Buying Physical Gold and Silver Personal Experiences & Thoughts On My Favorite Market By Tekoa Da Silva Publisher, BullMarketThinking.com Greetings, My hope in putting this guide together is to provide you with a well-rounded opinion on buying physical gold and silver, one that will help you in your journey towards safely acquiring precious metals. I’ve been trading and investing in precious metals since 2004, so let’s hope my experience will bear you some quality fruit. I should emphasize that this document is based on my own personal experiences. There are a million ways to “drive to Kansas”, and the road I took may be different from the road you took (or are currently taking). Therefore, the best advice I can give you is this: You are the driver. Trust your instincts, look around, and at each intersection carefully decide what’s best for you. Some roads I took may be shut down for construction, may no longer be safe, or simply may not be convenient for your circumstances. As chief navigator of your life, you need to carefully inspect each intersection, as financial “weather conditions” are changing faster than ever before. With that said, let’s begin. In 2004 I began buying physical gold and silver coins and bars. I used various methods in finding buyers and sellers (I was a bargain hunter), and limiting my risks. After accumulating bullion for a few years, I began investing in gold and silver stocks, and following that, gold and silver futures contracts. During the 2007-2008 economic slowdown (some might call it collapse, recession, etc.), I put together a company to engage in the buying and selling of scrap gold jewelry. This was a highly profitable business in which customers would sell physical gold jewelry or coins to the company for below spot price. The profit was made in the difference (commonly called spread) when selling the material to a refiner at spot price minus a smelter fee. Over the years I’ve also traded in many bullion fund ETF shares, as well as having opened accounts with domestic (US) and international bullion trading & storage companies. It’s these years of trading and product experience that I hope will yield you some educational value. *One disclaimer I must add: I have only traded physical metals inside North America. Although I’ve visited many jewelers in Asia and South America, I have not engaged in the physical buying, selling, and holding processes in these other countries. Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. How I Started Out In 2003-2004, when the price of gold was about $425 an ounce, I began learning of the coming bull market in gold and silver. I was in a position of having some extra money at the time and not knowing where to invest. I spent weeks and months on the computer reading online chat forums, listening to financial programs, and learning from guys like Jim Rogers and Marc Faber. At the time everyone was excited about real estate, and guys like Jim and Marc were recommending unpopular assets, those which would go up with inflation as Western debt levels increased. Gold and silver were prime examples of assets which would benefit from those rising economic pressures. So I took the plunge. I consulted with my best friend’s father (a very wealthy man), on what I should do. I told him I was interested in buying gold. He then showed me some of his own gold collection, which he began buying in the late 1980s. In his collection were 1 oz. South African gold Krugerrands (a very beautiful coin), so beautiful in fact, that I fell in love with them right then and there. I negotiated the purchase of 10 coins for $450 each, for a total of $4500. It was very exciting. Now that I had physical gold coins in my hands, I was presented with other questions such as—“Where should I keep them?”, and more importantly, “Where can I get more?!” Following that purchase, I told myself, as long as nobody knew I owned these coins, they were safe in my home, and that’s where I kept them. At the time I had a beautiful cherry desk set in my office which included a locked drawer. I kept my coins in there along with sensitive paperwork. (As a side-note: I no longer keep physical bullion in my home or office, for a few reasons. Firstly, it’s inconvenient because I travel often, and secondly—I’ve made it a habit to no longer carry valuables of a high amount) This concept of, “Where do I keep this stuff?” is such an easy one for me. My philosophy is this---if you welcome trouble, it will come into your life. If you dangle “thief bait” around your neck, you will attract thieves. However, if dangle a sentimental shoestring around your neck, you won’t attract thieves. So by living and maintaining a simple lifestyle and appearance, you won’t attract the type of people who steal. Additionally, by keeping quiet about your finances and what you own, you also won’t attract the type of people or situations in which things of value “go missing”. With that said, excellent places to keep physical gold coins can be in a large jar of cooking flour, corn, or peanuts (it sounds like I’m joking, I know). Another safe place can be inside a toolbox, or a can of nails, locked up in a secret compartment of your old, beat-up (but secure) woodshed or barn. Or, you can go with the tradition of using a safe deposit box at a local bank. So after I stored my shiny new gold krugerrands in my desk at home, I was excited and eager to continue building my collection of metal. I thought to myself---how can I get the most metal at the best price? It was during these years that an internet phenomenon was just hitting center stage, and it was called Craigslist. Everyone was using it for everything, and so was I. I bought my first car off Craigslist, I bought a toaster, and it’s also where I found my beloved cherry desk set. So I reasoned---Why not begin posting ads on Craigslist, looking for people who have gold and silver to sell? So that’s what I did. Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. I began running wanted ads on Craigslist everyday with the title of, “Coin collector looking for gold and silver coins and bars”. The ad text read, “Hi, I’m a young coin collector looking for gold and silver to ad to my collection. Please let me know if you have anything for sale! Thank you!” After posting my first ad, I began receiving emails. My process was simple---I asked everyone what they had for sale and how much of a discount they would offer me if I paid in cash and drove to their house or place of business to pick it up. Those who refused to offer me a good deal, I ignored. For those who were flexible in price---I would try my best to haggle them down 10%-15% below spot price. Many of them negotiated down to those levels. To limit the risk of being robbed when meeting with sellers, I carefully screened each prospect via telephone before meeting with them. I asked probing questions about their coins and bars, determining exactly how they got into their hands, why they owned them, and how long they had them. If anyone failed to produce a real story (one which I could tell was authentic), I simply told them I had no more money left and could not buy their items. (A side-note on “Greed & Danger”: Danger often accompanies greed [or vice versa]. When a person attempts to arouse your “greed” in a business context, they may also be placing a lethal bear-trap right at your feet. Let me tell you a short story… I once posted a classified ad on Craigslist seeking 100 oz. silver bars. At the time, silver was trading for less than $10 an ounce. I received a call from a “seller”, who by their name and heavy accent I could tell was of Vietnamese origin. I’ve had many Vietnamese friends over the years, so I’ve come to know that culturally (and especially during those early years of the bull market), the Vietnamese prefer gold bullion. Therefore, I thought it was a bit odd to hear from a Vietnamese seller of silver bullion, especially for 100 oz. silver bars. When I asked how he came to own the metal, he evaded my question. When I asked what it was about the silver that inspired his initial purchase, he again evaded my question. Answering my question with a question, he asked how much I wanted to buy. I asked how much he had to sell, and his response was, “As much as you want”. When I asked about pricing he seemed a bit too accommodative…and he further asked when and where we could meet. I realized then, it may not have been a negotiation at all. It may have been just a lure…to lead me right into a bear-trap. At that point I politely told him I was short of funds and had no more money with which to buy any metal. The lesson I learned from the interaction, was that when a seller is a bit TOO accommodative, and is trying to appeal to your greed (while in the presence of small red flags)...great caution is warranted. Danger often accompanies greed.) What these various experiences showed me, was that each person and source in the marketplace is different, and while some people will refuse to offer you a good deal—others are flexible and more willing to offer a friendly person a great deal. Additionally, through all these trades I learned much about the different forms of metal. I received about 10-15 emails per day from people looking to sell. About 1/3 of them had traditional bullion coins and bars, another 1/3 had numismatic coins, and the remaining 1/3 had industrial forms of metal (such as wiring, clippings, dore bars, chunks, etc). This gave me the daily task of assessing each deal and each product to determine if it was worth my time, and more importantly, if it was worth my money. Questions I had to ponder were---How long is it going to take me to sell this product to someone else when I decide I want cash? How much of a discount to the spot price am I going to have to suffer in order to get the product sold? How do I know if this is real gold or silver? Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. After looking at dozens of different types of metals products I concluded that bullion coins and bars were the only items I was going to buy from that point forward. Later on however, in my scrap gold buying business, I gained the experience and connections needed to deal in nearly every form of metal, but that’s a subject I’ll speak to in another paper. So after disqualifying 2/3 of the deals brought to me from classifieds, I focused my attention exclusively on bullion products. I wanted to get the biggest bang out of every dollar I spent, and acquire as much metal as possible. Therefore, I chose gold krugerrands and gold maple leafs, and gave my greatest attention to 1 oz. silver eagles and 100 oz. silver bars. During those early years of