Letter Re: Advice on Getting Started in Precious Metals Investing

Your reader TheOtherRyan wrote asking about how to get started in precious metals investing, especially the challenge of purchasing only a small amount each month. First, Ryan is wise to realize that you want to buy in small amounts, and not wait until a big “buy,” which might be at an unlucky price spike. Investors call the process of buying a little each month with a disciplined approach “averaging in.” It means you’re buying more on the months when the price is low than when the price is high, lowering your average total cost. Unfortunately, it can be difficult to do this economically. Many good mail order sites have significant minimums of thousands of dollars per transaction or more. Or the shipping costs kill you for small orders. Some states actually charge sales tax as you turn paper money into “real money” (silver or gold bullion) so retail shops are out of the question. Gun show sellers may offer some, but it will be hit or miss, unless you are looking for very popular items like 1-ounce gold bullion coins.

But there are some easy solutions. One is to open an ordinary brokerage account at any service like Fidelity, and use this to buy the funds that precisely track the price of your commodity. SLV tracks silver, and GLD tracks gold, each fund actually holding the commodity. The transaction costs are low, and it allows you to put in a small amount at a time, until you have accumulated enough to make a mail-order purchase from a reputable dealer. Meanwhile, you are secure against future price increases, and are averaging out the spikes and dips. It also lets you wait until the moment you choose to “buy on the dips.” However, this is harder than it sounds, because while a dip on a chart shows up as a drop followed by a rise, all you get to see in the real world is the drop, and you don’t know whether it will drop more, or rise. (Jim, I’d advise telling people to “buy on the drops” as a more helpful guidance). Of course, your stock fund will do no good in a crisis, so you need to cash it out when you have enough to make a mail-order metal buy. Research in advance for how you will make a fast withdrawal and transfer to the bullion supplier, and don’t forget the several day waiting period for liquidating securities. This option can suffer if you monthly investment is small, because the transaction fee to buy may be a large percentage of your cost. But maybe you can deposit $50 each month, then buy SLV when you accumulate $250, then sell and buy bullion when you reach $1,000, for instance.

Another option, especially for small purchases, is to buy on eBay. If you know your prices, and watch for reliable sellers with a track record of selling the kind of product you want, you can buy right about at spot price. (Try searching 90% silver rolls – or “silver dimes” or “silver quarters”). There are lots of choices at or around $100, and the eBay market generally knows the spot price. Be careful not to bid early, because a price drop may mean you overpaid by the end of the auction. Use a “bid-bot” like BidTamer.com to place a bid at the last minute, so your bid does not encourage others to outbid you. Halves and dollars tend to price higher relative to their silver value, so look for dimes and quarters. Liberty dimes can be worn down to reduce their weight, so look at Roosevelt dimes, or at least check the photos for an idea of condition. Know the spot price, and that there is 0.715 ounce of silver per dollar of face value. There are 50 dimes in a standard roll (or 40 quarters). Don’t try to get a screaming deal, because you will always be outbid. Look at completed auctions, and know what things went for relative to spot price at the time. You should be able to buy several rolls of coins shipped for about spot price. Of course, there is a small risk of fraud, so don’t put all your eggs in one eBay transaction, and don’t bite when it’s “too good to be true,” because the savvy bidders probably see the flaw you are missing. Figure 2% lifetime loss to eBay fraud, but you are still getting a good deal.

For comparison, if you were buying $500 face value of junk silver coins ($9,000 cost today) from an established mail order house (like Tulving.com) you’d get free shipping, and be buying pre-1964 coins at $0.10 per ounce under the spot price. Auction sites like eBay can come close to that (sometimes better), so don’t sweat a few percent of the price, because that can paralyze you. Remember that buying the quantity of silver coins you need is like buying beans for your survival storage. You aren’t buying them as an investment to make money, you are buying them as a means to survive. Best Regards, – Ben L.