Glossary for Investing in Precious Metals

Bullion – The word bullion technically refers to gold and silver formed into bars or coins to be specifically held for investment or as a store of value.  In the context of my discussion of precious metals, I have extended the definition to include any metal held as a store of value against inflation.  Thus platinum, palladium, rhodium, and even copper may be considered bullion in the context of this essay.

Bullion Coin – Bullion coins are coins made of precious metal that are not truly meant for circulation.  They are minted for investors as an investment or store of value.  Precious metal bars are often too large an investment at one time for many people.  Bullion coins on the other hand are typically minted in single troy ounces or fractions thereof.  Some are minted alloyed with other metal to make them more durable against wear.  This makes them much more affordable to the common individual than 10 ozt or 100 ozt bars.  If minted by a government, they also carry the recognized stamp of that government.  Private mints also issue bullion coins legally, though the US government has recently seized some of these claiming them to be illegal.  Prior to silver being withdrawn from circulation in 1965 and the debasement of the US dollar in 1971, there was no real need for bullion coins because precious metal was in circulation.  The first real bullion coins were the South African Krugerrands in 1967.  The USA started minting bullion coins in 1986.  Today many governments over the world issue bullion coins, often to commemorate certain events or people.  These bullion coins do have legal tender status.  However, it would be foolish to use them in that manner.  US silver eagles are stamped with a $1 value, gold eagles a value of $50 and platinum eagles a $100 value.  With today’s spot prices, it would be senseless to use these coins as currency for those denominations.

Coin – A coin is a usually a round piece of metal that is minted to represent some value in order to serve as a medium of exchange.  Today coins are minted by governments and private mints as bullion to serve as a store of recognized and trusted value.  Most metallic coins for circulation have been debased to the degree they no longer represent the original value intended.  Most circulated coins have become fiat currency.  An exception is the US nickel.  The nickel still (as of 2010) has the same composition (75 % copper & 25 % nickel) it did when it was first minted in 1866.  Since gold was taken out of circulation by the US government in 1933, silver was withdrawn by the public after 1964 and the US government stopped minting copper pennies mid 1982, coinage has been debased from its intended value.  Since then the penny has been debased to a copper plated zinc coin.  Copper is not considered a precious metal, but it is included here, as it increasingly looked upon as a store of value.

Exchange Traded Fund (ETF) – An ETF is similar to a mutual fund in that one is investing in a managed portfolio and it is traded on an exchange.  ETFs for precious metals have been popularized for many investors in the last five years and are frequently offered as a means of investing in precious metals.  They have latched onto the allure of investing in precious metals.  However investing in ETFs is not truly investing in precious metals, because you do not own any metal either physically or even in your name.  You simply own some paper saying you have invested in a portfolio someone else is managing that may or may not include actual metal.  The earliest precious metal ETFs actually held physical metal.  However, audits have exposed some ETFs to not actually have the metals on deposit they purport to have had, making them a very risky investment.

London Fixes – Twice daily (10:30 am & 3 pm GMT, Monday thru Friday) a very exclusive group of five bankers, representing five specific European banks, meet by telephone to buy & sell gold, silver, platinum and palladium.  Until 2004 these five bankers actually met in London for the fixing.  Since then it has been done by telephone.  These five bankers each consult their own network of bullion dealers during the phone conversation and together arrive at a “fixed” price in US dollars for that morning and again in the afternoon.  Further trading does take place (Monday thru Friday) in New York, Sydney and Hong Kong after London Fixes close.  This gives the London Fixes a price to start with the next day.  However, London trading is considered senior as all trading is based on metal deliverable in London and meeting London’s standards.

Platinum Group Metals (PGMs) – PGMs are a group of six metals grouped close to each other on the Periodic Chart.  They are iridium, platinum, palladium, osmium, rhodium and ruthenium.  They behave similarly chemically and their market prices are commonly quoted together.  Of the group, palladium,  platinum and rhodium are the only metals that are currently minted in bullion coins, making them the most likely of the group to serve as bullion.  Osmium is highly unlikely to ever serve as bullion as it easily oxidizes into toxic compounds.

