This is not a guide about why you should (or shouldn’t) buy gold. If you’re spending the time to read this, presumably you have already decided you want to own some or you are thinking about it. Maybe the greater than $3 trillion federal deficit has you wondering what impact that will have on our currency. Whatever the reason, this guide is will tell you what to buy and what to stay away from.
There are several ways to gain exposure to gold. The most common way for individual investors is to buy shares of gold mining companies or purchase an exchange-traded-fund (or “ETF”) designed to track the price of gold (i.e. GLD or IAU). These options are not the subject of this guide, nor is there much to explain on how to buy them. You buy them just as you would any other stock traded on the exchanges and there is no explanation required.
However, I believe these methods (buying gold ETFs or gold companies) are flawed if your objective is to buy an insurance policy against inflation. These other options can be great for speculative trades and trying to get in and out quickly without high transaction costs, but they are not the most ideal version inflation protection.
The more sound way to own gold is to buy gold bullion. If you’ve never heard the term bullion before, it’s simply gold (or silver) that is 99.5% pure and comes in the form of bars.
Now … there are 3 ways you can buy gold bullion which I summarized below
Buying Gold In An Allocated Account
Buying gold bullion in an allocated accounts means that you’re buying from a bank where they store the gold in your name. The term is “allocated” because the gold has a serial number or some other identifier that indicates you as the rightful owner.
From a legal standpoint, people like to buy gold in allocated accounts because they are the legal owner of the gold and have rights to it should the bank become insolvent. This is obviously preferred but it’s also more expensive to buy, store and insure gold in an allocated account compared to unallocated.
Owning Gold In An Unallocated Account
Buying gold in an unallocated account means that your gold is not specifically tagged in your name. Legally, when you deposit your money in an unallocated account, you are a creditor of the bank. The bank owes you the amount of money equal to the quantity of gold you purchased at the time of your redemption.
In other words, if you bought 1 ounce of gold in an unallocated account for $1,500 and you redeem it several years later when the price of gold is $2,000/ounce, then the bank owes you $2,000.
The bank may choose to own gold in its vaults for the total amount of gold it owes to its unallocated depositors or it may invest 100% of its deposits in other securities. The reality is that these banks probably invest their deposits into a mix of gold and other securities. Most banks that offer unallocated accounts have significant business in gold and they likely have a fair amount in their vaults.
As I mentioned, the risk for unallocated accounts is that the bank could go insolvent and you will be left empty-handed like all the other depositors. This arrangement is not much different from a standard checking or savings account except the FDIC does not insure an unallocated gold account.
The big advantage of buying in an unallocated account is lower fees; however, I do not recommend them for gold investing. The presumed goal is to buy an insurance policy against inflation or a currency crisis. In a worst-case scenario, I don’t believe an unallocated account leaves you in a secure position. If you like the sound of this option, I recommend buying gold ETFs like GLD and OUNZ instead.
If you like the idea of an unallocated account, then I recommend you check out goldmoney.com. This is slightly different the the pooled accounts we’re talking about but it works much the same way. The advantage is that you can trade in and out of gold easily and you can even trade with other people that also have GoldMoney accounts.
It works like the venmo of gold and it’s a very exciting way to own gold. One warning though: opening an account with them is a pain in the “you-know-what”. You have to fill out a lot of paperwork and get notary signatures and a bunch of other things. But once you’re in, you’re in.
How To Buy Gold Bullion Coins
If you want take physical possession of the gold you buy, the best way to do this is through purchasing gold bullion coins. Technically, gold coins are not bullion in the truest definition of the word “bullion”. However, there are certain coins minted with the purpose of serving as an investment in pure gold bullion and I will use the term “gold coins” in this guide.
As I mentioned, if you want to hold your gold then I advise investing in gold coins. Furthermore, if you are spending less than $10,000 in gold, I advise buying gold coins and storing them yourself. I personally own some gold coins in my home along with silver coins and junk silver (more on junk silver in another article). I also have some gold coins in a safe deposit box and gold bullion in an allocated account.
The advantage of buying gold bullion coins is that you know with almost certainty that you are buying pure gold. I will go into which ones to buy to ensure you are buying the right ones.
The other advantage is that gold is so valuable per ounce that it does not take up a lot of space. You can invest a sizable about of money and store it in a safe deposit box or a safe at your home. This comes with risk but there is risk in any investment you make including keeping your money in the bank.
The biggest advantage of buying coins and storing them yourself somewhere is that you are protected not only from inflation but also from bank risk. It’s a worst case scenario but we could see major bank failings in the U.S. again and you don’t want to have to file a claim with the FDIC to get your money back. Gold coins let you avoid any bank risk entirely.
