A Primer on Bullion Investing
The best way to protect your assets against economic downturns or currency devaluation is to purchase physical bullion investments as a hedge. This is because investment-level bullion, like gold and silver, holds intrinsic value and has a set scarcity. Governments can't print up more gold. Gold doesn't experience hyperinflation — it has held value for thousands of years, and will continue to hold value into the future.
Here is a quick rundown for first time bullion buyers that are looking to take proactive steps to secure their financial future:
What is Bullion?
Bullion is the term used to describe a bulk amount of precious, valuable metals like gold, silver, platinum or palladium. Almost all bullion is measured in terms of its weight and minted either in bars or in coins. The value of bullion is different that the value of collectibles, for example, because bullion metals are produced for the purpose of providing an investment and an inflation hedge, whereas collectibles have a numismatic purpose and are valued for their unique designs or rarity.
The IRS does not technically allow numismatic coins to be held as an investment, however there is often some crossover between collectible value and investment purpose. This is even true with some of the United States' official bullion coins, such as the American Gold Eagle coin.
How to Buy Bullion
Like any good or service, the laws of supply and demand affect bullion purchases; it is advisable to buy low and sell high. Bullion itself can either be purchased directly from minting sources like the Royal Mint in the UK or the Perth Mint in Australia, or it can be purchased from intermediaries who specialize in the buying and selling of precious metals bars and coins such as the American Precious Metals Exchange.
Note that any purchases made outside of the United States and brought into country can be subject to import taxes and additional costs.
Bullion Bar and Coin Pricing
Almost all precious metals are traded in US Dollars, regardless of where they are purchased (as is common with many international commodities). The price of a bullion bar or coin is primarily determined by the spot price of the metal, which is set and quoted in the Over-the-Counter (OTC) market. Trading occurs in many markets, but London has always been the primary precious metals marketplace. As an investor, you have almost no control over this process, since mostly institutional banks participate in bulk sales or purchases of precious metals.
Nevertheless, it is important to watch the OTC market because you may be able to “lock in” favorable prices and place your order before a negative fluctuation.
All dealers, producers, and distributors will add a little markup to the spot price of bullion when it is bought or sold. That said, the underlying metal's spot price (quoted in dollars per ounce) is the greatest determinant of any investment bullion value.
Which Bullion Bars or Coins Should You Purchase?
There are differences between purchasing bullion bars or bullion coins. There are also real differences between individual coins and individual bars (see our recommendations for some of the top bars or coins) and many of theses difference boil down to individual choice. Take the time to understand what you are looking at in a bullion investment: is it part of an IRA (we recommend that it is, to receive the tax benefits)? How long are you going to hold it? Do you care about the appearance of the coin or bar?
Some precious metals, like silver, are less expensive and may be a good choice for first time investors.
Depositing Your Bullion
If you are making a bullion purchase through a self-directed IRA, the IRS will require that you store your metals at an approved depository until you make a distribution (in which case the depository can mail you your metal). It is not legal to hold onto investment bullion that is receiving tax-deferred growth benefits or is purchased with income tax-free money.
However, even if you are holding metal outside of an IRA, it is still a good idea to look into a depository to preserve the quality and ensure the security of your bullion.