The Liquid element of a precious metal portfolio – by cabadjo.

Video transcript:

Today is Wednesday 11th January 2017 and we are presenting todays video written by one of our subscribers Cabadejo.

It runs as follows:

I have been invited to write a piece by illuminati Silver. So for a first offering I have elected to write about investing in precious metal coins. This will primarily be about silver coins but I will mention gold and other presentations of precious metal in my discussion.

If you have decided to invest some of your currency into precious metals why would you want to buy actual physical gold and silver?

There is a saying that “if you don’t hold it you don’t have it.” This is a topic in its own right but in brief holding physical gold and silver eliminates third party risk. When you invest in a company share, how well that investment performs depends on many other people. Lots can and do go wrong with companies which might jeopardise your investment.

When you invest in share representing physical silver, such as the ETF SLV, there is still third party risk. You run the risk there is no silver in the vaults or that at some point JP Morgan, the custodian of the SLV hoard, actually does sell it or something worse. If you invest in precious metal in an unallocated account, you may think there is gold or silver there with your name on it, but there really isn’t. You are actually in a very precarious position. You rely on many others; there are many others between you and your asset, if you indeed even have one.

On the other hand, a tube of silver coins in your physical possession is very tangible. You can touch (with gloves on I hope). You see them. They are yours. Yes the coins might be fake and someone might steal them but assuming this doesn’t happen you are not reliant on third parties to perform.
There is no third party liability.

So assuming you have decided that physical precious metals will be part of your investment portfolio, where do you go from there?
You have to decide how much of your capital you want to put into precious metals always remembering they are not income generating assets unless you trade them. I have often heard a figure of around 10% as a reasonable amount of an investment portfolio being devoted to precious metals.

Personally I would put more in but that is me. Considering the cost of even basic 1oz coins those with smaller amounts to invest may find they have to devote a larger percentage to a precious metal portfolio but there are easy ways to start. In the end it all depends on your own circumstances.

Building up a gold and silver investment portfolio is not simply about ordering gold and silver online or popping down to your favourite coin shop. A portfolio ought to have a logical structure.

There may be a rainy day when you suddenly need cash and have to sell assets. There may be an Armageddon time when you need to use your precious metals to barter and trade with. The value of gold and silver may actually fly to the Moon, how your precious metal portfolio is made up could become important. So bearing some of these things in mind, what do I think a logical structure to a precious metal portfolio should be?

Starting out it does no harm to amass some junk silver. This is the term usually given to what were circulating coins which contain silver. The governments have taken silver coins out of the general circulation of legal tender quite some years ago but these coins are still around and they are still very recognisable. I would get junk silver that the people in your street would recognise. So in the UK you would get pre 1947 shillings, two shillings, half crowns, sixpences and the like. You need to do a bit of research into what coins contain what amounts of silver. In the US I would get Constitutional silver. It is a cheap way to get your hands on silver, coins contain smaller amounts of silver so you aren’t dealing with big value items and people will recognise them.

Once you have decided on the coins you are best getting hold of, you need to create a quick ready reckoner as to what the spot price value of the silver in each coin is. Then you can quickly work out what you ought to be paying for a coin.

Junk silver is easy to resell at the melt price and relatively easy to buy around the melt price. You are building up a stack of less expensive small denomination silver coins recognisable to most people. One day these coins may be used as bartering tokens and even if that day never comes you have got yourself some cheap lower weight silver.

Buying modern low silver weight coins is expensive per ounce so this is a good way to put lots of low weight silver into your portfolio. You might lay your hands on coins which have numismatic value, that is collector value. Your coins might acquire numismatic value over time. This is an added bonus you should always be mindful of. If they never become collector items you still have the silver and you are making a good start. This is an excellent way to get children interested; this is how I got interested. At the same time they can learn the value of money and a bit of history.

I would call the junk silver part of a portfolio part of the liquid component. By liquid I mean a part that can easily be converted into cash. When you buy gold and silver you need to think about selling it. It is easy to buy a coin when you like the look of it and get all excited about owning but at some point that coin will be sold on and you must think about that day before you commit yourself. The liquid part of your portfolio may have to be sold quickly and so its numismatic value is unlikely to be fully realised. You will be able to get the spot price all things being equal so you ought to be paying as close to spot price when it comes to the liquid part of your portfolio. It is easy to imagine you can quickly sell more exotic coins but when the chips are down and a buyer is not interested in anything but the metal content or he senses you are desperate to sell, all that matters is the spot price.

Now this is where the best course of action for developing a portfolio differs between countries. Those in the US, Canada and Australia as far as I am aware do not pay tax when they buy silver. You can get silver close to spot price. It is not fancy silver but you don’t want particularly fancy silver. So suitable choices are generic bars and round along with the cheaper coins. Silver is silver and this is silver you are not budgeting to sell for spot price. If you spend more than that you could be wasting your resources. Part of your exit strategy should include the size of your silver coins, bars and rounds.

