Tuesday, April 16, 2013

A Precious Metals Market Perspective

There are three ways to own precious metals, take physical possession of the metal, or let a proxy hold the gold for you in a storage vault, or trade the metal with your broker using ETF’s (Exchange Traded Funds).

In the first process, taking physical possession, you have the metal to hold in your greedy little hands. In the second process someone else holds your gold in their greedy hands and there is a good possibility if every depositor wanted delivery, it just wouldn’t happen. And in the third method of “owing” the metal is through ETF trading. This last method is kind of paper trading of the metal. A person can buy and sell and never really deal with the physical metal.

There is one problem though. Physical gold, silver and platinum are real. A lot of these markets are hypothetical. They trade on the price of the commodity, with the buyer and seller not the least bit interested in taking possession of the precious metal. A buyer sells 1000 ounces of gold for September delivery and buys them back before the due date to avoid having to make delivery.

I’ve made several trips to a gold and bullion wholesaler. I was converting my junk silver and gold. People are buying, not selling. And I must admit when I first went there, I thought I was telling the owner something new about Obama printing dollars and how I wanted to preserve my buying power. The last time I was there, an elderly couple was telling him the same thing. And Chuck patiently listened to them.

So there are really two markets, one that deals in physical delivery of the metal to the buyer and one that deals with the change in price for the holder of the contract.

The precious metals have dropped in price considerably in the last two days. The thing to look at is the physical delivery. People on the street think that now is a good time to buy gold, since the price is down about $400 from its highs.

It appears the ETF’s and futures markets are where the battle over price of precious metals is being fought. A lot of those contracts can be bought with only 6% down. So Monday there had to have been some pretty heavy margin calls and if you didn’t make the margin call, you got sold out.

On a local level, I only have my own observations to report, but some bullion dealers around here are running short of gold and platinum maple leafs. It now takes a couple of days to fill an order. And it’s been that way since January. What we are looking at is not a real shortage, but it suggests more people are buying than those selling physical precious metals. Remember there is a $48 dollar premium on the purchase of gold and platinum per ounce; so you’re not going to change your mind on a whim.

I think that Joe Sixpack has figured it out. The banks pay zip for interest. Costs are going up and paychecks are going down. Silver rounds can be purchased for about a buck above spot. Physical ownership has a real feeling to it; you’re in control. It’s rather strange to see someone come in to this precious metal wholesalers shop with a stack of 100 20 dollar bills and leave with 60 ounces of silver. That buyer just made a statement; the banking system sucks. GOT SILVER?


michael said...

Hi Jim, same here in the East Bay.
My coin shop told me they were cleaned out of Gold Maples last week, by a massive buyer. Well as long as they still have Gold Eagles I'm OK I guess.

dearieme said...

Where do people store the coins?

I might have bought some except that all the banks around here have closed their safety deposits - presumably they were felt to be too unprofitable.

Burying the coins will enrich the lives of future archaeologists I suppose.

Jim in San Marcos said...

Hi Michael

I don't really like the gold eagles, they tarnish and aren't as pretty looking, the maple leafs don't and are 4 9's pure. I guess gold is gold.

China is starting to produce some pretty good fakes of gold and silver, so you do need a scale that can measure grams to the tenths.

Jim in San Marcos said...

Hi dearieme

I thought you lived in GB. Where are you living that they don't have safety deposit boxes??? We have two boxes in different banks to keep our valuables in.

If you own your own home, it wouldn't be much cost to have a carpenter come in and put in a fake wall in a closet or cut a cubby hole underneath the stairs.

My dad use to have a fake wall plug outlet that he kept a handgun and other things in for safe keeping.

Your biggest problem might be forgetting where you stashed it, Or not passing on the location to those that survive you.

With a safety deposit box with dual access, the survivor would empty it out when one owner dies and you don't have to worry about taxes. You don't have to give them a key, they get that "over your dead body." That sounds bad, but that's really the way you would want it.

AIM said...

The government most likely will not confiscate gold. Only reason they did it in the 30s was because the USD was still partially backed by gold and people were turning their cash in for gold (government has to stop that and keep the public from benefitting from the government's mistakes).