the bull market I discovered many owners of silver had owned the metal for a few decades and were resentful towards it. They made their purchases in the early 80s and hadn’t recouped their investment. I found these sellers to be quite flexible with giving me 5-10% discounts on bullion products, especially if I drove to them and picked the items up. After a few years of buying this way on Craigslist, I gained great experience and built my first hoard of metal. But I noticed something was happening. The prices of gold and silver were increasing rapidly, and while my hoard was quickly going up in value…motivated sellers were disappearing! The remaining sellers all wanted spot price or more, and none of them offered me discounts anymore. As the spot prices further increased, more buyers emerged on Craigslist and everywhere else. They were copying my buying strategy, and squeezing out all the profitability. So I chose to give up buying through on classifieds such as Craigslist. It was becoming “work”, and it just wasn’t very fun anymore (as shrinking profit margins are never very much fun). So while that buying period came to a close, it gave birth to my experiences buying mining stocks. For the next few years I began learning about mining companies and assembling my own portfolio. While I won’t speak to the mining stocks here in this report, it was a great way for me to continue my education in metals investing, after one “room” of the gold and silver party became too crowded. Early Conclusions Reached In Buying Metals: 1. If you’re looking for the cheapest and greatest exposure possible, go for bullion coins and bars. 2. Avoid numismatic coins unless you’re looking to build a “baseball card-esque” type of hobby, in terms of buying all the magazines and spending your nights and weekends learning about and studying the different mintages, etc. Buying numismatic coins is like buying art. You have no idea what you’re paying for unless you put in the time to understand the product, and have developed the ability to recognize whether someone’s offering you a good deal or not. 3. Avoid industrial forms of metal unless you’re willing to spend time and money on your education, much like numismatics. As mentioned, I learned a reasonable amount on the scrap jewelry side, but will speak to that in another paper. 4. Stay simple, appear simple, and use your common sense: Don’t tell everyone in the neighborhood you’re buying precious metals. If you have to tell someone, tell your wife or husband, and who knows, maybe it can be a fun journey for the both of you. Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. 5. Everybody loves cash, and negotiating is most fun when you are the only buyer in town. Bar & Coin Inspection We live in a day and age of counterfeiting in everything, and counterfeit coins and bars certainly do exist. The process I followed for gold and silver was pretty simple. During direct purchases from individuals, I always inspected each item carefully. I brought a gold tester, a scale, and a magnet (please find links at the end of this report for those products). These three tools, along with common sense, were enough to keep me protected. One of the benefits of choosing only 2-3 products for purchasing (and sticking to those products only), is that you become a sort of master on those products. You get a feel for them and can sense when something about the bar or coin in your hand is a little off in any way. The only way to build that sense is by buying a whole bunch of whatever it is you want, and handling the items every day. One thing I’ve always enjoyed is having a small coin or bar on my desk to use a paper weight. I’d find myself picking it up, admiring it, and further devising ways to increase my holdings. This daily routine of handling your favorite bullion products places the size and density characteristics into your subconscious muscle memory. Over time, you will be able to tell if a product is real or not by simply picking it up and looking at it. If it’s fake you’ll be able to feel it. In terms of actually testing your coin or bar, you should first consult the official dimensions and size specifications (Google “dimensions and size” of whichever coin or bar you are researching). Once you know the parameters of the product, use your scale to verify the weight, and a magnet to verify that it won’t stick (a rare-earth magnet will not stick to either gold or silver). If you feel the need for further testing, you may use a gold tester to determine its authenticity. You may also use acid testing for either gold or silver. Acid test kits can be purchased online, and you will need lots of practice to master the skill of acid testing. To learn, simply get started testing lots of pieces of bullion, and lots of pieces of other metals—such as coins, clippings, etc. These methods and tools are of great aid when it comes to verifying the authenticity of your bars and coins. With time, you’ll acquire the ability to tell within eyeshot (and handling) if a product is real or not. Limiting Transaction Risk One strategy for safety I’ve always followed is that of taking baby steps and starting small. If you’re dealing with a new seller or dealer, and the person immediately pushes to arrange a large deal with you--bring the deal size down and see how they treat you. I’ve