Last week, after a two-day euphoria over lower interest rates, stocks retreated, oil broke through $81/barrel, and the dollar sank, reaching parity with the Canadian dollar for the first time in decades.
Don’t be surprised if you start seeing TV commercials urging you to “Buy Gold!,” insisting inflation is back with a vengeance.
Put your wallet away for a minute.
That piece of advice doesn’t come from me, although I agree. It comes from folks who would be delighted to sell you gold: the Professional Numismatists Guild (PNG), a non-profit organization representing rare coin dealers, which recently issued a consumer alert.
To become a member of PNG, you’ve got to do more than pony up your dues. A dealer must adhere to a code of ethics and meet seven criteria, which among other things, indicate he/she is financially sound. PNG also requires members to agree “to submit to legally binding arbitration to settle any dispute,” says spokesperson Donn Pearlman.
In other words, these individuals deal with gold as a business and for many it’s their full-time career. Yes, they believe that an investor should have some gold in thier portfolio as an inflation hedge. PNG President Gary Adkins, who has been a gold coin dealer for 42 years, says, “people should probably have some percentage of their net worth in hard assets- around 5 percent.”
The key is to know what you’re buying, what you’re paying, and who you are dealing with.
Consider the two basic forms of gold investments: coins and bars. According to Adkins, “coins are best because they are always identifiable.” American gold eagle coins are stamped, so you know the exact purity and amount of gold you are getting.
“With bars, you may have to have it assayed,” i.e. tested to verify the purity. If you want your gold in bars, “stick with die-struck bars,” advises Adkins, because these “specify the gold content.”
Coins are often more convenient for individual investors because they come in fractional amounts such as 1 ounce, ½ ounce, ¼ ounce and 1/10th ounce. If you didn’t have the money to buy a full ounce when gold hit $732/ounce last week, you could have purchased a smaller amount. However, “the smaller the coin, the larger the premium you pay.”
According to Adkins, for a one ounce Eagle, you should expect to pay the spot price for gold plus about $25, or $757 based on last week’s gold price.
The premium on a ½ ounce Eagle will be slightly higher, around $30 per ounce, or around $381 ($732x½ + $15).
If you’re contemplating a gold purchase, be aware that fraud exists. Make sure you protect yourself and make an informed decision. To begin with, understand how and why you are buying gold. Is it going to be an investment? As an inflation hedge? As adornment, i.e. jewelry?
“You have to know your motivation,” says Adkins. “If it’s an investment, the market may have reached its peak.” So buying it right now might not be a smart move.
“We see a lot of people who jump in, and typically, it's too late. There wasn’t a lot of interest in gold when it was $350/ounce, but now that it’s heading toward $750” suddenly a lot of people are interested.
Keep in mind that gold hit an all-time high of roughly $850/ounce in 1980. People who bought it at that price are still waiting just to break even!
Your IRA is one way to hold gold coins as an investment. However, Barry Picker, a CPA with the firm Picker, Weinberg and Auerbach in Brooklyn, NY, points out that not all gold coins qualify as IRA investments. Only those coins minted by the United States or an individual state qualify.
In addition, you need a custodian willing to hold “non-traditional” assets. This can get very expensive. An Internet search turned up several custodians, but in one case the cost was $50 to set up the account, plus $200/year for accounts worth up to $28,574.99. The annual custodial cost for larger accounts varied and in some cases was higher.
As an alternative, Picker suggests considering a mutual fund that invests in gold or precious metals, as well as stocks of mining companies. You don’t need a special IRA custodian for this type of investment, he says, “because you’re not owning the actual metal.”
Don’t be afraid to ask the person you're buying gold from a lot of questions. You should know the price gold is selling for that day in the spot (current) market. When the dealer tells you the price of the coin you want to buy, “this indicates the premium you’re paying,” says Adkins.
It makes sense to check this against what other dealers will charge for the same piece so you can assess whether the premium is reasonable.
If you’re looking at a rare coin, you need to do your homework. A collector’s coin will carry an additional premium based on how scarce and desirable it is.
Once you reach an agreement on a purchase, Adkins says it’s essential to “get written confirmation on every trade.” This should state when and where you will be able to take delivery. It should also include any disclosures and terms of sale. “It should spell out the exact amount you are paying and give you an itemized invoice of everything you are getting,” he says.
Most importantly, know who you are doing business with. Ask questions such as: How long have you been in business? What are your guarantees? Are you affiliated with any professional organizations? “If you’re not getting answers, that should throw up a red flag immediately,” Adkins says.
He says individuals should be especially wary of cold-callers and advises steering away from coins that are plated with a precious metal, which have very little intrinsic value and should be viewed more as a souvenir.
For more information about how to protect yourself when buying gold coins, check out the lead article in the current issue of the PNG monthly newsletter http://www.pngdealers.com/pdf/guild.0707.web.pdf.
For $1.00 you can order a copy of the brochure “What You Should Know Before You Buy Rare Coins” by calling 760-728-1300 or by email at firstname.lastname@example.org. You'll find a national directory of PNG members at www.pngdealers.org.
Hope this helps,
If you have a question for Gail Buckner and the Your $ Matters column, send them to: email@example.com, along with your name and phone number.