My (revised) argument for the best way to invest in bullion

I did some calculations comparing the premium over spot versus the premium over the buy back price and found some interesting results. The fact that the bullion that you buy is only worth what someone would pay for it served as the impetus for my calculations.

For my analysis, I have reviewed advertised prices from an undisclosed online bullion retailer, and I chose 5 bullion products from the Canadian Royal Mint: 1/10 oz, 1/4 oz, 1/2 oz, and 1 oz gold Maple Leaf coins and 1 oz silver silver Maple Leaf. Refer to the table below:



Hopefully, I did the math correctly. Here is the summary that is easier to view:



BTW, DELTA represents the difference between the purchase price and the buy back price.

I have noticed that many bullion buyers based their decision on premiums above spot. However, when cashing in your bullion, shouldn't you focus on the buy back price versus the spot price?

The values in the red column represent the premiums above spot. In this case, a 1 oz gold Maple Leaf has he lowest premium, and the premiums increase as the gold content per Maple Leaf decreases. The silver Maple Leaf, as expected, has the highest premium.

The values in the blue column represent the premiums above the buy back price. The gold coins still follow the same trends, that is, the premiums increase as the gold content per Maple Leaf decreases. However, the premium for the silver Maple Leaf is significantly lower in this case. In fact, of all of the five coins, the 1 oz silver Maple Leaf ranks in 2nd place with the 1 oz gold Maple Leaf in 1st place.

If considering purchasing bullion based on the premiums above the buy back price, doesn't silver out perform all of the fractional gold Maple Leaf coins?

 

Log in or Sign up to hide this ad.

@E Pluribus Unum This will be helpful when the time comes. Thanks for your efforts.

 

Thanks for your work. Is your data using current year bullion? Are they are all 2017 Maples?

I ask, because random year buy backs on Silver Maples are often much lower than buy backs on random year Gold Maples of any size.

For example, on Provident:
Gold $1292
Silver: $17.05

https://www.providentmetals.com/silver-maple-leaf-coin-1-oz-canadian-brilliant-uncirculated.html
Random year silver Maples sell for $19.34 each, buy back at $17.70
Buy for 12% over
Sell back at 3.7% over
Lose 8.3%

Random year 1/10 oz gold Maples sell for: $142.80
Sell back at $135.43
https://www.providentmetals.com/1-10-oz-canadian-gold-maple-leaf-dates-our-choice.html
Buy for 9.5% over
Sell back for 5.7% over
Lose 3.8%

In the random year scenario (which practically all buyers will find themselves in), even buying fractional gold is the smarter buy over silver.

 

@jason,
I am glad you brought that to my attention. I used the values for 2017 Maples to be consistent. I didn't realize that a 2017 Maple will be considered random year Maple as soon as 2018 Maples.
While on the topic, why do random year Maples (or bullion from other governments) cost less than 2017 (or current year) coins? Do random year coins show signs of wear, scratches or toning?

 

I believe the assumption is that, yes, other year coins must have some wear or use due to previous ownership, no matter how minimal. It's quite absurd that this will make them cost less!

However, the big, big, big difference is that gold retains more of its random year value than silver due to silver aging so poorly in terms of tarnishing (and on some coins, milk spotting).

These value differences also apply to American Gold Eagles, too.

 

^ As a new member, I have seen the phrase, milk spotting, twice. I can guess what it is, @Jason.A , but could you provide a description.

Since AGEs are listed in your post, is there any explanation why the 1 Oz Gold Buffalo would cost more than your typical AGE? Thx.

 

I wonder how a 10 oz Silver Maple would factor in. I think it has a slightly lower premium than 1 oz silver maple. Also if you got 150-350 to spend you might be focusing certain buys.

 

I think the consensus on what causes milk spotting is that it is die cleaner not 100% removed at the mint that is left as residue on the coins. When those coins are then exposed to air, milky white spots begin to appear as a tiny spot or a blotchy cloudy area.

The only reason a gold buffalo would be more than a gold eagle is the gimmick of it being only gold in the coin. Both Eagles and Buffaloes contain exactly 1 oz of pure gold, but the gold Eagle contains a small amount of other metals, too. To be honest, I think they're both kind of ugly.

 

I revised my calculations using random year pricing. As Jason pointed out, gold is the better deal. Damn, I was hoping that silver would be a better buy! It's much easier for me to buy 10 oz silver at a time every so often than it is for gold. I guess it's time to diversify.




The one thing that I thought was interesting from the table above is that the difference in the premiums above the buy back prices doesn't vary much (3.6% to 5.2%) considering the gold content (that is, 1 oz, 1/2 oz, 1/4 oz and 1/10 oz coins). However, there is a significant difference in the premiums above spot (3.4% for 1 oz to 10.5% for 1/10 oz).

