Saturday, August 30th, 2014 MST

Warren Buffett Buys 130 Million Ounces of Silver!

Monetary Digest, May 1998

Warren Buffett is acclaimed as the most successful investor of our times, having become — according to Fortune magazine — the country’s second wealthiest man via his investment acumen. Starting 42 years ago with $100,000, Buffett is now worth more than $21 billion. His share of Berkshire Hathaway, the company he heads, makes up the bulk of his wealth. Berkshire’s net assets exceed $31 billion; it was through Berkshire that Buffett bought 129,710,000 ounces of silver.

Normally, Berkshire would have revealed its silver acquisition in its annual report; however, amid accusations that silver prices were being manipulated and a CFTC announcement that it was looking into the accusations, Berkshire issued a press release on February 3 disclosing the purchase.

Additionally, on January 28 a class action lawsuit was filed against the commodities firms that had been buying the silver. The lawsuit maintained the price of silver was being manipulated because the price of silver was rising as gold was going down, an “unprecedented” occurrence.

Asserting that gold and silver cannot move in opposite directions ignores the law of supply and demand. Due to central bank sales, gold is perceived to be in abundance, while silver is clearly in short supply. For their prices not to diverge under these conditions would be anomalous.

It is true that gold and silver prices generally have trended together. Their prices respond to monetary developments, rising during periods of inflation and falling during periods of disinflation. (Disinflation means declining rates of inflation.) And, both rise during financial crises. However, when one of the metals becomes abundant, or appears to be, its price falls.

During the late 1800s and the early part of this century, government policies (mostly silver purchase acts) resulted in huge quantities of silver being mined. When the government stopped buying silver, its price fell, clearly responding to an oversupply.

Now, silver is in short supply, and it is reasonable to expect silver’s price to rise to a level that will balance supply and demand. And, that’s exactly what Berkshire stated in its press release: that “equilibrium between supply and demand will only likely be established by a somewhat higher price.” At cost, the silver position makes up less than 2% of Berkshire’s investment portfolio.

Monetary Digest has for years maintained that silver offers better upside price potential than either gold or platinum. We take this position not just because of silver’s positive supply/demand fundamentals but also due to a phenomenon most silver analysts overlook.

Since the beginning of time, silver has served as money alongside gold. The Old Testament is replete with references of silver as money. Genesis tells of Abraham paying “four hundred shekels of silver, current money with the merchant,” for a burial place for his wife Sarah. And, everyone knows of the thirty infamous pieces Judas Iscariot took for betraying Jesus.

The New Testament also mentions Greek silver drachmas and staters. The thirty pieces Judas Iscariot received were probably staters. The King James Version translates the Roman silver denarius as “penny,” and today its initial, d, is the English symbol for penny, or pence.

Secular history credits Lydia, a country that is now Turkey, with producing the first coins in the 600s B.C. These coins, made of a natural alloy of gold and silver, were called staters and were the forerunners of the Greek staters. Seagoing merchants brought these coins to Greece, and by the mid-500s B.C. Greek silver staters were used in every area where the Greeks had colonies.

The Romans began making coins during the 300s B.C. and in about 269 B.C. issued the first silver denarius with the introduction of a new silver currency. As staters had spread to Greek colonies, denarius coins saw wide use in countries the Romans conquered.

Shortly after the birth of the United States, Congress put the new country on a bimetallic standard with the Coinage Act of 1792, which called for the minting of silver and gold coins at the fixed ratio of 15 to one, a ratio accepted worldwide at that time for the exchange of silver and gold. Silver coins as defined by the Act of 1792 remained part of our monetary system until 1965 when the U.S. Mint began producing the nickel-clad slugs we use today.

Not only has silver been used as money along with gold, but it has been more accepted by the masses. When the average person thinks of investing in precious metals, he generally gravitates toward silver because he gets more metal for his money.

Although the average person has significantly less money than the wealthy, in the aggregate the middle class has much more money than do the wealthy. In India, where silver is valued culturally, the middle class is larger than the population of the United States.

So, when the world faces another round of inflation or a financial crisis, the world’s middle class will pour their collective billions and trillions of dollars into silver while the wealthy opt for gold. Because the middle class has more money than the wealthy, their buying will push silver higher than gold on a percentage basis.

Right now, though, gold is trading near 18-year lows, and silver recently bounced of an eight-year high. Both are responding to supply/demand fundamentals.

