Investing In Gold Bars: Getting Started with Precious Metals

Investing in Gold Bars? A quick google search reveals no shortage of information to sift through. Some good. Some not-so-good. Whether you're opening a Gold IRA or buying to store precious metals at home, there are some things you need to know. Let's dive in.

Introduction to the Concept of Premium

If you’re looking to own physical gold, and pay the lowest possible premium over spot price, you should be looking at gold bars. The term premium refers to an important concept. Premium is the price a commodity like gold commands over its spot price per ounce on the open market.

There are exceptions, but in general, gold bullion bars are usually bought and sold at a lower premium, closer to spot price, than bullion coins or rounds on a per-ounce basis. Typically, simple cast bars – those where the gold is simply poured into a mold and stamped with manufacturer information – trade at very low premiums compared to more polished bars.

Buying Gold Bars? Size Matters...

As a general rule, you can get a better price on large bars than you can on smaller bars and coins. As with most items, you can usually get a better price from a gold dealer if you’re buying in bulk.

What Affects Gold Prices?

The primary driver of gold prices is the spot price of gold on the global market at the time of sale.  But other factors affect the market price as well:

• The size of the bar, with smaller bars generally commanding a larger premium than large ones, which tend to trade closer to spot.
• Mining and manufacturing costs.
• Transportation and storage costs.
• The condition of the bar. Some bars lose value with scuffs and scratches. Other forms of bullion hold their value well despite shipping, stacking, and storage damage.
• Age, with newly-minted gold bars fetching a higher premium to spot price than older aftermarket bars.
• Beauty and craftsmanship. Some bars are beautifully designed and manufactured and command a premium on the market – especially when undamaged and new. Other forms of bullion are poured into a cast and stamped with nothing more than a serial number and the name of the mint. These bars normally trade at or near the spot price.
• Provenance and the reputation of the manufacturer.
• Rarity. Some types of bullion have appeal to collectors and hobbyists who are willing to pay a premium over spot price.
• Dealer margins. Dealers may pay spot or below, or a reduced premium when they buy, and will charge a higher premium when they sell.

Successful gold investors look to minimize the premium when they buy and maximize the premium over spot price when they sell. The biggest spreads are in smaller gold bars. Small 1-gram bars can sell for a premium of 50 to 60 percent above the spot price, while giant 400-ounce bars bought in bulk can be had for a premium of less than one percent. However, at the current global spot price (1,713.30 as of May 8^th, 2020), 400-ounce gold bars are selling for more than $683,000 apiece.

Normally, secondary market bars are bought and sold at or near spot price. Inexperienced gold investors can reduce some risk by concentrating on the second-hand or ‘used’ market. You’ll still be exposed to changes in the spot price, but you won’t have to worry about losing a ton because you paid too much for a bar that normally sells at a much lower premium to spot.

Also, dealers won’t pay more than spot for plain-jane cast bars. Dealers buy generics at or near the spot price, or even at a discount from spot. If you are focused on gold as an investment, resist any urge to pay too much for a generic cast gold bar.

Related Article: How to Invest in Gold Bullion Coins and Rounds

Buying Gold Bars: Units of Measurement

Remember that when it comes to the precious metals market, an “ounce” isn’t the avoirdupois ounce you’re used to measuring out in the kitchen. In the gold and precious metals market, an “ounce” is shorthand for a Troy ounce.

• The Troy ounce (oz t) is much larger than a household avoirdupois ounce. One Troy ounce is the same weight as 1.09714286 avoirdupois ounces.
• A Tola is a popular unit of mass in the Middle East, and is equal to 2.666 Troy ounces. Most larger bars manufactured in Mideast mints are stamped and measured in Tolas.
• A Troy pound consists of 12 Troy ounces (not 16!), and weighs 373.24172 grams, or 5,760 grains.
• A pennyweight (dwt) is 1/20^th of a Troy ounce and weighs 24 grains 1.55517384 grams.
• A grain (gr) is 1/24^th of a pennyweight, or 0.06479 891 grams, and is the same as 1/4^th of a carat.

Keep this in mind when buying or selling gold or any other precious metal usually expressed in Troy units. Otherwise, you may get priced out of the market because you're underbidding, or worse, you'll underprice yourself and wind up selling too cheaply.

Related: How Much Does a Gold Bar Weigh?

Liquidity and Practicality

Gold is among the most liquid commodities in the world. That means it is generally very easy to find willing buyers and sellers. However, few individual investors have millions of dollars to bulk buy 400-ounce gold bars and then pay the storage fees. That market is primarily comprised of institutions, James Bond movie villains and governments.

Furthermore, a large 1-kilo or 400-ounce gold bar isn’t very practical as currency. If you want to own gold as a hedge against economic dislocation, it’s a good idea to keep at least some of your holdings in small bars and coins. Generic bars and coins around the 1 Troy ounce and 100-gram level provide a good mix of liquidity and value for novice investors. Most U.S.-based investors focus on 1 oz and 10 oz bullion bars, thought the 50g, 100g, 250g, and 500g sizes are popular as well.

Furthermore, those focusing on gold as an investment should generally avoid anything that trades at a high premium – especially as novices. It’s just too easy for new gold investors to make a costly mistake, paying too much over spot. Very small bars under 10 grams of gold trade at premiums that are too high to attract value-conscious investors. Leave these bars to the hobbyists.

Related Article: Gold Storage Options: How to Store Your Physical Gold Investments

Tip: Buying and selling directly from vault operators and gold dealers can help you minimize the spreads and invest more efficiently. If the gold never leaves the dealer/vault company’s custody, the dealer can be confident that the bars are genuine.

Novice gold investors may wish to stick with established and reputable dealers. While the vast majority of gold sellers are legitimate, gold prices have been on the rise, which attracts scammers who prey on inexperienced investors and the elderly.

Also, be cautious of dealing with cold-callers over the phone if they’ve never done business with you before. Reputable dealers don’t do business by buying phone lists.

Use caution if any sales agent uses high-pressure sales tactics, or tries to steer you towards rare collector coins rather than bullion bars and coins. Bullion coins and bars are valued primarily by weight. Seller margins are much higher selling collector coins and novelties rather than bullion. Novice investors are at a disadvantage in this market, as premiums are way too high.

As with most things in investing, if something seems too good to be true, it probably is. Nobody is selling gold more than a few percent below spot price. If you see gold for sale at a discount of 5 percent off of spot price or more, walk away.

Also, invest in gold bullion bars and coins as a way to diversify your retirement and hedge your portfolio against inflation or stock market volatility. If a sales agent suggests that you rollover your entire retirement into precious metals, run, don't walk the other way.