Is the current economic slowdown keeping you up at night? Worried that all the debt the federal government’s piling on will sink the value of the dollar? Afraid the only thing that’s going to be “stimulated” is inflation?
You’re not alone. During periods of economic uncertainty, gold has historically been the financial haven of choice. This time last year, as the extent of the sub-prime mortgage mess began to become apparent and Bear Sterns teetered on collapse, gold crossed the $1,000/ounce barrier. After retreating to around $710/ounce last November, it began climbing again, nearly hitting the $1,000 mark again in mid-February. Last week it closed at $930/ounce -- a gain of 31% in the past four months.
So it’s a bit surprising that gold expert and coin dealer Scott Travers would emphatically assert, “I don’t think anyone should be investing in gold bullion or gold coins.”
Turns out, what he means is that gold is not a financial instrument like a stock. That is, you shouldn’t be buying it with the expectation that it’s going to go up in value. Instead, he maintains, “You should be buying it strictly as an insurance policy, in case something horrible happens to the rest of your portfolio.”
In the event of a global financial meltdown, it might be impossible to cash in your shares of that exchanged-traded fund (GLD) you bought. If the markets seize up, you may not be able to sell your stock in gold mining companies. Gold futures are worthless unless the person on the other end of the contract comes through. And if your bank fails…
If things ever get that awful, you won’t be able to purchase food by waving your trade confirmation or stock certificate in the check-out line at the supermarket. What you want is a tangible asset that can be used as currency.
“Gold is a panic asset,” says Travers author of The Coin Collector’s Survival Manual . “Gold bullion and coins are the very antithesis of the financial markets because there’s complete transparency. You have it in your hand. You know exactly what you have.”
Essentially, this leaves you two options: buy gold ingots (bullion) or buy gold coins. Travers, who believes gold should make up 5% to 10%, but “no more than 15% of your total net worth excluding your primary residence,” to gold, says collectible gold coins make the most sense for individual investors: the gold content will give you a hedge against inflation while the rare nature of the coins will “buffer any decrease” in the price of the metal.
That is, in contrast to a coin such as a Krugerand, the value of which fluctuates directly with the price of gold, collectible coins have intrinsic value , separate from the price of the metal. This gives you some downside protection.
Specifically, Travers recommends Saint Gaudens and Liberty Head double eagles. Each contains about an ounce of gold. Because of their “collectible” nature expect to pay a premium over the spot price of the metal. How much depends upon the condition of the coin. My brief search over the Internet turned up Saint Gaudens double eagles with asking prices ranging from $700.25 to $99,500!
As explained in The Coin Collector’s Survival Manual, coins are graded on a scale of 1-to-70. A coin graded “1” is so worn the design is nearly indistinguishable, while a “70” is in pristine, condition. According to Travers, you want “investment quality” coins, which carry a grade of 60-to-62. “If gold is selling for $1,000 an ounce, you will probably pay $1700 for one of these coins,” he says.
On the other hand, even if the price of gold plummets, he maintains “you’ll still be able to get close to what you paid [for your coins] because they’re collectibles.”
Next week: How to be sure you’re not buying “fool’s gold.
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