Precious Metals - Gold, silver

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Last Updated: Sunday, 03 March 2024 04:46
Published: Friday, 23 February 2024 21:25
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Precious Metals - Gold, silver:

I'm not a big fan of buying gold/silver, etc for investment purpose. Nor buying it for showoff.

History:

Good article on historical gold and silver statistics is here .

Gold vs paper currency

Before Gold came into existence as currency, people used barter system to sell/buy things. This involved exchanging items with each other. Since this was very inefficient process, gold came into the process as a medium of currency. Gold mining has been taking place from about 5000 B.C. , so it has been about 7000 years, since gold has been used in some form as a currency or asset.

Gold has been used as a currency, since it's very easy to store, can't be produced artificially  and also limited in quantity. It's 20 times heavier than water, so 1 litre cube of gold = 10cmx10cmx10cm weighs 20kg, as compared to water of 1kg. So, at today's price of $2K/ounce, that 1 litre cube of gold would cost about $1M. Since it's limited in quantity and only exists in mines, no one can produce it artificially. Any thing that could be produced artificially by man, could not be used as currency. As such, gold was used as currency, and people had confidence that only so much gold was available.

Somewhere down the line, paper currency came into existence. Governments said that they will issue paper currency, which would be as good as gold. However, no one would believe in paper currency, as it was just a piece of paper. So, in order to make it work, it was backed by gold. That meant that the government would only issue paper currency in exchange for gold. So, let's say there was 1000 gram of gold in that country that was in circulation, then the govt would issue 1000 papers (assuming 1 paper was assigned value equal to 1 gram of gold). These 1000 papers would be held by the govt in treasury, and wouldn't be given to anyone. Now, whenever someone came with 1 gram of gold, govt would give him 1 piece of paper. That meant that the total amount of currency in circulation was still the same (999 gram of gold and 1 paper currency). Similarly, if more people came to exchange their gold with paper currency, govt would get more and more gold in exchange for these papers. After there is sufficient confidence in the system, most of the money in circulation would be paper currency, with an equivalent amount of gold sitting in the government treasury.  That gave confidence to paper currency, as it was conceptually equivalent to gold, but instead of carrying gold around, you could exchange this gold for paper currency from the issuer of paper currency, and then carry paper currency around, which was much easier. At any given point of time, if you wanted to get your gold back, you could take your paper currency to the govt and get an equivalent amount of gold.

There is no clear statistic on total amount of gold mined since the advent of civilization. According to the link at top, total amount of gold ever mined is 5.5B ounces or 165K metric tonnes (1 metric ton is 1000 kg). About 10% of the gold ever mined has been lost, used or unaccounted, so there's about 5B ounces or 150K ton of gold in circulation today. This article suggests that total amount of gold that is mined every year since 1995 is about 80M ounces or 2500 Metric tonnes.  World gold production peaked at 2.6K ton in the year 2001, and has been declining since then. In the year 2010, it was at 2.4K ton. Assuming $2K/ounce of gold price, that's $150B of gold that is mined every year. More than 50% of the gold ever mined has been mined in the last 50 years, and 90% of the gold ever mined has been mined since 1850. So, Gold supply is increasing by about 2% every year on an average. The aggregate un-mined known reserves of all the world's gold mining companies is approximately 45K tonnes as mentioned here . So, at current pace, somewhere around 2030, all of the known gold reserves will be exhausted, and then gold supply will increase very slowly.

Of this 150K ton of gold that has been mined, 50% is consumed in jewelery by mixing gold with other metals as copper, etc which results in 22k, 18k, 14k or 10k purity gold as pure 24k gold is too soft to be used in making any jewelery. 40% of gold is consumed as investment in gold coins, bars, govt reserves, etc and remaining 10% is consumed in industry for making solders, IC connections, medical uses, etc.

Indian households hold about 18K ton of gold, which is about 12% of all the gold in the world ever mined. Most of it is held in form of jewelery. Some estimates, put the amount of gold owned by Indian households to be 25K to 30K ton, which would be about 20% of all gold.

Governments hold gold in their reserves too, as bank's reserve assets. About 30K ton or 20% of gold is held by various governments. As of 2010 end, US Fed has the largest gold reserve at 8K ton (5%), Germany 3.5K ton, Italy and France 2.5K ton each, China and Switzerland at 1K ton each, Russia, Japan, Netherlands and India each at more than 0.6K ton of gold. IMF (International Monetary fund) holds about 3K ton, while ECB (European Central bank) holds about 0.5K ton of gold.

