Gold Silver exchange

Buying gold or silver when it is weak compared to the US dollar and then selling when it is high is a straightforward plan but comes at a high cost. Each time you trade back your metal into dollars, you incur a capital gains tax. The government wants its share of your wise investment. Further, in this day and age even if you decided to deal in cash, anything over $10,000 triggers a notification to the IRS and practically anything over $5,000 will make the bank sit up and take notice. You could keep your dollars under your mattress, but there it safely depreciates in value as the dollar loses a reliable 3% of its buying power each year. To break even, you need to be earning 4% or better; 4% to stay in the same place while waiting to change those dollars back into metal… sometime in the future.

Now gold and silver have a historical ratio of exchange. There are books and books on this topic and all sorts of golden ratios out there like 12:1 in Roman times and 15:1 at the onset of the United States. More recently in the last 50 years, the ratio has been as low as 15:1 (during the 1960s), 20:1 in 1979, and 30:1 in 2011. It’s been as high as 90:1 in 1990 and again in 2019. The “modern” average is somewhere around 60:1. Looking at the last 20 years or so the ratio has generally dropped no lower than 40:1 (but for a short stint in 2011)

            Rather than looking at the prices of either metal in terms of US dollars, one could choose to watch the ratio between the two metals.  When gold is worth a LOT of silver (like in 2019, 90:1), one could exchange their gold for a large volume of silver. When the ratio reverses, and say, gold is only worth 40 ounces of silver, that same silver would convert back into gold; much more gold than was started.

What’s intriguing about this method is that the dollar value of either metal is irrelevant. Gold could become worth $100 US per oz or $10,000 per oz.  All you are looking at is how many ounces of silver are required to equal the value of the ounce of gold.

There is no income report, nothing to declare to the IRS.  You are merely making a commodities exchange, trading apples for oranges and back to apples again. If, however, you try and turn the gold or silver into US dollars, you would then have to deal with such issues.

There are some real-world nuances that makes a bit of extra complexity. Since you will almost certainly be using a private business to make these transactions, there will be brokerage fees going back and forth that you must consider. These could be as high as 10-15% of the cost going from one metal to another, meaning that it’s probably wise to wait for large swings rather than small changes. A simple way to figure that out is to ask the dealer how many ounces of gold, or silver they will exchange for the opposite. You know what the ratio is by looking at the spot prices, and the dealer will tell you how much he will give you for your metal. Do the math between the trade he is offering you and see what that ratio works out to be. That difference is the real cost of the transaction. So, if the current ratio is 80:1 and the broker you are using will give you 72:1, then you know that the cost of this exchange is ~10% of the value being moved around. You would want to wait till the ratio is lower than 60:1(preferably much lower to profit) knowing there will be another exchange fee when you switch back.

Real World Considerations

Beyond the above concepts, there are more details that are worth understanding, even if you are convinced of the idea. You can buy gold or silver in every form imaginable. Examples are ingots and bars, to “junk” bullion to coins as small as 1/10th oz up to almost as large as you can dream up. The first thing to understand is that anyone can make a coin, but only a government can issue legal tender, and some gold and silver coins are, in fact, legal tender in their own countries. The Mickey Mouse commemorative coin on the left and US Walking Liberty coin below contain the exact same value of .999 pure silver, and both would yield the going price of silver if you sold them to a coin shop. (photos missing and may be added later) However, the US coin is money backed by the US Treasury that must be accepted for payments on a debt and carries that additional value.

 Almost no currencies today are based on the value of the metals of which they are made. The listed values of the coins are proof enough of this. The 1oz American Silver Eagle is guaranteed by the US government to have a $1 value. Of course, that silver is worth 10x that even under the worst conditions. But that $1 value IS part of that coin beyond the metal value. So, the Silver Eagle is worth the silver value + $1 US. The 1oz Gold Buffalo coin (left) is valued at $50 US, though the gold alone is more than $1,500. But again, it is worth $50 US over the metal value because it is legal tender backed by the Mint.

Choosing a silver or gold coin that is legal tender over say, a bar of metal can be advantageous. Legal tender coinage is trusted and comes in standard sizes and appearance. It makes the exchange of metals and value easier and safer than showing up with some weird rectangular thing claiming to be 5 oz of .999 pure silver. The US Golden Eagle and Buffalo, the English Sovereign, the South African Krugerrand, the Canadian Maple Leaf are all widely known and respected coins that are trusted throughout the world.

This reputation makes silver and gold coins unusual as you can trade them as currency. If someone owes you $50, you could not refuse a $50 US gold piece as payment. However, if you then sold it for the metal value, you would have to pay a tax on the profit over the $50.  Not, however, if you kept the coin.  So, while the coins are money, no one in their right mind would use them as money.

Interestingly, in recent years some states, like Utah, and allow parties to make agreements with each other to be paid in the actual metal value of the US minted coin and NOT pay a tax on the gains. It’s just a payment of a debt using US legal tender as far as the state of Utah is concerned. A business cannot be forced to accept the coins as value beyond their minted $1 and $50 values. They can accept them for their metallurgical + legal tender value without the capital gains hit. Check the legality in your particular state.

When buying US minted coins in bulk, they are sold in 500-piece boxes called “monster boxes,” sealed from the US mint. Silver coins come in monster green boxes and Gold coins in monster red boxes. Just like the US coins carry a premium, the boxes that are in sealed condition (with the banding straps intact) carry an additional premium of several hundred dollars. They are the same 500 coins, but just worth more. Because they are legal tender, the silver-filled monster green boxes are:

  1. Spot price of silver x 500 oz.
  2. $500 in 1oz $1 US currency
  3. About a $200 premium for a sealed box

The monster red boxes are:

  1. Spot price of gold x 500 oz.
  2. $25,000 in 1ox $50 US currency
  3. About a $5,000 premium for a sealed box

The takeaway from this is that if you are trading these boxes back and forth, you would be wise not to open them. You can also buy opened boxes that have the same 500 coins and not pay that premium.