AS AN MONEYMAGPIE INVESTEMENT AND SILVERCARL BRENNAND

YOUR GUIDE TO INVESTING IN PRECIOUS METALS moneymagpie.com eBooks moneymagpie’s Gold and as an

1 Introduction CONTENTS Why is gold so valuable? Introduction 2 Firstly, gold output peaked in 2003 and therefore its supply from Physical gold and silver 4 now on is limited.

Gold and silver exchange Secondly, during times of recession, may be pumped into a coun- traded funds (ETFs) 9 try’s banking system (a process known as quantitative easing) in order to kick-start the economy. This can cause higher and consequently Gold and silver the return on such as bonds, equities and property reduces as mutual funds 11 their value is diminished. Therefore, the demand for alternative invest- ments such as gold increases, and it consequently becomes more valuable. Gold and silver futures 12 Because the recent recession has been so severe, we’ve seen a dramatic increase in the price of gold. Ten years ago, gold was £200 an . From Gold and silver scams 14 then it began to rise gradually before a huge growth in the wake of the global economic collapse. Since 2008, the price of gold has been as high as £850 per ounce!

What about silver?

Since 2007, the value of silver has roughly doubled, similar to the rate of increase gold has enjoyed. Therefore many people see silver as an equally appealing investment opportunity as gold, despite gold’s standing as the more precious of the metals. The investment opportunities with silver are similar to those of gold, and it can certainly be a profitable market.

Why invest in gold and silver?

As part of an investment portfolio, precious metals are a good way of di- versifying or counterbalancing the risks that come with other investments. They’re still considered a ‘ haven’ compared to traditional investments. Currency values are steadily falling and while Governments can artificially multiply currency by creating more of it, is the only they cannot do this with as there is a limited supply of it.

For this reason, it’s often said that gold is a ‘recession-proof’ commodity. Simon Temple from Gold Investments says:

“There is no guarantee. However, as seen during this recent recession, the price of gold has increased quite considerably. As with anything on the market it has its ups and downs but luckily for us and our investor the ups outweigh the downs.”

One of the reasons gold is seen as such a great investment is that in the it is exempt from stamp duty and VAT. Sadly silver is afforded no such allowance and is subject to 20% VAT in the UK, giving investors a far greater incentive to put their money in gold.

So when should you invest? Simon Temple from Gold Investments thinks

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there’s no time like the present, particularly in the case of gold:

“We believe now is a good time to invest; as the and the suffer, gold is prospering. We see more and more clients investing in gold because they feel it’s safer than using the banks.”

FASCINATING FACT Gold is so pliable that a single ounce of gold can be stretched to a length of over 50 miles or beaten into a sheet to cover a hundred square feet.

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Physical gold and 2 silver There are three main ways to buy physical gold and silver – in the form of bars, coins (or rounds) and . Owning an actual piece of is an attractive prospect at the moment – this is because if there is a stock market crash, for instance, then it is a great comfort to have something safely stored away that is likely to only increase in value. It’s the ‘savings under the mattress’ philosophy but with a commodity that is far less likely to fall in value than money.

If you’re looking to buy gold or silver, your best bet is to use established British or European dealers who will deliver it straight to your house through trackable insured couriers. Go to a large, well-known firm with a good track record such as Goldline, ATS Bullion, Chard or GoldCore.

Alternatively, you could visit Coinex, a trade show organised by the British Numismatic Trade Association (BNTA). Only BNTA-approved dealers and international guests are permitted to sell at Coinex, so you can be confident that you’re buying from a reputable trader.

You can also buy gold through The Royal ’s recently launched website, royalmintbullion.com. Like the other firms, you will be able to have the gold delivered to your home through an insured postal. However The Royal Mint also allows you to store your gold or silver in The Vault, their on-site pre- cious metal storage facility – which is protected at all times by the Ministry of Defence.

Whenever you buy gold or silver, you should ensure you get a receipt and confirmation of delivery details before paying. Most dealers will offer a dis- count for buying in large quantities; at the other end of the scale there will usually be a minimum purchase applied. You can expect to pay for shipping and handling.

A major issue when buying gold or silver is storage. Putting it in a safe at home is a good , but ideally you should use a safe deposit box. For one thing, if you have gold or silver stored at home you will need to inform your insurer and this could increase your premium. And of course there’s the fact that no home security system will be as airtight as a bank vault’s.

If you’re not comfortable about storing precious metals at home, some com- panies will not only sell you them but offer to store them for you too. These operators include BullionVault, who keep the items in a high-security vault of your choice. You’ll be charged 0.12% a year for storage, and 1% for stor- age in The Royal Mint’s Vault, so you may want to compare this fee against the cost of buying a safe and/or improving your home’s security system.