Which Gold Coins to Buy Without Being Ripped Off
It’s not very difficult to buy gold coins but it’s easy to make a costly mistake without some basic knowledge. There are two questions you must answer before you invest in coins:
1) Which coins meet my investment needs?
2) What companies can I trust to buy coins?
To answer these questions, let me give you a little background on gold coins:
The most popular types of gold bullion coins are those minted by governments. Most countries usually mint their own coins in various denominations ranging from 1 ounce to partial ounce denominations.
Examples of the more commonly traded gold coins are American Eagles, Canadian Gold Maple leafs, South African Krugerrands, Australian Kangaroos and Austrian Philharmonics. The coins I just listed are the ones you (as a first time gold coin buyer) should buy.
These coins tend to be widely circulated and the most fungible for the purposes of investment. The reason for this is their gold content is vouched for by their respective governments and they are trusted sources. Although gold coins do technically have “face value” and may technically be used as currency or legal tender for transactions, their gold content is far more valuable than their face value.
There are many other governments that issue gold bullion coins, but I highly recommend sticking to the ones listed above. The coins issued by (most) other governments are fine, but why deviate from the coins that are most widely distributed and traded?
Of course there are some obvious reasons to buy coins that are scarcer and in shorter supply (that’s economics 101), but remember, we are buying coins purely for the physical gold within the coin (likely as a protection against inflation and currency changes), not as a rare collectible coin.
Collector Coins Vs. Bullion Coins
One of the pitfalls that first-time buyers make is to not understand the difference between collector coins and gold bullion coins.
Gold investors focused on buying an inflation hedge usually buy gold bullion coins because the prices are transparent and linked almost entirely to the spot price of gold. Their prices are quoted as a premium (or mark-up) over the current market price of gold traded on the exchanges.
On the other hand, numismatic gold coins are for coin collectors. The prices of these coins are determined by several other factors other than the spot price of gold.
More like fine art, genuine numismatists (expert coin collectors), tend to be lifetime coin enthusiasts with years of experience and accumulated knowledge. There is opportunity to make a lot of money with collector coins, but I don’t know how to do it any more than I know how to buy art or antiques.
It’s the rarity and historical significance that give these collectors’ coins their value; the actual gold content has very little to do with their market value or quoted price (although, you won’t find a collector coin worth less than the weight of its gold content). For this reason, first-time buyers are not likely to buy very rare and valuable collector coins because they are more expensive then a bullion coin with the same weight in gold.
Pay close attention to this next paragraph … it could help you avoid being ripped off:
The area where new buyers get into trouble is the newly issued “limited edition” collector coins. Private Minters will issue a new coin and put an official-looking design on it … then put it in a fancy case and call it “limited edition” or “one time only” or some other nonsense.
DO NOT BUY THESE GOLD COINS!!!
This is where you can get taken advantage of. The cost of these coins will be comparable to the basic bullion coins but the actual amount of gold in them is MUCH less. You are paying for the marketing and not the actual gold content and this is why you need to stay away.
Measuring the value of these coins based solely on their gold content, their value is likely less than half the amount of a standard bullion coin depending on how much actual gold they used in the coin.
It’s easy to avoid making this mistake: the only thing you need to do is only buy the government issued bullion coins I listed above and make sure the premium over the current gold price is reasonable. In other words, if the current price of gold is $1,800 per ounce and they are selling a 1-oz coin for $3,000, then something is fishy.
Stay away from the shyster commercials on T.V. or the click-through ads you will see when researching gold coins on the internet.
How And Where to Buy Gold Coins
There are a number of places to buy gold coins including buying online from websites such as moneymetals.com. Some investors also locally purchase gold coins at coin shops. In certain countries, you can buy gold straight from the bank. In the United States, you will likely be buying from either a website or a local coin dealer with a physical location.
Buying gold from coins dealers
While finding a coin dealer is relatively easy, shop around a little before you dive right in. As always, do your research first and explore at least 3 dealers before you pull the trigger. Call them up on the phone and ask “I am trying to buy bullion coins either American Eagles or Canadian Maple Leafs, do you currently have any and how much do they cost?”
Stay away from these sources:
• Craigslist ads
• Television advertisements
• Jewelry stores
• Any online dealer who insists on bank wire or cash transfers ONLY
• Any dealer that only has an email address and a P.O. Box
One option is go to www.pngdealers.org and search for a member of the Professional Numismatists Guild. However, in my opinion, the best way to find a local dealer is to talk to a friend or acquaintance who buys gold and ask who they buy from.
If your referrer had a good experience and can vouch for a local dealer, then you will likely not have any trouble either.
