Basic Precious Metals Terms List
If you are new to precious metals investing, it’s important to be familiar with a few basic industry terms. This blog explores some of the most common and important terms lists.
This is usually the most misunderstood term. Some think of bullion as pirate treasure or giant bars of gold. The term bullion is used to describe gold, silver, platinum or palladium coins, bars, ingots or wafers which directly follow market spot prices and have known amounts and purities of the respective metal.
This is a key term that is critical to know. The spot price is the current, real-time market price of the precious metal, determined by the latest trades on the futures market as well as the over-the-counter markets.
Thousands of websites around the world display the current spot prices of precious metals. When you buy or sell precious metals, the price is always based off of the current spot price. The spot price is a global price and it changes moment by moment.
Margin or Premium:
This is one way to purchase paper metal. To buy or sell a futures contract, each party or side of the transaction must put a “down payment” on the futures contract. The contract is held by an independent central clearer. With your deposit, the central clearer “guarantees” the balance of the contract, promising to either party their potential profit.
This is like purchasing the right to collect on the profits of an order of precious metals without having to buy the metal outright. The percent of risk is magnified because a small drop in spot price could force the buyer out of their paper metal position. Margin percentage requirements are set forth by the COMEX.
This applies to physical metal transactions. It is the difference between the selling price and buying price of a specific metals product. If a vendor sells Silver Eagles at $6 over spot price and offers to buy them for $4 under spot price then they have a spread of $10. The smaller the spread, the better of the consumer stands when doing business with a vendor.
Premium: These terms are used to describe the difference between spot price and what the actual price is for a specific kind of gold or silver. For example, a 1oz U.S. Silver Eagle made by the United States Mint is easily recognized and guaranteed for its weight and purity.
However, a 1oz generic bar of silver made by an unknown refinery would be unfamiliar and not guaranteed after it is in circulation. So naturally, the Silver Eagle has more value and therefore, a higher price.
Other things to consider would be the size of the metal. Also, generally speaking, the smaller the piece of metal is, the higher the premium will be.
It is much easier to create a single 100 oz silver bar than it is to create one hundred 1oz bars. Premiums will follow suit as well. Factors for the metal Premium can include the costs of fabrication, distribution, supply/demand factors, broker/dealer fees and desired profit from the dealer.
Troy Ounce: This is the traditional unit of weight used for precious metals.
Fiat Money: Paper money or currency that is made legal tender by government law. Fiat currency is not backed by gold or silver.
This is a coin or currency that is identified by a government to be an acceptable form in the discharging of debts within that country.
Mint: A place where coins or bars are manufactured. There are government mints and private mints.
Precious metals coins that hold some collectible value are deemed numismatic. This is a broad term and its definition is unclear. Technically, a U.S. Silver Eagle is a numismatic coin as soon as it’s made. It is both bullion and numismatics. The law that created the production of these coins even defines them as both numismatic and bullion.
A numismatic coin’s price consists of not only the precious metal’s content but also commonly depends on their rarity, condition, production dates, historical significance, mint marks, and beauty.
Because of these factors, more valuable numismatic coins are often encased in clear plastic “slabs” for preservation and given a “grade” or score by Numismatists. The coin would be considered a numismatic coin before and after the grading process.
Ask Price: The price at which a dealer offers to sell precious metals items to you.
Bid Price: The price at which a dealer offers to buy precious metals items from you.
Around is a metal disk made of precious metals usually produced by a private mint. They are not intended to be used as money nor legal tender. They are struck with various images on the coins, are different sizes than legal tender coins and the weight and purity are not guaranteed by a government. Rounds generally carry less of a markup premium than legal tender, the government issued coins.
A term used to describe a bag of pre-1965 U.S. coins containing 90% pure silver. The coins have been circulated as currency thus the bags will not typically contain rare coins. They are sold in bags based on the total face value of the coins within the bag.
A “bag” of junk silver is jargon for $1,000 face value of dimes, quarters, half dollars and/or dollar coins. A half bag would be $500 face value of the coins in the bag. Because the amount of silver in the coins is already known and easily traded, it is not economical to melt the coins just to be in another shape/purity.