Pool Account – Pool accounts are held in the name of the investor where the actual metal is held in storage in his name.  There are two types of pool accounts.  An “allocated account” is one by which specific numbered bars of metal are stored in the investor’s name.  The specific bar numbers, as stamped on the bars themselves, are given to the investor for his records.  Should he want to obtain physical possession, those specific bars will be sent to him.  An “unallocated account” is one in which the investor has simply bought into a large pool of precious metal with other investors.  In this type of account, one’s own metal is indistinguishable from that of other investors in the same institution.  The only distinguishable characteristic of one’s account is what metal one has invested in and how many ounces of that metal he has.

Precious Metals – The term “precious metals” refers to metals that are 1) rare and therefore valuable.  They are also 2) non-radioactive, so they can be handled.  They are 3) relatively inactive chemically such that they retain their value by not breaking down into other compounds.  There are eight metals that are commonly included together in this group, suggesting they hold these criteria: gold, silver, palladium, platinum, rhodium, iridium, ruthenium and osmium.  To be truthful, I don’t understand how osmium is on this list.  However, it is commonly quoted as a “precious metal”, probably because it is a PGM.

Spot Price – The spot price of a metal is a price that is fixed in London based on buying & selling offers in very large trades during the day, Monday through Friday.  During London’s off hours, prices are set in New York, Sydney and Hong Kong.  The common individual has no access to these prices.  Rather the typical dealer and individual buyer will buy & sell at some price relative to the spot price.  Typically, gold one ounce Eagles sell $20 to $100 dollars above the spot price.  Silver eagles typically sell for $2 to $3 above spot price.  Silver bars are also quoted at 60¢ below to 90¢ above spot price, depending on whether you are buying or selling.  Prices are often given in this manner relative to the spot price because prices change so frequently.  It’s simpler to quote an amount above or below the spot, rather than keep changing the quote every time the spot price changes.

Troy System of Weights and Measure – Precious metals are measured, market prices are quoted, and coins are minted based on troy ounces.  The troy system is named after Troyes, a trading center in northeastern France in the Middle Ages.  This is a different measuring system than what is commonly thought of as ounces when buying groceries or weighing other common household items.  The following table is meant to clarify any confusion between the Troy system and the more common American / English system.  The gram equivalents are approximate and are rounded to the nearest gram.

Troy System of Weight Avoirdupois (English / American) System of Weight

Troy Ounce  =  480 grains (Grains are of the English system.)            English Ounce  =  437.5 grains

Troy Ounce  =  31 grams, (abbreviation – “ozt” or “t oz”)            English Ounce  =  28 grams, (abbreviation – oz)

Troy Pound (obsolete)  =  12 Troy Ounces  =  373 grams            English Pound  =  16 English Ounces  =  454 grams

Tonne or Metric Ton  =  2679 Troy Pounds  =  1000 kg            Ton or Short Ton  =  2000 English Pounds  =  907 kg

Metric Ton  =  32,148 Troy Ounces                                     Ton or Short Ton  =  32,000 English Ounces

Troy Ounce  =  1.215 English Ounces                         English Ounce  =  0.823 Troy Ounce

The tonne is not truly part of the Troy System.  However, it is used to describe very large amounts of precious metals, especially gold.  Governments and central banks deal in such large quantities of gold that describing these quantities in ounces would be impractical.  Such quantities often exceed 100 tonnes.  Some countries possess thousands of tonnes of gold and describing such amounts in ounces would not be practical.

Nor is the grain part of the Troy System.  However, it is frequently used to measure very small amounts of metal.

Copper, not being a precious metal, is measured in English pounds.  Copper pennies (1864 to 1982) weigh 3.11 grams total, of which 95 % is copper.  In 1982 the metal composition was changed mid-year to 99.2 % zinc, weighing 2.5 grams.  Therefore one should not rely on 1982 pennies for copper content, unless you weigh them.  There is no other way to distinguish 95 % copper 1982 pennies from 99 % zinc 1982 pennies.  Therefore rely on pennies minted prior to 1982.

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