Bars

Gold bars

Buying bullion bars is the traditional way of investing in physical gold.

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Buyers have confidence in bars as they can be satisfied that a certified item consists of 99.5% pure gold, or almost 24 carat. There are also practical advantages to buying bars; mainly that when buying in bulk there are less individual items to deal with than there would be with coins, for example. Storing gold bars is made easier by their rectangular shape as they can be stacked together to best utilise space.

Sizes of gold bars include, but are not limited to:

• 400 troy oz (12.4 kg)

• 1 kg (32 troy oz)

• 10 troy oz

• 1 troy oz

• 100 g

• 1 tael (50 g)

• 1 tola (11.7 g)

The Association classifies gold bars by its specification. This stipulates that bars must have:

• A of 99.5%

• Marks stating serial number, refiner’s hallmark, fineness and year of production

• A gold content of 350 – 430 troy oz

Many people see bars as a better investment than coins because they gen- erally carry a lower price premium than coins or jewellery. Simon Temple agrees with this:

“We feel coins and bars are the best investments to make. The coins and bars we deal in are internationally recognised and therefore are able to be sold across the globe.”

The Gold Bars Worldwide website offers a guide to buying and selling gold bars for beginners and has easy-to-use guides on gold. Small bars can be bought from dealers such as Spink at about 5% above metal value and sold back at the same rate below value.

As with most trades, dealers make it cheaper for customers who buy or sell gold in bulk. When buying bars it is important to check that the dealer is reputable and what the insurance costs are. Make sure you’re completely confident before you hand any money over.

Silver bars

As with gold, a popular way of investing in silver is by buying actual bullion bars. In some countries, such as and , bullion bars can be bought or sold over the counter at major banks.

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The flat, rectangular shape of silver bars makes them ideal for storage in a home safe, a safe deposit box at a bank, or placed in allocated (also known as non-fungible) or unallocated (fungible or pooled) storage with a bank or dealer.

Silver bullion bars should have a fineness of 99.9% and are available in various sizes:

1000 troy oz bars (311 kg) are really for large bullion dealers due to their size and the fact they’re not ‘divisible’ i.e. unlike coins you either buy the whole bar or nothing. For private investors, haulage and storage costs may make bars of this size unviable.

100 troy oz bars (3.11 kg) are the most popular with retail investors as they are manageable in terms of size and weight. Major brands include Engelhard and Johnson Matthey. Due to their status, they tend to be cost- lier than other suppliers but you can be confident of their quality and that your money has been well invested.

10 troy oz bars (311 g) are very popular as their size and weight makes them affordable for lower-level investors. They generally command a slight- ly higher price per troy oz over heavier bars.

1 troy oz bars (31.1 g) are not as popular as 10 oz bars because many investors choose coins when dealing with an amount as small as this.

Odd weight bars cost less but the price range is wider due to the extra work it takes to calculate their value and the additional risk involved in dealing with unknown brands.

Coins

Gold coins

Coins are valuable for two different reasons – metal (weight) value or an- tique (numismatic) value. Coins are seen as a more flexible investment than bars as it’s easier to sell a percentage of coins than a whole bar.

The most common gold coins are the Krugerrand, sovereign and and these trade at the lowest premium. Krugerrands are many people’s preference because they’re available in greater quantities and they can gen- erally be bought at lower prices than any other gold coin.

Krugerrands are produced at a consistently high quality, and are known as a very cost-effective way for small investors to buy gold. Their popularity may partly be because they contain exactly one ounce of fine gold and are therefore easy to compare price-wise.

Because the sovereign and Britannia are both UK tender, if sold at a profit they’re not liable for .

It’s worth mentioning that Hong Kong is widely acknowledged as the cheap- est place to buy gold coins. However, it’s probably not a realistic option due to flight costs plus the expense of getting the coins back to the UK.

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Silver coins

Silver coins have long been a popular way of physically holding silver. Coins can be minted as either ‘fine’ or ‘junk’ silver. ‘Junk’ silver sounds worse than it is – it is simply older coins containing a smaller percentage of silver. Coin silver tends to have a fineness of around 90% with the remaining 10% made up of . This is because coins need to be harder than bars due to their everyday use in circulation.

Sterling silver coins were minted in the , and . They are 92.5% silver and include Crowns, Half-crowns, Florins, , Sixpences, and threepence.

Silver coins are a great investment in terms of their liquidity as they can be converted into cash very easily.

