Gold and Other Precious Metals Chapter 25 Tools & Techniques of Investment Planning Copyright 2007,...

Gold and Other Precious Metals

Chapter 25Tools & Techniques of

Investment Planning

Copyright 2007, The National Underwriter Company 1

What is it?

• Most common precious metal investments:– Gold– Silver– Platinum

• They are valued primarily because of their scarcity.– To a lesser extent, because of their utility for scientific and

industrial purposes



Investment Planning


When is the use of this tool indicated?

• When the investor anticipates instability in traditional capital markets– Historically, when stock and bond markets have fallen, the price

of gold and other precious metals has tended to increase.

• When the worldwide economic or political outlook is one of uncertainty and fear– Precious metals tend to be viewed as a more stable and secure

investment.

• When the investor anticipates that the purchasing power of the dollar will be eroded by high rates of inflation



Investment Planning


When is the use of this tool indicated?

• When the value of the investor’s dollars is declining because of international currency fluctuations

• When the investor desires to diversify a portfolio that already contains significant amounts of stocks, bonds, and real estate.



Investment Planning


Advantages

• Gold and the other precious metals offer a potentially high return.

• Precious metals provide a degree of psychological security matched by few other investments– They are tangible, or physically possessable assets

• They can be purchased in relatively small quantities and in a variety of forms.



Investment Planning


Advantages

• There is an underlying demand for them as a commodity in addition to their speculative or investment value.– Due to their utility for scientific and industrial purposes

• Precious metals held over a very long period have proven to be a relatively safe and stable investment.



Investment Planning


Disadvantages

• Precious metals are a highly speculative form of investment– The price of gold is determined more by international, political,

and psychological factors than by normal economic factors of supply and demand.

• Historically, the prices of precious metals have been highly volatile.– The investor is subject to a high risk of significant loss of capital.– Panic of buying gold could quickly reverse itself.



Investment Planning


Disadvantages

• They have frequently been controlled by various governments– Example: The United States government hoarded gold in its

vaults for many years and forbade U.S. citizens from owning and selling gold privately for investment or speculation until 1975.

• Direct investments in precious metals typically yield no current income.– Gold is relatively “expensive” when alternative investments are

yielding high rates of return in the form of dividends or interest.



Investment Planning


Disadvantages

• Precious metal investments involve storage costs.– Directly or indirectly– May amount to more than a dollar per ounce on an annual basis– There may also be shipping and insurance charges

• Sales tax may be payable.• There may be assay costs involved in the purchase.



Investment Planning


Tax Implications

• Taxable gain is realized and must be recognized to the extent an investor receives more upon disposition than he paid.– To the extent that the selling price exceeds the investor’s tax

basis, he must realize a gain.

• No gain is reportable until the investment is disposed of in a taxable transaction.– Advantageous to high tax bracket investors



Investment Planning


Tax Implications

• A loss from a precious metals transaction is allowable to the extent an investor paid more for the asset than he received from the sale.– To the extent that the investor’s basis exceeds his selling price,

he has a deductible loss.

• Gain or loss on a transaction is a capital gain or capital loss assuming the metal is held as an investment.– The length of time the metal was held prior to disposition will

determine whether the capital gain or loss will be long-term or short-term.



Investment Planning


Tax Implications

• No gain or loss must be reported if one precious metal is exchanged solely for another.– The metal received must be of the same nature and the same

character as the metal given up in the exchange.– An exchange of any two different types of metals will trigger

the recognition of gain or loss. • Example: Gain or loss would be triggered by the exchange

of a silver bullion-type coin for a gold bullion-type coin.



Investment Planning


Tax Implications

• The exchange of a precious metal for property other than a similar type of precious metal will result in a reportable gain or loss.

• Coins acquired in a taxable transaction must be valued for tax purposes at their fair market value rather than at their face value.– Example: A Fifty Peso Mexican coin with a gold content of

1.2057 ounces may be worth a lot more than fifty pesos.



Investment Planning


Alternatives

• From the standpoint of form of an investment:– Speculative real estate– Collectibles– Diamonds and other gemstones– Art

• From a risk-return standpoint:– Speculative stocks– Junk bonds– Securities options– Commodity futures– Limited partnerships– Other capital gain-oriented investments



Investment Planning


Where and How do I get it?