What the government most like will do this time is just tax the heck out of gold so your profits are gone (if you live in Calif and sell your gold you are already at 40% in taxes).

Government will not allow any other currency to compete with its Fed Reserve notes (they are already starting to shut down BitCoin... they closed a big BitCoin exchange company and site down by not allowing them to have a bank account any longer). If you can't pay your taxes with it, and if you liquidate in order to buy something you get the heck taxed out of you... then you won't be able to use gold on very much of a level.

They'll keep the Fed Res Note going until a new currency is created and shoved down the peoples' throats. Probably some IMF arrangement like a basket of euro, yen, yuan and usd.

I don't think the gold and silver stacking is going to pay off for anyone. It isn't a solution and a way out of our problem. The government will always control and tell you what the legal tender will be.

They've got the guns, the police, the soldiers and the prisons. They win. We lose.(Until the system crashes and they do themselves in and are no more.)

Jim in San Marcos said...


The government can't really tax gold.

I am at a loss as to how they figure out how much we owned

AIM said...

It's called capital gain tax, short term and long term. Both Fed and State if you live in Calif. That's my understanding.

If you sold some gold to a bullion or coin dealer to get money to let's say buy a car... you're going to pay the taxes on the gold sale.

Am I wrong?

Joseph Oppenheim said...

It's been so long that I bought gold that I might have forgotten and things might have changed since then, but as I recall, there was a sales tax when buying over $1000 worth of it. But one could avoid that by making several purchases, each under $1000.

Jim in San Marcos said...


If we look at the scenario of our currency losing 90 percent of its value in the next 10 years and we bet on gold and silver, I wouldn't go to a bullion dealer and get taxed on the conversion to cash. There are many different ways to convert that gold to cash.

If what we are discussing happens, you preserve your buying power. If it doesn't, you haven't lost much considering what the banks are paying for savings deposits.

Jim in San Marcos said...

Hi Joseph

Luckily things have changed a bit. Here is the boiler plate at the bottom of a receipt on a recent Platinum purchase I made. This is for California.

"Bulk sales of precious metals and or rare coins at a total greater than $1500.00 is non-taxable" So I guess we are OK there.

Strangely the Obama health care bill had a provision in it to mandate coin dealers issue a 1099 for all precious metals sales. That was suppose to take effect Jan 1, 2013, but I guess Congress fixed it so it didn't happen. The connection of health care to precious metals eludes me.

Anonymous said...

Great Post. I have lurked on this website for years, and we are finally getting around to solutions that resonate with me.
Jim your comment essentially stating "what's the worst that can happen if you buy precious metals" is spot on. There is no downside in today's manipulated markets.
That said, this is the best series I've seen on reasons to buy silver: http://dont-tread-on.me/?p=22551 and this the author's YouTube website: http://www.youtube.com/user/TruthNeverTold/videos?view=0&flow=grid
For an explanation of taxation on PM and what is exempt see this: https://libertycpm.com/about-us/selling-gold-silver-san-diego/united-states-reporting-requirements-on-gold-silver-bullion/
Another great commentary blog on PM is here: http://blog.milesfranklin.com/

And what does Obamacare have to do with PM reporting requirements? Nothing. Just uncle sam trying to squeeze out competitive currencies to force you into fiat FRN's to penalize people that don't want their wealth illegally inflated away. Cheers

Jim in San Marcos said...

Hi Anon 5:00

Here is another link that confirms the 1099 quantities in your third link: http://goldsilver.com/article/irs-1099-gold-reporting-private-gold-private-silver-bullion/
Buy what ever you want, but be selective when you sell gold, keep it under 25 troy ounces---most people won't find that too hard to do :>)

I do have one caveat on those links, they tend to focus the reader on precious metals as a solution to this mess. Some people especially the younger set might benefit more from buying a home that the bank owns 90 percent of. There is some pretty good leverage there. Forget San Diego.

If you're working and putting 20K into your savings each year, 5k in silver or platinum might be something to seriously consider. They are both cheap in relation to gold.

Thank you for the links, they were very informative. Glad to hear you enjoy the blog. Take care.

Alma said...

This is cool!