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Friday, October 31, 2008

How to Buy Gold and Silver on the Comex

This article is about how to buy gold and silver on the Comex. Firstly, for those unfamiliar with the Comex, it gives a brief overview of how it works and how futures contracts for gold and silver work. Then there is some information that an investor might want to use to buy gold at spot on the Comex Exchange.

In all activities of this sort it is highly advisable to consult with your financial advisers and brokers before embarking on any futures contracts.

Real Gold & Silver vs Gold & Silver Spot Price
Currently there is an unprecedented shortage of physical metal in the real gold and silver bullion markets. It is very difficult to buy physical gold and silver and the premiums (the amount over the spot price charged by dealers) are the highest since the 1980s and the waiting period is blowing out to 8 weeks or more for delivery.

In view of the increasing financial instability now worldwide, more and more people than ever are seeking physical gold and silver.

Yet, after an understandable climb in the gold and silver prices during the middle of the year when the 'credit crisis' really began to emerge, the spot price of gold and silver is falling. This is contrary to normal economics as, traditionally, in any past crisis , the value of gold and silver would consistently rise.

But nowadays, the spot price and the comex price, no longer reflect the true price of gold and silver in the market. Why is this so one might ask? Usually one would expect when a shortage of a commodity occurs, then the price would rise commensurate with the unavailability, and then more of the commodity should enter the market to make up the short fall, resulting in a balance being struck between the price and the commodity. Yet here we have a widening gap between the 'apparent' price of gold and silver and the availability of it.

To answer this conundrum and, possibly take advantage of it, we need to look at a number of issues. The first of which is, what is the comex or spot price of gold and silver?

If you already understand about the Comex you can skip this part.

What is the Comex
There used to be two exchanges in New York. The New York Mercantile Exchange and the Commodity Exchange, Inc (COMEX). In 2006 these two exchanged merged and became one. It is now the New York Mercantile Exchange (NYMEX) but is divided into two parts, the NYMEX Division upon which is traded such commodities as oil, gas, palladium and platinum and so forth, and the COMEX Division on which gold, silver copper and aluminum is traded. It is this exchange that we are most interested in. On this exchange are traded 'Future Contracts' of gold and silver.

Futures Trading
Futures trading is the basic action of entering into a legal contractual agreement with another (known or usually not known) individual to exchange money or assets of some value at some time in the future and with the pre-determined price (called a futures price) based on the underlying asset. Such an asset could be stock, an interest rate even or, in this case gold.

It is an agreement to exchange the underlying asset, or equivalent cash flows, at a future date.

In other words if you enter into such a contract you are betting that the value or price of that asset or stock or gold is going to be at a certain value at a predetermined time in the future. At that time, when the contact is completed and 'settlement date' arrives, you or the other party cough up with the difference between what was originally paid and what the settlement price is.

One of the perceived advantages of futures trading is that you do not have to put up all the money needed for the contract but usually only a percentage. Usually around 10 percent. This means that people can trade with a smaller amount. It is rather like going to the races and placing a bet for 1000 dollars but only putting 100 dollars down. If you lose you have to come up with the 1000 dollars of course but if you win you have only needed 100 dollars to play the game. There are some other factors of course that an investor in futures trading can come a cropper with, such as a drop in the price of the commodity resulting in more money being demanded of one by the broker. This happens only too often and many people over commit themselves and so can lose more than the shirt of their back this way. It takes good knowledge and due diligence and an excellent financial advisers and broker to play in the futures market.

Both parties of a futures contract must fulfill the contract on the settlement date. The seller then delivers the commodity to the buyer, or, more often than not, it is a cash-settled future, and cash is transferred from the futures trader who sustained a loss to the one who made a profit.

Incidentally, you can bet both ways of course, that the price will go up or down.

Gold & Silver Futures Trading
In this case the futures traded are gold or silver and done through the Comex, the marketplace where one buys and sells specific quantities of gold or silver, in the form of a futures contract, at a specified price with delivery set at a specified time in the future. The preset price is called the futures price and the delivery date is called the settlement price.

In Gold and silver future trading, the precious metal is usually not delivered but a cash settlement is affected. Many institutions who by gold and silver futures contracts, especially banks, will sell short, or in other words sell before the contract expires. However, we are going to look at how one can see the contract through to expiry and then accept delivery of physical gold and silver

What happened with the Comex?
Firstly, to help understand how this works, we might ask the question, why is the Comex price of gold and silver so much lower than the real price of gold and silver?

The “Resource Investor” ( noted recently, "In that CFTC (Commodities Futures Trading Commission) report, it surfaced that those few banks took the huge net short positions in gold and silver futures just ahead of the largest and harshest fall in prices for gold and silver since the Great Gold Bull began in 2001 – 2002. The 'Got Gold Report' covered it from the silver point of view earlier this week."

This means that, artificially through a process of short selling on contracts, the price of gold and silver was driven down as part of the effort to boost up the dollar. Of course this only affected the COMEX gold and silver price and had no effect on the real price of gold and silver, which is demonstrably in short supply, except to focus more attention on the ever widening gap between the two.