• Gold or silver can be purchased as:– Coins– Bars– Certificates

• Certify that a specific warehouse is holding a given amount of that metal for the investor



Investment Planning



• Investors who wish to buy small quantities of gold should consider coins.– They are easy to purchase, store, and resell.– The most popular bullion-type coins have a fine gold content of

exactly one troy ounce.• They generally have no numismatic value.• The value of an investor’s holdings can be figured by multiplying the

price of gold for immediate delivery by the number of ounces held.– The “spot” or cash price

• Many investors prefer to purchase gold in the form of “ingots”– Small wafers of gold– Sold in standard weights that range from one gram to 400 troy

ounces



Investment Planning



• Gold should be purchased only from a recognized dealer.– The ingot should be stamped with the name of a recognized

refiner.– It should be accompanied by an assay certificate

• Assures the purchaser of its purity and authenticity• Saves the cost of another assay when sold

• Dealers that specialize in precious metals– International Precious Metals (www.preciousmetals.com)

• A number of banks act as an agent for their customers who choose to purchase precious metals.



Investment Planning


What fees or other costs are involved?

• Gold, silver, and platinum are purchased at the market value plus a premium.– Generally ranges from 2% to 3%– Covers the dealer’s profit and the cost of fabricating the metal– Premiums decline with the quantity of the metal purchased.

• May be less than 2% for a 100-ounce bar

• An investor who desires to take physical possession of a precious metal must pay insurance and shipping costs.– Sales taxes may apply as well.– A representative shipping and insurance charge for six ounces of

gold is $18.



Investment Planning



• Certificate Programs– Offered by a number of large dealers, banks, and brokerage firms– Appeals to investors who prefer not to accept the risk and expense

involved in taking physical possession of a precious metal– The investor receives a certificate stating that he owns a specified

number of troy ounces in an independent bank depository.• The investor can sell his holding at any time or take delivery of the bullion.

– The investor saves in delivery costs, as well as sales taxes and fabrication charges.

– Generally, the minimum investment required is $1,000.– A typical commission is 3% on orders up to $1,000; 2% to $10,000, and

2% to $50,000.– Annual store charges are 0.5% of the value of the investor’s holdings– A 1% commission is paid upon the sale of the metal.



Investment Planning



• Certificate Programs– Offered by a number of large dealers, banks, and brokerage firms– Appeals to investors who prefer not to accept the risk and expense

involved in taking physical possession of a precious metal– The investor receives a certificate stating that he owns a specified

number of troy ounces in an independent bank depository.• The investor can sell his holding at any time or take delivery of the bullion.

– The investor saves in delivery costs, sales taxes and fabrication charges.– Generally, the minimum investment required is $1,000.– A typical commission is 3% on orders up to $1,000; 2% to $10,000, and

2% to $50,000.– Annual storage charges are 0.5% of the value of the investor’s holdings– A 1% commission is paid upon the sale of the metal.



Investment Planning


How do I select the best of its type?

• In making a selection among various types of precious metals, an investor should consider the following factors:– The price of one metal compared with another.– The position of the price relative to recent highs and lows of the

metal.– The potential downside risk

• One metal may be used for many more scientific and industrial purposes than another.

– May have a higher “floor” than the other

– Other value determinants such as:• Sensitivity to political changes• Supply and demand influences



Investment Planning



• Compare the premium charge imposed by a number of dealers.

• Deal only with reputable dealers.– If delivery is requested, they should be willing to ship within 48 hours

of payment.

– They should be willing to exchange gold for cash.



Investment Planning



• When storing gold, the dealer history should be examined.– The firm should be in business for a minimum of five years

– They should be periodically audited by an independent certified public accountant.

– Gold should:

• Be stored in a segregated account.

• Not be subjected to the claims of the dealer’s or the custodian’s creditors

– If an investor’s bullion is mingled with that of other registered holders, his holdings should be clearly identified and available for delivery after the payment of any appropriate charges.



Investment Planning


Where can I find out more about it?

• Newspapers that carry the daily price “fixings” for gold and other precious metals as well as stories and reports on market activity– Wall Street Journal– New York Times– Barron’s

• American Metal Market• Financial Times

– Offers an international perspective• Mineral Commodities Summaries

– Contains statistics on precious metals production and use• Major brokerage firms and commodity trading houses

Gold and Other Precious Metals Chapter 25 Tools & Techniques of Investment Planning Copyright 2007,...

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Transcript of Gold and Other Precious Metals Chapter 25 Tools & Techniques of Investment Planning Copyright 2007,...