The Expense of Investing in Gold and Silver

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Includes: GLD, IAU, SLV
by: Sergei Barna

Responding to readers' comments about my last article "The Best Long-Term Investment: Gold vs. Silver vs. S&P 500," I mentioned that my calculations of returns favored gold and silver because they did not take into account the high transaction costs of buying and selling the PMs and the higher capital gains tax under the current law. I decided to do some research to find out what the actual bid-ask spreads are for various gold and silver bullion products. Table 1 below shows Kitco's ask (sell) and bid (buy) prices on May 23, 2011 for gold products, when London Gold Fix price was $1,510.50 and London Silver Fix price was $34.70. I also included premiums relative to spot price for both bid and ask as well as the bid-ask spread.

Table 1

Kitco Ask Bid Bid-Ask
Ask Premium Bid Premium (Kitco)
Gold Maple 0.05 oz $ 102.53 35.8% $ 74.60 -1.2% -27.2%
Gold Eagle 0.1 oz $ 179.23 18.7% $ 151.40 0.2% -15.5%
Gold Maple 0.1 oz $ 176.19 16.6% $ 151.40 0.2% -14.1%
Gold Eagle 0.25oz $ 425.28 12.6% $ 378.49 0.2% -11.0%
Gold Maple 0.25 oz $ 421.49 11.6% $ 378.49 0.2% -10.2%
Gold Eagle 0.5 oz $ 820.21 8.6% $ 757.00 0.2% -7.7%
Gold Maple 0.5 oz $ 820.21 8.6% $ 757.00 0.2% -7.7%
Gold Buffalo 1 oz $ 1,609.29 6.5% $ 1,517.50 0.5% -5.7%
Gold Philarmonic 1 oz $ 1,594.84 5.6% $ 1,515.00 0.3% -5.0%
Olympic Gold Maple 1 oz $ 1,579.66 4.6% $ 1,505.00 -0.4% -4.7%
Gold Maple 1 oz $ 1,587.25 5.1% $ 1,517.50 0.5% -4.4%
Gold Eagle 1 oz $ 1,602.44 6.1% $ 1,547.85 2.5% -3.4%
Gold Krugerand 1 oz $ 1,579.66 4.6% $ 1,527.50 1.1% -3.3%
Gold Bar 1 oz $ 1,542.90 2.1% $ 1,515.00 0.3% -1.8%
Gold Bar Perth Mint 1 oz $ 1,542.90 2.1% $ 1,515.00 0.3% -1.8%
Gold Bar 100 oz $152,740.00 1.1% $150,219.79 -0.5% -1.6%
Gold Bar Kitco 1 oz $ 1,542.90 2.1% $ 1,518.50 0.5% -1.6%
Gold Bar 400 oz $609,760.00 0.9% $600,930.00 -0.5% -1.4%
Gold Bar 10 oz $ 15,359.00 1.7% $ 15,140.00 0.2% -1.4%
Gold Bar Perth Mint 10 oz $ 15,339.00 1.5% $ 15,140.00 0.2% -1.3%

Since ask is the price that you pay the dealer and bid is what you can get from them for exactly the same thing, you would prefer the bid-ask spread to be as small as possible. The table is sorted by bid-ask spread with the largest spread at the top. Gold coins that are less than one troy oz. have by far the largest bid-ask spread and thus are much worse as investment instruments. Even 1 oz. gold coins have considerable spreads from 5.7% for Gold Buffalos to 3.3% for Krugerands. Gold bars of various weight have the smallest bid-ask spreads from 1.3% to 1.8% and thus appear to be suited better as bullion investment instruments.

Table 2 below shows Kitco's ask, bid, premiums over spot, and bid-ask spread for silver bullion products and is sorted by bid-ask spreads (highest at the top).

Table 2

Kitco Ask Bid Bid-Ask
Ask Premium Bid Premium (Kitco)
Silver Glacier Nat'l Park 5 oz $ 207.25 19.5% $ 176.25 1.6% -15.0%
Silver Gettys. Nat'l Military 5 oz $ 207.25 19.5% $ 176.25 1.6% -15.0%
Silver Philarmonic 1 oz $ 40.45 16.6% $ 35.10 1.2% -13.2%
Silver Maple 1 oz $ 41.70 20.2% $ 36.75 5.9% -11.9%
Silver Olympic Maple 1 oz $ 41.70 20.2% $ 36.75 5.9% -11.9%
Silver Eagle 1 oz $ 41.45 19.5% $ 37.25 7.3% -10.1%
Silver Koala 1 oz $ 40.20 15.9% $ 36.75 5.9% -8.6%
Silver Bar 100 oz $ 3,720.00 7.2% $ 3,510.00 1.2% -5.6%
Silver Kitco round 1 oz $ 36.77 6.0% $ 35.27 1.6% -4.1%
Silver Bar 1000 oz $ 35,900.00 3.5% $ 34,998.19 0.9% -2.5%
Silver American Eagle MS 70 1 oz $ 85.45 146.3% NA NA NA
Silver Grizly Bear 1 oz $ 40.45 16.6% NA NA NA

Silver coins have much larger bid-ask spreads than gold coins — even the most popular Silver Eagles and Maples have spreads of 10.1% and 11.9%, respectively. Silver bars and rounds have smaller spreads (decreasing with weight) but are still high relative to bid-ask spreads on gold bars.

I also compared Kitco's bid-ask spreads with those of Apmex. As you can see in Table 3, although the spreads are similar between the two dealers, it is worth shopping around for a better price. You have to read the fine print, since prices you see might be for a minimum amount transaction (eg. Apmex bid prices are for a transaction of $10,000 minimum and for lower amounts they reserve the right to name the price they would pay), and you can get a cheaper ask price if you buy larger quantities.

Table 3

Apmex

Kitco

Bid-Ask

Bid-Ask

Gold Eagle 1 oz

-2.7%

-3.4%

Gold Maple 1 oz

-3.2%

-4.4%

Gold Buffalo 1 oz

-3.5%

-5.7%

Gold Krugerand 1 oz

-2.8%

-3.3%

Gold Philarmonic 1 oz

-3.5%

-5.0%

Gold Bar Perth Mint 10 oz

-2.9%

-1.3%

Gold Bar Perth Mint 1 oz

-2.9%

-1.8%

Silver Eagle 1 oz

-10.4%

-10.1%

Silver Philarmonic 1 oz

-11.9%

-13.2%

Silver Maple 1 oz

-10.8%

-11.9%

Silver Bar 100 oz

-4.9%

-5.6%

Silver Kitco round /bar 1 oz

-8.8%

-4.1%

Even if you choose bullion product with the lowest bid-ask spread, you also have to consider storage costs. Keeping it in your house is easiest but covering your bullion under your homeowner insurance policy won't be cheap. Renting a safe-deposit box at a bank is also pricey. According to bankrate.com, a small deposit box (from 10"x10" to 15"x17") will cost you anywhere from $100 to $560 per year, depending on a bank. For a larger box, such as 24"x65", you might have to pay as much as $6,492 per year (Citibank, NY). For those investors who don't insist on possession of physical metal, ETFs are by far the cheapest way to go — bid-ask spreads are small, broker commission can be as low as $5 per trade, and the ETFs' annual maintenance fees are also low: GLD — 0.4%, SLV — 0.5%, IAU — 0.25% per year. However, regardless of whether you buy physical bullion or ETF shares, you will still have to cope with the tax disadvantages of precious metals. Whereas long-term capital gains tax rate on stocks (and dividends) is 15%, the IRS will tax your gains on gold and silver at a much higher 28% maximum rate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.