Buy Silver Bullion and Buying Gold

The basis of bullion is that international debts, and even some domestic debts, can be paid more efficiently in gold than in foreign currencies, which have to be converted back into host currency through the bank. So wherever a supplier and a customer both have an e-gold account they can transfer ownership of gold between themselves across the Internet, and this constitutes payment.

To get started you use your own currency to buy grams of gold. The gold is delivered into a depository, and is credited to your own e-gold account. You then get a secure Internet identity, and thereafter you can instruct your e-gold provider to debit your e-gold account in favor of your supplier – another account holder in the system. Whatever you have bought from them is delivered to you independently. It is primarily a payments system, but it doubles as a route for owning and storing gold.

Advantages of e-gold:

1. The great virtue of the system which sets it apart from our national currencies is that at all times the number of grams credited to all accounts is guaranteed to be exactly the same as the number of grams in the depository. It is to all intents and purposes a private currency system based on the gold standard.
2. You do not have to spend your gold grams. You can sit on them, in which case you are using the system not as a payments mechanism but as a store, and you can then sell the gold back in return for straight cash (usually this is done through a liquidity provider, not to the e-gold provider itself).
3. You can buy small amounts of gold at relatively economic prices – well below the costs of coins and small bars. The costs are competitive on larger holdings too.
4. You benefit from an unallocated share of an allocated quantity of gold. This mixing of the two statuses of stored gold sounds as if it offers what really counts – which is 100% backing of positions with stored metal.
5. The custody charge is very competitive under normal circumstances. E-gold has turned out to be a convenient payment mechanism for eBay (the internet’s highly successful auction system) because it offers rapid guaranteed payment without all the sellers’ overheads and expenses of credit cards. This makes it work very well for once off sellers who want quick, sure, electronic settlement. Because of its use as an eBay payments mechanism it has a large number of users with tiny amounts of gold, so it has opted for a fixed price custody service at an incredible $1.30 per month – including insurance. This pricing subsidizes the very few serious gold investors who use it, and they can currently get a great deal: storage and insurance for $500,000 of gold for $16 a year! Unfortunately they tend to reserve the right to charge on ‘commercial quantities’ – whatever that means. In effect they are just covering their backs against a sudden rush of volume hoping to benefit from the cheap custody.
6. If you have a foreign currency bank account this may well provide your cheapest way of currency conversion. Banks can be very expensive because they charge such a high FX trading spread. Here the service may allow you to buy gold for your home currency and sell it for your holiday money. With an overseas bank account this may be your cheapest way of getting money into it.

Disadvantages of e-gold:

1. The main disadvantage of krugerrand price is the inevitable up-front load. For new customers the load may start at 3% and diminish to 1.6% – (the 1.6% rate is for trades over $100,000). Even on those large quantities of gold that amounts to $6.40 on a $400 ounce, which makes the product look expensive next to futures. In theory this would be paid back over several years of cheap storage, but it is unlikely the cheap storage is sustainable if serious investors start using this service in any volume.
2. There is a degree of intermediation in the holding. Your gold is the legal property of trustees who have a fiduciary duty to you. This appears to be a reliable mechanism in normal circumstances but is still not quite the same as outright ownership.
3. The system was designed for payments, and in order to make it acceptable for suppliers outward transfers may not be repudiated. The system’s direct competitors – visa, MasterCard etc – are very big and can offer suppliers guarantees about payment which do not necessarily mean that customers forfeit all rights after a payment has been correctly initiated. The e-gold providers perhaps do not feel big enough to wear the risk of customer repudiation, so the gold holder ends up wearing the risk of an unauthorized payment being made out of his account. The worrying element of that is the relative ease with which serious hackers can break Internet access (using such devices as keyboard grabbing software).
4. The providers are not especially liquid. If you want to buy a serious quantity (1 kg in one case) they may deny you immediate execution. This means you must wait until the following day’s gold ‘fix’. You might well miss your intended dealing price.
5. There may be some obscure charges. For example, your right to exit at the ‘spot’ price is not altogether clear because the spot is itself unclear. There is no central spot price for gold. Similarly there may be charges for sending money in and out.
6. There is a custody charge, (but it includes insurance, and is so low that it has been included in the advantages section!) This is a useful Internet way of owning real gold. Although the up-front costs are significant they may pay themselves back – particularly if you are going to hold gold for a considerable period. Through the custody charging policy alone it makes for a cost-effective long-term reserve against calamity. Some of the providers allow you to freeze an account. This is a useful extra facility that allows you to be a bit more relaxed about the Internet access issue.