Assay: A test to determine the quality and purity of a gold or silver product. When a gold or silver product has an “assay” test certificate, this is a guarantee from the assayer that the product in question does indeed contain the described amount and purity of gold or silver.
Why Precious Metals are a Critical Part of a Solid Wealth Strategy
Liquidity As long as you buy the right forms of metals, physical gold and silver are very liquid. It’s so easy to call up a broker and lock in a buy or sell price for any quantity of bullion and place your order. For a non-paper investment, precious metals are one of the most liquid investments you will find.
Precious metals are perhaps the world’s most liquid asset and they are traded throughout the world. I have an acquaintance that travels the world. He used to carry pockets full of cash on his trips. Now he carries 1oz Gold Eagle coins.
He tells me he can walk into almost any bank in the world, place the Gold Eagle coin on the counter and receive the approximate market value in any currency he wishes. Gold truly is the world’s form of money.
It’s true that unlike selling a stock or mutual fund on the phone or online, you do have to get the metals shipped. Many people who sell paper assets tend to make a big deal out of the shipping issue.
Actually, it’s really not that big of a deal. It’s amazing how many tens of millions of dollars’ worth of gold and silver are shipped every day by FedEx, UPS, the U.S. mail and by other shipping methods.
It’s also hard to beat gold and silver’s flexibility. You can buy and sell gold and silver from the other side of the planet with a click or a phone call, and you can also buy and sell it from individuals and small local shops right in your hometown. You can use metals for trade, and buy and/or sell them to anyone you wish, at any time you wish. Try doing that with a stock or mutual fund.
Portable Gold is a very portable form of wealth. Many people are shocked to discover that, if you had some good size pant’s pockets, you can put a half million dollars’ worth of gold in your pant’s pockets.
You can put millions of dollars’ worth of gold in a briefcase. If there comes a time when you need to grab as much wealth as you can, with short notice, and take off, gold is not a bad way to go.
Silver on the other hand, is quite a bit bulkier and less portable from a dollar value standpoint. I have a friend who always travels with his special belt.
The belt has 1/4 ounce Gold Eagle coins sewn into it. If anything was to happen to him and he was to lose his wallet and his credit cards, etc., his plan is that he has enough gold in his belt to buy an inexpensive car or whatever he needs to get back home.
Creditable Some people call gold and silver global money. If you have the right forms of gold and silver, you will find that it is accepted practically anywhere in the world. Gold and silver are so creditable that they were officially recognized in the U.S. Constitution which states; “No State shall make anything but gold and silver coin as tender in payment of debts.”
Privacy is one of the big reasons so many wise investors choose to buy these shiny metals. They’re some of the most private forms of wealth available. If you buy certain types of coins and bars in the United States, there is absolute, positively no reporting required at all.
That goes for when you purchase the metals and when you sell them. Additionally, for certain items, the quantities that you can buy and sell them in without having to be reported are completely unlimited! This is a HUGE benefit and if privacy is important to you, you will love this.
There are certain types of coins and bars, and certain quantities of coins and bars that can be bought and/or sold that DO have to be reported to the government.
For these certain items and quantities, the broker/dealer whom you are buying or selling the coins from is required to complete the IRS form 1099-B with the person’s name, address, social security number and more.
They send a copy of that same form to the Internal Revenue Service. Clearly, when you have to report the sale of your metals, your transaction is no longer private. For many investors, it’s very important to know exactly which forms and quantities of metals are able to be kept private.
You will find many metals’ broker/dealers who will not tell you the entire story on this and suggest that if you do not buy numismatic coins, you have no privacy when buying bullion. This is simply not true.
If you purchase the right types of bullion, in the right way, bullion can be as private of an investment as you will ever find. For more information on this and a detailed list of exactly which types of metals are private and which ones are not, please visit our website.
A great aspect of owning precious metals is that you never have any capital gains or losses until you actually SELL your precious metals. You can hold your metals for decades with no reporting required.
You can even have huge “paper” gains and huge “paper” losses during that time. But it’s not until you actually sell them, that you then realize a gain or a loss.
