From the October 2011 issue of Investment Advisor • Subscribe!

October 1, 2011

The Gold Buying Guide

A booming market for gold has unleashed unscrupulous sellers

With so much interest in the gold and silver market, most financial professionals are getting flooded with questions about how best to gain exposure to precious metals. Unfortunately, this has created a fertile market for dishonest firms with big advertising budgets.

Since many financial professionals have little experience purchasing and taking delivery of a commodity asset, here’s a little buying guide so you can help your clients avoid the major tricks and traps in the industry right now.

The Numismatic Bait and Switch

The most important concept for new gold and silver investors to understand is the difference between bullion coins and numismatic coins.

Bullion coins are those that derive their value almost entirely from their metal content. If a bullion gold coin is priced at $1,800 per ounce, it’s because it contains close to $1,800 per ounce worth of gold.

Numismatic coins derive their value from being rare or collectable. If a gold numismatic gold coin is priced at $3,600 per ounce, it probably still contains only $1,800 worth of gold; the rest is a premium for the coin’s aesthetic qualities.

If your client wants to invest in precious metals, he should be buying bullion coins or bars only. Numismatic coins are only for those looking to build a coin collection for sentimental or historical purposes.

The Confiscation Con

One of the main techniques a metals broker will use to switch customers from bullion to numismatics is to talk about President Roosevelt’s “confiscation” of gold—and then claim that only their coins are exempt. This is baloney.

The reality is that no gold was forcibly confiscated in the 1930s. However, to debunk this claim on its face, all you have to know is that almost all numismatic coins sold by scams dealers do not even qualify as “rare and unusual” under the terms of Roosevelt’s order. Most are simply old coins that were minted en masse by historic empires. They are genuinely old, but about as rare as a Members Only jacket.

Proof Sets and Commemorative Sets

Clients should be wary of anything using the term “collectible,” “proof” or “commemorative,” as they often indicate a rip off.

Proof sets generally consist of legal tender coins which were specially pressed by the mint to give them a shiny, mirror-like finish. They can be quite beautiful, but they contain no precious metal content. Buying a 1986 U.S. Mint Proof Set leaves the buyer with an asset worth approximately $0.91.

Commemorative coins are those coins that are created to memorialize a specific group, activity or occasion. Though often fashioned to mimic the look and feel of precious metals coins, they typically do not have precious metal content of any worth. When they do, customers still end up paying much more than bullion value because of the sentimental design printed on the coin.

These coins are often created to appeal to purchasers’ minds and hearts. You’ve probably seen ads for the commemoratives clad with gold or silver “recovered from the vaults beneath the Twin Towers after 9/11.” The fact remains that the coins are essentially worthless.

Investment Grading and “MS-70”

Many coin dealers are selling bullion coins with an MS-70 (mint state, flawless) rating at multiples of the price of an ungraded coin. My research uncovered one company selling 2011 American Silver Eagles with an MS-70 grade for $129 when the spot price was below $35.

Clients should be advised that every widely circulated bullion coin is “investment grade.” Grading is only meant for genuine old, rare coins. I like to use a car analogy: You’re not going to pay extra for a 2011 Corvette in “mint condition,” but you might for a ‘69 Corvette. 

When it comes to bullion, all clients should worry about is the weight of pure precious metal. Scratches are irrelevant unless someone lops off a chunk of the coin.

I believe it is positive for our clients’ financial security that they are increasingly turning to physical precious metals for capital preservation. However, this presents the financial advisory community with the task of ensuring that clients aren’t swindled.

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