Buying Strategies and What To Avoid

Buying Strategies and What To Avoid

Purchasing physical gold and silver can be an effective way to diversify your investment portfolio, hedge against inflation, or simply preserve wealth in uncertain times. However, buying precious metals requires careful planning, thorough research, and understanding the best strategies to make the most of your investment. In this article, we discuss various strategies for purchasing and storing gold and silver, the types of products available, and common mistakes to avoid.

When purchasing physical gold and silver, investors have several options, including bars, coins, rounds, and 90% silver coins. Each type has unique benefits and potential drawbacks, so it is important to understand the differences.

Bars: Gold and silver bars are typically available in a variety of weights, from small 1-ounce bars to larger 1-kilogram or even 400-ounce bars. Bars generally have lower premiums compared to coins, making them a cost-effective choice for investors looking to buy larger quantities of metal. The downside is that larger bars can be harder to sell in small quantities, which affects liquidity.

Coins: Coins, such as the American Gold Eagle or the Canadian Silver Maple Leaf, are popular with both investors and collectors. Coins often carry higher premiums than bars due to their minting costs, designs, and legal tender status. Coins are typically more recognizable and easier to sell in smaller quantities, which adds to their appeal. However, their higher premiums can make them more expensive for investors seeking bulk purchases.

Rounds: Rounds are similar to coins in shape and size but are not legal tender. They are produced by private mints and usually have lower premiums compared to coins, making them a good choice for those seeking smaller, divisible units of precious metals. However, rounds may not be as recognizable as coins, which could affect their liquidity.

90% Silver Coins: Often referred to as "junk silver," 90% silver coins are pre-1965 U.S. dimes, quarters, and half dollars that contain 90% silver. These coins are popular among investors because they offer a convenient way to accumulate silver in smaller, divisible units. They are also easily recognizable and tend to have lower premiums compared to bullion coins, making them a practical choice for beginners or those looking for fractional silver.

When purchasing gold and silver, it is crucial to assess the purity and authenticity of the product. Reputable products will have markings that indicate their weight, purity, and the mint that produced them. For gold, purity is usually expressed in karats or as a percentage (e.g., 99.9% pure or 24-karat gold). Silver is typically marked as .999 or 99.9% pure. Here are some tips for ensuring authenticity.

Use a Reputable Dealer: Always buy from reputable dealers who has a track record of providing authentic products. Look for dealers who are members of industry associations, such as the Professional Numismatists Guild (PNG) or the American Numismatic Association (ANA). Consider working with a reputable local dealer like The Silver Dollar, as they can offer personalized service, provide assurance of authenticity, and help you avoid potential scams. In addition, they often will provide better deals and pass along tighter spreads as the relationship grows.

Use Verification Tools: Consider using verification tools such as metal testers, digital scales, or even portable XRF analyzers to verify the purity of your gold or silver. Some dealers also offer certificates of authenticity with their products.

Avoiding Counterfeits: Be wary of deals that seem too good to be true, as they may involve counterfeit products. Always verify the credibility of the seller before making a purchase and confirm the expected weight etc.

Once you have purchased gold or silver, the next step is to decide on storage. Proper storage is crucial for protecting your investment from theft or damage.

Secure Vault: One of the safest storage options is to store your precious metals in a secure vault, often provided by third-party companies or banks. This option provides high security, insurance coverage, and peace of mind. However, there are storage fees involved, which can add to the cost of your investment.

Safety Deposit Box: Banks offer safety deposit boxes where you can store smaller quantities of gold and silver. While this is a relatively secure option, it does come with annual rental fees, and access may be limited to bank hours.

At Home Storage: Storing precious metals at home is another option, particularly for those who want immediate access to their assets. If you choose at-home storage, consider investing in a high-quality safe that is securely anchored. It is also important to ensure that your home insurance policy covers theft or damage to precious metals. The downside of at-home storage is the risk of theft or loss.

Purchasing gold and silver can be a rewarding experience, but there are common pitfalls that beginners should be aware of to avoid costly errors.

Overpaying for Premiums: One of the most common mistakes is overpaying for premiums. Coins and bars often come with added premiums above the spot price of the metal, which can vary significantly based on factors like design, rarity, and demand. It is important to compare premiums from different dealers to ensure you are not overpaying.

Falling for Scams: Unfortunately, the precious metals market is not immune to scams. Internet scams are particularly prevalent, with fraudsters offering one-time special prices or deals that seem too good to be true. Always buy from reputable dealers, ideally a local dealer you can trust, and do your research before making a purchase.

Not Understanding Liquidity Issues: Liquidity refers to how easily an asset can be bought or sold without affecting its price. Large gold or silver bars may be difficult to sell in smaller quantities, which can create liquidity challenges. Coins, smaller bars, and 90% silver coins are generally more liquid and easier to sell, especially during times of economic uncertainty.