always believed that trusting your instincts and taking baby steps is the best method of avoiding situations which can lead to fraud, fake products, theft, etc. When it comes to purchasing bullion from a large dealer, I would again suggest starting small. Once you build confidence with a new dealer, you can gradually make larger purchases. Over time you will develop a strong relationship, and they may offer you preferred pricing to retain your loyalty. A Note on Security When Buying & Selling With Individuals When I began buying metal directly from individuals, my deal sizes were usually under USD $1,000. At the time, $1,000 could buy more than 100 ounces of silver and more than 1 ounce of gold. When I was Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. offered good deals above $1,000, I would carefully screen the buyer, and pay particular attention to the proposed meeting location. If a deal was large, I would call my friend and childhood mentor to come with me (who was a local police sergeant), or if it was a major deal (or series of deals), I would pay for a 1-hour “police detail”. A “police detail” is a service most American police department’s offer to the community. It’s mostly businesses, banks, and road construction companies that use this service. The service is hiring a policeman to serve as private security. For example, if a bank hires a police detail, the officer simply posts himself at the bank and stands guard throughout the day. This amazing service is available to anybody in the community for a flat hourly rate! So for example in Boston, I would hire a police detail for about $40 an hour, with a few hour minimum. For less than $200 bucks, I could have a policeman pick me up, drive me around to a few different locations while handling cash and physical metals, and drop me back off at home when finished! This is a great option for those in the business of handling large sums of capital. Buying and Trading Metals Post-2007 Following the surge in metal prices and the decline of the American economy since 2007, I no longer view gold and silver as a great place to make money on the “buy-side spread” in terms of dealing with individuals. Once again, this is because great numbers of people have rushed into the metals markets and every classified community will have scores of vultures looking to buy gold and silver at a discount. That isn’t to say you can’t make money doing it---but I simply don’t have the interest in competing with other buyers. With that said, I now look at bullion only in terms of gaining exposure to the gold and silver price, and when I’m looking to buy or sell---I want fast, excellent, safe service. Following my years buying on Craigslist, I began doing larger deals with bullion brokerages and have found the process safe, simple, and easy. When I want to buy, I call up 2 or 3 brokers and ask them how much the buy/sell rate is on a specific coin or bar. I then compare the prices against one another and factor in the cost of insurance and shipping. Insurance and shipping is usually 1%-2% (of the total value of the transaction), depending on the size of the deal. Whichever brokerage offers me the best price is the one I usually deal with. After doing a number of deals, I’ve found there are two bullion dealers I do business with most. The first is Kitco (Kitco.com). The reason I do business with them (they are not paying me to say this by the way), is because they offer exposure to a variety of metals, and they offer pool accounts, should I decide I want them to hold on to my metal for a while. They are not as cheap as my second pick, but I trust them. However, I don’t think I trust them enough to leave more than $25,000 USD worth of metal in their possession for too long. They are too diversified an organization for me to entrust a large amount of my cash. The second dealer is Certified Assets (CertifiedAssets.com). I’ve done a number of deals with them, and their prices are very fair (and cheaper than Kitco). Additionally, they have an operating relationship with a depository company called First State Depository. The third dealer I’d like to mention is a local dealer in your city or town. If for nothing else than knowing you’re getting a better deal than everyone around you, call them up and ask for pricing. Who knows, maybe they’ll run a special at some point which can compete with one of the large brokers I’ve Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. mentioned. Also, they might be good people to know in case you’re in a pinch of some kind and need to liquidate your metals locally at short notice. Gold & Silver Through The Mail This concept is scary for many people, as the idea of sending $20k or more to someone you don’t know is foreign. Therefore, I recommend doing due diligence on metals brokers, even with the companies I’ve mentioned. Start with the Better Business Bureau’s website (bbb.org), then type the name of the brokerage into Google and see what you find. Add search words like “scam”, “ripoff”, etc., to zoom right in on the pages which might contain customer complaints with those keywords. Some consumer advocacy websites might prompt you to pay for reports on whether or not a business is reputable…but don’t waste your time or money on that. If you have any sense that something is wrong…skip the dealer entirely