Many of the smartest investors I know recommend owning some gold and silver.

However, they generally don’t view these precious metals positions as traditional “investments.” (Though they can certainly be great investments when purchased at the right times.) Instead, they view these positions as a type of financial “disaster insurance” that they buy and hope they never need to use.

Let me explain…

You’ve probably heard that precious metals are great inflation “hedges.” And that’s historically true over the long run. But gold and silver truly shine when things go really wrong.

People always flock to the safety of gold and silver when governments fail, currencies collapse, and economies break down. That’s because gold and silver are among the few assets with no “counterparty risk” – meaning they are no one else’s liability. (While it is relatively new and fully digital, Bitcoin also meets this definition.)

Those of us who live in the United States and most other developed countries haven’t had to worry about those types of financial disasters in a long time. However, while the risk of experiencing one in our lifetimes is still relatively low, it is not zero.

So, I agree that it makes sense to keep a small amount of your savings in gold and silver, just in case. For most folks, a reasonable range is probably between 5% and 10% of your total net worth.

However, there are a few things you need to know before you buy this type of “insurance.”

First, it’s best to stick to physical, “hold in your hand” gold and silver for this purpose. Precious metals stocks and funds are convenient investment and trading vehicles. But they also typically carry counterparty risk, which essentially defeats the purpose of buying these assets as insurance in the first place.

Second, there are generally two types of physical gold and silver you can buy – “bullion” and “semi-numismatic” (semi-collectible) coins.

[Note: There are also “numismatic” (collectible) coins. As their name implies, these coins are priced primarily on their collectible value rather than on any metals they may contain, so they aren’t included in this discussion.) And each type of gold and silver has additional nuances you need to understand.]

Let’s start with bullion. 

What You Need to Know About Gold and Silver Bullion

Bullion is the name for the “no frills” gold and silver coins and bars issued by most major governments and some private mints. Some of the best-known bullion coins include American Gold and Silver Eagles, Canadian Gold and Silver Maple Leafs, and South African Gold and Silver Krugerrands.

The most important thing to understand when buying bullion is that it is a commodity.

Bullion isn’t rare, and it doesn’t have collectible value. It trades at the current market value (“spot price”) of the precious metals content it contains, plus a small markup or “premium.”

Because bullion is a commodity, you can generally buy it from any established dealer (though it never hurts to check any company’s online reviews before giving them your business). But it makes no sense to pay more than you must, so you should always shop around for the lowest premiums possible.

Bullion premiums typically range from roughly 4% to 8% of the spot price for gold and approximately 2% to 20% for silver, depending on weight. (Generally, multi-ounce bars and coins have lower premiums than 1-ounce coins, which in turn have lower premiums than fractional-ounce coins, etc.). However, premiums can sometimes move outside these ranges depending on market supply and demand.

That is the case with silver today. Since the COVID-19 pandemic began, many governments – including the U.S. Mint in particular – have had trouble keeping up with demand for silver bullion. These shortages appear to be primarily the result of supply-chain bottlenecks rather than an actual shortage of silver. But it has still caused premiums on silver bullion to soar.

For example, while premiums on most 1-ounce gold bullion coins remain in their usual 6% to 8% range, the premiums on American Silver Eagles and other popular silver bullion coins are as high as 30% to 40% today. As a result, it probably makes sense to avoid large purchases of silver bullion until premiums come down a bit.

In the meantime, if you’re determined to buy some silver bullion, you could consider purchasing it through a service such as Goldmoney or BullionVault, which allows you to buy bullion online and store it in a secured vault.

These services aren’t a perfect substitute for holding bullion in your possession, but they generally offer more security than most “paper” gold investments.

Because these services are often based outside the U.S., they can carry some additional tax reporting requirements. So, if you choose this route, you’ll want to check with your accountant or tax professional. And again, it’s a good idea to shop around to compare fees and features. 

What You Need to Know About Semi-Numismatic Gold and Silver

Unlike bullion, semi-numismatic gold and silver does have some collectible value. It is priced partially on its precious metals content and partially on its scarcity and condition (or “grade”).

Some of the best-known semi-numismatic coins include the gold Saint-Gaudens “Double Eagle” (minted by the U.S. government from 1907 to 1933) and the silver Morgan Dollar (minted by the U.S. government from 1878 to 1904 and again in 1921).

Coin grades range from 1 (poor condition) to 70 (perfect condition). Coins graded in the 50s carry the designation “AU” (about uncirculated), while coins graded 60 through 70 carry the designation “MS” (mint state).

“Semi-numismatic” refers to coins graded between AU-58 and roughly MS-65. However, those graded MS-62 to MS-64 generally offer the best mix of collectible value at a reasonable cost.

Because grades play a significant role in the value of these coins, it’s critical to work with a reputable coin broker. It’s also a good idea to look for coins graded by one of the top two grading services: PCGS (Professional Coin Grading Service) or NGC (Numismatic Guaranty Company).

You’ll typically pay a bit more for these assurances, but it’s worth it to be sure you’re getting exactly what you pay for.

That’s it for this week. As always, if you have any questions or comments on today’s editorial – or any previous Money Talks topics – you can always reach me directly at [email protected]. I can’t respond to every email, but I read them all.