You do have to pay short-term or long-term capital gains income taxes on your gains, depending on how long you held the metals before selling them. Or, if you happen to have a loss when you sell your metals, you may be able to deduct the loss on your income taxes.
It’s up to you to report your capital gains or losses on your tax returns. It is not up to the broker/dealer from whom you bought the metals to report it.
Since you can buy your metals from one dealer and sell to a different dealer or individual, the dealer who sold you the metals would have no knowledge of previous or future transactions. Again, you should always consult a qualified tax advisor on matters pertaining to investing and taxes.
When selling your metals, the broker/dealer who is buying the metals from you will be required to complete IRS form 1099-B for certain types and quantities of metals sold. Some Key Factors That Impact the Performance of Gold and Silver High Inflation or the Fear of High Inflation
Gold is widely known as one of the best hedges against inflation. Inflation is the loss of the currency’s purchasing power. Gold often rises as inflation rises.
As inflation rises, the value and purchasing power of your paper fiat dollars go down, but the value of your gold often goes up.
Many investors seek a hedge to protect them from inflation and often turn to gold and silver. Historically the additional demand created during inflationary times often makes metals prices go even higher.
The Federal Reserve has kept interested rates at artificially historic lows for years. Even if the next move turns out to be deflationary, many experts believe it will be short lived and that inflation will be the next big wave.
To me, common sense tells you that if the Federal Reserve has kept interested rates at historic lows for this long and if there is no room for rates to go much lower, and if we know they will not stay this low forever, then it seems pretty easy to guess which way they will have to go eventually.
It would not be surprising if, at some point, rates spring up rapidly and possibly over correct to the upside, as they seek market equilibrium. If this scenario were to happen, history tells us that it would be bullish for metals prices.
A Decline in the U.S. Dollar and/or Other Major World Currencies
Any educated and honest person will have to admit that at the rate we are printing greenbacks, eventually, there is no way the dollar can do anything but decline in value.
Our government is clearly out of control and printing and spending money as if there were no concerns. If the dollar declines in the future, history usually dictates that gold and silver prices will eventually rise.
If either of these scenarios were to happen, no one really knows how the global impact would play out, but some experts predict that the effects would be terrible.
Sharpening Rising Interest Rates
Similar to inflation, gold and silver prices tend to increase as interest rates rise, although not always. A popular belief among some investors is that hikes in short-term interest rates have a tendency to halt inflation.
Historically this scenario has not played out. Higher interest rates are inflationary because they raise the cost of borrowing and the overall cost of living.
The Federal Reserve can’t keep interested artificially low forever, and they have no way to go but up. At some point, interest rates will have to go up and when they do, they will likely cause the metals’ prices to go up as well.
Global banks are a critical component of our world economy. Our global economy has become so connected when a major World Bank fails, it sends shock waves throughout the world. When banks fail, people lose faith in the system and often turn to the safety and security that gold and silver offer.
What Percentage of Metals Is Right for Your Portfolio
Deciding how much of your investment portfolio to put toward precious metals is always an interesting question. It always comes down to personal preference. There is no one percentage that is right for everyone. To give you some guidelines or averages, I would say that the typical range is from 5% to 20%.
I do know some investment advisors who work with high net worth clients and lately, they have been advising clients to place as much as 40% of their assets into physical precious metals. For many, that would be somewhat extreme, but this gives you an idea of a range of investible assets that some investors are putting into precious metals.
It’s important to first know your reasons and motivations for investing in precious metals and of course, your investment timelines. Precious metals’ can experience some pretty intense price swings. I would not look at metals as a short-term investment. For most people, it would be good to have at least a 3 to 5 year planned hold time or more.
The great news is, as discussed earlier, gold and silver are very liquid so it’s easy to ramp your percentage of metal holdings up or down as needed. My suggestion is not to get hung up on the percentage you plan to invest in metals.
If you don’t own any precious metals, buy some and see how it makes you feel. It’s much more important that you get started and do something; you can always adjust as you go along. Don’t get stuck with the paralysis of analysis.
As you know, investing is a very personal thing. Everyone’s needs want, investment time frame, tolerances’ for risk and price changes are different. The important thing to know is that investing in precious metals is not always a steady, smooth-sailing program.
The market occasionally experiences some pretty wild price swings within relatively short periods of time. Sometimes investing in metals can be like the white-knuckle express.
Metals’ prices are driven by a large number of influences such as global usage, huge purchases and/or sales made by countries, banks, investment firms, and wealthy individuals, global unrest, world events, worry about currency stability and changes in the value of the U.S. dollar, metals’ supply forecasts, changes in government policies, interest rate changes, wars, terrorist events and much more.
As you can see, most of these factors are totally unpredictable, at least in the short-term.
In my opinion, if you have somewhat of a long-term outlook, you should simply not worry about the short-term price swings. There will always be unforeseen events that will cause metals’ prices to spike one way or the other. By far, the most successful investors I know simply don’t worry about all of the “noise” of the short-term moves.
Most of them simply accumulate metals on a consistent basis. When the price drops, they use that as a buying opportunity to increase their purchases. When prices unexpectedly spike up, they often take advantage of the gift the market has handed them and at least take some profits on their windfall gains by selling a portion of their metals and then buy back in when the price takes another dip.
If you have the right mindset about it, instead of being stressed out about the short-term moves, you can actually relax and enjoy trading in and out on big market moves. It’s all in how you look at it really.
However, if you have short-term investment needs or if your personality cannot deal with these types of price swings, then perhaps metals are not a good fit for you.
The last point I will make on this is if the worst-case economic scenario were to happen to our currency, our banking system, and the entire economy, there will be thousands of investors who will look back and say, “Thank God I invested in precious metals,” and it’s very likely that when looking back at those short-term price swings, they will look very minor indeed.
Gold vs. Silver - Which Is the Best Investment?
This is the classic question that always comes up, “Is gold a better investment than silver, or does silver trump gold?” As you may guess, this is a personal decision and everyone has their own preferences. To help you decide which metal is best for you, let’s take a look at some facts.
So in terms of supply and demand, silver is a better bet. In terms of storage and size, gold is a logical choice. Now, to examine this further, let’s take a look at the silver/gold ratio.
Silver / Gold Ratio
The silver/gold ratio is a great way to measure historical price differences between the two metals.
Going back thousands of years, the average historical price ratio between silver and gold has been 16 to 1. (Some research shows that it is a 12 to 1 ratio if you go back far enough in history, but we will stay with the more conservative 16:1 ratio.)
What this means is that it would take 16 ounces of silver to equal the price of one ounce of gold.
As I am writing this, the ratio now stands at about 58 to 1, meaning that it now takes 58 ounces of silver to equal the price of one ounce of gold. If the ratio were to get back to its historical average of 16 to 1, the price of silver would have to increase by over 360%.
Another aspect to consider is that silver is often called the poor man’s gold. The reason for this is since gold costs so much more, smaller investors cannot afford to buy gold, thus they turn to the more affordable silver. There are huge numbers of these smaller investors who are now turning to silver in a big way.
Today, the government’s gold reserves would only cover a tiny fraction of the debt that they have created and they are in desperate need of huge sums of capital to maintain their power.
It’s not hard to imagine that the privately held gold and silver reserves of its citizens and corporations have got to look pretty tempting to them.
(Yes, some think that the capital need is so great that they would not only try to confiscate the gold but the silver as well.) After all, the laws they would need to do this are already in place.
You can draw your own assumptions about any possible confiscation that may or may not happen in the future. What we do know for sure is that the government has confiscated gold bullion in the past. There is also precedence of the government allowing its citizens to keep their collectible coins. What may happen in the future is anybody’s guess.
This study also revealed that over the 33 year period that it covered, the average return on rare (high quality, graded and collectible gold coins) was 50% higher than that of bullion.
Between 1979 and 2010 higher quality collectible gold coins actually performed slightly better than stocks.
However, when correlated with inflation over that same time period, high-quality collectible gold coins produced over 3 times more than stocks and more than 2.5 times more than gold bullion. The study found that with collectible coins, it’s the quality that counts.
Today, more currency can be printed in massive quantities with the push of a button. Rare, high-quality collectible coins cannot be created out of thin air; you can’t just go and make more of them.
When you compare the available quantity of high quality, collectible/numismatic coins to the ever-increasing world population and the ever-increasing quantity of paper fiat dollars, it’s not farfetched to think there is a likelihood that high-quality collectible coins could continue to climb in value.
According to the CU 3000 Index which is considered by many to be a standard of numismatic coin performance. All investments carry risk and there is certainly no guarantee that any numismatic coin will increase in value.
However, when you factor in the possibility of confiscation and then look at the historical performance of high-quality numismatic coins, it does make a pretty good case to at least consider holding a percentage of them in your precious metals portfolio.
What is the Best Way to Buy Precious Metals?
Generally speaking, there are only a handful of different ways to purchase bullion and numismatic coins.
You can buy from local shops and dealers, online broker/dealers, or from places like eBay®, Craig’s List, newspapers, flea markets, etc. While there are exceptions, here are the general pros and cons of buying from each of these various options.
Buying Locally vs. Buying Online
When buying locally you don’t have to pay the shipping and insurance fees and you don’t have to wait for your shipment to arrive.
It’s general cash and carries, so it makes buying locally quick and easy. When you buy online, depending on the amount you order, you may have to pay shipping and insurance to receive your order, if you do not qualify for free shipping.
If you are dealing with a reputable, fairly priced broker/dealer, you will find that in real life, the shipping and insurance fees are very reasonable and generally very small.
When you do buy online, you will have to wait for your order to arrive. The lead times vary somewhat by broker/dealer but much more significant, they vary by the current availability of the actual metals. Due to the record-breaking demand, the U.S. Mint ran out of Silver Eagle coins three times in 2013.
If the mint is on backorder, it’s hard to get your metals until the mint produces them. It’s important to note here that most experts agree that due to the relatively low supply of silver and the soaring demand, in the future we will continue to see longer and longer lead-times to receive metals and there will be continued outages and delays by the mint.
That’s just the reality of the marketplace and eventually, it will likely be reflected in higher prices. As long as you are buying from a reputable broker/dealer, you can rest assured that you will always receive your purchases.
If your local dealer buys from the giant wholesalers, they too will be affected by backorders, shortages, and delays just as the online guys are.
A very important issue is, generally speaking, local dealers have a much smaller client base than most online dealers and thus they are not able to offer anywhere near the selection that online companies can.
Since metals are commodities, bullion generally has a very low markup percentage, so it’s very hard for a local dealer to inventory a large variety and deep inventory something that is so expensive and carries a relatively low markup.
Often local dealers will sell you metals that they just purchased from the last guy who came in to sell his metals, so you often don’t get first quality, high-quality, mint-direct metals and you often have a very limited selection to choose from.
From a pricing standpoint, most local dealers have much higher overhead costs, a smaller customer base and a smaller volume of sales. When broker/dealers purchase from the giant mint-direct wholesalers, the wholesalers offer volume discount pricing. So the more you buy from these giant wholesalers, the lower prices you get.
Unfortunately, the little guy is always going to be at a price disadvantage to the larger, high-volume companies. It’s not unusual to find margins charged by some local dealers that are two to three times what is typically charged by online dealers. Obviously, there are exceptions and it is always wise to shop around for the best prices, terms, and service.
It’s very important to keep in mind that many broker/dealers make the majority of their profits on hidden fees and up-sales. Be aware that many of them will lure you in with very low prices on core items like Silver Eagles.
The price looks great so investors are eager to jump in. The problem comes when you go to check out. All of these previously hidden fees start popping up left and right. By the time you get to the final checkout, they have deceptively added a ton of hidden fees.
Had you known that from the beginning, you probably would have never considered buying from that dealer? Now, the metals are in your shopping cart, you have locked in your price, you have jumped through all of the hoops, and many shoppers just say, “Oh the heck with it” and complete the purchase.
You don’t have to settle for that. Do your homework and make sure you are aware of ALL of the fees and costs before you commit to buy.
Don’t forget about the sales tax. If you are shopping locally and if you’re located in a state that charges sales tax on precious metals, you must pay the prevailing tax percentage on your metals purchases.
Sales tax rates and laws vary by state. If your state charges sales tax on metals, this can have a dramatic impact on your total cost of the metals. I would strongly urge you to shop online if your state charges sales tax. Why would you just throw that money away if you don’t have to?
Lastly, it’s important to keep this in mind. Local stores often buy from their walk-in customers and then turn around and sell those items to the next buyer who walks in. Many of the local shops do not have the instruments or the expertise to inspect and ensure the quality and authenticity of the items.
Most of the time, when you buy online, you receive items that come straight from the mints, and that’s the best single way to ensure legitimacy and ensure that you are receiving the actual metal and not a counterfeit item.
As far as shopping on eBay®, Craig’s List, flea markets, etc., my suggestion is to avoid them. If you don’t receive the item you purchased, or if you receive a different item than what you thought you were purchasing, or if you were to receive a counterfeit item, you usually have little recourse and it’s a giant pain.
A big percentage of the counterfeit precious metals that are introduced into the marketplace are sold through these outlets. You often have less sophisticated shoppers who shop for metals in these ways and sellers know it is very difficult for you to track them down to recover your investment.
In my opinion, these options are good for buying household items and the like, but not for something as important as investments that you will be depending on.
Dollar Cost Averaging
Several times a month I receive calls from people who are ready to ‘go all in’ on gold and silver. The stories are always very similar. They just discovered for the first time what’s going on with the devaluation of the dollar and the light bulb in their head just came on about gold and silver.
They are tremendously excited about it, and want to buy all they can right now! While I applaud the fact that they did finally realize the game that’s being played and the importance of owning some physical gold and silver, I usually suggest that they relax and use the tried and true method of dollar cost averaging, just like you would do when investing in traditional “paper” investments.
The concept is solid. No one in the world can accurately predict the short-term price moves of the metals. Even if you did a complete study of the fundamentals, trends, supply/demand analysis and any other methodology you could imagine, the market is always subject to manipulation by the big players so they can always affect the short-term moves.
So if you were to try and guess the perfect day and time to ‘go all in’ and make your big purchase, the odds are astronomical that you would pick the perfect time.
I always suggest that investors determine the amount they want to invest in metals and decide on a general phase-in time period that works for them.
Then, you can generally divide your purchases up and make them over a period of time, thereby buying some at higher prices and some at lower prices. In most cases, this strategy will beat the ‘go all in right now strategy’. The smart way to do it is to keep a keen eye on the markets.
Be willing to adjust your estimated purchase time periods and amounts slightly, depending on the current price trends. If you look at a chart and silver has been in a downward trend, you may want to watch it and see if it starts to bottom out or reverse its trend and then make your next purchase.
Of course, you won’t always be right, but if you space out your purchases and make minor-buy timing adjustments along the way as the market swings up or down, you should increase your odds of having an overall lower cost per ounce than you would by making one big purchase.
Keep in mind that occasionally there will be some rather dramatic market moves where it may become pretty obvious that it is a great time to step up your buy or sell amounts. Sometimes the market hands you a gift and it becomes clear that it is an exceptional time to buy or sell.
You still may not want to go all in at one time, but just increase your purchase amounts from your previously planned amounts. This is also a wise method to use when selling your metals. You do the exact same thing, for the exact same reasons, but you are looking for price up-ticks to sell on.
Also, sometimes the market will run up substantially and present a great time to sell and take some short-term profits, and then buy back in again after the market finds its base. Many people find it fun and interesting to watch the markets and look for great opportunities as they present themselves.
However, if this is not your thing, you can be sure that there are many, many buy-and-hold metals investors out there and that’s a perfectly fine way to go if it works for you. I believe it’s more important that you make the wise decision to own some physical metals than it is that you timed your purchases correctly.
Here’s the really important thing to keep in mind. If several years from now gold and silver reach the price targets that many forecasters are predicting, you will look back and many of the price movements today will look insignificant.
So while we can’t predict the short-term price changes, it’s not unlikely to assume that the metals will continue to increase in value as the dollar continues to decline in value.