Friday, September 11, 2009
Amateur's Guide to Gold and Silver Coins
If you visit this site regularly, odds are that you're worried about the economy. We all hear "buy gold and silver to protect against the collapsing dollar," but most of us are newbies who don't know much about gold or silver coins, how to buy them, what to buy, or have any idea of what a reasonable deal is. It is intimidating. The market price on a 1 oz. American Eagle coin runs ~$1000 these days. We're not talking about pocket change. What to do? I'm also an amateur at this, but I have actually bought a few coins. If you haven't bought any at all and haven't got a clue what you are doing, stick around. You might learn something. Gold There are a ton of different forms of gold out there and a ton of different dealers vying for your money. The first thing you want to sort out for yourself is: why are you buying these things? What do you want to do with them? Be sure you have answered these questions for yourself before you begin. You need to know why you are buying gold, other than because that's what the guys on TV are screaming at you and that's what the economic loony-tune at 3CNB says. I recommend Gary North's book The Gold Wars, which you can read for free in PDF format, before you get started. If you are just looking to hold gold as you would hold a stock or a bond with a broker, gold coins may not be the thing for you. Goldmoney.com allows you to buy and sell gold or silver metal (measured in "goldgrams") and store it in their facilities for a monthly fee. That way, you don't have to worry about thieves breaking into your home and stealing your precious investment. Of course, you won't have the gold in your hand, either, which carries its own risks. In any event, I think this method is better than most "digital methods" in that Goldmoney actually holds physical gold in physical vaults, while most ETF's and the like trade in futures contracts. In other words, ETF's trade in "paper gold" and since it is a breakdown in the "paper" financial systems we are talking about here, better to have the physical stuff than a pile of potentially worthless paper. But, as I said, it is still not the real thing in your hands, so, though you have eliminated one source of insecurity, you are still stuck with another. Physical Gold If you want the real thing in your hot little hands, you have many choices available to you. First, you have to decide what you want to purchase. Second, you have to decide how you will go about purchasing it. Buying Gold Let's deal with the second problem first. You have two basic choices: a retail coin store, or an online/over-the-phone distributor. The first option is probably the least intimidating and most straightforward: you'll have someone to talk to, and can make your purchase as if you were at a department store or any other retailer. Like other retailers, prices and service vary; so you'll want to be selective. The most important thing is to know the market price of the items you're looking for before you show up. You can do this by getting a quote from several online distributors for comparison, or by looking up the spot price of gold and estimating. I'll talk about that later. As far as finding a particular store to go to, you'll just have to look that up yourself. I recommend using Google maps. Put the map roughly on an area where you live, zoom in to your city, and type "gold coin" or suchlike in the search box. Then, start shopping! A couple of notes about retail: you'll pay slightly more, but you get the added benefit of privacy. Some folks don't think of that. You'll pay more because you are paying for overhead, plus the dealer's assumption of risk by acting as a market-maker. His inventory fluctuates in price by the minute, so those coins you see in his display case represent a risky proposition just so you can looky-looky before you buy. He expects to be compensated. Online dealers can buy from the market the moment you make your purchase, so they have lower operating risk. Privacy can be had by dealing in cash with the retailer. Of course, you'll have to abide by certain restrictions. I will not go into those, as I don't know them all that well and don't really worry about them so much. I figure that between this website and all the other craziness I get myself involved in, Uncle Sam's got my number already. Besides, I don't plan on skirting the law, anyway. Suffice it to say, if you plan on "protecting your privacy," do your homework! If you go with an online/over-the-phone dealer, you will likely get slightly better prices, but you will have to pay for shipping and you will have to wait for your purchase to show up in the mail. That last one can be excruciating, especially if you have spent several thousand dollars on a purchase. However, I have made many transactions to date, and have never had a problem. For online/over-the-phone purchases, I highly recommend Franklin Sanders, a.k.a. The Moneychanger. He's permanently listed under the "resources" section of this website. He's an honest dealer, has very good prices to boot, and he's something of a hero in my opinion for standing up to the IRS in a harrowing tale you just have to read to believe. He has a Monthly Acquisition Program (MAP) to help you accumulate gold and silver efficiently over time. Basically, you