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Tuesday, December 09, 2014 12:57 PM

Physical Gold and Silver vs. Paper Gold and Silver: How Much Markup Are You Willing to Pay?

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I am a gold bull, but I am also concerned about seriously misleading hype regarding alleged shortages.

For example, a friend recently emailed an article that contained this claim: Gold Selling for at least 50% over Spot in Asia-Rob Kirby.

According to Rob Kirby "In the Asian market, if you could find physical bullion as cheap as spot plus 50%, you’d be doing really, really, really well and you’d be hard pressed to find serious tonnage at that price in Asia.”

Kirby, who specializes in acquiring large amounts of physical gold for clients, sees physical gold bullion selling for at least “50%” over spot, which would put the price of gold in Asia at least $1,800 per ounce.  Kirby also says, “Prices being paid right now in Asia make a mockery of the prices being shown in COMEX and the LBMA (London Bullion Market Association). These paper markets have divorced themselves from the laws of economics.
Misleading Gold Hype

Kirby's statement is purposeful hype. The phrase that Kirby relies on to make his statement semi-factual is "serious tonnage of bullion". However, people don't generally buy serious tonnage of bullion. Instead, they buy bars.

Even with that phrase, I would expect arbitrage to whittle away at the alleged 50% markup.

Markups normally decline the more one buys. Anyone can ascertain that by checking refinery, mint and bullion dealer prices for direct sales online.

Of course, if someone demands "tonnage" of bullion or coins and "tonnage" is not available, then one cannot readily get it at any price.

Regardless, the average person can buy physical gold and silver in small or large quantities with very tiny markups. I will mention numerous ways in just a moment but first let's consider silver.

Silver Bars and Coins

Reader Mark emailed me a few weeks ago when silver was trading at $15.72. Mark complained that his dealer wanted $24.50 for an American Silver Eagle (ASE).

That's a markup of $8.78, nearly 56% over spot! On silver bars, the dealer markup was spot plus $3.50. That's a markup of about 22%.

That small coins and bars are so expensive does not mean there is a shortage of silver. Nor does it mean there is a difference between physical silver and paper silver. All it means is there is a shortage of silver eagles and small bars.

I believe it's crazy to pay such prices. And although I am pretty sure one can find better dealers with lower markups, coins and small bars are simply not the best way to go in my opinion.

Three Options

Mark asked me for some options. I noted three of the most popular vault options for gold and silver, but there are others. Here is my standard reply to such inquiries:
In general, I do not recommend purchasing gold and silver coins and small bars because the markup is generally very high. There are additional concerns and risks should you want to sell your holdings. Finally, should you decide to take delivery yourself, there are ongoing storage concerns, including insurance.

All things considered, there is a great deal of merit in audited, safe storage. I prefer holding metal outside the country for obvious reasons. Others disagree. If you want immediate physical possession yourself, much of the following discussion does not apply.

Three popular choices for holding gold in vaults are GoldMoney, BullionVault, and Perth Mint.

GoldMoney and BullionVault offer allocated programs. In allocated programs you have title to what you purchase.

Perth Mint offers allocated and unallocated programs. It’s important to distinguish between the two. Unallocated gold is a financial asset; you own a liability of the Perth Mint.  You do not own metal.

The Perth Mint does offer allocated storage, but is very expensive.  Perth charges 1.00% per annum for storing gold, whereas GoldMoney charges 0.12% at most locations, 0.18% at others per its fee schedule.

Perth maintains that its unallocated program is 100% metal-backed, but also admits theoretical exposure should the Mint becomes insolvent. However, Perth Mint operates under a Government Guarantee that many will find sufficient.

GoldMoney holdings are in audited vaults in Singapore, Hong Kong, Canada, London and Switzerland. The bars are individually numbered and assigned. You may own a percentage of a bar.

GoldMoney is based in Jersey, an English speaking country off the coast of France. Jersey has some of the strongest property rights laws in the world. 
GoldMoney sells at the market ask plus a mark-up. BullionVault is commission based on top of a bid-ask spread. BullionVault’s combined commission + spread may at times be lower than the mark-up at GoldMoney. However GoldMoney guarantees a trade, they are a broker dealer. And GoldMoney allows one to sell at the market bid with no mark-up (i.e., no commission when selling).

I prefer allocated storage over unallocated storage. Because Perth Mint allocated storage cost is so high, I prefer GoldMoney and BullionVault to Perth Mint.

GoldMoney is unique in that it allows for direct metal-to-metal exchanges between any of the following metals: gold, silver, platinum, palladium. Other dealers may provide a two-step gold-silver process (i.e. sell one and use the proceeds to buy the other).

Bear in mind I do have a relationship with GoldMoney. It will not affect the price you buy or sell at, but I feel the need to point out the relationship.

If you decide to go with GoldMoney, please select this GoldMoney link containing my referral code. It costs you nothing more, but as an incentive to use this link, new accounts will receive six months free storage.

The following applies to US citizens:

I am not a tax accountant but please remember that offshore accounts are taxable and must be disclosed to the IRS. Only the gains are taxed when you sell, not the holdings.

Reporting of Foreign Bank and Financial Accounts may apply to accounts that total in excess of $10,000. Please see Report of Foreign Bank and Financial Accounts for more information.
Please do your own due diligence. There are numerous alternatives and you may find an alternative you like better.

The important point is that unless you insist on taking immediate possession of small quantities of silver and gold, there are numerous ways you can buy physical gold, silver, and platinum at tiny markups.

And as long as you can buy precious metals at small markups, these stories of physical metal prices vs. paper metal prices are purposeful hype.

Mike "Mish" Shedlock

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