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By John Embry
If you are considering buying gold and/or silver the first question
you should ask yourself is “What am I trying to accomplish?” The
answer to this question will guide you through the rest of this
process.
Suppose you are thinking that gold or silver would be a good
investment. The first thing you need to realize is that if you start
today with 10 troy ounces of gold, in 20 years you will still have
only 10 ounces. There is no interest, no div idend
or any other expansion of the amount you
hold. The only way your investment will
pay is if the price of gold increases. O t he r
t y p e s o f investments may pay interest
or a d iv i d e nd and incre as e t he amount
of d ol lars that you have, even if the price
does not change over time.
Mo st p e opl e, w hen aske d w hat t he y are
trying to do will answer that their purp o s e i s t o
p r o t e c t t h e i r a c cumulated wealth. Stated another way, they are
looking for insurance against loss of value. For this purpose, gold
and silver are ideal. The best illustration of this is the $20 gold piece
minted prior to 1933. At that time, gold was valued at $20/troy
ounce. That one gold piece would buy a very nice man’s suit. Fast
forward to today, that gold piece is worth over $1000. So, to carr y
the analogy further, that gold piece would still buy a very nice
man’s suit. Let’s look at what happened.
At first glance, most people would say that the price of gold
increased from $20 to $1000/ounce. This is not accurate. Gold still
buys the same amount of goods and services that it did in 1933.
Gold stayed pretty much constant. The value of the dollar fell by a
factor of 50 so that it takes 50 times more paper dollars to buy the
same amount of goods and services than it did in 1933.
Looking forward, you must ask, will the dollar buy more or less in
10, 20, or 30 years. The gold you have today will allow you to buy
the same amount of goods and services that your money will buy
today, 10, 20, or 30 years from now. Looked at in this way, gold and
silver become a way of preserving your wealth. They are a form of
wealth insurance.
Most Europeans have long held 10–20% of their net worth in
precious metals for this very purpose. They have a history which
includes hyperinflation, government changes, borders that have
moved and two world wars. The durability of gold has served them
well through all sorts of political unrest. In fact, it is the only
constant in a world subject to change.
WHAT TO BUY
You have now made the decision to make
a purchase and are faced with the decision of
what to buy. There are many ways to own
gold, coins, bars, old coins, jewelry, etc. Since
they are all a way to accomplish the same task,
we should look at some of the differences.
In today’s market, there are a couple of different ways to buy gold.
Bullion coins and bars would be one way. The other is collectible coins.
Which is better? They both have advantages and disadvantages. Let’s
first look at the difference.
Bullion coins are sold by weight. This is the common definition of bullion.
Collectible coins are sold by a complex pricing structure that includes,
but is not limited to gold weight. It is valued as a collectible. You might
also hear the term numismatic used to refer to
collectible coins. This is a bit of a misnomer.
The term numismatics refers to the study
of money. Although coin collectors are
referred to as numismatists, the study of
money can include many different things
besides coins. Paper money is included and
one can certainly c ol le c t mo der n coinage
as a hobby or nu mismatic pursuit. For our
purposes, we’ll call older coins “collectibles.”
In 1933, FDR, in a desire to remove the United States from
the international gold standard, issued an order to the public to turn
in all gold coins, bullion and gold denominated
paper bills. People were paid at par value for
these items. After this was accomplished, he
immediately devalued the dollar by raising
the “official” price of gold from $20 to
$35/ounce. This has become known as the
gold confiscation.
The order made the following exceptions: gold
used in industry or profession; gold held in trust for
a foreign government and coins having a “recognized
special value to collectors of rare and unusual coins.” It is this phrase that
leads some dealers to claim that collectible coins are exempt from any
future act because of this phrasing.
Other dealers will claim that bullion is the best way to buy because it
does not have the collectors premium and thus the price is closer to the
value of gold itself. This issue is one that you should have resolved one
way or another when you go to buy. It will determine what you buy
and as a consequence, how much you pay.
Using our analogy of insurance, one is basic coverage and the other is
a more expensive coverage. Whether the more expensive model gives
you more protection is a matter of opinion. You should know what you
believe about this.
GOLD PRICING
The w ay gol d and si lver are pr ice d is t he s ource of a lot of
misunderstanding.
Most people look at the “spot price” and try to figure out how everything relates to
that. The “spot price” for gold is the price per ounce of a 100 oz. gold bar used
to fulfill a futures contract on the Comex, or New York Commodity Exchange.
Gold producers sell their gold (sometimes before it is produced) on a forward con-
tract to a buyer. On the day that is specified by the contract, the settlement price is
called the “spot price”. These contracts can vary in length of time and they all have the
same physical amount of gold, 100 ounces.
If you are a gold user and buy a contract, you
will receive a 100 oz. bar as settlement if you
wish. To produce a more saleable product, you
must then melt the bar and put it into discs for
coins or smaller bars. There is a cost involved.
Then, a design or pattern is stamped into the gold
disc or bar. There is a cost involved in this. Once these
coins or bars are produced, the manufacturer must market
these to companies which sell these to the public. There is
an additional markup involved here. As you can see, the costs
and markups will put the price well above the “spot price”.
Further, collectible coins have scarcity, condition, and other factors which also af-
fect price. In periods of high demand, the market may also move ahead of the price.
An example of this is when the producers around the world cannot produce
any more coins than they are currently making. An increase in demand will not
affect the spot price at all since the producer is already buying as much gold as they
can produce. What happens then is that the premium for coins that already exist
increase even though the spot price hasn’t changed.
In the long run, the price of gold is secondary to the purpose of holding it. Remember
our insurance analogy. If you buy gold today and sell it in ten years for a profit, you
have done well. If, in ten years, the price of gold is less than what you paid, the
difference is the cost of insurance. Spread out over ten years, it is probably a small
cost indeed. This also explains why most dealers will tell you that the longer you hold
gold the better off you will be.
Most of us would be hard pressed to find another form of insurance that pays you
the premium back if we don’t use it. Life insurance is probably the only one and
there is certainly a cost involved there. The key thing to remember is that
“spot price” is the price for a gold contract and that there are several steps involved
in putting gold into a form that is saleable in today’s market. Anyone claiming to sell
at or near spot is probably buying from an unwitting public at 20–30% below spot.