It seems that most serious gold investors would rather purchase a one 1 oz gold coin instead of ten 1/10 oz gold coins - even though the premiums above the buy back prices differ by 1.6%. The only way I can justify purchasing 1 oz gold coins instead of 1/10 oz gold coins is the difference in price. According to the first table, a 1 oz gold Maple costs $1,335.16, whereas buying ten 1/10 oz gold Maples costs $1,426.80. That's a difference of $91.64 that could be further invested in precious metals, stocks, etc. A disadvantage is that when it comes time to cash in your gold, an investor must sell in 1 oz increments. This is not that big of an issue unless someone wants to sell their gold in smaller increments.

For those of you experienced gold investors, how do you prefer to buy gold and why? Fractional gold or 1 oz gold coins? Or a mix?

 

Thanks for your great work showing this in an easy to read format. Thanks, also, for pointing out that I was correct. I hope it will help everyone make smart buys.

If you're not able to buy full gold ounces but are instead able to buy 10 oz of silver every so often, I'd recommend instead you: 1) save up to buy that 1 oz gold coin or 2) instead of 10 oz of silver, buy 1/10 oz of gold.

In terms of reselling, you will have zero issue selling a full ounce of gold. Most coin shops cycle through million+ dollars per year, if not month.

Good luck

 

Thanks for your advice. I was always under the impression that buying 1/10 oz of gold was a bad option - maybe when comparing it to 1 oz gold. But the numbers show that it beats silver.

 

Yeah, a full oz is better than a tenth oz, but a tenth oz of gold is still better than silver due to lower premiums.

Be on the look out for specials on tenth oz coins. You can always find something for less than 10% over spot.

 

I'm not so sure about anything that's less than 10% over in 1/10th size. Something you want to keep in mind is liquidity. Several things come into play with liquidity, mostly where you're from and what is most recognized and bought and sold. I know plenty of people that have issues selling foreign items.

 

1/10 oz random year Maples from Provident online. Or, almost any 1/10 oz AGE or gold Maple from a local coin shop.

 

YEESH !!! I bet you don't need to eat often. You know, being so full of yourself.

 

First, let me say I really appreciate the effort E. P. Unum put into making those charts; great work. Now my comment on why the buy/sell premium on silver is higher than on gold. Why would the market support this? It could just be irrationality in the market - not an unknown phenomenon. But I can see two rational [well, at least semi-rational] reasons. One is that you expect silver to out-perform gold in the future. Historically, the ratio has been averaging around 60/1; now it is about 75/1. If the ratio went back to it's historical norm, silver would out-perform gold by about 25%, more than making up for the couple percent higher buy premium. [Note: I am NOT predicting this will happen; just saying it is not irrational to think it might.] The second is that if you are preparing for the financial apocalypse [credit card machines stop working, paper money is shunned, etc.], 75 ASE's will probably be much more useful than one AGE or even 10 1/10th oz AGE's. [Again, I do not think the apocalypse is on the way, but I have raised my assessment from "virtually impossible" to "highly unlikely".]

 

I think you've REALLY overthought this.

The very straight forward reason why premiums on silver is higher is because the value of the coin is lower. It's that simple. Every coin has an inherent cost to mint.

The higher value a bullion coin has, the lower the premium on it will be. Thus, a one ounce gold coin has a lower premium than a 1/2 ounce gold coin, which has a lower premium than a 1/4 ounce gold coin, which has a lower premium than a 1/10 oz gold coin, which in turn has a lower premium than 1 oz silver coin, which has a lower premium than a 1/2 oz silver coin, which has a lower premium than a 1/10 oz silver coin.

Every coin has a basic cost of minting that must be factored in. The more the coin can be sold for its intrinsic metal value, the lower that premium needs to be to recoup all of those costs of minting, shipping, etc.

Does that make sense?

 

I think you have a good point in a way, but I am not sure the minting costs are that relevant. But as you note, the price level of the item is important; there are a lot more potential buyers for a $20 item than for a $150 item, and thus more likely to run the price up. But I don't think that necessarily means that the two factors I mentioned have no effect on the spread. And you are right - I do tend to do a lot more thinking about things than most people.

 

The Buffalo is 24 karat gold. The AGE is 22 karat.

 

OK, I finally got my first 1/10th oz gold Maple Leaf in the mail. I know that one of the most important rules in investing is not to make decisions based on emotions. For example, you may find McDonald's food to be disgusting, however, if buying stock in McDonald's is going to give you a good return, who cares what a Big Mac tastes like. The 1/10th oz gold Maple is tiny (16 mm) almost 2 mm smaller than a dime and thin as a piece of paper. I didn't realize how small it is until I held it in my hand. But I'm not buying it for its looks so I won't complain. I am still very excited to have it and I will continue buying them.
One question: Why is the premium for the 1/10 oz Krugerrand much higher than the 1/10th oz AGEs and Maples, whereas the premium for the 1 oz Krugerrand are about the same as the 1 oz AGE and Maples.