Gold coins are so misunderstood, yet they are the BEST way to play the gold bull market. There are literally dozens of different forms of physical gold bullion on the market, so we asked coin expert James DiGeorgia for an explanation…
I love those gold bars you see in the movies. Stacks of 100-ounce bars are commonly the target of thieves and villains, like Goldfinger or some other greedy scoundrel. When not being used by Hollywood or lifted by egomaniac mobsters, 100-ounce bars are primarily traded on the major world commodity exchanges and used by the world’s central banks when trading gold.
Private investors buying less than 1,000 ounces of gold should steer clear of these 100-ounce gold bars. And I strongly recommend NEVER buying smaller gold bars, like 1 ounce or less weighted gold bars produced by private mints or refiners.
First of all, small investors who buy one or two 100-ounce bars lose the ability to sell their gold in intelligent increments. In addition, only exchanges regularly trade 100-ounce bars. Most gold dealers, coin dealers and gold brokers don’t trade these bars and will discount a bar that large, by 5-7%.
Second, my personal experience with smaller gold bars has been consistently bad. They sell for a 3%-10% premium over the spot price, which works out to a spread of as much as 20%, which is way too big.
The marketplace is dominated by bullion coins. The vast majority of rare coin and bullion dealers do 99% of their trading in coin form.
The American Gold Eagle: Bullion vs. Numismatic Coins
It’s important here to make a distinction between bullion coins and numismatic coins. A bullion coin’s value is derived solely from the content of its gold and is normally sold at a small premium above the market price for gold. A numismatic coin derives its value from its rarity, historical and aesthetic qualities and can sell for up to a million dollars.
Now that I’ve steered you away from gold bullion bars, let me also caution you against private mint gold coins. Many refiners and private mints around the world produce 1-ounce to 1/10th-ounce gold coins and offer them for sale as "bullion" alternatives. They tout either the fact that they cost less than more commonly traded gold bullion coins produced by the governments of the United States, Canada, South Africa and Australia or that they are sold based on the uniqueness of their design.
Private mints coin their gold bullion with images of everything from sporting events to Elvis Presley.
You should never buy privately minted gold bullion coins. They sell originally for large premiums above the price of gold and later sell at a discount to their intrinsic gold value because they are NOT widely bought and sold by dealers, and therefore dealers will discount the coins when (or if) they buy them.
Instead, you should stick with the five most commonly traded gold bullion coins in the world!
The American Gold Eagle: The Krugerrand, the Maple Leaf, and the Roo
Back in the 1970s, the most famous gold bullion unit was the Krugerrand from South Africa. The coins contain 1 ounce of gold and just enough copper to allow the coin to be struck. So the net weight of the coin is actually more than an ounce. They dominated trading in the last gold bull market and are still traded today. The South African government produces small-weighted coins in addition to the 1-ounce standard.
The popularity of the South African Krugerrand prompted the Canadian government to mint the Canadian maple leaf in 1979. The coin was an instant success, thanks to a clever advertising angle that touted the Canadian Maple Leaf as the first solid 24-karat gold bullion coin. While that is true, the fact remains that Canadian and South African coins both contain a full 1 troy ounce of gold. Few people realize that the Canadian Maple Leaf actually has a face value of $50 Canadian dollars, far less, of course, than the value of the gold bullion.
The "Roo," as it’s commonly called, is minted by the Australian Perth Mint and is actually the second bullion coin produced by Australia. The first was called the "Nugget Coin," and the Kangaroo replaced it. The most popular European bullion coin is the Vienna Philharmonic. It is struck in pure (99..9%) gold by the Austrian Mint, which has been minting gold coins for more than 800 years. The obverse depicts the great organ in the Golden Hall in Vienna’s concert hall (Musikverein), home of the Vienna Philharmonic. A bouquet of musical instruments represents the world famous orchestra on the reverse of the coin.
One of the most popular gold bullion coins in the world is the China Panda, which was first introduced in 1982. The 1/20-ounce coin was introduced in 1983. Throughout the years, the China Mint has kept the same Panda design, but has frequently changed the position of the panda on its coins.
But the American Gold Eagle is now by far the most popular gold bullion coin in the world. Authorized by Congress in 1985 and first minted in 1986, American Eagles are minted in 22-karat, which was the standard established for circulating U.S. gold, dating back to the gold that was first struck in 1796. In fact, the 22-karat standard has been the worldwide standard for circulating gold coinage for more than 350 years!
American Gold Eagles have a substantial patriotic edge, as they can only be coined from newly mined sources in the United States. The balance of the coin’s composition consists of silver and copper, which is added to increase the coin’s durability. Gold is a very soft metal.