Investors perceive gold to be in abundance. One or two smaller central banks have been regular sellers this decade. Additionally, gold producers and hedge funds have been selling forward for years, artificially inflating the supply. With price inflation at its lowest level in years and the Asian collapse being perceived as “manageable,” investors have turned away from gold.

Silver, however, is another story. But, before returning to why Warren Buffet invested some $680 million in silver, it should be pointed out that the events that have driven gold to 18-year lows have positive sides to them.

First, more gold is consumed than is mined. The shortfall is being met by central bank sales and by forward sales by gold producers and hedge funds. (Forward sellers borrow the gold they sell, usually from central banks.)

A financial crisis could cause central banks to reverse their attitude toward gold. If the Southeast Asian crisis has proven anything, nations need to back their currencies with gold. The price of gold in Southeast Asian currencies soared as the conflagration spread.

As their currencies collapsed, Thailand and South Korea mounted door-to-door campaigns to get their citizens to donate gold in any form — trinkets, jewelry, even pure ingots — to exchange for “hard” currencies to be used to meet their international commitments. Although the Thai baht and the South Korean won became pariahs on the world’s monetary markets, the donated gold was eagerly snapped up after being refined.

Someday, gold producers and hedge funds will stop selling forward. Then, the supply of gold will shrink for two reasons. First, the forward selling will stop. Second, the forward sellers will have to replace the gold previously sold forward. This gold will come out of production, thereby further reducing the supply of gold available to meet demand. As for the hedge funds which are selling forward, they will have to buy their gold, increasing the demand.

All this will produce an exciting rise in the price of gold sometime in the future, probably sooner than most expect. Meanwhile, the supply/demand fundamentals for silver grow increasingly positive by the day.

Silver:

Eight Years of Production Deficits

The industrial demand for silver has grown every year since 1987, rising from 455.5 million ounces to 798.9 million ounces in 1997. In 1990, industrial demand overtook production and has exceeded newly refined production every year since then. This year’s shortfall of 160 million ounces means a cumulative deficit of 1.2 billion ounces in only nine years.

The production deficit has been met by sales from aboveground stockpiles, from both commercial depositories and individuals who store their silver at home or at the nearby bank. Despite the shortfall which has been widely known for years, both groups have been net sellers for years, and understandably so.

For decades, even during the production deficits of the 1970s, silver users have maintained there is sufficient silver available to meet demand. The surpluses of the 1980s supported this position, and the notion that sufficient silver supplies will always be available has become an axiom among “sophisticated” investors who ignore the work of CPM Group, the Silver Institute, Gold Fields Mineral Services and other analytical firms that have for the last few years pointed to declining silver stocks.

CPM Group asserts that silver stocks are approaching “critically low levels.” (CPM is a highly-respected consultancy which analyzes all metal markets. CPM sells its reports to mining and investment companies around the world. CPM strives for accuracy and is not part of the hype that so often emerges from coin and precious metals promoters.)

Silver stocks in Comex-approved warehouses have fallen from some 260 million ounces in early 1995 to less than 90 million ounces in mid-April. (The sharp jump in December 1996 reflects the inclusion of silver held at Wilmington Trust, which previously had not been a reporting depository.) Comex-approved silver must have been refined by one of about 75 refineries worldwide, be in 1,000-oz bars, and be stored in a Comex-approved warehouse. Silver stocks in London, Tokyo, Zurich, and at smaller exchanges around the world have dropped commensurately.

CPM Group estimates “reported and unreported” silver stocks at no more than 410 million ounces. In 1990, the first year of the current production deficit, these stocks were put at 1.6 billion ounces. In only eight years, industrial demand consumed 75% of what was once thought to be an unlimited supply.

However, silver held by investors outside Comex-approved depositories as coins, 100-oz bars, Silver Eagles, etc. also is available to meet the production deficit. And, for the last few years, these investors have been net sellers. Most of the 90% coins and 100-oz bars sold back to precious metals dealers are shipped to refineries and converted into Comex-approved 1,000-oz bars or sold directly to industrial consumers.

Estimates of how much silver the public holds are at best sophisticated guesses. CPM Group has done the most work in this area and put it at 394 million ounces. Add the 167.5 million ounces held by governments, and the best estimate of all the silver available to meet the production deficit is 971.5 million ounces. This may sound like an enormous amount, but considering the size of the deficit, it’s not.

