What Is the Four Pillar Precious Metals Strategy?
The most common way people describe diversification is "not putting all eggs into one basket." There is no such thing as a perfect investment that has zero risk and performs in every market condition. Therefore, intelligent investors diversify their portfolios.
Regarding portfolio allocations, there tend to be four different baskets in which people put their investment eggs: speculation, fixed income, cash/cash equivalents, and alternative assets. Click here, for a detailed breakdown of the different baskets.
Having different eggs in each basket is equally important as having multiple baskets. Another way to say this is diversifying across and within asset classes. The reason for multiple baskets and different eggs in each basket is to have as many points of failure as possible. Apple is a good company, but most people would not put 100% of their speculation basket into one stock. A lousy Apple market performance would destroy the entire portfolio.
Stocks (speculation), bonds (fixed income), and real estate (alternative assets) are all in three different investment baskets. They will perform differently in different market conditions and are all part of a healthy portfolio. Four different asset types of precious metals fall into two baskets: cash/cash equivalents and alternative assets. The best way to diversify precious metal investments for protection and growth is called The Four Pillar Precious Metal Strategy. (Four Pillars for short)
The Four Pillars Strategy tactically holds the four precious metal asset classes as part of your overall investment strategy. The four asset types are Bullion, Investment Grade Coins, Pre-1933, and Rare Coins. The remainder of this article will describe the different asset classes and outline some of the strengths and challenges of each asset.
1. Bullion
Bullion is what most people think of first when thinking about precious metals. Bullion is any metal valued by its weight. Bullion can take almost any form. The most common bullion forms are bars, coins, rounds, jewelry, nuggets, gold teeth, and art. The U.S. Gold Bureau sells gold, silver, platinum, palladium bullion bars, coins, and rounds.
A proven strategy is to put each metal into your portfolio.
The Commodity Exchange (COMEX) sets the price and constantly fluctuates like a stock's price movements. Bullion price is primarily driven by the paper market (futures contracts, ETFs, and various precious metals stock investments). Bullion is considered a cash equivalent.
| Strengths | Challenges | Where Does It Fit? |
|---|---|---|
| Easy to Sell, Liquid | Priced in paper, subject to volatility and manipulation | Cash equivalent basket |
| Currency agnostic, can be exchanged in any currency | Long-term, inverse relationship to the stock market | Considered a short-term, aggressive and volatile position |
| Best for a barter/trade scenario | The best way to think about bullion is that it is a better store of value than cash. | |
| Viable to buy a new currency if needed |
2. Investment Grade Coins
Investment Grade Coins are the second pillar. Investment Grade Coins are designed explicitly for longer-term investments, usually five years or more. Investment Grade Coins do not trade on their weight and are uncorrelated to the spot price. Instead, Investment Grade Coins trade on rarity. Unlike bullion which fluctuates constantly, Investment Grade Coins are unconnected to the stock market. They tend to be more stable and predictable over time.
Since Investment Grade Coins trade on rarity, investors are willing to pay more than the weight of the metal. The best investment comparisons would be fine artwork or oceanfront real estate. What would be the better investment? If there were two identical houses in every way, except one was on the ocean and another five miles inland, which one would be more expensive? Which would have less risk of unfavorable price corrections? Most of the time, the oceanfront property would be the better investment because it is predictable that people will always want to experience the ocean. Investment Grade Coins will behave much the same way. See the historical performance of some Investment Grade Coins.
The U.S. Mint produces Investment Grade Coins, as do other trustworthy sovereign mints worldwide. The largest market for Investment Grade Coins is within the U.S., so U.S. Mint Investment Grade Coins should be your portfolio's primary Investment Grade Coins. That said, some excellent foreign options can diversify and give your portfolio depth. The Investment Grade Coins with the highest market demand and resale value will be graded in a perfect PF70 or MS70 condition, depending on the coin. With some rare exceptions, the PF70 will usually be the best Investment Grade Coin. Learn more about Mint State and Proof coins.
Like fine art, Investment Grade Coins are a good strategy for passing down large amounts of wealth to the next generation. One of the most substantial benefits of Investment Grade Coins is that they are considered private transactions for tax purposes, meaning a 1099 is not required. Every tax situation is unique, so it is between the investor and their tax advisor how they want to handle the gains from the sale. Investment Grade Coins are considered alternative assets.
| Strengths | Challenges | Where Does It Fit? |
|---|---|---|
| Strong performance history, in most cases averaging double-digit annual returns. | Not very liquid if cash is needed in a hurry | Alternative Assets |
| Not connected to the Stock Market, more stable than bullion | Best results happen on a longer timetable. At least a five-year hold is recommended. | Considered a moderate to conservative risk, mid to long-term investment |
| Unique Tax Status | Not well understood by many people | Best for growth and passing down wealth to the next generation |
3. Pre-33/Pre-65 Coins
Pre-1933 Coins (usually referred to as Pre-33s) are the third precious metals pillar. In 1933, the U.S. made it illegal to own gold. Production stopped as well. There are various pre-33s, but some of the most common are Morgans, Peace Dollars, Walking Liberties, and Double Eagles. When coins sell for millions of dollars at auctions, usually it was a Pre-1933 Coin. Check out some Pre-33 Coins that have sold for millions.
Pre-1933 Coins are considered alternative assets in a different market than Investment Grade Coins.
Pre-33s are usually very rare and require long-term holds. Industry professionals recommend holding Pre-33s for 20 years or more. Since the coins don't trade hands very often, the price stays constant until one is sold at a public auction or through a reputable dealer. Some coins have populations of less than 10 in the world.
Most coins minted in the United States before 1965 were 90% silver and 10% copper. Silver at the time was a cost-effective way to produce coins that were both durable and attractive. All other U.S. denominations other than pennies and nickels at one time were struck using 90% silver.
In 1965, Public Law 88-36 reduced the amount of silver in coins from 90% to 40%. Silver was eliminated from all coins in the United States beginning in 1970. As a result, silver coins containing 90% are valuable based on their silver content and are extremely desirable to collectors and investors.
| Strengths | Challenges | Where Does It Fit? |
|---|---|---|
| Hold value extremely well | Long-term hold. Professionals say 20 years or more. | Alternative assets |
| Worldwide Market | It can cost significantly more than most people can afford | Very long-term, highly conservative asset |
| Elite-level investment | Not always a liquid market. | Best for generational wealth and long-term protection of capital. |
| Historical Value | Coins don't change hands frequently, so it can be hard to determine the fair market value of a coin until one is sold. | |
| Very Rare | ||
| Each coin has an incredible history and is no longer in production. |
4. Rare Coins
Rare coins are the fourth pillar of a sound precious metals strategy. Rare Coins will be coins that don’t fit well in the other three categories. The best way to understand Rare Coins is something like a collectible. Multiple factors determine the value of Rare Coins, ranging from supply and demand, nostalgia, emotional attachment, quality of designs, market conditions, and consumer trends and behavior. Rare coins will be the most speculative of any pillar but can also be the most lucrative return on investment. Usually, Rare Coins are the most unique and beautiful coins available on the market.
Click here to see some examples of Rare Coins.
Rare Coins compare best to something like baseball cards or a Faberge Egg. Some Faberge Eggs sell for $18, while the most expensive Faberge Egg sold for $33,000,000 at auction. Rare Coins behave much the same way. Some rare coins, although beautiful, never get market traction. They become overpriced bullion. At the same time, others become grand slam investments. Rare Coins are technically an alternative asset but usually behave more like a speculation asset. It makes sense to allocate a small percentage (maybe 5-10% or so) of your precious metal budget to Rare Coins if you like some speculation and emotion.
| Strengths | Challenges | Where Does It Fit? |
|---|---|---|
| Huge upside potential | Niche market that has fewer people shopping for the coin. | Alternative asset but can behave like a speculation asset. |
| Unique designs and limited mintages | Many investors prefer Investment Coins and Pre-33s to allocate their investment capital. | Moderate to aggressive, mid-term investment |
| Niche market where investors are willing to spend large amounts of money | Speculative | Best to be thought of as the speculative component of a precious metal portfolio. |
This article is just the basics but hopefully helps you begin your journey and avoid the common pitfalls most people make. Speaking with our caring experts, you can learn how to best use the Four Pillar Precious Metal Strategy to help you reach your goals.
The U.S. Gold Bureau is proud to be the leading provider of precious metals education and is here to help you. When you choose to do business with the U.S. Gold Bureau, you are assigned a personal precious metals expert to help you every step of the way for the years to come. The more knowledge you have, the more confident you will be in protecting your finances and growing your wealth with precious metals.
Why do this alone? Why not partner with caring professionals to help you become a successful precious metal investor?
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