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JANUARY 10, 2011
In life, sometimes the fastest way to learn is to make the wrong decision.
As much as we love to learn new things, as investors we prefer to learn from other people’s mistakes as opposed to making them ourselves.
Due diligence is mandatory!
For today’s gold and silver investors, industry pitfalls are aplenty and one’s chances of making wrong investment choices grow each day as this gold and silver bull market gains further ground.
In the coming weeks and months we will be delivering Investor Beware pieces to help our customers understand the mistakes one can make investing in this industry.
There are many institutions and dealers who play upon investor fear, ignorance, and or greed in aims to hook line and and sinker capital away from you and into their pockets.
This week we will start with one of the most prevalent black eyes in our industry: behold, the unscrupulous numismatic coin dealer.
One of our bullion customers a few years ago told us about an unfortunate investment he had made, $250,000 sunk into supposedly rare old gold coins. His words… “Now that gold has doubled in price, I still can't find anyone that'll give me what I paid for these @%&!#@g things.”
Over the past few years, collectable numismatic coin outfits have been growing like weeds and thanks to their ruthless scare… ah sales tactics and incredibly high product markups of 30-50% or more over spot prices, buying expensive advertising is no problem for these folks.
Be it on radio or television, they’ll even buy one of the Presidential Candidates you may have voted for or purchase the endorsement of a high exposure TV “newsman”.
Here at GoldSilver.com we are often asked our take on numismatic collector coins. It is also rather commonplace to have all types of investors approach our dealership confessing their mistake in purchasing collector coins in the hopes of getting their gold and silver investment portfolios back on track.
Ah but first, let us digress. We must define numismatics and explain the positive qualities of collectable coins, yet why we believe they make poor silver and gold investments for the average investor.
Numismatics is defined as the study or collecting of coins, medals, paper money, etc. Numismatic is the proper term for collector coins having added value to their collectors as beautiful, old, precious items, in addition to the value of the metal they contain.
There are three “layers” of cost built into the price of a numismatic coin: metal content, numismatic premium, and dealer profit.
This in contrast to bullion bars and bullion coins, which have only two layers of cost: metal content, and dealer profit.
And sold for $21 million to you sir! On to our next lot...
We think of numismatic coin collecting in terms of fine art. Common sense tells us that true numismatists, collector coin experts, are generally child coin collector enthusiasts who found their trade early on. There are a select few of successful players in these arenas; they typically have lifetimes of expertise.
As for novice involvement in collectibles, it can be very risky business from an investing and financial point of view.
Let us be clear, in a precious metal bull market, a select few numismatic coins will do well; but many will not. Unless you are an experienced, knowledgeable coin collector, with as much or more knowledge than your numismatic dealer possesses, investing in numismatics is a high-risk proposition.
As you can read, we are not fans of numismatics as investments… at least not in this cycle. There are a few reasons for this:
For one, unless you are well educated and knowledgeable about these products, you cannot hope to profit. And, two, we believe a currency crisis is inevitable, and probably sooner rather than later.
In the event of a global currency crisis, all the growing millions of investors who have been hoarding their collectible coins over the past four or five decades will dump them on the market in a desperate rush for cash or liquidity. Should that occur, the value of premiums on numismatic coins, save those items whose rarity is absolutely indisputable, will tank.
Finally, we warn you that upwards of the high ninety percentile of scams and cons in the physical precious metal industry are pulled using numismatic and semi-numismatic coins. There are many scandalous methods cutthroat dealers may apply in hoodwinking investors; here are some classical cons they use:
Bait & Switch 101
Many large-scale semi-numismatic coin dealers will advertise incredible deals with low priced bullion products to attract gold and silver investor interest.
Once these dealers have their prey on the phone, their sales force is trained to balk on selling the advertised bullion and up-sell on their high-markup items, like pre-1933 gold coins, Swiss francs, French roosters, etc.
Their sales tactics would be laughable if they weren’t so effective at fleecing the public from their hard earned savings.
Confiscation Scare -> Up Sell Tactics
This deception generally preys upon the essential reason folks call or visit these outfits in the first place (their uncertainty about the economy and governmental policies).
If a dealer ever attempts to influence your investment choices by using confiscation scare tactics, simply exit the shop and or hang up the telephone.
If they have the audacity to present you with President Roosevelt’s 1933 Executive Order, laugh in their face and walk away.