Since 1990, the production deficit has averaged 111 million ounces. At this rate, in only 8.75 years the world’s silver will be consumed. For the last five years, the deficit has averaged 187.8 million ounces, a rate that would use up the world’s silver in a little over five years. Considering this, it’s easy to see why Warren Buffett invested some $680 million in silver.

Of course, the world is not going to be out of silver in five years, or 8.75 years, or even 20 years. The law of supply and demand will see to that.

The production deficit will push the price of silver higher, causing two things to happen. One, the rate of growth of consumption will slow as the users develop more efficient uses. Two, higher prices will allow the mining of lower grade ores. But, the production deficit will continue for many years, because reducing the consumption of silver and increasing its production will not be easy.

First, approximately 80% of the silver coming out of the ground is a by-product of copper, lead, zinc or gold. The prices of those metals determine how much ore is mined, not the price of silver. Silver could go to $50, but if the price of copper does not move up, no increase in silver will come from copper mines.

Additionally, increased production and the opening of new primary silver mines will not close the production gap. In 1997, primary silver mines produced only about 84 million ounces. To meet an average annual deficit of 111 million ounces, primary silver mines would have to increase production by 132%, not an easy task.

As for increased efficiency reducing usage, only small gains can be achieved. During the 1980s, when silver traded at prices several times those of the 1970s, silver users made great efforts to reduce silver usage. Additional technological advances can be expected to reduce consumption only marginally.

Silver’s supply/demand fundamentals are very positive, and it is easy to see why Warren Buffett bought 130 million ounces. Most assuredly, before investing $680 million Buffett studied silver statistics from every available source. Undoubtedly, CPM Group’s studies were among them.

From CPM’s February issue of Precious Metals Investor:
Quite frankly, the upside price potential for silver over the next two years is enormous. CPM Group expects prices to exceed $8.00. Our monthly projections have silver trading between $10 and $11.50 by the end of 1999. Realistically, it is easy to conclude that silver prices will have to rise significantly from recent levels, but difficult to say how high prices could rise on a daily basis. Buffett’s purchase validated silver as a credible investment. Investors who before would not have given silver a first look now know of silver’s positive supply/demand fundamentals. Since the news broke, most financial publications have reported Buffett’s move and why. This exposure caused more investors to look at silver.

Still, there are the pundits who have taken shots at Buffett’s silver buy. One sarcastically said that all Buffett did was move silver from one warehouse to another. Let’s not forget, however, that Warren Buffett paid $680 million to move his silver to another warehouse.

Other critics laugh and say, “Okay, so he owns 130 million ounces of silver. Who’s he going to sell it to? When he goes to sell, he will drive the price back to $4.50.” These cynics ignore Buffett’s history of investing. Buffett is noted for his long-term investing. He did not buy silver for a $2, $3, or $4 move. With his staying power, Buffett may not be a seller until silver hits $15 or $20. When silver rises to higher price levels, he will evaluate silver’s upside price potential at that time.

Since Buffett’s cost is about $5.25/oz, silver probably has solid support at $5.50. With a twelve to 18-month target of $10.00-$11.50 and a downside risk to only $5.50, silver has a very favorable risk to reward ratio and should be bought immediately. Cmi recommends BU 1964 Kennedy half-dollars or circulated pre-1965 90% coins. For investors preferring pure silver, Engelhard 1-oz Prospectors are fairly priced. At times, Canadian Silver Maple Leafs are cheap.

Many readers, remembering prices of $4.50/oz only a few months ago, will find it difficult to buy at current prices. The days of prices below $5.00 were before Warren Buffett decided to buy silver. Many investors have made a lot of money investing with Warren Buffet. Monetary Digest readers should be among them.

Certified Mint on the Internet

By the time this issue reaches readers, CMI’s Website should be up and running on the Internet. Our Website will provide Internet users an insight into CMI’s philosophy about investing in precious metals, will contain specific recommendations, and will alert first time investors to the pitfalls of investing in gold – as does this issue of Monetary Digest. It also will contain an extensive glossary of terms as used in the precious metals industry.

We plan to post daily spot prices as of the close of futures trading on the Comex in New York. Furthermore, on Fridays, we expect to comment on economic, political, and social developments that affect precious metals prices.