Silver rounds

Although similar in appearance, there are important differences between coins and rounds. A coin is officially minted and is , whereas rounds generally contain a troy ounce of silver and are not legal tender. Rounds are usually minted independently, are 0.999 in purity and are produced by a wide array of mints. Rounds can be ordered with a custom design stamped on the faces or in assorted batches.

Jewellery

Jewellery accounts for two-thirds of the world’s annual gold demand. Sil- ver, on the other hand, is used mainly in industrial applications, especially in the technology sector. Jewellery makes up only 15% of silver demand.

Unlike bars and coins, jewellery can be bought and used for decorative purposes as an accessory rather than always being stored in a safe.

Unfortunately, the jewellery market is notorious for having huge mark-ups over the actual metal value of the item itself. Some large pieces can be priced at 250% of the market price for gold, whereas the mark-up with bars and coins tends to be around 5%. This is a premium for the craftsmanship of the design and is one of the reasons why jewellery may not be your best for an investment.

There are also tax issues, as Simon Temple explains:

“Jewellery incurs VAT and therefore the consumer has to make back 20% on top of the premium they are initially paying.”

You may then take a hit when it comes to selling. This is because while there is an international marketplace where the price of gold and silver bullion is at an accepted rate, the valuation of jewellery is very subjective and opinions can differ wildly between valuers.

Even though the value of gold and silver continues to rise, it’s estimated that sellers of jewellery redeem just 30% of the cost price, with many jewellers reluctant to even consider buying pieces back.

Therefore, the huge spread between the buy and sell price for jewellery is so

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wide that making a decent return on it is quite unlikely.

Selling physical gold and silver

Once you’ve invested in physical gold or silver, the tricky part is deciding when to sell it. You may wish to hold on to it indefinitely and cash it in as a retirement fund when the time comes. If the price of gold or silver spikes drastically, it doesn’t necessarily mean it will fall immediately, so don’t sell out of panic.

As we’ve mentioned, the price of gold is at its highest in times of economic turbulence – i.e. during the recent recession. So if you already own gold, now may be a very good time to sell. However, if you’re just about to invest, you may have to wait some time for another global recession, so you should think long term.

The British Numismatic Trade Association (BNTA) is a coin specialist and has a list of reputable gold buyers and is a good place to start. In terms of bars, ATS Bullion and BullionVault are internationally-trusted dealers and should be your first port of call. As with any sale, though, you should spend time comparing offers to ensure you get the best possible price.

As for what kind of return you can expect from a gold investment, Simon Temple explains that there is no precise formula, although it’s worth retain- ing it for the long term:

“Unfortunately, as with every commodity, there is no set return you will see in your investments. It also depends on the time the customer is willing to hold on to their gold. An example, though, would be if you bought an ounce of gold with us ten years ago and sold it to us today the profit made would be around £900.”

FASCINATING FACT The modern Olympic Gold Medal is actually made of which is then plated with six grams of pure gold.

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Gold and silver exchange 3 traded funds (ETFs) ETFs are like tracker funds which try to copy the performance of a market such as the FTSE 100. Shares are issued on a quantity of stored physical gold or silver and as the price increases, so does the share value.

The beauty of ETFs is that they give exposure to physical gold and silver without the hassle of having to insure, store, move or resell it. To invest you can expect to pay a small commission fee which is normally around 0.5%. Most ETFs have a minimum investment but you don’t have to buy large amounts.

ETFs can also be held tax free in an ISA and although ETFs are traded like standard shares, they are exempt from stamp duty.

It’s worth taking a look at the Exchange Traded Gold website, which is updated every minute with the price of gold and details the value of interna- tional shares. For silver, MetalPrices.com is a similar site.

ETFs track the price of gold or silver. However, unlike tracker funds, they’re actual companies in their own right and are traded like individual . So they can be bought and sold through a trader, just like you would buy shares in any company. It’s a quick and effective way of moving money in or out of the market. (If you already have a broking account, there is no need to set a new arrangement.) You can follow the progress of your fund in the main- stream financial press such as the Financial Times, or on the internet – just as you might follow any other stock.

An ETF based in gold or silver is regarded as a safe option. If you’re still relatively new to the investing game, it’s best to steer clear of ‘’, ‘leveraged’ and ‘’ ETFs. These have the potential to make you huge profits, but also bring a much higher level of risk and are best left to the professionals.

If you’re serious about investing in ETFs, it’s advisable to sign up to a rele- vant newsletter to receive trading alerts and advice. The Gold and Oil Guy is a reputable one.

You may want to consider investing in Indian gold markets. In , gold is seen as a symbol of power and wealth and the country is the world’s larg- est buyer of gold (having 9.5% of global ).

