If a person spends any amount of extended time watching a financial TV channel or program, eventually a commercial is going to appear pitching the idea of buying gold and precious metal coins. The idea is not a new concept. However, due to the rise in value of precious metals, government-issued coins that include gold, silver, platinum and other metals are in fairly high demand. However, that doesn’t mean a person should jump in the car and start buying every coin he can find at a local coin shop or pawn shop. That’s just a fast way to pay too much money for coins that may not be profitable as investments as a result.
Background
Precious metal coins have definitely been on the rise since the early 2000s. Gold has been leading the charge, but silver and platinum have done well also. For example, in 2002 gold spot value was hovering near $300 a Troy ounce. Today, the same metal now sits at just below $1,700 an ounce, a 550 percent increase in value in 10 years.
Silver, while nowhere near as valuable, has also risen from a level of $5 per ounce to today’s higher value near $30 an ounce, a 600 percent increase in value. Platinum has jumped from $600 an ounce to almost near gold at $1,600 an ounce, a 150 percent increase.
With all these changes in value, it’s no surprise people feel compelled to jump into these metals, assuming they will continue to rise in worth. And that’s the major risk. No one really knows if precious metals will continue to increase. This is due to a number of reasons including:
• Precious metals have no intrinsic value. Their price is set simply by how much people feel the metal is worth. They don’t produce a product, they don’t represent a company, and they don’t create dividends.
• Much of the rise in precious metals and their demand has been mainly due to fears of the U.S. and global economy, especially after a major recession hit in 2008 and spread around the world. Precious metals have often been seen as a hedge to currencies, being disconnected to the currency weaknesses. However, precious metals like gold also drop quickly when the demand and inflation fears disappear.
• Commodity speculators have been pushing precious metals prices very high, more than is healthy from a market perspective, and reaping profits on such rises. Gold is now seen as the next market bubble ready to pop and drop considerably.
Valuation
For centuries gold and other metals have been chased after and used for value simply because people like the look of the metal and it was hard to find. While in some cases, accidentally, such metals would be found above ground, most times people had to dig to find precious metals. Once pulled from the ground, smelted, and converted to pure status, the metals were generally used for jewelry at first, enhancing their perceived value. That said, gold and silver were predominantly made-up, valuable assets. It was only in modern times with manufacturing and industrial use that precious metals gained other values as well as needed resource. For example, gold in particular makes an efficient conduit for fine electrical currents needed to operate high-technology equipment such as computer components.
In terms of investment, precious metals have long been collected in the form of government coins. The government issuance assures a buyer of the actual metal content of the coin as it’s pretty much guaranteed by law and government minting standards. However, these coins generally track the value given to them by the metal spot market. For example, when gold is at $400 an ounce, gold coins issues by the U.S. mint are valued at relatively the same worth just due to their metal content.
The above said, precious metal coins could also carry collector’s value as well. Not every government coin will have this. For example, Austrian one and four ducat gold coins are basically worth just their gold value. They are reissued coins and so many of them were stamped into production, they are plentiful in number worldwide.
However, when the U.S. mint temporarily stopped printing American Eagle gold coins in 2011 due to a gold shortage, existing Gold Eagle coins started jumping in value well above their metal value. Usually, in any coin sale, the seller will charge a slight premium for profit, typically equal to 10 percent of metal value. However, because the demand shot up due to the shortage, Eagles were selling at significant premiums that equaled as much as 25 percent. So valuation is relative and often dictated by mob mentality and a bit of price-gouging at times rather than direct market correlation. Gold tends to suffer the most from this activity, but other precious metal coins are not immune.
Finding Rare Precious Metal Coins
Precious metal coins can be easily found via most coin dealers, but a purchase will simply produce the next coin the dealer has in stock from a bulk supply. If a buyer is after a particular collector’s coin, he’s going to first have to start with a lot of research. Like any other coin type, collector coins in precious metals do exist and are often designated by a number of features including their year of issue, number of similar coins existing, where they were minted, and if there were any minting mistakes.
The quality of the coin in terms of wear and tear also matters significantly as well. All of these features vary from one coin to the next, so a buyer needs to get an idea of what makes a coin collectible versus just valuable.
Once a person has a fair idea of what he’s looking for, then begins the search. Multiple tools need to be used which includes online sellers, auction sites, private sales, and offline coin dealers as well. By spreading a wide net a buyer has a better chance of finding the coins he wants than just going through one source only.
That said, pricing will vary considerably as well. Both general economy conditions, demand, market values and more will dictate coin pricing to go up and down. Further, if the coin is graded, that will boost the coin price up even further, if just to recover the grading cost if nothing else. If the grading is extremely high, the professional condition rating can boost a coin’s value by a couple hundred dollars over its spot market metal value.
Pricing is often subjective, however, and nobody should let himself be overcharged paying more than necessary. Again, further research is required to understand what a fair value is for a given coin in a variety of markets. Once a buyer has a relative range of what multiple sellers want for a coin, he won’t be surprised or caught off guard by a seller that is significantly off the beaten path. The buyer will also see a bargain when it appears as well.
Ironically, traditional dealer stores tend to have the most expensive prices. This shouldn’t be a surprise; traditional dealers have to pay for a storefront, expenses, rent and more. Online dealers generally tend to be slightly cheaper but most simply Internet platforms for traditional dealers who have expanded online. That said, those that move more inventory regularly tend to have lower prices and premiums on those coins. Finally, private sales through auction sites and classified ads tend to have the lowest premium cost. That said, they also have the highest risk for fraud.
Buyers have to be extremely careful working with a private seller. While there are thousands of good sales that occur every year, there are also enough instances of criminal activity or misleading sales descriptions that people regularly get burned. First off, a buyer should always use some kind of insurance coverage as a financial safety net if a purchase goes bad.
Escrow services are available to provide such a protection, only paying a seller when the given coin is delivered and confirmed. Alternatively, using protected markets where sellers are vetted and profiled ahead of time can provide some level of protection as well. The most risky sales are person-to-person through basic classified ads. Given the number of instances of muggings that have occurred through these sales, they should be avoided. If a sale has to happen, a traceable payment tool should be used to find and arrest the party if the deal goes bad. However, most scammers demand cash only, so it can be hard to stop them aside from just not dealing with a cash in-person sale at all.
In Summary
Precious metal coin investing may still be fairly profitable, especially if values continue to climb rather than fall back. However, like any investment, the best protection a buyer can have boils down to research, caution and intelligence. There are plenty of information resources available online, but the best purchases still depend on the buyer understanding what he is putting his money into. That takes homework and patience.