and do business with someone else. Once you’ve identified the dealer you’re going to do business with, call them up and compare pricing. When you’ve settled on price, they might offer to “lock” it in for you, as long as they receive your check within a few business days. You’ll be asked for a personal check or a certified bank check, and possibly a bank wire. I do not recommend using credit cards for bullion purchases, as many dealers have strings attached to credit card purchases due to fraud or other types of claims customers can make to dispute transactions. If you’re dealing with a good broker, you should be able to comfortably send them certified bank checks with no problem. When a dealer locks-in a price for you, they will most likely add a small amount to your purchase order for shipping, handling, and insurance. Never, ever, ever, ship metals without FULL insurance. The cost is only 1%-2% of the value of your metal. Now that you’ve ordered your bullion and paid for it, the package should be on its way. You can sit back and enjoy yourself. You’ll most likely hear the doorbell ring in a few days, and when you open the door, a FedEx delivery truck should be greeting you with a package. It should be an unmarked, small to medium-sized cardboard box. When you slice it open, you should see plastic tubes containing your gold or silver coins. Congratulations if you’ve gone through this process, it’s very exciting. When you’re finished admiring your coins, you can safely store them away. Again, as long as you don’t brag to everyone in the neighborhood about your coins, you can essentially put them in any private area and they should be fine. However, if you are building a $5-$10+ million dollar coin collection, storing them in your home might be a bad idea, unless you have a private vault somewhere on your property. Also, if you don’t feel safe having your metal in one location, you can “spread it around”---ie., keeping it in different locations to hedge risk. I’ll talk about that further ahead. Selling Your Bullion Now let’s fast forward two to three years into the future when hopefully your bullion holdings are trading at a much higher price than they are today. How do you sell them? Let’s take a look. Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. If you purchased your bullion through classifieds (like I did in years past), don’t call up any of those people you bought from. Call one of the dealers I mentioned, or your local city or state dealer. The reason I mention a local dealer again, is because when you sell your metal, there’s nothing like getting a stack of warm, soft cash placed in your hands---especially if it’s a tall stack that needs to be placed inside one or more large envelopes. You can’t put a price on that feeling. Additionally, if you need the money fast, a local dealer will pay you on the spot, whereas mailing to a dealer could take seven to fourteen business days, not including time needed for the check to clear. So when you’re ready to sell, follow the buying process but in reverse. Ask what the “buy price” is for the product you have, call up competitors, and decide who to deal with. If you ship the metal in the mail, load the package with all the insurance it needs to be covered and wave it goodbye. It’s as simple as that. Domestic and Foreign Trading - Storage With An “Online Dealer” Over the past ten years, a number of website-based bullion dealers have sprung up around the world, offering bullion trading and storage. I’ll list a few of these brokers below, but let me first tell you my thoughts and feelings on them. Over the last five years a number of gold company scams have occurred, by companies claiming to be storing physical bullion on behalf of customers, or offering “leveraged” gold, silver, platinum or palladium products. I must warn you—do not entrust your money to any bullion storage company you don’t know. Seek out the absolute best. By dealing with the most trusted institutions, you reduce your risks significantly. That doesn’t mean that all small brokers and dealers are going to harm you. Many of them are run by honest and trustworthy people, and of course, this journey is yours after all, not mine. With that said, here is a short list of online brokers which offer the services I just described. I won’t go into full detail on each one of them, because their information and offerings change all the time, and it’s also part of your journey to make the phone calls necessary to learn about each company. Don’t ever take anyone’s word or recommendation on anything without calling and verifying it yourself. If it feels right and the information checks out, go for it. Here they are: GoldMoney BullionVault Kitco GoldSilver.com Perth Mint There are many other similar companies around the world, but these five have been around for most of the last 10 years, and have integrated themselves within the North American and European gold and silver communities. *A note on vault storage - Many companies offer two different types of “product & storage”, commonly called “allocated” and “unallocated”. Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. Allocated means your bars and coins are specifically titled to you as the owner, to which you can identify them by serial number. They are your coins and bars sitting inside the vault. The second form called, unallocated, means there’s a bunch of coins and bars in the vault, and none of them are specifically “allocated” to you. This means you are a notional “creditor”, with a “claim” against the gold in the vault, equal to the size of your purchase. There are pros and cons to both of these methods. Allocated is safer because if the organization goes bankrupt, you may be able to claim your bars and coins held in their vault. For this reason, allocated is more expensive (1-2 percentage points). With unallocated bars and coins, you cannot claim any particular coin or bar, because you only own a claim against it. So if the organization goes bankrupt, you will be standing in a creditor’s line waiting for your money back (along with many others). Either way, organizational risk is the largest risk when looking at allocated and unallocated metals holdings method. Arranging Your Own Storage One option following a large purchase of bullion is to personally arrange storage of your holdings. This requires calling a storage company or bank, and inquiring about their vault storage costs. I’ve spoken with a few storage companies and after assessing the costs (a few percentage points annually), I determined this route wasn’t for me. I have however, used safe deposit boxes at banks many times. If your holdings are large enough that you wish to use a storage provider, here are a few companies you can do some due diligence on: CNT Depository, Inc. Ed Lubicich, Director of Vault Services e-mail: [email protected] Tel: 508-807-4801 722 Bedford Street, Bridgewater, MA 02324 First State Depository www.firststatedepository.com Eric Higgins, Head Of Customer Service e-mail - [email protected] Phone 302-765-2760 100 Todds Lane, Wilmington, DE 19802 Gold Silver Vault www.goldsilvervault.com Bob Coleman, Director of Customer Relations e-mail - [email protected] Phone 208-468-3600 Toll Free 866-468-3600 Administrative Office 2245 North Samantha Court, Nampa, ID 83687 Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. Via Mat International Inc. www.viamat.com Stephanie Mendez, Secure Storage Specialist e-mail - [email protected] Phone 516-281-3662 130 Sheridan Blvd. Inwood, NY 11096 You might also want to call an insurance agent and ask for an annual insurance contract covering your bullion. I have not done this personally, but I expect it would be available at a cost of a few percentage points per year of the total value of the metal. Let’s move on now to what many gold and silver investors refer to as “paper gold”; gold accessed through publically traded markets. Accessing Gold and Silver Through The Stock Market A convenient way to buy gold and silver in recent years has been through the stock market. Let me explain how it works. A financial firm gathers a pool of money. With this money they purchase a large quantity of gold or silver. Then they store the metal with a vault storage company certified by market regulating authorities, which can be inspected and audited regularly. Once the metal is placed in the vault, the shares are ready to be issued. Let’s say there are a total of 1 million ounces of gold sitting in the vault, getting ready to trade on the market. The firm would issue for example, 10 million shares, representing ownership of the 1 million ounces of gold. Each share would claim ownership of 1/10 of an ounce of gold, and the market would “price” the shares at 1/10 of the spot price (per oz.) of gold. So if the price of gold is $1800 an ounce, each share would trade at about $180. By purchasing ten shares of that stock (or “ETF” as they’re commonly called), you would own 1 full ounce of “notional gold” via the stock market. The firm would also deduct an annual expense from the fund’s assets, to cover operating and management expenses. In recent years, lots of bullion funds and ETF’s have been launched on the stock market. Gold, silver, platinum, and palladium can all be purchased using these funds. They’re fast, convenient, and eliminate certain risks associated with holding physical gold in your possession. However, these funds carry other risks you need to be aware of. Those risks are associated with the people managing the fund, vault security, and the nature of the stock market itself. In the case of bullion and ETF funds, there are layers of organizations in between you and your gold, and if any one of those groups in the chain commits fraud, the entire system breaks. This warning isn’t meant to scare you---it’s just meant as a way of saying that risks are always present when looking at metals ETFs. Here are the stock tickers of a few popular metal ETFs: GLD – SPDR Gold Trust Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. SLV - IShares Silver Trust PHYS – Sprott Physical Silver Trust For more information on these funds, just type their names into Google. As a final note, when purchasing these ETF’s, it will be your stock broker who helps you to buy and sell. Futures Contracts: Sharp Blades of Gold and Silver Gold and silver futures contracts are another way of accessing precious metals. But I must warn you-unless you are a professional investor with a real reason to use these vehicles, stay away. They are simply too risky for the average person. Futures contracts are like driving a Ferrari under a 20 mph speed limit. There’s nothing wrong with driving under the speed limit, but the leverage involved with futures contracts can increase the speed of gold and silver volatility in such a dramatic way…that a slight touch of the accelerator can quickly drive you up and over the curb and into a tree. Let me explain. All futures contracts represent a great quantity of commodity dated for delivery at some point in the future. They’re structured similarly to options, in that they have “delivery months”, much like “expiration months”. Since futures contracts represent a great amount of any given commodity, common sense would say they involve great amounts of money to own and purchase. Not necessarily. A 100 ounce gold contract at the time of this writing represents $168,000 worth of gold, to be delivered at some point in the future. You might think, “That means I need $168k in cash to buy that contract”--not so. Futures contracts only require a cash collateral of between 5%-15% of the total value of the contract’s underlying commodity. Therefore, a 100 oz. gold contract might only require that you deposit 9% of the total value, which in this case would be roughly $15,000 in cash collateral. So for $15k which the brokers call an “initial margin”, you would have enough to purchase one of these 100 oz. gold contracts. Here’s where the volatility comes in. Let’s say gold moves from $1680 to $1700 (a bit over a 1% move) per ounce. The new value of the underlying 100 oz.’s of gold is equal to $170k, up $2k from your purchase price. After this move higher you look at your statement and it indicates your $15k deposit has now earned you $2k, for a total of $17k…or roughly a 13% return on your initial deposit. Not bad for a day’s work you tell yourself! The next morning, you wake up, look at the markets, and see that the US Fed announced a new quantitative easing program, and the price of gold rose nearly 5% in response. The previous day gold was trading at $1700 oz., and now it’s trading at $1780, and all the experts and gold websites are screaming that $1900 is shortly underway. You log in to your brokerage account and see your initial $15k deposit has turned into total equity of $25k! In just a few days you made $10k, nearly doubling your initial deposit! Your phone rings, and it’s your futures broker. He excitedly explains to you that the futures exchanges have reduced gold “margins” from 9% to 6%, which means investors are now only required to put down 6% of the total value of each 100 oz. gold contract. You pull out your trusty calculator and determine that each contract now only requires a deposit of about $10,500. Seeing that you have total equity of Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. $25k, you buy another contract, doubling your gold holdings! As everyone in the gold community knows, gold will be going to $2k and higher, so it’s smart to add to your holdings. Your second contract purchase gets filled at the price of $1780 an ounce. Going to bed excited at the wise decision you made, you sleep with the lovely idea that as gold moves to $2000 an ounce you’ll be earning a small fortune. The next day you wake up to see how your gold is doing, and for some reason, it’s down 5.5%! It collapsed overnight from $1780 to $1680. You call your broker in a fury to find out what’s going in, and he tells you the exchanges increased margin rates due to growing speculation in the gold market. He further tells you that you lost $10k on the contract purchased at $1780, and all your gains have been wiped out from your first contract purchased at $1680. You now only have $5k in equity remaining, a 66% loss on your initial investment! It’s okay, you tell yourself, because the bull market will save you. Before your phone call with the broker is finished, he tells you that you can no longer keep your initial gold contract purchased at $1680. The reason he explains, is that $5k is no longer enough for the “maintenance margin” (cash collateral) required to hold your contract. You need to have at least $12k in equity just to keep it. He concludes that unless you deposit another $7k by the end of the day, he will be forced to sell it on your behalf. Seeing as you don’t want to clean out your life savings on this stupid gold investment, you tell him to sell at whatever price you can get, but over the last five minutes of conversation, sellers have been dumping their contracts ahead of you. He is only able to get you $4k on the sale, leaving you with an over 66% loss during one of the greatest gold and silver bull markets in history. The circumstance described above is what many futures “investors” go through. Futures contracts should not be used by anybody but professionals. Because you’re reading this paper I know you’re much smarter than the hypothetical person described, but it’s something to keep in mind if at any point in the future someone tells you that futures contracts are a good idea for the average investor. Keep things simple, and if you buy physical gold and silver, stay away from the “leverage” products. Becoming Your Own Jeweler: Buying Scrap Gold & Gold Jewelry During the 2007-2008 financial crises, I formed a gold jewelry trading company, and began organizing gold jewelry buying events in and around my home city of Boston. I found the profit margins to be incredible---most pawn shops were only offering 20%-40% of the spot price of gold, and the “mail-in” gold buyers were paying less than 15%! I chose to pay about 60% of the spot price for the gold, leaving me with a profit margin that averaged about 40%. This payment percentage was more than all local competitors, and it attracted many happy customers. At buying events, many customers would bring upwards of $3k-$5k worth of gold jewelry to sell. At a 40% profit margin, a $5k “sale” (or rather purchase), created a profit of over $2k. This business was lots of fun but very short lived. Within a few years’ time, new competitors came into the market and squeezed out margins (much like what I experienced during my classified ad bullionbuying days). High unemployment rates worldwide have created masses of people, all roaming in search of a new job or career. Scrap gold buying became a magnet for those types. Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. Through the experience however, I learned some of the most valuable lessons on the gold market to date. I learned how to test broken and scrap pieces of jewelry, how much to pay people, and more importantly, what to do with it after I bought it. Scrap gold jewelry is basically gold bullion, but it’s just contained in an “illiquid” physical shape. Illiquidity means that it’s harder to sell something because there are fewer buyers and sellers available in the marketplace. This inconvenience can work to your benefit however, if you’re one of those people who know how to identify value. It’s like speaking a language very people know, and if you speak it, you’re “in”. Many are curious as to whether or not there is still opportunity to make money buying scrap gold. The answer is yes. But’s it’s not as easy as it used to be, and the low-hanging fruit has already been picked. Therefore, I don’t “recommend” using this method as a way to accumulate gold unless you have a preexisting business with very high foot-traffic…something in which gold-buying could fit into smoothly. If you have 50-100 customers standing in front of you every day in some kind of retail location, it could be a service that might offer value to them (as well as creating an additional income stream for yourself). Due to the length of details on this particular topic, I’ve decided to write a separate document on what I’ve learned about scrap gold buying, which I will make available on my website. Winding Down I hope this paper has encouraged you to consider gold and silver. I am not an investment advisor and I do not “recommend” it, but it’s been a passion of mine since 2004. This document is very brief, but I must admit--buying gold and silver is a simple proposition. You don’t need to read 200-300 pages to learn how to do it. A few tips and pointers, along with encouragement should be enough to get you started, because after all, this is about you and your journey. There are lots of small and constantly changing variables you will need to learn on your own, but the best way to get started, is to get out there and get started! To start, call up each of the gold brokers listed below and say, “Hi, I’m interested in gold and silver bullion. Why should I own them, and why should I do business with you?” GoldMoney - 1-855-583-GOLD BullionVault - 888-90-VAULT Kitco – 877-775-4826 GoldSilver.com - 888-319-8166 Certified Assets - 866-765-3352 The responses they give you will yield a wealth of information, and your confidence will zoom upwards with each new phone call you make. In Closing I’d like to thank you for reading this document. My experiences in gold and silver are continuing to this day, and on my website at BullMarketThinking.com, you can follow my regular updates, thoughts, and market interviews. I feel that we’re in a generational bull market for gold and silver that may last Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. another 5-10 years. These years should be very exciting for those who own the metals and the businesses surrounding them. All the best in the days ahead, Tekoa Da Silva Publisher, BullMarketThinking.com Resource Links Gold Testing Equipment: Gold Tester: This “AuRACLE” Model AGT-1 Electronic Gold Tester is available from Amazon.com for $429.99. It is the newest in testing technology, and does not require gel-tubes like older versions. Take a look at the information page to learn more. You can view it on Amazon by CLICKING HERE. Rare Earth Magnets: These rare earth magnets will serve you well, and are generally a fun thing to have around. They are cheap, usually less than $10 bucks, and I recommend having them. You can view them on Amazon by CLICKING HERE. Digital Scale: Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions. A digital scale is good to have to quickly and easily confirm the weight of your coins or bars. Some might say it is not necessary, but it is part of the toolkit of any wise metals buyer. They usually sell for less than $15 bucks. You can view this model on Amazon by CLICKING HERE. Disclaimer & Safe Harbor: Please note that nothing in this document should be misinterpreted as a recommendation or solicitation to buy or sell any security or investment. The writer of this document is not a qualified investment professional, and nothing he says should be considered investment advice. Furthermore, always consult a qualified investment professional before making any investment decisions.