If you’re unsure about whether to opt for physical metal or ETFs, then con- sider your reason for investing. If you’re looking to insure against financial crisis then buying and storing your own bullion is preferable as ETFs can fluctuate.

Examples of gold ETFS include:

SPDR Gold Trust (GLD) was the very first Gold ETF fund and still the most popular. They purchase 400 oz gold bars from London Good Delivery Bars, and issue the shares at one tenth of the price of an ounce of the gold.

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ProShares Ultra Gold (UGL) is for the seasoned investor who is very aggressive and not averse to risk. Also known as a double gold ETF, it is de- signed to double the investment return. In other words, if the price of gold increases by 10% the value of the shares should increase by 20%.

Market Vectors Gold Miners fund (GDX) attempts to mirror the NYSE Arca Gold Miners Index as closely as possible, before any fees are removed from the investment. Using index investing, your portfolio will have 32 mining companies behind it. Keep in mind, this type of gold ETF is made of up gold company stocks, thus it tracks the gold stock index, not the gold price index.

Some silver ETFs are:

iShares Silver Trust (NYSE:SLV) is the world’s largest silver ETF and currently holds 10,764 metric tons of silver. SLV is viewed by many as the best silver ETF on the market.

ProShares Ultra Silver (NYSE:AGQ) invests in silver futures and is a very bullish and is certainly not for the amateur.

PowerShares DB Silver (NYSE: DBS) has a smaller trading volume than the above examples, only trading around 100,000 shares per day.

FASCINATING FACT A cubic foot of gold weighs approximately half a ton.

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Gold and silver 4 mutual funds Investing in a gold or silver is basically buying shares in mining companies.

Because mining companies have fixed costs, whenever the price of gold or silver increases the percentage of profit rises quite dramatically. For example, if it costs a mining company £700 to mine an ounce of gold when the price is £900, the profit is £200. When the price goes up to £1,000, the mining costs remain the same so the profit is £300 – a 50% increase in profits caused by an 11% rise in the price of gold.

Of course, the opposite would be true if prices go down. So for this reason, the prices of mutual funds that invest in gold mining companies tend to move about twice as much as the gold price.

Other events which can affect the prices of gold and funds would be company-specific issues like operational problems or just the overall stock market – if the market goes down, all stocks go down, includ- ing gold stocks (regardless of the price of the metal).

This could be the option for you if you’re confident that gold or silver prices are going to continue to rise. Here’s a selection for you to look into:

• FrankTemp/FrankAdv Gold PrMadv

• Vanguard FDS Precious Metals and Mining

• First Eagle Funds Gold

• Permanent Portfolio

FASCINATING FACT Silver has remarkable anti-bacterial qualities, and its use in drinking water purifiers is becoming increasingly common in homes and offices.

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5 Gold and silver futures This is a severely high-risk strategy and is only for very experienced inves- tors (and people with more money than sense!). It involves predicting how the price of gold or silver will change in the short term and investing money accordingly. There are so many factors that can affect the price of gold and silver, so it’s extremely difficult to forecast changes in the market. In fact, sinking money into metal futures can’t really be called investing – it’s spec- ulating, which is a polite word for gambling. As you’ve probably gathered, we don’t advise speculating on futures, but if you’re determined to chance your arm, here’s the best way to go about it:

1. Understand the risks

When buying gold and silver coins or bars, you pay the current asking price. A differs in that it’s an agreement that you’ll pay the current price at some point in the future, regardless of the price at the time. There- fore, if the price goes down you’ll lose money; but if the price rises, you make a profit. This is known as a “call” contract; you can do the same thing in reverse with a “put” contract. What makes investing in gold and silver futures potentially both profitable and risky is the margin. Futures contracts are bought and sold with the trader putting up a small amount of the actual price (say 10%). When you invest in futures costing £100,000 you put up £10,000 (or less). If the price goes up 10% you can double your money. But if the price goes down 10% you’ll lose your entire investment.

2. Focus on the factors affecting the price

There are three major economic forces that can affect the price of precious metals.

Firstly, demand increases when new buyers are entering the market. This has been evident in recent years as newly-emerging industrial nations such China create growing demand for gold.

Secondly, there’s the value of the US dollar. If the value of currency falls, ei- ther because of rising inflation or a weak dollar on the currency exchanges, it takes more money to buy metals and consequently the price rises.

Thirdly, economic uncertainty plays a big part. Gold and silver, as we’ve mentioned, are relatively safe investments. During times of financial hard- ship, investors pull out of risky stock markets and put their money in safer investments, of which precious metals are firm favourites.