The thought of getting on the Internet probably frightens many readers. They — like your editor — probably have not yet learned how to program a VCR. If you are one of them, but would still like to look at our Website, have one of your grandchildren pull it up for you. I guarantee that they can pull up our Website as easy as you drive a car. The Internet and VCRs may be confusing to you and me, but they will play an integral part in our children’s and grandchildren’s lives.

Although the Internet is being used by some people for evil, the Internet contains a wealth of information and facts (and sometimes erroneous positions) on nearly all topics. Our Website will be linked to other sites which should be of interest to readers, such as the World Gold Council’s Website at gold.org, the Silver Institute’s site at silverinstitute.org, and the Gold Institute’s site at goldinstitute.org. These sites contain more facts, statistics, and information about precious metals than the average person would ever care to see. Furthermore, they are linked to still more sites around the world, such as the Chamber of Mines South Africa, the Bank of England, and the Perth Mint in Australia.

Certified Mint’s Website can be found at certifiedmint.com. After visiting it, let us know what you think. And, we would love hearing your suggestions as to how to improve it.

Myths, Misunderstandings and Outright Lies

Many myths, misunderstandings, and outright lies about the purchase and sale of precious metals circulate among investors. Generally, these misconceptions and falsehoods center around the fear that the government may again call in gold as it did in 1933. By cultivating such fears, unscrupulous firms can sell high-priced — and often overpriced — coins with greater margins of profit. Investors who believe these stories invariably pay too much or buy the wrong coins. Monetary Digest readers need not suffer such fates.

“Reportable” Purchases

Often, promoters will assert that the coins they offer are not subject to “reporting.” Such statements imply the government requires gold transactions be reported. No laws or regulations require the reporting of the purchases of any precious metals.

Bank Reporting

It is often erroneously thought that banks report all checks more than $10,000 to the government. Banks do not. This misconception grew from cash reporting requirements.

A cash transaction exceeding $10,000 requires a bank to report. Although the cash reporting threshold is $10,000, many banks ask for identification for purchases of cashier’s checks for as little as $3,000. That is because bank lawyers want to “play it safe.” Even then, banks usually do not report unless a combination of transactions exceeds $10,000 during a short time span.

Reportable Sales

Sales (customer sales to dealers) of certain precious metals exceeding specific quantities call for reporting to the IRS on 1099B forms. Reportable sales (again, customer sales to dealers) apply to 1-oz Gold Maple Leafs, 1-oz Krugerrands, and 1-oz Mexican Onzas in quantities of twenty-five or more in one transaction. Reporting requirements do not apply to American Gold Eagles, no matter the quantities. Furthermore, reporting requirements do not apply to any fractional ounce gold coins.

Most investors have no first-hand knowledge of these matters; consequently, when precious metals dealers talk about cash reporting or 1099s, investors are unable to know that they are not being told the whole story. Wanting to avoid the government knowing about their precious metals investments, many investors are delighted to learn that their purchases will not be reported and end up buying overpriced coins. Investors wanting to avoid reportable sales should buy American Eagles.

Confiscation

The most frequently raised issue used to promote high-priced coins is confiscation. Many telemarketers tell investors that old U.S. gold coins are not “subject to confiscation,” leaving the impression that modern gold bullion coins are. Consequently, many investors, wanting only to buy gold, end up purchasing old U.S. gold coins at prices significantly higher than the value of their gold content. The idea of buying “non-confiscateable” gold sounds like a powerful argument but wilts under scrutiny.

Some precious metals firms maintain that old U.S. gold coins, proof sets, and commemorative gold coins are “collectibles” and would not be subject to another gold recall. Other firms say that premiums of at least 15% make coins collectibles. Another notion holds that coins one hundred years or older are antiques and therefore not subject to confiscation.

Bait and switch practices are common. One large firm that advertises Gold Eagles extensively switches buyers to rare coins by putting the following statement in its literature:

Under current federal law, gold bullion can be confiscated by the federal government in times of national crisis. As collectibles, rare coins do not fall within the provisions permitting confiscation.

Another firm, which was featured in the Oxford Club’s March issue of Hard Money Report, boldly states that $20 Liberty Double Eagles “in certified mint condition” are:

Private, Non-Reportable — unlike gold bullion, stock, and bonds, your purchases of rare coins are not reported to the I.R.S. or any government agency. Can’t Be Confiscated — By law, pre-1933 gold collector coins are specifically exempt from confiscation by the U.S. Government – but modern gold bullion can be seized.