Gold is also held privately in stocks/funds . These funds actually buy physical gold on your behalf, when you buy such stocks. As of 2011, 2.5K ton or 2% of gold is held in such funds. The most widely traded such exchange traded fund is SPDR gold ETF (ticker GLD), traded in US stock market. It has about 1.2K ton of gold held in its stocks.

Aside from 40% of gold accounted above, 10% of the gold is in industrial materials. So, the remaining 50% of the gold ever mined is in various countries as household jewelery, gold coins, bars, etc (excluding indian households).

Gold producing countries:

The world’s top five gold producing countries mine about 50% of gold of the total mined output of 2.4K ton. Countries producing about 2/3rd of total gold production in world are as follows: China - 370 ton (15%), South Africa- 275 ton (11%), Australia - 250 ton (10%), USA - 250 ton (10%), Peru - 210 ton (9%), Russia - 160 ton (7%), Canada - 105 ton (5%). By comparison, India produces only about 2.5 ton or 0.1% of total gold produced every year. South Africa was the largest producer of gold for many decades, producing over 800 tons every year, but all easy pickings have been done, resulting in precipitous decline of new and existing gold mines. So, it's getting more difficult and expensive to mine new gold. While gold mining cost were around $200/ounce at start of 2000, they are now over $700/ounce and going higher each year. This ABN AMRO paper has good statistics on gold mining costs. Still at prices over $2K/ounce, it's still profitable business.

Gold consuming countries:

In 2011, there was demand for about 4K ton of gold. Gold is not consumed in the true sense. 2K ton (50%) was consumed in jewelery, 1.6K ton (40%) in investment (1.4K ton in bars/coin, while 0.2K ton inETFs), and remaining 0.4K ton (10%) in industrial applications. Note that before the bull run of gold (year 2003 and before), about 80% of gold demand was for jewelery, 10% for investment and 10% for industrial applications. So, the rising price of gold has generated a lot of demand for gold as an investment. Since annual production of gold is about 2.4K, while demand is 4K, the shortfall is made up by recycling scrap gold, as well as by sale of gold by Banks around the world. The world’s largest consumer of gold is India, at 800 ton (20%), then China at 500 ton (12%), and a distant third is USA at 125 ton (3%). Rest all countries consume less than 100 ton, and consume roughly in line with what they produce. Gold demand has fallen significantly for all countries except India and China, since 2003 as prices for gold went up by a factor of 5. India's gold import was 1K ton in 2011, a record high.

 

 

Buying/Selling Precious Metals = Gold, Silver, Platinum, Palladium:

Gold/Silver coins are the best way to buy these precious metal, as they may be gifted to others. Platinum and Palladium and two other metals, that are considered alternative to gold, and are highly traded. However, we'll be looking at gold/silver only. There are few terms that we need to know before rushing to buy these.

