Rathbun: How not to invest in precious metalsWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
In part two of this series, I will look at some ways not to invest in precious metals. That is not to say any of the following are bad investments — they’re not — just that there are better ways to invest in metals if you are going for an inflation hedge and as insurance against really bad things happening in the economy.
One of the worst methods of investing in precious metals is through rare coins or numismatics. When you purchase a numismatic gold coin, say a 1929 double eagle, you are paying for not only the gold content but also the rarity and the grade or condition of the coin. Now, on a couple of fronts we can objectively evaluate the coin. We know how many were struck and how many are known to exist today. So it is fairly easy to figure out the rarity. The 1929 Saint-Gaudens double eagle had 1.7 million minted.
Most of the double eagles were returned to the mint and melted down. Some, however, were unofficially saved by treasury employees. Estimates of the quantities saved range from a few dozen to several hundred thousand, depending on the date. To say the least, these specimens are rare and very few have come up for auction in the past couple of decades.
The problem with using this coin as a store of value, meaning the gold content, is that as a collectible it is worth a lot more. From one standpoint of investing this may be a good thing, but from the standpoint that you want to have something of value you can exchange for food or shelter, it is a very bad way of investing in gold. If it gets to the point of bartering for food and medicine, the rarity of the coin will mean nothing.
Secondly, the numismatic value of a coin is heavily weighted on the grade or the condition. Ratings range from MS (mint state) 1 to MS 70. An MS 70 coin is perfect and usually has never been touched by human hands without gloves. A coin that is MS 1 is usually a glob of metal and is not good for anything but melt-down value. The difficulty with grading is that it is very subjective. I knew a dealer who would purchase coins and pay a company to recertify them at a higher grade.
The difference in price between an MS 60 and an MS 65 can be exponential. So grading is very critical and it doesn’t take much to lower the grade of a coin. A fingerprint left by someone not wearing gloves can lower the grade and the value several thousand dollars. So as a store of value and an inflation hedge, numismatic coins are not the way to prepare for a difficult economy.
Now, all of that being said, I do collect coins, have for most of my life and enjoy it very much as a hobby, but not so much as an investment against economic upheaval.
It is very important that when you look at investing in precious metals you know what you are buying and why. Many of the firms that advertise on the Internet do kind of a bait and switch. I had a person come to me saying they invested in gold but what they had really purchased were rare coins; in the time gold went from $800 an ounce to $1,400 an ounce she lost more than $100,000 because the numismatic value decreased. Actually, it didn’t decrease; the company that sold them to her marked it up so much on the purchase that the redemption value was below what she paid.
Next time we will discuss investing in mining companies and how to prevent yourself from being disappointed.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants Ltd. He can be heard every day at 4:06 p.m. on “After the Bell with Brian Wilson and the Afternoon Drive” and at 6 p.m. every Wednesday and Thursday throughout northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at email@example.com.