You might be able to get 10oz bars for a lower price per ounce but do you want to sell a whole bar in the future. Will you find buyers especially if the price of silver went a lot higher. If you can get government mint coins for near spot I would recommend these because they are recognisable. I know it is irksome but if they have a picture of the Queen on, people will tend to trust them. If they are recognisable as coming from your country's State mint, then people are more likely to accept these coins. You might not always be trading with a dealer so rounds could be unfamiliar to ordinary people.

A coin with the Queen on saying 1oz silver is more reassuring. If you can get 1oz rounds a good deal cheaper I would include those but think about who you might be dealing with. People may end up happy to trade more for a recognisable coin over something they don’t know. Investors might want to invest in bars but remember lots of bars are faked and are easier to fake. Come the day silver is more valuable there will be a big incentive to fake silver and bars are the easier choice. Large bars are nice but you are forced to sell a large amount of silver in one go. Remember this is the liquid part of your portfolio where the exit strategy should be in the front of your mind.

In most of Europe all silver is taxed. There is no VAT on coins in Norway and Estonia. Norway is outside the EU so if you live inside the EU you would be expected to pay VAT on import. Estonia is in the EU so if you order from inside the EU and arrange your own shipping you can buy VAT free silver coins. This makes a big difference to purchase prices, as VAT is generally around 20%. The main website for Estonian silver is www.celticgold.eu. Also included in the Estonian coin sellers is www.silver-to-go.com but I have only seen German details for this outfit. Both are good sources.

German dealers apply a marginal rate scheme where VAT is charged on the dealers mark up and not on the full pre-tax price. Because there is lots of competition in Germany you will likely find you can find the cheapest deals there. The price comparison site www.gold.de is a good place to look. Germany is in my opinion the go to place for silver coins in Europe both for variety and price. Other countries in the EU also apply a marginal rate scheme, such as the Netherlands. I also see the main coin website in Belgium, www.goldsilver.be offers low VAT coins at keen prices.

Bars and rounds attract full rate VAT. They do not make sensible investments in Europe unless they have a significant collector value. They would not be part of the liquid component of a European precious metal portfolio. Even silver coins from VAT friendly sources in Europe are touch and go. If you can find good deals the lowest premium silver coins can occasionally make the grade for a liquid portfolio but silver coins are not cheap in Europe. The low VAT sources are well aware that coins attracting VAT in neighbouring countries are much more expensive and so the cheapest silver coins I can immediately see at the time of writing this is the Australian bullion kangaroo 1oz silver coin sourced in Germany at €18.43 whilst the prevailing spot price is €15.71. That is 17% over spot and that is a very low premium in Europe. So if you had to sell recently bought silver coins and a dealer took them off you at spot you are looking at a hefty loss. This is not a good exit strategy for a liquid portfolio. Silver is not a good choice in Europe.

On the other hand purchases of gold are tax free in the UK. In the UK if you buy and sell UK legal tender gold coins there is no tax when you buy and no capital gains tax when you sell. I do not know about taxation of profits in other European countries but certainly the UK is very tax friendly towards gold. It is quite possible to buy gold coins such as the Sovereign for 2% above spot price. You can equally sell Sovereigns quickly for around spot price. There is no tax to worry about, selling is quick and around spot price is easily achieved. The Sovereign has 7.31g of gold where there is 31.1g in a troy ounce. Half sovereigns can also be picked up at 2% over spot and have just over 1/10th ounce of gold. The way forward with a liquid portfolio in the UK is small gold coins.

I do not know what the tax position is in other European countries. I can see that there is a complicated tax system in France surrounding gold. I expect it is simpler in Germany. Outside of Europe I can see that in Australia gold less than 99.5% pure attracts tax. You need to do your homework as it applies to your country. In the liquid component of a gold and silver portfolio taxation should be figured in to your decisions. Silver is a good choice in the US and gold is the way forward in the UK.

For some people this will be as far as they will take their portfolio. Investing in more numismatic coins is seen as a waste of cash which could have been used to buy more metal. Investing in the numismatic part of a gold and silver portfolio is more risky but for me is the exciting part and one of the main reasons I do it. For the next episode I will start by looking at some other practical considerations of investing in gold and silver before getting into numismatics which is a fancy word used to describe the collector value of coins.

That completes cabadejo’s article/video. What did you think? Did you find it useful and helpful? Please state your comments below. Meanwhile we would like to thank cabadejo for a tremendous effort in producing this. It is very much appreciated.

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Illuminati Silver owners come from a background of Banking, International Wealth Management and Economics. Having now retired from these worlds we are not qualified to give investment advice. Therefore, this and other productions must not be deemed to be giving such advice and merely represent the personal views of its owners.

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