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Saturday, July 01, 2006

Go for the gold

About twenty years ago I had some investment funds burning a hole in my pocket, and I wanted to try something new. Having had a love of coin collecting since a lad in '67, I thought it would be interesting to invest in precious metals. At the local coin store in Allentown Pennsylvania's Lehigh Valley Mall, they had a 100 ounce silver bar on display. Wow. The thought of owning a 100 Oz ingot of pure silver struck my fancy, and it became my immediate goal to own that bar. Silver was selling for approximately six dollars an ounce at that time, so for me to walk away with that giant ingot, I would need to cough up $600 plus tax.

(I would later learn that you should never purchase precious metals in a retail environment in which you would pay sales tax, which greatly erodes at your profits. There are ways around this.)

At any rate, I purchased that bar, and proudly held it for several months, as silver prices climbed. When silver reached about $8.80 an ounce, I soon realized an interesting dilemma of owning such a large bar. You have to sell the whole thing to get your profit. What if silver continued to climb after the sale? It would have been much more efficient to have bought ten 10 ounce bars and sell them off incrementally as prices went up and down rather than to have bought one great big bar. But the thrill of owning such a large investment vehicle clouded my judgment. I had visions of being like that guy on the James Bond classic, Goldfinger, (only with a block of the much cheaper silver instead.) Lesson learned.

Another lesson I learned is that the smaller the size of the ingot, the higher the cost of trading. The trading fee (dealer charge for selling to you or buying from you,) for a 100 Oz bar is less than for a 10 Oz bar, which is less than for a one ounce bar. To put this in perspective, before I bought my 100 Oz mega-bar, I purchased a puny one ounce silver bar. By the time I paid the fee and taxes, silver would have needed to climb 25% before I could see a profit.

At any rate, I sold my silver bar for about $880, but the profit from that mega-bar was short lived. In attempts to capitalize on the volatility of the silver market, I foolishly repurchased ninety ounces of silver in ten ounce bars over the course of the next few weeks in the vain attempt to have more flexibility in selling options. At least I had the foresight to purchase from a bullion remarketer who doesn't charge sales tax. However, I still paid a higher premium for trading in smaller ingots.

It took two decades before silver reached the point where it became profitable to start selling off. (This was not so much from selling my mega-bar and insisting on "change," but rather because of where metals prices were going during that time.)

As a long time collector of US silver coins, it had been a goal of mine to someday own gold. For a time, it was illegal for the average US citizen to own gold bullion. That changed in 1975 when Congress allowed gold bullion to be sold to its citizens. So right around that time, I bought my first gold coin - a one ounce African Krugerrand. Shortly after, I bought a one ounce Canadian Maple Leaf, and then a US American Eagle, also an ounce in weight.

Over the next couple of years, I also acquired three platinum units in the form of one ounce ingots.

In a future post, I'll let you know how these investments worked for me.

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Monday, July 24, 2006 7:54:00 PM  
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Wednesday, July 26, 2006 6:55:00 PM  

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