12 January 2011

Anarchist Pig- Gold Fever

It seems to me that anytime I turn on the television, I am bombarded by commercials and infomercials selling two services- tax defense against the IRS and companies selling gold and other metals. I'm not sure what the combination of these two trends mean other than the fact that the world is going to hell and I watch too much TV. Many people in the U.S. are in debt to the government and can't pay what they owe and many others are worried that the credit of the government is now at junk status and it can't pay what it owes either.

Boy do I miss Billy Mays.

Let me say that although I'm a big fan of conspiracy theories (UFO's, Big Foot, Bermuda Triangle, the Cubs never winning the World Series) I'm not one of the drones eagerly following Glen Beck's lead and loading up the garage with bullion- I don't think that I'm going to need shave gold shards off of coins to buy toilet paper after the world ends in 2012. I do believe, however, that there is real danger in our fiat money system which is nicely summed up in this paper written by Ludwig von Mises in July, 1953.

Once decoupled from gold reserves, our paper money system is supported by nothing more than the psychological hope that everything is going to be okay- the currency equivalent of sunshine, lollipops and unicorns. If you really want a good reason to stare at the ceiling fan in the middle of the night, think about what all of your monetary assets (cash, savings, maybe some retirement funds) are comprised of- electronic ones and zeros on some server someplace. Now, combine that thought with the electronic "flash crash" of 2010 and a government that needs to print billions of dollars to pay the interest on the trillions of dollars it borrowed to plug holes in the ever increasing federal debt- another $ 600 billion in "quantitative easing" (a nice euphemism for "printing money") was announced yesterday on top of the $ 1.7 trillion to date. Buying some silver, gold or even platinum seems to be a prudent idea and here are some of my thoughts (and experience) on the subject.

First off, let's start with the disadvantages to investing in metals (Note- for the purpose of this post I'm talking about real metal i.e. coins and bullion, not metal miner's stocks, ETF, mutual funds etc.) Unlike many other investments, metal is not going to pay you interest or any type of dividend while you own it- it's going to sit quietly in your desk, your safe or bank and rise and fall with the market price. The other disadvantage with owning metal is liquidity and the difficulties that may arise when the time comes to sell it. Although you think your shiny 1 ounce silver dollar is worth $ 29.00 (because that's the price of silver at the moment you want to sell it) you are entirely at the mercy of what a prospective buyer wants to pay- remember that they will have to pay a discounted rate in order to make a profit when they sell it. Finally, you can't walk into a 7-Eleven and plonk your ounce of silver on the counter loudly announcing "a round of slurpees for everyone" to loud applause-it is not going to be accepted as currency except at face value (which is $ 1.00 dollar, and you're an idiot if you spend it for that.) Remember, liquidity problems will also expand exponentially with the size of your chunk of metal so ease off the 100 ounce silver bars and start out with 1 ounce coins cowboy.

Okay, so why would you want to own some metal ? Well, there are quite a few reasons. First, unlike stocks, bonds or other investments there is no credit risk tied to your asset- a gold coin, for example, is not going to go bankrupt or be worth $ 0.00 at some point in the future. Next, metal prices rise in times of economic and political uncertainty and goodness knows we have plenty of that going on right now. Once the wheelbarrows of money from the Federal of Reserve dry up, all of that money sloshing around in the system will probably lead to increased inflation and loss of value in terms of the U.S. dollar- both good things for metal prices. Finally, there is an issue of privacy when you own metal. I actually like the fact that metals don't pay dividends or interest simply because that means I am not receiving annual forms to file with the IRS and state taxing authorities. The very fact that they are physical assets means they are portable and can be quietly given to family members (i.e. children) at some point in the future unlike stocks and bonds which have a long paper trail.

So, you might be ready right now to charge out and buy some metal. How do you do it ? Unless you live on a desert island, I recommend avoiding the Internet and dealing with a local metals broker or coin shop instead. The Internet is fantastic for doing your research and getting a good idea of how much your investment is going to cost, but I generally don't like buying metal online for two reasons. First, online companies are going to charge you much more in terms of transaction costs than a local dealer because they need to add shipping and shipping insurance to your purchase. Second, my general rule is not to buy metals unless I have some idea of the reputation of the seller- a coin shop that has been in business in your town for 25 years is probably a safer bet than an online company located a couple of time zones away.

When you decide to buy some metal, you need to consider what type you want to purchase (I'll limit this to platinum, gold and silver) and in what form (again, for brevity we will limit this to coins or bullion.) All metals have their own advantages and disadvantages as investments in terms of supply, industrial and personal (jewelry) uses which you can easily research online. I invest in all three to give my group of metals a little bit of diversification- platinum, for example, is more sensitive to industrial cycles because of its use in the automotive and electronic industries. I also invest in both bullion and coins for the following reasons. Bullion purchases (such as 1, 10 or 100 ounce bars) generally give you the best purchase price in terms of being closest to the global market price at that particular time. Again, do your own research, but the most important thing with bullion is to insure that the bar has been stamped by one of the refiners listed here at the London Bullion Market Association as being acceptable for delivery in the world market. These pedigree markings show a prospective buyer that the bar is acceptable in terms of weight and content although they will probably want to do further testing because of the amount of fraud in the bullion market. Because of fraud concerns, coins are much more difficult to forge and are therefore more easily sold. The main thing to remember with coins is that you will be paying a premium above the market price of the metal due to numismatic value or demand. I also want to note that we are not talking about investment grade coins (rare coins that are graded and sometimes "slabbed" inside of acrylic containers.) That is an entirely different animal that I am not experienced with.

Here's an example of premium when buying a coin. At the time I am writing this, a gold 1 ounce eagle is selling here at Kitco (a great website by the way) for $ 1458.54 while the price on the world market for 1 ounce of gold is $ 1,382.50 (note at the same time, a one ounce bullion bar is selling for $ 1,407.50 which is closer to the market price.) The coin is selling at a premium of $ 76.04 or 5.5 % above market while the bar is selling at a premium of $ 25.00 or 1.8 %. Both products contain one ounce of gold but the bar is actually refined at .9999 while the coin is .9167 fine- a microscopic difference because the coin needs certain alloys to be cast. Another thing to remember is to save your money. Again, looking at the Kitco pricing (which is typical) shows how sellers punish the little guy. While our one ounce gold eagle is selling for $ 1,458.54, a 1/10th ounce eagle is selling for $ 165.90- sounds like a great deal right ? Not so fast. Simple math tells us that the 1/10th eagle is priced at a rate of $ 1,650 per ounce which is a whopping $ 267.50 or 19.35 % above market price. Instead of rushing right in to buy 1/10th of an ounce of gold, it might make far better financial sense to buy 5 ounces of silver which is priced closer to market price.

So, like any investment there are pros and cons to owning metals. I wouldn't cash out all of your savings and buy some but a couple of ounces bought over a couple of years is probably a good idea. Again, do your own research and make sure you are dealing with a reputable seller.

1 comment:

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