3. Open a brokerage account

A broker is a middleman used by investors to buy and sell, and their knowl- edge and up-to-date information is invaluable. Although brokers charge commission for overseeing trades, you can keep costs to a minimum by using discount brokerage firms.

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4. Keep your finger on the pulse

The smallest of changes in the price of gold or silver will have a significant effect on whether you make a profit or a loss. You can get live quotes at the Gold Price and Silver Price websites. Futures contracts are always some- what different in price and need to be watched separately. Most brokers have online sites where you can monitor prices in real time.

5. Study the markets and trading patterns

Once you’re confident that you’re ready to try your hand at trading gold or silver futures, make sure you start with small amounts until you find your feet. You should also limit your risk by including a ‘stop sell order’ with each trade. This is an order to your broker to sell automatically if the price falls a certain amount. This is a sensible way to limit any losses.

FASCINATING FACT 75% of all gold ever produced has been extracted since 1910. It has been estimated that all the gold in the world that has ever been refined would form a single cube 20m (66ft) a side.

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6 Gold and silver scams Here’s our guide to avoid getting scammed when it comes to gold and silver.

Gold

It’s worth warning about some of the ‘cash for gold’ companies. Most of these operators offer good, fair prices for the gold you send them. However, as we all know, during difficult financial times, there are always unscrupu- lous people trying to take advantage of those who are desperate for cash, and the gold market certainly has its share. We’ve heard countless stories of people sending off their expensive, treasured jewellery in good faith, only to receive a paltry cheque in return. Our advice is simple – if you’re in any doubt about a merchant, don’t use them.

Also be careful who you tell about your investment in gold. Close friends and relatives aside, no one needs to know that you potentially have gold stored in your home.

Test your gold

Markings check

Inspect your gold for official markings. A stamp indicates fineness (1-999 or .1-.999) or carat (10K, 14K, 18K, 22K or 24K). Anything less than 10K is not considered to be real gold. A magnifying glass will make this process easier. Be wary, though, as a good counterfeit will also include these markings.

Discolouration

Gold discolouration, particularly around areas such as the corners of a bar, is a reliable sign that it’s fake. If the gold is wearing away and you can see a different metal beneath, you’ve only got a gold-plated bar.

Magnet test

Because gold is a non-magnetic metal, if it sticks to a strong magnet then you know it’s counterfeit. However, if it doesn’t stick to the magnet, that doesn’t necessarily mean it’s genuine as many fakes are made from non-magnetic metals.

Density test

There aren’t many metals denser than gold. The density of pure 24K gold is around 19.3 g/ml – much higher than most other metals. Therefore, measuring the density of your items is quite a reliable way to determine if your gold is real. Just remember that the higher the density, the purer the gold. Make sure to perform the density test on gold that has no gemstones of any kind attached.

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1. Weigh your piece of gold. A jeweller may do this for you for free if you don’t have your own scales. You’ll need the weight in grams.

2. Fill a measuring container with water. It’s helpful if the container has millimetre markings on the side. Make sure you don’t fill the container to the top otherwise it’ll overflow when the gold goes in. Note the exact amount of the water level.

3. Place your gold in the container. Take note of the new water level and calculate the difference between that and the original level in millilitres.

4. Use the following formula to calculate density:

Density = mass / volume displacement.

A result close to 19 g/ml indicates either real gold, or a material with a den- sity similar to gold. Here is an example calculation:

Your gold item weighs 38 g and it displaces 2 millilitres of water. Using the formula of mass (38 g) / volume displacement (2 ml), your result would be 19 g/ml.

Bear in mind that different gold purity will have a different g/ml ratio:

14K = 12.9 to 14.6 g/ml

18K yellow = 15.2 to 15.9 g/ml

18K white = 14.7 to 16.9 g/ml

22K = 17.7 to 17.8 g/ml

Ceramic Plate Test

This is an easy way to tell if your gold is fool’s gold. Bear in mind that your item may end up scratched.

1. Find an unglazed ceramic plate to use. If you don’t have this, you can buy a piece of unglazed ceramic cheaply.

2. Drag your item across the surface. A black streak indicates your gold is counterfeit, whereas a gold streak indicates your item’s genuine.

Silver

As with gold, there are many counterfeit silver bullion bars in circulation. Luckily, there’s a simple procedure you can carry out in order to determine whether or not a bar is genuine. This is known as a ‘ring test’. Bang the bar with a wooden spoon and if there’s a ringing sound, then the bar is made of silver. A bar alloyed with will not ‘ring’ but make a dull ‘thud’ instead.

FASCINATING FACT Like gold, silver is extremely malleable; just one gram of silver can be stretched into a wire almost 2km long.

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