Introduction to Precious Metals
16 December 2020
Historically, precious metals have performed well in uncertain environments, consistently maintaining their value and protecting wealth. When interest rates are low, particularly when inflation is taken into account (real returns), precious metals often rally due to economic uncertainty.
Why Gold & Silver?Whether worn as jewellery, held in investment grade cast bars, minted tablets or coins, physical gold and silver are amongst the world’s oldest asset classes.
The demand for physical gold and silver as an investment has constant demand. The factors that have contributed to this demand include:
- Capital Growth
- Low Interest Rates
- Portfolio Diversification
- Economic Uncertainty & Inflation
- Currency Hedging
- Wealth protection
A Historical PerspectiveTo gain a historical perspective on gold prices, between January 1934, with the introduction of the Gold Reserve Act, and August 1971, when US President Richard Nixon closed the U.S. gold purchase window, the price of gold was effectively set at US$35 per ounce.
Using the set gold price of $35 and the price of $1,800 as of November 2020, that equates to a price appreciation of approximately $1,765.00 or 5,143%. In July 2020, the price of gold had surpassed its previous all-time price high of nearly US$2,000 an ounce – the highest price since September of 2011.
Capital GrowthUnlike other types of commodities in terms of its interplay with risk assets, gold has low overall correlation to equity markets, whereas other commodities are positively correlated to equities, with this correlation rising during equity market selloffs.
Currency HedgingGold acts as a natural currency hedge for the Australian investor. Why, you ask? A fall in the Australian dollar exchange rate results in higher AUD denominated gold prices, (assuming the USD gold is unchanged). Therefore, increased USD gold prices in conjunction with a lower AUD exchange rates, make physical gold a compelling investment for the Australian based investor.
What About Silver?Like gold, physical silver can thrive as an investment. Since 2004 the silver price has seen an increase of 7.4% compounded annually. Its popularity has stemmed from its variety of uses across many industries. Silver is valued for its electrical conductivity, thermal resistance, reflective qualities, and antiviral properties. For these reasons silver is used in mobile phones, cameras, laptops, and medical equipment such as X-ray machines, and recently in sports clothing and medical bandages.
Silver is an extremely affordable investment in comparison to gold. Making it an excellent option for new investors. Yet silver is often overlooked by many investors, even though it possesses the ability to outperform gold. Especially in environments where the price of both gold and silver are on the rise.
During the 1970s when precious metals were constantly on the rise, the Australian silver price showed a 1200% increase whereas gold was about half of this coming in at 633%. To provide a more recent example, the bull market between 2000-2011, silver showed a 779% while gold came in at 617%.
What Type Gold and Silver to BuyPhysical metal comes in various forms; cast bars, minted bars and coins. Cast Bar is the ‘poured’ form of bullion; the process of casting has been around for hundreds of years and it begins by heating the metal into liquid form. This liquid metal is then poured into a mold, design to hold a certain weight and to create a certain shape. Once cooled, it is taken out of the mold to be stamped and serialised. No two poured bars are the same due to the pouring process that often creates abnormalities and blemishes that are unique to those bars.
Minted bar / tablet and coins are a manufactured form of bullion. Minted bars traditionally began life as cast bars; from there they are fed through a machine that compresses & strikes, this produces a bar that is more intricate & detailed than a simple cast bar. These usually come sealed in its packaging (CertiCard, capsules or the likes) accompanied with a certificate containing a unique serial, number assayer’s signature, weight & precious metals content; the selling price of these are usually higher than cast bars due to the added manufacturing cost. ABC Bullion carries a range of minted tablets in various sizes from 1g to 1oz.
Physical metal in coin form are usually available in small denominations, making it an excellent entry to the precious metals market or gifts for those looking for tangible stores of wealth. These small denominations include sizes below one ounce, often called, fractional coins, may go as little as 1/100th of an ounce. When buying in bulk form, a set of coins (supplier dependant) comes in a ‘tube’ and a set of tubes comes in a ‘monster box’.