The obverse is based on world-renowned American sculptor Augustus Saint-Gauden’s design for the prized 1907 $20 gold coin. The reverse pictures a family of eagles, symbolizing family tradition and unity.
Which gold bullion coin do I recommend? Hands down, the best gold bullion coin is the American Gold Eagle! It’s the most liquid coin in the world. The buy/sell spread is rarely more than 7% on small amounts and as little as 5% on larger quantities.
The American Gold Eagle: Check for Damage
Don’t buy bullion coins that have any rim nicks, scratches, abrasions, chips, or dents or those that appear to be discolored in any way. NEVER! Any knowledgeable buyer will discount coins that have even the slightest damage.
Steer clear of any coins that have carbon or copper spots. Some gold bullion coins, even those that are in 100% absolutely perfect condition, will have tiny spots visible to the naked eye without magnification. These are natural and are caused by the inclusion of copper into the gold to increase the durability of the planchets (the metal disks) on which the coins are struck. Despite the fact that these spots are natural to gold coins, they are undesirable, and dealers will buy and sell them at a slight discount. Make sure when buying gold bullion coins that you insist on "no spots." Keep in mind a spot is only a problem if you can see it with the naked eye. If you have to use a magnifying glass to see a spot(s), it is not a problem.
Don’t buy "rare date" bullion coins. A bullion coin is a bullion coin. Don’t be fooled. The least expensive way to purchase the 1-ounce coin is to specify "common date." Common date means the bullion dealer can send you any date bullion coins of the type you desire in gem condition. If you order a specific date, for example 1996, it will cost more then the common date.
Some telemarketing firms are now selling some dates of the American Eagle a-ounce gold coins in mint state condition for premiums of 10%, 20%, even 30%! Yuck – what a horrible deal. It’s a complete rip-off. The coins are and will always be bullion coins. They’re NOT rare and don’t deserve a premium.
NEVER buy or sell gold bullion strictly on the basis of the best price. Saving a few dollars with buying or selling prices versus dealing with a reputable company or person is silly. Over the years, I’ve seen investors decide to do business with one dealer or another based 100% on price. The firm could offer the best price because they had no intention of delivering the gold! When the gold market gets red hot, the scam artists breed like rats. Here are two recommendations I always make:
The American Gold Eagle: Know Your Dealer
Know your dealer. Do some background checking. How long has the dealer been in business? Check with the Better Business Bureau. Are you dealing with a "nameless" clerk or a principal in the firm on whom you can check? You’d be amazed how many people are out there waiting to steal your money.
Always take immediate delivery of your gold coins. NEVER store your gold coins in a dealer’s vault. I’ve seen people lose every penny trusting a dealer. Take the time and get a safety deposit box at your bank and take charge of the storage. When buying bullion, it’s important to get your gold as quickly as possible. Checks need several days to clear, money orders need less time and bank wires are immediate; you can always insist on next-day shipment when you send a bank wire.
Now I’m going to give it to you straight: When the gold market gets red hot, and it will, EVERY gold dealer and precious metals brokerage firm will pay spot (most current price) for your gold coins and sell at 10% over spot. The bid/ask spread at which gold coins are traded will widen. It happened in 1979-1980, and it will happen again. Don’t sweat it. Take your profits, and don’t let the wider premiums bother you.
The best analogies are…
Gasoline: When we experience a "shortage," gas stations gouge. It happens every time. A frenzied marketplace creates fear, which widens the spread, and prices rise. Buyers get the short end of the stick, while dealers get rich.
Stocks: Forget all the nonsense about reform on Wall Street. The fact is when a stock becomes red hot, the spread between the buy and sell widens. The specialists who run the market make much more money. They argue that the spread widens because the transaction risk increases. This isn’t always true, but it’s true enough that they can get away with the wider buy/sell spread.
Here’s the bottom line: Get into your gold investments now, before the market gets red hot. Diversify your investment portfolio, because it’s the smart thing to do. Get yourself into a position to ride gold from $350 to $1,250 or $2,000 an ounce. Buy the best, most liquid gold investments and cash in on the bull market ahead.
for The Daily Reckoning
September 1, 2004
Editor’s Note: Experts as knowledgeable about gold as James DiGeorgia are as rare as a MS-69 $2.50 Liberty!
James was trading in gold coins before his 15th birthday, and by 16, he already had his own office in Danbury, Conn. That was back in 1976, and the gold market was just about to mushroom. By the time the precious metal markets had crashed, James had made well over $1 million.
He’s never looked back. Since then, James has traveled the world attending auctions, estate sales and conventions and establishing a network of dealers and traders in virtually every major city on earth.
Now James DiGeorgia is one of the most familiar rare coin dealers in the world.