Here is why you should do so:
President Roosevelt’s 1933 Executive Order 6102 prohibited the private ownership of gold in America. It required US citizens to hand over their gold bullion to a Federal Reserve bank or face a $10,000 fine and or 10 years imprisonment.
The President's order listed the following exemption:
Gold coin and gold certificates in an amount not exceeding in the aggregate $100 belonging to any one person (roughly 5 ounces of gold); and gold coins having a recognized special value to collectors of rare and unusual coins.
The "rare and unusual coins" clause is what many dodgy coin dealers use to convince investors that regular bullion coins are not safe. Under the ruse that they themselves are offering rare and unusual coins which would be exempt from a potential future Roosevelt-style confiscation, they are then able to justify up-selling the public 30 to 50% or more of the precious metal coin content of the products they sell.
Neither Rare nor Unusual
Our research has shown that roughly 25% of privately held gold in 1933 was turned into various Federal Reserve banks (this gold was melted down into 22k bar form and moved into Fort Knox helping to ensure the dollar’s viability as an internationally convertible gold standard currency). The roughly remaining 75% of privately held gold was hoarded and not turned in.
Not one US citizen was convicted of hoarding their gold and millions of common pre-1933 gold coins still being sold today are ironically being touted by those same sellers as rare and unusual, the exact same coins the government sought to acquire under Roosevelt’s Executive Order 6102.
Real rare and unusual numismatic coins can sell upwards of 100 times or more of their precious metals content.
Chances are high that great granddaddy’s hoarded $20 Saint Gaudens gold piece is neither rare nor unusual. And chances are even higher that the large semi-numismatic dealers hounding your Internet browser, television, and radio are offering you products that are neither exceptional nor fairly priced. They are more than likely offering old domestic and foreign overpriced silver and gold products.
Cherry Picked Stats of Value Appreciation
Rare coin sales pitches will many times come complete with figures tracking numismatic coin versus bullion ask-price performances over select periods of time. The select rare coin baskets and or indexes displayed will of course outperform bullion, this thanks to beneficially hindsight-selected spans of time and products.
For example, this breath-taking chart:
Their statistics will of course also fail to reflect the collector coin’s extreme bid ask spreads and mark-ups for their performance valuations.
In the 2008 performance chart above, the creator has deceptively written a zero in front of gold’s 6% appreciation for the year making it appear as if gold were merely up 0.6% for the year. Now that is some transparent numismatic niceness!
What is their Bid Price?
Just ask any dealer for the bid price of the product you are interested in, even balk as if you actually own the product and are in the market to sell. Then simply see how transparent their answer is.
Also always be aware that a collectable dealer’s grading leads to arbitrary realms of valuation where your collectable coin bid can be cut down substantially.
Would you be experienced enough to know when you are being fleeced on a collectable coin bid/offer price?
You Reap What You Allegedly Sow
Everyone Needs a Hobby
If you are into collecting old coins as a source of pleasure, go for it. All of us have things of beauty we desire or admire, and no one can take that enjoyment away from you.
As kids we loved our baseball card, comic book, and Barbie doll collections. Far be it from us to take pleasure away from any enthusiastic coin collector out there.
If you do decide to delve into numismatic coin collectibles, we urge you to do your research, learn as much as you can about old coins and about the dealers you trade with.
We also urge folks to refrain from looking at numismatics as a way of feathering one’s nest or for protecting wealth, in all likelihood, most folks will be far more secure and profitable over the long-run by sticking with gold and silver bullion investments.
If you are interested in physical gold in silver for the same reasons as us, we believe the best way to invest is by acquiring physical silver and gold bullion.
Gold and silver bullion coins, or bars, have the type and grade of metal and their weight stamped right on them. In the event of a crisis, your local radio and television stations, news websites and stock tickers will constantly be broadcasting the price per ounce. You will know exactly how much your gold or silver is worth at any given time; and dealers, buyers, merchants and bankers will know as well. Demand for your bullion will skyrocket, and you will be able to sell your metals quickly and easily.
It’s highly unlikely the same will be true of your numismatic coins, for which you will have paid a higher premium to begin with. The exact metal content may be unclear; dishonest dealers may dispute the coin’s weight; and no one is likely to care that you paid a few hundred extra dollars in premium per ounce because your coin was old and supposedly rare.
As a gold and silver investor it pays to do your homework to learn what to do and almost more importantly, what not to do with your gold and silver investments.
As for us, we’re going to stick to physical gold and silver bullion investing. We believe this to be the surest path to profit from the oncoming currency crisis and the tremendous transfer of wealth ahead. What about you?