  • Weight (in troy oz): The most common weight for these coins is 1troy oz (31.1g). NOTE: it's NOT 1 oz, as 1 oz is only 28.3g. We quote Gold/Silver in troy oz in USA and in international markets. Coins may be more than 1 troy oz in weight, as they have to be mixed with other metals to make them more durable. Many reputed mint companies will guarantee that gold/silver content itself is 1 troy oz. Most commonly seen with gold coins, where the weight of gold coin is 5-10% more than 1 troy oz, to give you 1 troy oz of gold.
  • Spot Price: Spot price is the price at which gold/silver is sold in huge commodity markets. Usually you have to pay a premium over the spot price to buy these from online merchants, as they have shipping costs, credit card costs, insurance cost, etc. No one can sell you physical gold/silver etc for spot price, as they will lose money doing that.
    • 2023: As of 2023, spot price for 1 troy oz of metals is: Gold = $2K,silver = $20, Platinum and Palladium = $1k. Coins for 1 oz sell for 2%-5%
  • Purity: Gold/Silver also have a purity noted on them, which specifies how much of the weight is pure gold/silver. Generally, these coins are mixed with other metals to make them more mintable. It's common to see gold/silver coins mixed with other metals. In India most coins are sold at 92% purity (i.e only 92% of the weight of the coin/bar is precious metal, the other 10% is less precious metal as Silver,Copper, etc). But they are priced as if it's 100% gold/silver. Gold/Silver purity is noted in karats. karats indicate the proportion of precious metal out of a total of 24 karats. 24 karats is 100% pure gold, So, a 22 Karat gold is 22/24=91.67% gold content. Most places sell gold at 18 karat or 22 karat purity. Here in US, all sorts of coins are sold with different purity levels. Purity is also noted in "spine". Four nines (99.99% or 0.9999) is called four spine. Three nines (99.9% or 0.999) is called three spine. A lot of coins that are minted by individual companies are 3 spine, that's 99.90%. Typically four spine is a little more valuable because there is more gold. Chinese gold pandas are 3 spine, for example. Us liberties or Buffalos are 4 spine.
  • Minting Companies: Companies may mint their own coins, and sell them. These don't have that lure, as you these are NOT considered currency. US Mint ( branch of Treasury Dept of US govt) has the authority to mint coins and sell gold, silver, Platinum and Palladium coins in different sizes. It doesn't directly sell to general public, via sells them via it's authorized sellers. These US Mint Coins are highly sought after, as they are internationally recognized as being of highest purity, backed by US govt and have legal tender value just like US currency (i.e 1 Dollar Gold coin has $50 written on it, meaning US govt will pay you $50 if you decide to use it as a legal tender. No one does it, since market price of that coins is lot higher at $2000) and may be included in Retirement (i.e. IRA) accounts too.
    • Link to US Mint coins: https://en.wikipedia.org/wiki/Coins_of_the_United_States_dollar => For Gold/Silver coins, the gold reference is "American Eagle" coins. They have guaranteed 1 oz of gold/silver with 3 or 4 spine purity. However, they carry premium over spot price.
      • American Gold Eagle (AGE): These are the only gold coins that you should buy as they may usually be bought with only 2% premium over spot price of gold. One thing to note is that these coins have low purity of 91.67% (22/24*100) as it's 22 carat gold. It has 3% Silver and 5.67% copper. However, it still contains 1 troy oz of gold, as the total weight of coin is 1.091 Troy oz, with 1 troy oz of that being gold. It's very durable, but less shiny than other coins which are 99.9% pure gold.
      • American Buffalo (AB): These were first minted in 2006, and are the only 24 karat gold coins with 99.99% purity offered by US Mint. These were offered to compete with pure gold coins offered by Canadian and Australian Mintage. Since these have no other metal content, their weight is 1 troy oz. They are more delicate and easy to chip, or get their gold brushed off.So, they have to be kept in a box or package.
      • American Silver Eagle (ASE): ASE are composed of 99.9% silver and 0.1% copper. These coins usually sell for $3-$4 over spot price of silver. You may buy other Silver coins (NOT ASE) by other minters which may be only $1-$2 premium over spot price. But expect to pay at least 5% over spot price, which makes it lot more difficult to make as much profit when selling (compared to gold).
    • Other Govt Mint coins: Government of many countries around the world also mint gold/silver coins. Some of the popular ones are Canadian Gold Maple Leaf (GML) coins with 99.99% purity, South African Krugerrand Gold coins of 22 Karat (Same as AGE with total weight being 1.09 oz), Australian Kangaroo coins produced by Australian Mint and Britannia coins produced by British Royal Mint. They are all guaranteed by the respective Governments, so are equally safe.
    • I would personally prefer to only buy AGE, and not bother with any other gold coins. They are very liquid, and easy to buy/sell. For Silver coins, since the premium for ASE is 20% over the spot price, I would prefer to buy it local minting companies, which sell it to you for 5%-10% over the spot price. You easily lose 2%-3% in gold and 5%-10% in silver each time you buy/sell compared to spot price. As for my recommendation, you should never ever sell anything you buy. So, just buy and keep it forever !!

Below are few merchants where you may buy these. 

EBAY: I used to buy them on ebay before 2014, as at that time they allowed you to buy gold/silver using ebay GC, which you could regularly get on discount for 5%-20%. So, that was a pretty good deal (easy 5%-20% profit). Since 2014, they stopped accepting GC for buying any precious metals. Now, there's no reason to buy on ebay. Actually you should avoid buying on ebay, as ebay has gone downhill, and still going that path. Lots of other retailers offer much better service at the same price.

COSTCO/WALMART: As of 2023, 2 biggest retailers - Walmart and Costco have started offering Gold/silver coins. Costco usually have gold coins on sale from time to time with only $30-$40 over the spot price of Gold. Silver coins go less on sale. However, their American Eagle silver coins usually sell for only $2 over spot price per coin, which is a decent markup (Not a bad deal, as other retialers usually have > $2 markup on these coins). Walmart has gold/silver coins via 3rd part sellers. One of the most reputed 3rd party sellers is "APMEX", but you may buy from any 3rd party sellers, as Walmart stands behind the product. Whenever I've Walmart GC to burn, I usually end up buying these gold/silver coins.

Shipping is always free, item is non returnable, and you can pay with credit card, and earn points (1%-2%). 

 

 

 

DEALS:

 

Costco:

 

Walmart: