1935 silver certificate

As concern rises over a possible resurgence of inflation, some financial advisers suggest putting 5 or 10 percent of invested assets in gold or silver. If you decide to do so, here are some basics to keep in mind.

Over arbitrarily selected periods such as the past 5, 10 and 15 years, gold and silver have risen, on average, twice as fast as the consumer price index. But speculating in precious metals is dangerous because of price volatility. Gold jumped from under $200 an ounce in 1978 to a high of $875 in 1980 and is now around $400. Silver prices averaged $5.40 an ounce in 1978, jumped to a 1980 high of $48 and are now around $9.50. Thus it might be prudent to buy periodically to average the cost.

Also, many buyers have been gypped. For example, "leverage companies" offer a transaction where you put up 20 percent of the cost with the understanding that the firm will buy and store the metal "for future delivery." In dozens of cases, firms never bought the metal. In two bankruptcies, one in California and one in Florida, some 50,000 investors lost more than 100 million dollars.

Matt Zale, securities director of the Arizona Corporation Commission, notes that the precious-metals market is largely unregulated. "Telemarketing," or boiler-room operations, flourish, he says, as high-pressure sales are solicited by phone.

Use caution. The Council of Better Business Bureaus warns against ads offering metal at "below spot prices," buying deferred-delivery contracts or making commitments without a written description of any proposal. Deal only with a bank or reputable dealer and, if the gold or silver is to be stored, get a written guarantee that the metal will be kept separate from the seller's operating funds. If in doubt, check with your bank or Better Business Bureau.

The two most popular gold-bullion coins are the South African Krugerrand and Canadian Maple Leaf, both 1 ounce. The Mexican 50-peso gold coin is 1.2 ounces and the Austrian Corona 0.98 ounce. These also are minted in coins weighing fractions of an ounce. Gold bars come in 400, 100, 32.15(1 kilo), 10, 5 and 1-ounce sizes.

A bag of "junk" silver holds 715 ounces of 90 percent silver dimes, quarters or halves minted before 1965. "Clad" silver bags have 295 ounces in 1965-70 Kennedy half dollars of 40 percent silver. A bag of 1878-1935, 90 percent silver dollars is 755 ounces. You can buy a half, a quarter or a tenth of a bag. Silver bars weigh 1, 5, 10, 32.15, 100 and 1,000 troy ounces, each 9.7 percent heavier than avoirdupois ounces.

Prices quoted in newspaper financial page are what banks pay each other for precious metals. A retail markup or premium may be 3 to 4-1/2 percent. If you take delivery of a metal bar, it cannot be resold without an expensive assay. Bullion coins do not need assays, nor do sealed bags of silver coins or metal stored in a bank.

Some details. A certificate from a dealer or bank lists ownership of a specified amount of metal. A warehouse receipt is issued only against large bars such as 100 ounces. It is a negotiable instrument, risky to have lying around. Storage charges vary: For example, 24 cents per ounce of silver per year and $1.20 per ounce of gold, or 1/4 percent of market value for gold and 1/2 percent for silver.

As examples of operations, Deak-Perera, a precious-metals and currency dealer, has customer holdings audited by independent accountants. Merrill Lynch offers two purchase options--one, its Sharebuilder Plan, requires a minimum initial investment of $100 and subsequent ones of $50. Republic National Bank of New York offers a retail service and acts as agent for banks around the country. The Capital Preservation Group of money-market funds gives shareholders a precious-metals brokerage service at a 1 percent commission on wholesale prices.

Gold and silver have a zero yield or, because of storage charges, a negative yield. So some advisers recommend stocks of gold and silver-mining companies such as Homestake, instead. Five mutual funds that own such stocks: Franklin Gold Fund, International Investors, Precious Metals Holdings with 15 percent of assets in gold bullion, United Services Gold Shares, and Strategic Investments.