This has consequently opened up the opportunity for investors and traders in gold and silver to buy at the Comex Price and sell on the open market. There are some costs issues to overcome but these are minor when you look at the difference in the price of the Comex and physical metal.

How to Buy Gold and Silver on the Comex
Taking delivery of a commodity is not usual and some brokers might try and talk you out of it as it involves more work for them. Something they are not keen to do. So you will have to find a broker willing to do the work and be insistent about taking delivery. It is quite legal and in fact that is what the market was originally designed to do.

The following outlines the basics, including the various procedures involved in taking delivery of a gold or silver future contract on the Comex. There are some costs involved of course which will vary with the broker you use.

Whereas, with a cash market you can buy or sell during the term of a contract, to take delivery you will need to wait until the term of the contract expires and you can take delivery. This is called taking a long term. Various entities, such as banks for example, take a short term. They have no intention of taking deliver and so, with the ten percent leverage (remember?) they can take enormous amounts of contracts and sell them short, keeping the price down and, in effect, manipulating the gold and silver price.

But if you intend to take possession you will have to ante up the whole amount required to complete that contract and you would have to wait until the contract expires before you can organise and take delivery.

For example, if a contract was bought today, and the price on the gold contract was between $695 - $735 per ounce, the full value of the contract you bought would be $69,500 - $73,500 per 100-troy ounce. Likewise if the price on the silver contract was between $9.74 - $9.16 per ounce, then it would be $48,700 - $45,800 per 5,000 troy-ounce contract.

These figures would not include any commission charges incurred going through a broker of course and are just an example to illustrate how it works.

Of course, if you did not want to take possession of the metal you could simply enter a position without posting the full contract value, but instead post around 10 percent (The actual percentage may vary depending on your broker and other factors). This is the "margin" which is posted "in good faith". Price can go through some dramatic changes in the any futures market and if the price of gold drops significantly you might be called upon to add funds to your account to maintain your position. (called a maintenance margin) or you might find your position is liquidated. There is usually a risk maintenance level and if your account falls below that level then you would need to top up your account with the requisite funds.

Now, when the time comes to take delivery you will get a Notice of Delivery and the full amount will be debited from your account. So you would be required to have the full contract value deposited in your account with your broker at the price the contract was originally purchased. There would be a few days of processing at the end of the contract but then you would be able to take possession, usually a couple of weeks later.

You can do this in three ways.

You will receive a receipt, which in effect is like a stock certificate, and you could store that. The gold would be in storage in a vault and you would be up for some storage charges, This premium, compared to the gold price, will be minuscule. The gold is kept in storage for you and you can take physical delivery anytime you want of course. This is the first method.

The second is that you could have the gold bullion shipped to a warehouse. You can be put in touch with the vault that contains your gold (generally in or around New York, US) and have brinks or an Armored car transfer your gold to a warehouse or bank of your choosing. There would be more costs involved with this but, again, the charges would not be very much compared to the value of the gold bullion.

Of course you can avoid doing any of this by simply depositing the full value of the contract when you establish the position. Note, you can decide not to take delivery of course at any time and close out your metals position and take a profit or loss depending on the price movement.

Price and Delivery Costs
Usually when the contract is expired and delivered to you it is in the form of a Certificate. Many clients have the broker hold their certificate so the contract can be sold back into the market at a later date. However, In this case you want to take delivery so you would get the certificate from the broker.

The costs involved now will depend upon your broker, usually there is a contract fee and a commission, as well as insurance and storage fees. The gold can stay where it is and simply be stored for a regular fee.

However, IF you want to take it out of the Comex warehouse and have it stored elsewhere then it would be your responsibility to organise this. This would be typically done through a security shipping service and arranged storage at a bank vault.

In order to sell the gold or silver back on the comex there is also the addition action required which is to have the gold assayed (assayed: an analysis of a metal to determine the quality and weight of the metal). Any gold removed from the Comex Warehouse must be assayed prior to being sold again on the comex. So this would be an additional cost if you planned to sell it there in the future. However, you can sell the gold or silver to a gold dealer any time without having to have it assayed.

If your intent is to actually receive the physical metal, it is held in storage at specific "delivery points." It is your responsibility to make the arrangements to do this. There are fees associated with removal from the storage facility. In addition, if the metal is taken out of storage, it cannot be sold for delivery on the exchange without being re-assayed.

Some people actually turn up with a SUV, their receipt or certificate and have the gold loaded into the back of the SUV and drive off with it. Not something to tell the neighbors of course.

Of course to do all of this one needs to have an account with a broker who handles, or preferably specializes, in Commodity futures trading on the Comex. You will need to set up an account whereby you have access to broker-assisted trading rather than just trading online.

In step form it goes like this:
Broker holds the receipt in PFG's account for customer
Client buys the futures contract.
Client will take delivery between First Notice Day and the Last Trading Day.
On delivery day account is debited cost plus a small delivery fee.
Receipt is booked to customers account
Monthly storage charge also passed on to customer's account.

For Physical Delivery when the Customer wants the gold or silver bars in their procession
Client buys the futures contract.
Client will take delivery between First Notice Day and the Last Trading Day.
On delivery day account is debited cost plus a small delivery fee.
The broker provides the customer with name and phone number of the individual at the depository to
Customer makes arrangements for the physical delivery including having the gold or silver assayed if required in order to sell to a dealer.
Last word on Buying Gold and Silver on the Comex
For the new person or one inexperienced in futures trading, it is advisable to only use funds which you can happily afford to lose. It is also advisable to have a broker who fully understands gold and silver futures trading and with which one can build up a relationship. Also always seek the advice of a competent financial adviser prior to making any investment.

Buying gold or silver on the Comex can be a very fruitful exercise and following the above outlines and point will help you to understand a bit more fully how to buy gold and silver on the Comex.

Tuesday, October 28, 2008

Calculating the Value of Scrap Gold

Having scrap gold for sale is one thing but how do you calculate the value of scrap gold?

The spot gold price is really a poor indicator of the value of gold. Look around and you can see that gold sells for much more than the spot price of gold (which is only the paper price of gold on the market after all and is not really gold).

Scrap gold is really any gold that is not wanted or which can be turned into cash or profit so scrap gold can include the following therefore:

Gold jewelry
Gold chains
Gold fillings (dental)

In fact anything that is made of gold or has gold in it.

Before you sell scrap gold you should know exactly how much actual gold you have and how much it is worth. Then you can ensure that you are getting the right price for your gold.

There is a secret formula which scrap gold dealers use and when calculating the value of scrap gold and which is shown here.

These are a the steps you would take.

Separate the gold you have into their various karat fineness. Some will be 10 karat, some 14 karat, 18 karat, 22 karat or 24 karat, the purest. You might need to examine detailed numbers stamped on the gold or if there are none then have the gold examined or tested by a reputable dealer. You should keep in mind that some testing may involve the loss of some gold so this is only recommended where you have a decent amount. If it is just a ring or small chain it may not be worthwhile having it tested. It is possible that some gold is simply gold plated and therefore would hardly be worth while selling as gold.

Find out the value of each group by using the gram scale. If you are only able to weigh by the ounce then you will need to convert to grams by multiplying by 28.35 For example. 2 oz. Equals 2 x 28.35 which equals 56.7 grams. You can find charts to do this conversion. Fine gold is also measured in troy ounces. One troy ounce is equal to 31.1 grams of gold. This is all pure gold you understand.

Any gold coins should be looked at separately. They can have what is called a numismatic value. That is to say, the rarity, age, condition and other factors can have a bearing on the value of the gold coin. In some cases the gold coin value as a rare gold coin can be much more than the value of the gold it contains.

Once you have established that your gold is only worth the value of gold, get today’s price per gram, you can do this from the charts on this website. Multiply by the fineness of the gold. In other words divide the karat by 24, then multiply that number by today’s gold price per gram. For example with your 10 karat gold and the current price was 30 dollars a gram then the price of your 10 karat scrap gold would be $30 x .4167 = $12.501 per gram.

So you simply multiply the price per gram by the weight in grams. If you have 10 grams of 10KT gold and you calculated the price at $12.06 per gram, then your scrap gold is worth 10 x $12.06 = $120.59.

10KT = 10/24 = .4167
14KT = 14/24 = .5833
18KT = 18/24 = .750

Here are some more examples:

If you had 5.0 grams of 14KT scrap and gold was $900.00, per ounce for example, then $900.00 divided by 31.1 equals $28.9389 multiplied by .5833 (14KT) equals $16.88 per gram. $16.88 multiplied by 5.0 grams equals $84.40.

Now if you had 15.3 grams of 10KT gold scrap. $900 divided by 31.1 equals $28.9389 multiplied by .4167 (10KT) equals $12.06 per gram. $12.06 multiplied by 15.3 grams equals $184.52.

If you practice it a few times you can get quite good at it.

Most people use grams for these calculation but many scrap gold buyers use pennyweight (DWT) instead of grams. There are 20 pennyweights in a troy ounce. So in this case you can substitute 20 for 31.1 to calculate pennyweight in our formula. You can also multiply a pennyweight by 1.555 to get an equivalent gram weight or divide a gram weight by the same 1.555 to get pennyweight.

Scrap gold dealers generally will not give you top value for gold. However in these uncertain times many are looking for gold themselves so are likely to pay for gold and usual If you are selling scrap gold you might be better off selling privately or by auction, depending on the amount you have to sell.

Also one should be aware that, in some cases, there are other precious metals mixed with the gold and some of these, such as platinum, would be worth more than the gold.

In all cases, however, calculating the scrap value of gold or any precious metal for that matter, is an important step when it comes to selling scrap gold.