There are two types of coins available, bullion and numismatic. Bullion coins are acquired for its precious metals content only, where numismatic coins may or may not have as much intrinsic value and are often sought for their rarity and collectability.
Nonphysical metal comes in various forms; ETFs, unallocated, pool allocated.
Exchange Traded Fund (ETF) is a basket of securities or a commodity you can buy or sell through a brokerage firm on a stock exchange. ETFs are offered on every conceivable asset class from traditional investments to so-called alternative assets like commodities or currencies. An ETF is bought and sold like a company stock when the stock exchanges are open. Unlike a company stock, the number of shares outstanding of an ETF can change daily because of the continuous creation of new shares and the redemption of existing shares.
Unallocated metal lets you purchase into the Mint’s working inventory; choosing to purchase unallocated option are therefore purchasing into the pool of working metal of said Mint which they use to facilitate their day-to-day operations.
ABC Bullion offers pool allocated metal, where you invest in a ‘share’ in a pool of physical metal managed by ABC Bullion. Clients each own a share of this pool of physical metals, rather than specific bars as with purchasing physical metal. The main benefit of purchasing pool allocated metal is that clients pay a reduced premium and storage & insurance is free of charge. ABC Bullion pool allocated can be purchased in whole ounces or by dollar value (parts of an ounce). If required, this pool allocated metal can also be converted into physical metal simply by paying the balance of fabrication cost to then be collected, delivered or securely stored by ABC Bullion or its sister company, Custodian Vaults.
When deciding between paper and physical gold, the answer comes down to the reason you are buying precious metals. Are you only speculating on the price of gold or silver going up? Or are you buying gold or silver with a view to wealth protection? That is, as a form of financial insurance.
How to InvestThe wide variety of gold-backed and gold-related investment products provide many ways to get into gold for every type of investor, but always do your research or speak with your financial advisor to understand the best product to suit your needs. It is not possible for ABC Bullion to tell you how much you should invest in gold or silver, as we do not know your specific financial situation and objectives.
Due to their low correlation to most mainstream assets, many of our clients use gold and silver to diversify their investments. Others use them as a store of wealth or for protection against inflation.
Research by the World Gold Council in various countries shows that adding between 2% and 10% in gold to a portfolio over the past decade would have resulted in higher risk-adjusted returns.
How to value Gold and SilverThe fixing (or fix) is a daily process, an agreement between participants on the same side in a market to buy or sell precious metals at a fixed price, or to maintain market conditions such that the price stays at a given level, by controlling supply and demand. Orders are changed throughout the proceedings as the price is moved higher and lower until such time as the orders are satisfied and the price is said to be “fixed”.
The spot price is the current market price at which an asset is traded for immediate payment and delivery. The spot price is a wholesale price for multi-million-dollar sized orders of metal and does not consider the cost of making the metal into coins or bars, transporting it, storing it and/or retailing it to the investor. Precious metals are priced in troy ounces which differs slightly from normal ounces. A troy ounce is an imperial measure and there are 31.1035 grams in a troy ounce, and 32.15 troy ounces in 1 kilogram.
What does ‘Good Delivery Bars’ mean?
London Bullion Market Association (LBMA) sets the stringent criteria that enable the global trade in gold and silver bars. It is the de facto standard trusted around the world. Only refiners whose bars have been accredited by LBMA as meeting the exacting standards for trading on the global OTC market can produce "Good Delivery Bars." It is the internationally accepted trading standard used by precious metals dealers, traders and bullion banks around the world to trade and deal in gold and silver. Specifications for good delivery bars is that each bar is marked with the fineness, the year of production, the serial number and the refiner’s assay stamp.