send him money every month, he sends you coins at the best price he can get on the market on approximately the 15th of each month. If you do this, you will wind up with a crazy mix of coins, but you will usually get a better price with less headache than if you were to try to do it by yourself. But remember: one day, you'll have to redeem your coins, and that can be its own headache. I'll talk about that later. Other coin dealers: I have had Camino Coin Company recommended to me by a reputable source, but have never bought from them myself. Other dealers I have never bought from: Colorado Gold, Gainseville Coins, and if you can afford to buy in bulk, Tulving. But again, I have never done business with any of these companies, and cannot specifically recommend them. Another place to buy coins is at estate sales, eBay, Craigslist, pawn shops, and the like. You might get a handsome deal if you know what you are doing. Or you might get ripped off. I have seen coins at pawn shops with an asking price of 50% over their market values. If you are not an expert, I'd stick with people like The Moneychanger until you get your feet wet. Gold Coins/Bars What should you buy? There are all kinds of crazy denominations to buy gold in, from kilogram bars that will run you $30K to tiny little things that you will lose if you sneeze too hard. I will deal with them all together. First, as tantalizingly cool as they are, I would not recommend giant bars for average people even if you can afford one, because you will have to redeem so much at once. Unless you plan on paying for a house with a gargantuan chunk o' gold, this is a stupid plan. Of course, you may actually be planning on doing that... I've certainly tried crazier things. Sometimes they pan out... I would also not recommend buying "numismatic" coins -- coins whose value is determined by some historical or collectible significance. If you just like coin collecting, fine. Have at it, as a hobby. But we are talking economic collapse scenarios here. Nobody gives a rip if Abe Lincoln sneezed on your special commemorative nickel 150 years ago and it still has the booger on it; you're bartering goods for dinner. All that mumbo-jumbo is going to wear thin on people and it's going to be a tough sell unless you happen to find just the right buyer who will give you the "real" price. Stick to bullion, whose value is derived from precious metal content. It'll be easier to price and more liquid in the market. And with that, we return to the topic of redeeming one's gold. Remember, you can't eat gold, wear it (in most cases), or use it to give you shelter from the rain. It's value is in the ability to trade it for other things, like paper money, goods, or services. To be a good trading item, it needs certain properties, key among these, other people have to want it, be able to recognize it, and it must be meaningfully denominated. If you have to cut your chunk o' gold in pieces with a hacksaw to make change, well, it just isn't practical. For that reason, I would not recommend anything larger than a 1 oz. gold coin or bar, which is worth about $1000 at today's prices. Obviously, that is like carrying around a $1000 bill, which should already tell you we are at the upper practical limit. But for a long-term storage of value, these denominations are much more efficient than smaller denominations, which tend to trade at higher premiums over the spot price. Which is to say, you'll be paying a lot more for smaller coins relative to their gold content, at least in today's market. Which brings us to the types of coin/bar you'll be looking at. This is actually a very important issue, since you'll want other people to recognize your gold as being legitimate when you want to make your trade. It is best to buy something other people will know. The most popular/recognizable coins, in my opinion, in order of preference from most desirable/recognizable to least, would be: the American Gold Eagle, the Canadian Maple Leaf, and the South African Krugerrand, followed by an assortment of other coins in no particular order: the Austrian Coronnae, the Mexican Peso, the British Sovereign, the French Franc and a whole boatload of others. The first three coins come, conveniently, in 1 oz., 1/2 oz., 1/4 oz., and 1/10 oz. denominations. The Austrian 100 Coronnae contains .98 oz of gold, and the rest have odd contents specific to each coin. The only popular bar that I'm aware of is the Pamp Suisse bar, which is also 1 oz. The convenient and uniform, interchangeable weights of these coins/bars is a definite plus as it allows easy conversion to dollars, and, at least in theory, to one another. The "boatload of others" are not so easily converted, unless you have a good calculator and a spreadsheet of data handy, or are a lot smarter than I am. To most people, this is a detriment, although a dedicated coin dealer shouldn't have much trouble providing you with a market should you decide to redeem your gold. Most dealers will pledge to buy back the coins they have sold to you at market price on some future date, should you want to sell. The second thing to consider with coins/bars is composition. Most of the coins are actually alloys; they contain another metal, usually copper, to give the coin hardness and durability. To compensate for the dilution effect, the coins actually weight