Ignoring Storage Costs: Storage costs can add up over time, especially if you choose third-party vaults or safety deposit boxes. It is important to factor in these costs when calculating the overall return on your investment.

Lack of Diversification: Some investors make the mistake of putting all their funds into one type of gold or silver product. Diversifying between bars, coins, rounds, and 90% silver coins can help mitigate risks and improve liquidity.

When it comes to buying gold and silver, there are two common strategies: making a lump-sum purchase or buying consistently over time. Each strategy has its own advantages and drawbacks, depending on your financial goals and the nature of market fluctuations.

Consistent Buying (Dollar-Cost Averaging): One popular approach is to buy gold and silver in smaller amounts at regular intervals, a strategy known as dollar-cost averaging (DCA). With this method, you invest a fixed amount in precious metals at set periods (e.g., monthly or quarterly), regardless of market price. This reduces the risk of market timing and helps average out the cost of purchases over time. By purchasing consistently, you buy more gold or silver when prices are lower and less when prices are higher, effectively reducing the impact of market volatility.

Lump Sum Purchase: Alternatively, you can make a lump-sum purchase, where you buy a larger amount of gold or silver all at once. This approach can be advantageous if you believe that prices are particularly favorable at the time of purchase. However, this strategy also carries greater risk, as it exposes you to potential market downturns immediately following the purchase.

Volume Weighted Average Price (VWAP) and its Impact on Returns

The concept of the Volume Weighted Average Price (VWAP) can be a helpful metric for understanding the impact of consistent buying on returns. VWAP represents the average price of an asset over a specific time period, adjusted by the volume of transactions. It is calculated by dividing the total value traded (price times volume) by the total volume during a given period. VWAP is a useful tool for assessing whether you are paying a fair price in comparison to the average market activity over time.

When you employ a consistent buying strategy for gold and silver, your goal is to purchase gold or silver at an average price that is ideally close to or below the VWAP. This helps mitigate the risks of buying at the peak of a price spike. Since precious metal prices tend to fluctuate due to various economic factors, such as interest rates, inflation, and geopolitical events, DCA allows you to smooth out the effects of these fluctuations.

By accumulating metals over time, you can reduce the impact of short-term volatility and align your cost basis more closely with the VWAP, potentially leading to better average returns in the long run. On the other hand, with a lump-sum purchase, you risk purchasing at a price well above the VWAP if market conditions are unfavorable, which could negatively affect your returns.

When considering which strategy to use, it is important to evaluate your financial situation, risk tolerance, and market outlook. For those seeking to reduce risk and avoid the challenges of market timing, dollar-cost averaging may provide a more stable path for investing in gold and silver. However, if you are confident in market conditions, a lump-sum purchase could offer greater immediate exposure.

Practical Advice for Informed Decisions

While this would seem like common sense, it's certainly not. Piggybacking on point 4 above - some of this is repetition but it needs to be repeated.

Do Research: Educate yourself about the different products available, the current market conditions, and the reputations of dealers before making a purchase. Find a reputable local dealer to guide you through the buying proces and offer personalized advice. This will help you avoid falling for scams and overpaying on premium.

Compare Prices: Always compare prices, premiums, and dealer fees to ensure you are getting the best deal. Use online resources to track the spot price of gold and silver, but verify deals through trusted dealers to avoid scams.

Determine your Goals: Determine your investment goals—whether you are looking for long-term wealth preservation, a hedge against inflation, or a collectible asset—and choose products that align with those goals.

Work with a Trusted Dealer: Establish a relationship with a reputable dealer (like the Silver Dollar), preferably one who is local. A trusted dealer can help you navigate the market, avoid scams, and ensure you are getting quality products.

Start Small: If you are new to investing in gold and silver, consider starting with smaller purchases, such as 90% silver coins or 1-ounce bars, to become familiar with the market before committing larger amounts of capital.

If you have questions or you're not sure, contact us or stop by our store and chat as we would be happy to give our input.

Conclusion

Buying physical gold and silver can be a rewarding way to preserve wealth and diversify your investment portfolio. By understanding the different types of products available, assessing purity and authenticity, selecting the right storage option, and avoiding common mistakes, you can make informed decisions that maximize the value of your investment. Remember that knowledge is your best ally in navigating the precious metals market, and taking the time to research and plan can help you avoid costly errors and ensure a successful investment experience.

As mentioned - don't invest until doing your own research which may includes talking to a registered financial investment advisor. We're always happy to talk metals but we're not financial advisors. Still have questions? Don't hesitate to contact us or stop by our store and chat. We would love to help you figure out your unique situation and help you buy gold and silver regardless of if you're close to our shop in Roswell, GA or not.