I am a proponent of maintaining 2 positions in physical silver: a core position, for which no dollar amount is too much to either buy or sell and an investment position which is purely intended for taking profits and procuring other assets.
In my experience, starting up building up a core position the BEST strategy was to dollar cost average. Every paycheck or every month, just buy a small amount regardless of the price doing no analysis of the charts or any research on the fundamentals.
Having built up a sizeable core position, I then moved on to building my investment position, for which I have formal rules, analysis and conditions dictating how I buy as well as an established plan for when to sell.
That being the case, I have found certain types of physical silver bullion are more suited, depending on the strategy I employ and my long term goals in investing in precious metals.
As a general rule, the best strategy to employ is to get gold and silver as close to the current market price as possible, lower if possible. There is a minor exception to that, that presents itself with certain numismatic coins I will discuss.
Types of Silver Bullion
The following are the types of physical bullion you can invest in:
Numismatic or collectable coins
National government mint bullion
Generic private mint bullion
Junk Coins
Scrap
Numismatic or Collectable Coins
Numismatic or collectable bullion coins are those which generally sell at a significant premium over current market spot price.
One form can be old, circulated (or uncirculated), proof set gold or silver coins that were at one point in time an official currency. If such is the case, usually this kind of bullion is rated by an agency such as the Professional Coin Grade Service (PGCS). There are other forms of numismatics, including coin sets released by a mint for special occasions or tailored towards collectors instead of investors. This kind of bullion is more like fine art, than it is actually bullion. In my opinion, they generally are not a preferred means to invest in precious metals.
This does not mean that there are not good investment opportunities in what I would consider "numismatic" precious metals. The primary drawback to this kind of investment is that often times, these coins are priced significantly higher than the spot price, meaning if a 1 oz numismatic coin is selling for $50, but the spot price is only $30, purchasing the coin is not as efficient an investment as buying 1 oz of any other form of bullion at a 40% lower price.
That being said, there are opportunities where it may be a good investment to purchase numismatic gold and silver. The two examples I have seen personally are:
1. When the price of the coin is at or lower than the market value of the gold or silver content of the coin.
2. When a coin is minted by a national, government mint and the face value of the coin is the same as the purchase price.
The first scenario tends to especially occur on the internet, but uninformed collectors or owners of such coins may present the opportunity as well. Occasionally dealers will list collectable coins at the price they themselves purchased them from. If they have inventory dating back as recently as 2-3 years prior, when for example, the spot price of silver was half or a quarter of the current market price, it is entirely possible that such a dealer may sell a numismatic coin LESS than the current market price for the metal content of that coin.
For example, there may be scenarios where an online dealer will sell a Royal Canadian Mint silver collectable coin from 5 years earlier for $60 (the purchase price they themselves bought the coin for, when silver was, say $20/oz). That coin may have 2 oz of silver in it (unlikely, but possible). If the CURRENT market price of silver is $35, the melt value of that coin might actually be $70. In my opinion, that would be a scenario where it would be a good time to buy such a numismatic coin. A counter example where it would a BAD time to buy such a numismatic coin is if the silver spot price is $35, a coin has 2 oz of silver in it, and the coin is priced at $100. That would be a bad buy, in my opinion.
One may question the ethics behind this scenario, as it often is due to seller ignorance where this may unfold. I am of the opinion that if a seller is willing to part with an item without knowing or appreciating the actual value of it, the buyer is doing nothing unethical by purchasing it from him at a price the seller agrees to.
One of the big drawbacks of buying this kind of precious metal is the market that will purchase the coin and include any kind of numismatic premium is significantly smaller than the market for other forms of investment grade bullion. One may be able to flip those coins on e-bay at a profit or at a flea market, or maybe find a coin dealer who will pay a premium for it. In a worst case scenario, the coins can be either melted down or sold for their melt value alone (the cost of the metal in the coin). If precious metal prices continue to go up (which I believe they will for quite some time), this is still a profitable scenario. If the prices go down, of course, it won't.
The second scenario where it may be a good idea to invest in numismatic or collector coins is when the coin is minted by a government (such as the Royal Canadian Mint, the US Mint, Perth Mint, Austrian Mint, etc.) and is stamped at a face value that is at or close to the sell price of the coin, even if the melt value is significantly less than the price.
The best example of this is the recent $20 series of silver coins released by the Royal Canadian Mint:
Even though these coins only contain 1/4 oz of silver, meaning it's melt value will be less than it's face value or purchase price unless the price of silver is close to $80 CAD/oz, I still believe they are a good investment. The fact that they are stamped with a face value of $20 (equal to the price the mint sells them for) gives the coin a guaranteed floor price. One can take this coin to any bank and exchange it for $20 in fiat currency at any point in time. I think it would be foolish to do so, given the fact that this particular coin resells on e-bay for $40 or so.
I consider this kind of coin more like insurance. This is because:
1. The price of silver can go to $1/oz and this coin will never be less than $20.
2. If silver spot price surpasses $80/oz, the melt value of the coin will be more than the face value.
3. The collector value for the coin may make it possible to resell it substantially higher than the melt or face value, which as of authoring is the case.
In either case, I do not recommend numismatic or collector coins as the primary investment vehicle for precious metals, even though there are deals to be found. The big drawbacks to collector coins is the lack of recognizability, smaller market for them, and volatility of numismatic premiums which may cause the price of such items to fluctuate substantially.
Collector coins may not be immediately accepted by prospective buyers, and with a higher premium due to the numismatic value, it may not be as efficient to buy collector coins over buying generic or government minted bullion. I will cover those forms of bullion in future articles.
(Shout out to my friend E.S. for letting me rip off his idea :)
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