most popular metals for investment. However, you can further diversify
your portfolio by buying platinum and palladium. Among the four metals, the most
popular one is gold. Gold has been the preferred monetary metal for millennia.

Following gold closely is its cousin, silver. This metal also played a major role in
history as a means of exchange. Moreover, it is an industrial metal (used in medical,
energy and electronics industries) that is found in many places around the world.

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Generally, the price of silver follows the price of gold in a much more unpredictable
manner. Investors usually describe silver as “gold on steroids”. When the price of gold
changes, silver produces higher gains. When gold price goes down, silver experiences
magnified losses. If you have a solid appetite for risk and think that the price of gold
will go up, you should also have silver bullion in your portfolio.

At current prices, silver costs about 65 times less than gold. This makes it more
affordable. However, the cheaper price increases its transaction costs by quite a
large amount. The increase comes about since the costs related to the transaction
are spread on an item of much lower value.

In case of an unstable economy, the lower value of silver makes the metal ideal for
transacting everyday items. You wouldn’t be able to use an ounce of gold in such a
scenario as its value will be too large.

If you have a solid appetite for risk

and think that the price of gold
will go up, you should also have
silver bullion in your portfolio.

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STEP

2 FIND OUT THE MARKET PRICE OF THE METAL

You should determine the cost of the weight of the bar

you wish to purchase based on the spot price.

When dealers quote the prices of gold and silver, they usually includes two
components. First, there is the international spot price, which is the current value
of the metals in the market. Next, there is the purchase premium.

The bulk of the purchase price consists of the spot price. This price is easy to find.
When looking to buy gold or silver, you should find out the spot price before
purchasing. Apart from this, you should determine the cost of the weight of the
bar you wish to purchase based on the spot price.

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WHAT IS THE SPOT PRICE?

The spot price is the current price at which gold, silver or other precious metals
are sold in the market. This price is determined by the demand and supply of the
metals at the main markets where they are traded. This price is usually changing.

The spot price therefore is the prevailing price of precious metals at the London
Bullion Market during European trading hours. The same price is also quoted on
the futures market. Thereafter, the price is also determined in Hong Kong, New
York City and Sydney. This price keeps fluctuating and is the major factor that
determines the cost of the bullion you will buy.

From Chart 1 below, we can see the spot price of gold on May 1st, 2014. In the gold
market, daily price fluctuations of one percent are the norm. This is why it is crucial
to find the current spot price immediately you want to make a purchase.

Chart 1:Spot Price of Gold on May 1st, 2014

When you know the spot price, you can determine how much bullion you can
acquire with your budget. Let’s look at an example. If you want to buy gold bullion
worth $200,000 and the spot price is $1,300 per ounce, this means you can buy
about 153 ounces of gold.

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STEP

3 DETERMINE THE CHARACTERISTICS OF THE METAL YOU WANT

As in investor, you should buy bullion coins

and leave numismatic coins for connoisseurs.

Now that you’ve decided on the precious metal you would like to buy, check its
characteristics.

i) Form - Physical gold and silver come in form of bullion. These metals are shaped
into bars, coins or rounds, specifically for investment purposes. The bullions are
manufactured by national mints and various refiners around the world.

You should know the difference between bullion coins and numismatic coins.
Bullion coins are specifically minted for investment purposes while numismatic
coins are collectibles sold at a high price. As in investor, you should buy bullion
coins and leave numismatic coins for connoisseurs.

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ii) Weight - Bullion bars come in different weights. A troy ounce (31.1 grams) is the
standard unit of precious metals. For example, you can buy gold weighing anything
from 1 gram to 400 ounces (12.4 kilos). For silver, you can buy the metal of up to
1000 ounces (13 kilos). These weights and sizes can be confusing especially when
buying the metals for the first time.

iii) Fineness - The other thing you should check is the finesses of the bullion coins,
bars or rounds you want to buy. The fineness refers to the amount of precious
metal in the bullion in relation to the impurities. Fineness is usually indicated as
parts per 1000. For jewelry, fineness is expressed on a scale of 24 karats.

Generally, gold bullion has a fineness of 999.5 (99.95% pure metal) or more. On the
other hand, silver bullion has a fineness of 999 (99.9% pure metal).

iv) Brand - When gold is mined, it is taken to refiners when it is impure and rough. The
refiners mold the gold or silver into standard bars that investors in the international
market recognize.

A gold bar is branded with its refiner’s name. The name is always indicated on the
bar. Therefore, you can determine the quality of a bar based on how reputable the
refiner is.

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HOW CAN YOU IDENTIFY A REPUTABLE

GOLD OR SILVER REFINER?
A trade association known as the London Bullion Market Association (LBMA) has
come up with standards that precious metal bullions must meet to be sold or
bought on exchanges. The association has a set of stringent quality criteria and
accreditation process that refiners must meet. The association also carries out
regular checks to ascertain the quality of production.

To protect yourself, it’s advisable

to buy gold or silver from refiners
listed on the Good Delivery List.
There are about 70 gold refiners and 80 silver refiners worldwide that have been
accredited by the LBMA. The refiners are listed on the Good Delivery List that is
available a http://www.lbma.org.uk, the LMBA’s website.

To protect yourself, it’s advisable to buy gold or silver from refiners listed on the
Good Delivery List. When you buy precious metals from these refiners, you can be
sure of the quality of the bullion (the accuracy of the fineness and weight indicated
on the bar). Moreover, precious metals from these refiners are widely recognized
and accepted for exchange.

If you buy bullion from refineries that are not well-known, you may find it difficult
to resell them. Moreover, you have to contend with the risk of counterfeit.

While there are a number of good refiners not listed at the Good Delivery List, you
should strive to acquire the most recognized and accepted bullion.

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STEP

4 FIND OUT THE PURCHASE PREMIUM

Generally, the purchase premium is charged as a few percentage

points or decimal of a percentage of the spot price for gold.

The spot price refers to the market price of the amount of gold or silver you wish
to buy. The metal may or may not be available at the time of trading. Moreover, the
metal is usually not available where you are for trading.

To get the gold or silver bullion you want to buy, an extra cost is added to the spot
price. This cost will foot the expense of producing and shipping the bullion to your
location. The purchase premium refers to this extra cost.

Generally, the purchase premium is charged as a few percentage points or decimal

of a percentage of the spot price for gold. The premium is a lot higher than would
be charged for silver of the same weight.

All costs related to the physical aspect of the bullion, for example, manufacturing
costs, insurance during transportation, storage insurance as well as the dealer’s
margin are covered by the premium.

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The purchase premium will compensate all the parties involved in manufacturing
the bar and transporting it securely to you.

The spot price is transparent and you should know it when buying gold. Apart from
the spot price, find out the premium charged. The dealer cannot cheat or impact
on the spot price. The only control the dealer has is on the premium price. Make
sure you inquire how much premium is charged in terms of percentage points for
each bullion you want to buy.

Keep in mind that gold is never available at a discount off its spot price. This metal
is an extremely rare liquid asset that is recognized globally as a store of value.
Buying gold at a discount would be similar to buying discounted US dollars, which
will be suspicious.

Most times, schemes to buy discount gold are intricate scams run by con artists
who lure investors with promises of quick gains. The cons involve complex gold
acquisition procedures, which always require the investor to pay hefty down
payments for the bullion.

However, there are a few exceptions to this rule. There are some cases where gold
may be available at a cheap price:

• A seller trying to exchange illegally acquired gold (from politically exposed

persons, illegal mining or theft)

• A clueless seller who does not know how gold is priced

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STEP

5 DECIDE THE ALLOCATION OF METALS YOU WANT

Generally, the purchase premium is charged as a few percentage

points or decimal of a percentage of the spot price for gold.

Precious metals are tangible products. The fine metal content in the bullion
determines its value. You should try to get the highest quality bullion at the lowest
price. Look for precious metals that are charged the lowest premium and are
within your budget.

When looking to buy, consider if whether you will need to sell some of the bullion
to cater for living expenses in future. Apart from this, consider your expectation of
needing the bullion for transactions in case of a severe economy downturn.

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Let’s look at an example. Suppose you want to invest $200,000 to buy precious
metals. You can follow the steps below to determine the products to go for.

a) A kilo is the bullion sold at the lowest premium. When you slightly exceed your
budget, you can buy 5 kilo bars.

b) Let’s say you expect you will need $60,000 in future to pay for living expenses (for
example, when you retire). You may want the cash in smaller tranches of $5,000.
Therefore, you can allocate the budget of 2 kilo bars and smaller 100 grams bars
with values of about $4,200 each. You can allocate these to your portfolio of 14
gold bars of 100 grams (with a value of $58,800.)

c) If you anticipate there will be an economic disorder someday, you may need to
buy items with your bullion. Since gold has a high value, you can allocate $20,000
to buy silver coins and bars. You can buy 1000 1-ounce silver bars (each valued at
about $20). You can also opt not to buy 5 bars of 100 grams gold and instead use
the money for silver allocation.

Assuming the spot price of gold is $1300 per ounce and that of silver is $20, you
will end up with the following:

• 3 kilo gold bars sold at 1% premium (total cost $125,377)

• 9 100-grams gold bars sold at 2.5% premium (total cost $38,553)
• 1000 1-ounce silver ingots sold at a 17% premium (total cost $23,400)

Your total investment will cost you $187,330. You can allocate the remaining
amount to any product you choose.

The above are five of the steps you should follow when buying gold and silver.

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