An election is an advance auction of stolen goods, as Ambrose Bierce put it. The bidding began many months ago and continues in the Big Apple this week, with each candidate burnishing his shield, sharpening his sword…and raising the stakes.
Republicans can tell which way the wind is blowing. They’ve come out with a flattering convention theme – "A Nation of Courage" – and an agenda at least as bellicose as their opponents’.
Kicking the scrawny butts of nearly unarmed Third World nations is not the sort of thing that epic poems and granite monuments typically celebrate. Besides, when you are the world’s only superpower, it’s not courage that you need…it’s prudence. You just don’t want to do something rash or stupid. But that seems to be what both parties are bent on.
Conservatism is dead in America. George Bush will put the crown on his own head on Thursday and announce a reign of grandiose ambition, expansionism, recklessness and self- delusion. It makes little difference whether he wins or loses. Neither party plans to cut spending, though it is debt that threatens the republic far more than terrorism. Neither party can face up to the $44 trillion "funding gap" in federal finances, nor to the current account deficit, nor to the challenge of low-wage competitors in Asia. Even Alan Greenspan is talking about the need to reform Social Security and Medicare; but which national leader is going to tell the voters that they will get less than expected? Nor does either party question the "War on Terror"; it’s a fool’s war, which is why it is so popular.
But Nature has to have her way…no matter what we think. America cannot continue to be the world’s only superpower, for Nature will not permit a monopoly for very long. And yet, no foreign nation is strong enough to offer a serious military challenge – at least not yet. So the U.S. of A. must ruin itself…and needs leadership that is up to the task. In Bush and Kerry, America seems to have found its Louis XVI…it’s Nicholas II, its Theodosius, Rome’s last emperor. In Bush and Kerry, America has found leaders worthy of a nation of happy hallucinators.
What is astonishing to us is the way both parties have become war parties. We predicted it; but we are still surprised by it.
"Last night, in Madison Square Garden, I took the stage at the Republican National Convention to speak to America about the threats we face in the world," said an e-mail message from Rudolph Giuliani…
"President Bush has been the steady hand we need in these times of uncertainty and danger. He understands the stakes…he chooses to fight terror in places like Baghdad and Kabul, rather than in New York and Kansas. It is the right way to fight this enemy, and it is a fight we must win…
"In order to take the fight to our enemies, we must have the strength of conviction and support for our Armed Forces…this is not a fight that favors sensitivity and nuance. This is a fight that requires strength, determination and resolve."
An edited version reads as follows:
We cannot recall when America was in such a fighting mood.
Too bad the fight is an expansive fraud (see additional note below). But it is a convenient and foreseeable one. "The first panacea of a mismanaged nation is inflation," wrote Hemingway. "The second is war."
Government has proved completely inept at fighting illiteracy, poverty and drugs. Liberal activists found that they could no longer expand government spending – and their own authority – except by becoming "neo-conservatives" and focusing their do-goodism on foreign policy. Besides, who will oppose war spending when the nation is in danger?
Of course, the nation is in no danger at all. A handful of murderous fanatics represent a threat to Americans – along with muggers, rapists and reality TV – but not to America itself. Only by reacting to terrorists in an absurd and hysterical way can the nation defeat itself.
Bush and Kerry have come forward just when Nature needed them…
Spend, spend, spend…fight, fight, fight…from the comic to the tragic…America creates her own calamity.
More news from the East Coast:
Tom Dyson, from 808 Saint Paul St…
– Long-time readers will recall Dr. Steve Sjuggerud’s 1-2-3 Stock Market Model. Based on three critical factors, the indicator predicts the future direction of the stock market with astonishing accuracy.
– On July 7, 2004, just after Alan Greenspan raised rates, Dr. Sjuggerud warned his subscribers that his model had moved into "Super Red Light" mode, and he recommended shorting the market. This development was dutifully reported in The Daily Reckoning…
– "The ‘red light’ we refer to today has nothing to do with the shadowy clubs and street corners of Baltimore’s seedy underbelly, but a stock market ‘sell’ signal," we explained at the time. "You see, dear reader, we here at The Daily Reckoning will venture far and wide to deliver you the goods…including territory forbidden to brokers, market makers and stock market shills. ‘Sell’, we say…"
– …And sell off the market did. The Nasdaq – the target of Dr. Sjuggerud’s sell order – fell from 2,007 down as low as 1,752 two weeks ago. It has since rallied, closing yesterday – the final session in August – at 1,838, for a loss of 8.5% since we entered "Super Red Light" mode – and a profit of 25% for Steve’s subscribers.
– Of course, your humble editors here in the Baltimore HQ of The Daily Reckoning take no credit for the prediction; we simply passed on the message. "Why was it so easy?" asks the obnoxiously accurate forecaster. "Put simply…all the pieces had fallen into place for us to go short."