Gold: Minimum gold content > 350 troy ounces (circa 10.9kg); maximum gold content > 430 troy ounces (circa 13.4kg)
Silver: Minimum silver content > 750 troy ounces (circa 23 kg); maximum silver content > 1,100 troy ounces (circa 34 kg)
All ABC Bullion gold & silver bars are produced by ABC, the refinery division of Pallion which has been appointed to the London Bullion Market Association’s (LBMA) Good Delivery list for gold & silver. This is a testament to its ability to refine and produce gold products to LBMA standards, universally regarded as the highest international standard. LBMA accreditation is given only to companies that meet the Association’s stringent assaying and bar quality criteria as well as its responsible gold and net tangible asset requirements. The appointment makes ABC Refinery the only independent LBMA accredited gold refinery in Australia.
Storing Gold and SilverABC Bullion offers different storage solutions depending on each client’s requirements. Whether it be pool allocated or physical metal, there is a storage option for you. Storing physical bars with us is an extremely safe and easy process. Be comforted by the fact that your bullion is insured for its full replacement value.
There are several options available including Secure, Premium and Pool allocated or with our sister company Custodian Vaults.
Firstly, Pool allocated metal as explained earlier is not yet a tangible bar. Therefore, when purchasing this product there are no storage fees. If you choose to leave it in this form you can sell any amount at anytime while experiencing no fees. Making it a cost-effective method of storing and owning metals.
However, if you choose to transform this metal into bars or hold the metal in a physical tangible form the below options are best suited to you.
Secure storage is offered for all ABC, PAMP, Royal Canadian Mint Coins and gold Perth Mint Coins. It has an annual fee of 0.75% of the total value of your holdings. If you choose to withdraw your metals, you may not get the exact same products that you purchased and placed in storage. But you will receive a product of the exact same weight and type.
Premium storage is available solely for our 1kg ABC gold cast bar. This class of storage is slightly more expensive than our secure storage. The reason for this expense is the personalisation of the process. The annual fee for this class of storage is calculated at 0.95%. This class is unique in the sense that you are able to retrieve the exact bar you originally placed in storage.
Another storage option available is a safe deposit box at Custodian Vaults. Custodian Vaults is a sister company of ABC Bullion. Due to this relationship we provide out clients with complementary transfers of metals purchased with us to your vault. We are also happy to meet you at your box if you wish to sell your metal back to us. When storing large amounts of physical metal this is a more cost-effective solution. The prices start at $292 annually and varying depending on the size of your box and amount of insurance required.
Selling Gold and SilverIf you store your metals with us at ABC Bullion it can be as simple as a click of a button. When selling your metals, you will be quoted a buyback price. When selling, you will notice that the buyback price is slightly different to the selling price, this is called a ‘spread.’ The spread allows for different trading and handling costs associated with us selling and buying precious metals. This spread also allows for a small margin to be made by ABC Bullion, like all other traders.
Selling your metals can be done either online, via a phone call or in our offices. ABC Bullion will repurchase any metals that are in storage with us instantly. If it is in your possession or offsite, you will need to bring the metals to your nearest ABC Bullion office or post it to the Sydney office. ABC Bullion will then process a buyback and make payment to your designated bank account with funds typically received within two days.
Precious metals are an outstanding in a portfolio diversification. Buyers who want to get involved in this market must understand why precious metals are critical and how can you profit from it. Specifically, gold and silver are an excellent form of hedge against inflation. Let me elaborate on this matter. Gold and silver hold a unique position in the monetary history where they retain their purchasing power regardless of the economic cycles economies around the world experience whether though deflation, stagflation or inflation. These three forms of economic cycles are different from each other which I will be explaining in my next part.
To really grasp the significance of gold and silver we have to take into consideration that first of all gold and silver are an insurance and not a quick Ponzi scheme where people buy and sell after a few weeks. The purpose of precious metals is to actually protect your wealth from an inflationary crisis. Gold and silver are measured relative to currencies. An ounce of gold will remain constant but currencies which are measured relative to precious metals will constantly fluctuate. Fiat money has a history of major changes where the purchasing power losses greatly in buying goods and services. There are three important factors that drive the price of gold:
- Real Interest rates
- Supply and demand
- Geopolitical risk