One final note on coin shops: it’s important to stay vigilant and take every step you can ensure that the dealer is a reputable entity. However, I have never actually had any trouble buying from a dealer in the past. I have only heard stories of people that have had their deposits taken or worse.
I believe there are far more reputable dealers out there than bad ones, but take every precautionary step you can. As I wrote above, try to buy from a dealer that was referred by a friend.
There are some reputable websites from which you can purchase gold coins for investment. Like gold dealers, you also need to do your due diligence to avoid being ripped off.
Stay away from websites that don’t have a physical addresses or those that promise very low spreads not consistent with the market you are seeing at other sites. Do your due diligence, read online reviews and ask a trusted friend to refer you to a reliable company.
For several years I have used moneymetals.com (we do NOT receive any commission from them) and they have delivered with quality spreads and relatively short waiting times . There is a wait period in between the time that you purchase the gold and receive delivery. This is one of the advantages of buying from a coin shop.
Do your due diligence before you pick a source and remember that miscellaneous expenses can sneak up on you.
Make sure that you know of any additional charges, commissions, insurance fees, shipping costs or the charges that may be levied on bank wire transfers and credit cards among other things.
For example, some sites will show a cheap price for a coin but then make up for it with more expensive shipping costs. Narrow your options down to 3 or 4 sources and compare those miscellaneous expenses associated with buying from them. Compare all of them and choose an option that makes the most sense for you.
Regardless of the gold source that you use, ensure that you verify the reputation of the company through third party sources such as RipOffReport.com and Better Business Bureau.
How To Buy Gold From An Individual
There may come a time where you want to buy gold coins directly from someone rather than going through a coin shop or website. I don’t recommend doing this the first time you buy gold … but as you learn more, there are some advantages to doing this.
The reason why I like the idea of buying from another individual is because some day you will want to sell your coins too. You might build a network of people locally that you can buy and sell from. The reason why this is desirable is because coin shops take a big commission when buying and selling from you (this is how they make money).
If you can cut out the middleman, it will save you a lot of money when it comes time to sell. That’s why I sometimes buy from people directly … to expand my network. When you do buy gold from another individual, make sure that you know how to spot fakes.
Keep in mind, they could be a completely trustworthy person that’s not trying to rip you off. But THEY may have been ripped off and bought a fraudulent coin. Watch the video below on how to spot fakes:
Questions About How To Buy Gold
We sometimes receive questions about buying gold so we’ll do our best to tackle the more common questions below
What is the cheapest way to buy gold coins?
You’ll have to shop around and become a vigilant consumer to find where you’ll get the best price. From my experience, you’ll likely find the cheapest prices from one of the larger online coin sites like moneymetals.com. Remember to not only consider the price but also the shipping costs, insurance for shipping, and any other fees there might be. For this reason, you might find it cheaper to buy from a local dealer where there is no shipping costs for buying gold coins or wait time.
What is the best gold coin to own?
I already addressed what I believe are the best coins to own above and I don’t believe you can go wrong from buying one of those. However, if you are in the U.S. and you want to pick only one, I would recommend buying American Eagle gold coins. The reason I recommend these coins is because they will likely be the most widely held and traded coins which makes it easier to buy and sell with the smallest spread.
Why are gold bars cheaper than coins?
This is a great question with a fairly simple answer. The reason is that the production costs on gold coins is generally more expensive for a smaller amount of gold. It costs the mint a lot of money to design and produce the coins whereas gold bars are much similar and there is not as much emphasis on appearance.
You will also notice that the premiums are more expensive on gold coins containing less gold. For example, if you by an American Eagle 1/10 oz gold coin, the premium will be higher as a percentage of the total price of the coin when compared to a 1 oz coin.
This is because it costs roughly the same cost to produce the 1/10 oz coin as it does the 1 oz coin. For this reason, it’s more economical and efficient if you buy 1 oz coins and not the smaller denominations.
Should I buy gold bars or coins?
The answer to this question is more a matter of preference than a concrete answer. In my opinion, for the first time buyer, I believe it’s better to buy one of the primary coins I recommended below. The reason is because they are more widely known and understood, so it will be easier to trade and sell.
With that said, you will get a slightly better deal if you are buying gold bars (for the reasons discussed in the previous question), but the difference in price won’t be drastically different.
How much gold can I buy without reporting?
We want to be careful when giving out advice on anything tax related so please consult a tax professional because these rules change. As of right now, you can buy less than $10,000 in gold without the supplier being required to report the transaction. If it’s greater than $10,000, then the supplier must submit Form 8300 to report the transaction.
If you buy a total of $10,000 from the same supplier within 24 hours, they still have to submit Form 8300 with your name on it. If you want to buy more than $10,000 at once, your best bet is spreading it around to different gold sites or dealers.