– Now Dr. Sjuggerud sends us word of a new trade…he calls it the "Druckenmiller Opportunity." Dr. Sjuggerud has just recommended – for the first time ever – that his readers buy a specific tech stock for a short-term speculation! We’d call him crazy, but we know better…
– In early January 1991, Stan Druckenmiller was short approximately $3 billion in the U.S. and Japanese stock markets. "On the way down," explained Stan, "the pessimism regarding the U.S. stock market had become extreme. Everybody was talking about how the market would crater if the United States went to war with Iraq."
– Furthermore, Druckenmiller noticed that many of the fund managers he knew were holding their highest cash balances in 10 years. "I was convinced that once the war started," he said, "the market had to go up, because everyone had already sold."
– Today we hear the same story. According to a new survey by Merrill Lynch, 30% of fund managers are overweight cash and the last time mutual funds had this much cash piled up was in March 2003 – just before Gulf War II. Merrill Lynch: "[This] represents one of the highest cash positions that we have seen, only surpassed by the aftermath of 9/11, the credit crunch of October 2002 and the pre-Iraq uncertainty."
– Not only are cash balances high, but yesterday we heard that consumer confidence had plummeted in August. The Conference Board said that the reading had dropped to the lowest level since May and was far below what analysts had expected. The market didn’t seem to care…it just shrugged and then rallied. The Dow closed 51 points higher, reaching 10,173. The S&P added 5, or 0.5%, to 1,104, comfortably outperforming the meager 2 point gain at the Nasdaq, which left the tech index at 1,838.
– But while Mr. Market has lifted itself from its August funk, we’ve yet to see any really significant upside strength. Dr. Sjuggerud thinks this might be because the uncertainty surrounding the November presidential election is keeping investors on the sidelines. It’s acting like a deadline, he says. But when the deadline passes, the money will come flooding back into the market.
– It’s a three-month play, and if done right, using the right tools, Dr. Sjuggerud reckons he can pick off a quick- fire gain. We wouldn’t like to bet against him. [Ed. Note: This is a delicate speculation, but in typical True Wealth fashion, Steve is making the trade as safe as possible. The tech company he recommends has boatloads of cash, a product used by the majority of Fortune 500 companies and is a prime takeover candidate for a company like Oracle. Of course, we can’t reveal the name of the company, but everything you need to know is in the latest issue of True Wealth.
Bill Bonner, with more views…from the building with the golden balls:
*** Reader comment:
"Perhaps foreigners will buy hard assets in the United States. Don’t forget, the value of those assets depends on the American consumer. That value will drop if Americans have no money or desire to purchase the production.
"There was a lot of concern when such foreign purchasing was going on several years ago. Pebble Beach comes to mind. I believe it was purchased by a Japanese investor and sold by him to a Japanese company at half its purchase price. That owner invested a significant amount of money in the property, which was finally sold back to American investors at something less than the original price.
"Seems like a great method of repatriating our dollars. Pay a foreigner for a TV. He turns the cash around and buys a hotel in the United States. The former American hotel owner holds on to his cash, the value of which increases, while the hotel deflates in value because the Americans who would stay at the hotel stay home watching TV while saving their cash. The foreigner invests money in the property to make it more attractive, repatriating even more cash and employing Americans. But the TV keeps working, as does the American who continues to save his cash, maybe even buying another TV along the way. The foreign investor finally bails out to an American investor and the process starts over again.
"Who’s the fool? Probably the person who gets the foreign dupe to understand the racket."
*** And another:
"I have three credit cards with a combined balance of over $50,000 with 0% interest until June and July of 2005. My other credit card company offered me a $38,000 cash advance with 0% APR until March of 2005. I couldn’t resist. Let’s hope the dollar doesn’t soar! I’ve got a pretty big carry trade going here."
*** And another:
"This is pretty interesting…comes from a dumb chain letter I received. It does make sense and is in keeping with your loose fiscal theme.
"Alexander Tyler (a Scottish history professor at the University of Edinburgh) had this to say about ‘the fall of the Athenian Republic’ some 2,000 years prior.
"’A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, [which is] always followed by a dictatorship."
"’The average age of the world’s greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:
"’From bondage to spiritual faith;
"’From spiritual faith to great courage;
"’From courage to liberty;
"’From liberty to abundance;
"’From abundance to complacency;
"’From complacency to apathy;
"’From apathy to dependence;
"’From dependence back into bondage."
[Ed. comment: Yes…the average citizen now depends on the U.S. government…and the U.S. government depends on Asian financing…
But between dependence and bondage come a couple of other steps…absurdity…delusion…and often, a brawl or two.)