Gold, silver bullion coins’ ‘fondle factor’
Sept. 30, 2011, 12:01 a.m. EDT
By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) — If you’re looking for a safer place to park your money these days, gold and silver bullion coins may be it, but don’t expect to make a quick buck.
Bullion coins are “not about making a profit — rather they are about wealth preservation, but there is also the real possibility of making a handsome profit,” said Mark O’Byrne, executive director at international bullion dealer GoldCore.
For those who truly understand the gold and silver coin market, that all makes sense.
“Gold and silver coins are not ‘investments’, rather they are a safe form of money and an important form of financial insurance that everybody should own,” said O’Byrne. “Bullion coins are like car or health insurance in that you should own them, but hope you never have to use them.”
To be clear, there is a huge difference between accumulating bullion coins for the value in their metal content and collecting “numismatic” coins, which typically have additional value in their collectability and rarity.
“The minute we say ‘collecting’, (as in: collectibles) we are dealing with the hope of numismatic-premium-based future appreciation, which might occur regardless of gold’s value,” said Jon Nadler, a senior analyst at Kitco Metals.
Instead, accumulating “normal” gold bullion coins is referred to as “stacking” by the current crop of gold aficionados, and the gold bugs who amass such bullion coins aim to buy them, regardless of price, on bets that gold itself can only go higher, he said.
Even after the more than 10% drop in gold futures /quotes/zigman/661658 GC1Z +0.81% so far this month, prices are still 13% higher year to date, trading above $1,600 an ounce. Silver futures /quotes/zigman/663010 SI1Z -0.07% have dropped around 27% month to date and have lost over 1% from the end of last year — though not a bad performance given that copper /quotes/zigman/635638 HG1Z -1.88% has dropped 26% year to date.
And recent data on physical demand for gold and silver paint a fairly clear picture on what direction investors think the precious metals are headed next.
Demand for silver coins and medals climbed 28% to 101.3 million ounces in 2010, from 79 million in 2009, according to data from Thomson Reuters GFMS’s World Silver Survey 2011, cited by The Silver Institute.
And demand for gold bars and coins stood at 1,148.4 metric tons in 2010, up 48% from 776.1 metric tons a year earlier, according to data from the World Gold Council.
Justifying the joy
There are many advantages to buying bullion, the biggest of which is the fact that they’re something tangible.
“The joys relate to the “fondle factor” — the ability to touch and see your wealth encapsulated in a compact, shiny form that has mesmerized humans since before Portugal sent its ships out to find more of it in the New World,” said Nadler.
Bullion doesn’t even take up as much space as you might think.
“Enough gold bullion to pay for a lifetime of expenses will fit in a briefcase ... and a 10-ounce bar of silver is no bigger than a pack of cigarettes,” said Jason Whitney, president of US Secure Coins in Lumberton, Texas. Gold and silver won’t spoil either, so don’t require special environments like wine, fine art or rare books, he said.
So even with so many options for metals investors, bullion stands out.
With metals futures contracts, “as the market moves, there may be sizable margin calls the investor can be forced to pay,” said Terry Hanlon, president at precious metals dealer Dillon Gage Metals, and higher margin requirements may force investors to liquidate their positions.
The CME Group recently raised some metals contracts’ margin requirements, or the amount of money investors must put up to be able to trade. Read about the margin hikes.
With exchange-traded funds ”someone else controls your metal,” said Hanlon. “It’s not easy to take delivery because enormous minimums must be met and there are additional charges involved.”
Meanwhile, there’s lack of liquidity and uncertainty over performance when it comes to gold stocks and bonds, according to Chintan Karnani, chief analyst at Insignia Consultants. And other paper assets may or may not be accepted as “collateral or be ready to be sold” in the event of a crisis as easily as physical gold and silver.
“Unlike stocks and some bonds, metals are never worth zero,” said Pablo Solomon, a coin collector since childhood, who’s also an artist and designer. “Think of gold and silver as both a fun hobby and as an insurance policy.”
Trials and tribulations
Still, there are at least a few negatives involved with owning bullion.
Gold and silver doesn’t give out any dividend and there are no personal tax and income tax advantage while investing, said Karnani.
There are also storage costs involved in the form of an annual locker rent which needs to be paid to the bank or the insurance cost of the valuables stored in the house, he said.
To insure the gold, it would be cost roughly 20 cents per $100 value, according to David Beahm, vice president of precious metals investment firm Blanchard and Company, Inc., so insuring $1,000,000 of gold would cost $2,000.
Costs for gold storage at BullionVault stand at $4 per month minimum or 0.12% per year for accounts over $40,000, according to Adrian Ash, head of research at BullionVault.com.
That sounds negligible, but storage location is also a big issue. “The legitimate reasons for holding gold make it all but mandatory to hide it where you can get to it easily, thus increasing the risk that it will be stolen,” said Michael Greaney, a veteran coin collector.
“In the event of disaster or financial meltdown, a thousand ounces of gold in a vault in New York are going to do little good for an owner in California,” he said.
Why coins?
It may cost a bit more to own coins rather than bars but to many, coins are worth it.
At Blanchard, you can buy a one-ounce gold American eagle coin for as low as 4% above spot prices and a one-ounce gold bar would be as low as 2.5% above spot, according to Beahm.
So why are coins a better choice over bars when it comes to physical ownership of gold and silver?
“Coins are preferred as their manufacturing origin is not questioned when I sell them,” said Bill Rummel, a coin collector and investor for decades based in Charleston, South Carolina. “Hand stamping a series of numbers on a bar is not evidence of its authenticity.”
Besides, “coins can always be melted into bars, but not in the reverse,” he said.
Gold’s coin form is also “easily tradeable and concentrates high value in an easily portable form,” said Greaney, who’s also director of employee stock ownership plan administration services for Equity Expansion International.
Kitco Metals sells Canadian Maple Leaf gold coins at around 3% over spot prices to the retail public, according to Nadler, who also said some dealers are selling silver coins for as much as $6 or $8 over spot amid speculation of shortages, when $2 to $3 is the historical norm.
So, “why not buy silver coins in the form of bags of the pre-1965 U.S. coinage and pay perhaps only as little as 50 cents more than spot prices?” he said.
- Myra Saefong is a MarketWatch reporter based in San Francisco.
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