more than their "gold content mass," i.e., a 1 oz. American Eagle weighs more than 1 oz. in total, but contains exactly 1 oz. of gold. The exceptions: the Maple Leaf, and Pamp Suisse bar are pure gold, as is the Austrian Philharmonic, which you might also encounter. This is important because pure gold will be softer and more prone to physical damage than a "real coin" equipped for the demands of circulation, such as the Krugerrand, Sovereign, Eagle, Peso, or Franc. This may not matter to you; your coins may sit in the attic, comfortably protected and gathering dust. But, if you are like me and you are worried about worst case scenarios in which you might actually find yourself using your coins as real money in a barter -type economy, better to go with the more durable varieties. But be prepared; you will pay a bit of a premium for them. If you just want cheap gold, go with the Pamp Suisse and Maple Leaf; if you want functional coins, the Eagle and Krugerrand are your best bets. This brings us to pricing. The Eagle is by far the most desired gold bullion coin here in the US. It generally sells for a premium of 8-10% over the spot price of gold, i.e. at $1000/oz., you can expect to pay about $1080 to $1100 for a 1 oz. Eagle. In recent times, as demand for these coins has risen, the smaller denominations (1/2 - 1/10 oz.) have seen premiums skyrocket; the smaller the coin, the higher the premium. It is now common to be asked to pay 25-30% over spot for 1/10 oz. Eagles. And, people are paying it. I find this to be a bit steep, so I would rather use larger silver coins for this value range (~$100) than pay the premium. But, suit yourself; just expect to pay more for smaller coins. Expect a lower premium on Krugerrands, even lower on Coronas and the "boatload of others," and Maple Leafs and Pamp bars to trade near the spot price, Maples just a tad higher. Kind of just what you'd expect. To me, the Krugerrand is the best bet this late in the game, and if you can find fractionals, I would snap them up if they are under 10-15% over spot. But that's just me. Silver Coins As with gold coins, there are about a zillion varieties of silver coins available through pretty much the same channels as the gold coins. I'll stick to 3 varieties that I think are your best investment: "junk silver," silver "rounds," and Silver Eagles. Silver "rounds" are a bit like silver versions of Maple Leafs. In fact, you can get 1 oz. Silver Maple Leafs, which I would lump in with silver rounds. They are basically 1 oz. solid silver coins. They are an economical buy in that they have low premiums over spot, but they have the same drawbacks as the solid gold "coins:" low durability. Luckily, silver is a bit harder than gold, and you are only talking about a ~$15-20 coin, so you don't have quite as much to worry about. These generic "coins" are produced by a variety of companies, such as Engelhard, and Sunshine Minting. Some of them are quite ugly. But their job is to reliably and recognizably hold 1 oz. of silver, and that they do. If you are looking for cheap silver, this is probably your best bet. Expect to pay a bit over premium, but not as much as with Silver Eagles or junk silver. Junk silver is the fairly well established trade name for pre-1965 American silver coinage: half-dollars, quarters, and dimes. NOT nickels, as I once thought, and even posted about long, long ago. Nickels have pretty much always been made of nickel, with few exceptions. Junk silver coins contain 90% silver alloy, and actually circulated for quite some time until inflation got the better of them and their melt value (the value of their precious metal content) was far higher than their face value (i.e. 25 cents for a quarter). This is kinda the thing we are trying to hedge against, incidentally. Today, a junk silver quarter will run you about $3 or more. Since these coins circulated quite effectively for a long time, you can rest assured they are durable enough to serve in a barter economy, should it come to that. And their denominations are small enough that they are good for everyday transactions. $1 face value (i.e., four quarters, two half-dollars, or ten dimes) contains .715 oz. of silver no matter the combination of coins used to arrive at $1; prices are usually quoted in multiples of face value, i.e. 14x face value at recent prices, or $1.40 for a dime. The multiple is tied to the spot price of silver but is not identical to it. You will not get $1 face value, or .715 oz. of silver, for the spot price of .715 oz. silver. You will generally pay more, and the premium is considerably higher than for silver rounds. Expect to pay close to what the coins would trade for if $1 face value actually contained 1 oz. of silver. If you decide to buy these coins, I would buy them from The Moneychanger or another online dealer, as you will likely get a far better price than at a retail coin shop. The Cadillac of silver coins is the American Silver Eagle. The design is quite attractive, unlike some of the generic rounds. Unfortunately, they are also pure silver, so you won't get the durability of junk silver. Expect to pay anywhere from $3-5 over spot per 1 oz. coin, and probably more as the price of silver rises. Fun coins, but not that efficient as investment vehicles. There are many other types of silver coin and bars out there, but they just won't be as recognizable as these coins and will likely be less liquid. For my money, I prefer a base investment of junk silver for a possible barter scenario with some silver rounds for higher value denominations. OK, and maybe a few Silver Eagles just for fun. Investing in Precious Metals Let me first say that if you are looking to me for your advice on precious metals investing, you need to look further. Read The Gold Wars, then get involved with either The Moneychanger or Gary North. I repeat -- I am only an amateur. Both of these men are experts in the gold and silver markets and very honest and honorable people. A subscription to North's website is one of the best investments you can make in my opinion, and can save you from a lot of rookie mistakes. If you save yourself just one $1000 mistake, you will have paid for your subscription for many years. When you are making an investment, at the end of the day the person who will be held accountable for your decisions is you. Nobody else. Make sure you know what you are doing and fully understand and are comfortable with the risks you are taking. Remember, anybody could be wrong, including an amateur like me. That said, I will share my thoughts on what I think is a good investment strategy for the next several years. I would buy a fair amount up front in a few block purchases to get started. If you haven't bought any yet, you are behind in the game and need to get going. Generally, retailers will discount your sales tax if you make a purchase over $1000. It is usually worth your money to add a few silver rounds or some junk silver to get the purchase over $1000; $80 (the tax on $1000) will get you several coins. Once you are comfortable with your position, buy coins here and there as you see fit with some fraction of whatever you manage to save. If you will be making an investment of any size, you might try to keep down the quantity you have physically on hand to a comfortable level by also having an account at Goldmoney. Over the next 5-10 years, I expect inflation to take off pretty badly, so I wouldn't want large cash positions or especially fixed income assets (bonds and CD's, etc). I would hold enough for emergencies, and not too much more. I think that treating your coins or your Goldmoney account as your savings account is a good idea; remember, you can always sell them to get your money back if you need it. I like Franklin Sander's MAP Program in this regard. Just send him what you scrounge together, and you get some coins in the mail. Yes, you'll get crazy, unpredictable stuff, but it is gold and silver and it is kind of fun. Like Christmas just for you, once a month! You'll also get smaller denomination coins at better prices than you could on your own without a lot of effort. A couple of other points: remember that the precious metals markets can be just as volatile as anything else, and sometimes even worse. There is a lot of risk involved as with any investment, and you may lose money, possibly a lot of it. The spectacular rise and fall of silver in the late 70's to 1980 is one such incident. The day will likely come that you need to sell off your meticulously acquired coins, and possibly quickly. Selling a coin is not as easy as selling a stock; it takes time. You can mitigate your risks to some degree in this regard by using Goldmoney, which will allow you to make transactions more rapidly, and by leaning towards gold rather than silver. Gold is typically less volatile. You can also get a subscription to North's site, which will keep you much better informed than you would likely be on your own. Storage is also an issue here, unlike with stocks held at a broker. Remember that silver has a much lower value density than gold. $3000 of gold takes up approximately three 1 oz. coins and could easily be carried in your pocket without much notice. $3000 of silver weighs about 5 kilo's and would require a hefty bag or a box. Owning such coins can make you the target of theft as well. Be careful where you store your coins and who knows about them. You wouldn't want to do something stupid like post on the internet for all the world to see your interest and likely ownership of gold and silver coins. I mean.... ummm.... never mind... You should also be fully cognizant that by entering the precious metals market, you are entering a heavily manipulated market. The government very much will not want you to succeed. It will work against you at every step, tracking your purchases if it can, using its considerable economic and political clout to push prices down, and charging you an exorbitant tax when you redeem your coins on the "profit" you made as a result of the government's own currency debasement. The IRS treats gold as a "collectible." Unfortunately, we live in a world where we have to worry about such things as inflation, manipulation, and theft of our property. The thieves in the street and the thieves in government unite against us. In a non-inflationary world, we could just leave our money in the bank and not worry, for it would be earning real interest and be there for us in our times of need and in our retirement. But that is not the world we live in. To protect more of what you have earned from the thieves, you will have to fight back. In my opinion, precious metals are one of your better weapons.