No federal law or Treasury department regulation supports these contentions. They have been made up and perpetuated by telemarketers solely to promote overpriced or rare coins. They have been repeated so many times that they have become accepted a true, but they are not!

The myth that specific types of gold coins are “not confiscateable” stems from the Executive Order that President Roosevelt issued in 1993 calling in gold. The Executive Order exempted “gold coins having a recognized special value to collectors of rare and unusual coins,” but it did not define special value or collector, and certainly not collectibles. Nevertheless, telemarketers promoting old U.S. gold coins perpetuate this myth because it makes easier the selling of high-priced coins.

Just because Roosevelt exempted “gold coins having a recognized special value” does not mean that any future call-in would exempt collectibles. Roosevelt’s Executive Order would have no legal binding on another gold call in. Besides, on December 31, 1974, with Executive Order 11825, President Gerald Ford repealed the Executive Order that Roosevelt used to call in gold in 1933. This was necessary because on the same day, Congress restored Americans’ right to own gold. Furthermore, in 1977 Congress removed the president’s authority to regulate gold transactions during a period of national emergency other than war.

Even if a law did exempt certain coins from future confiscation, the government could change that law. Sadly, the government often simply ignores laws. Dealers who say they sell “non-confiscateable” gold have no basis for making such claims.

For the sake of further discussion of this matter, assume there were another gold call-in. Would old U.S. gold coins, which make up the bulk of the “non-confiscateable” market, be exempted? Probably not because they are common coins. (The old U.S. gold coins most often promoted are the $20 Libertys and the $20 St. Gaudens, also known as Double Eagles. A $10 coin is called an Eagle, a $5 coin a Half Eagle, and a $2-1/2 coin a Quarter Eagle.)

Although Roosevelt’s Executive Order required Americans to turn in their gold coins and gold bullion, foreigners continued to redeem paper dollars for gold until August 15, 1971, when President Nixon closed the gold window. From the end of World War II to 1971, our gold reserves were cut in half.

It is generally believed that the gold coins surrendered under Roosevelt’s call-in were melted or refined into .999 fine bullion bars. That was not the case. It was to the government’s advantage to give the foreigners gold coins instead of bullion bars.

With the official price of gold at $35 an ounce, a foreign bank presenting $35 million paper dollars received 1,000,000 ounces if the Treasury delivered gold bullion. However, when the Treasury delivered gold coins with a face value of $35 million, it delivered only 967,500 ounces, saving 32,500 ounces.

Each $20 Liberty and St. Gaudens (Double Eagles) contains .9675 ounce of gold. The smaller coins contain the same proportions. Therefore, it was to the Treasury Department’s advantage to give out U.S. gold coins instead of bullion bars. Additionally, before Roosevelt’s call-in, millions of old U.S. gold coins already had made their way to Europe.

So, in view of the government’s policy of delivering “confiscated” gold coins to foreign governments, how can a promoter of old U.S. gold coins claim to be selling “non-confiscateable” gold when the coins he delivers may have been called in in 1933?

Promoters of old U.S. gold coins rarely reveal the sources of their coins. They foster the idea that the coins they sell somehow survived the 1993 call-in. Probably, the coins being promoted just arrived from Europe a few weeks earlier. Several large numismatic wholesale firms have offices in Europe for finding hoards of old U.S. coins. One firm advertises “Shipments coming in from Europe daily.” Another firm boasts offices in Brussels, Paris, and Zurich.

As noted above, the premise of “non-confiscateable” gold lies in Roosevelt’s Executive Order that exempted “gold coins having recognized special value to collectors of rare and unusual coins.” Are old U.S. gold coins “rare and unusual” today? Not hardly.

Between 1850 and 1907, U.S. mints turned out over 100 million $20 Libertys. Between 1908 and 1933, they coined some 65 million $20 St. Gaudens. Today, no one knows how many have survived, but the number is in the tens of millions, with the bulk of them residing in European bank vaults.

Because of all the old U.S. gold coins in Europe and because of the huge premiums they carry, old U.S. coins are dangerous investments at this time. If gold rallies, European banks may see it as an opportunity to unload, causing old U.S. gold coins to fall in price while gold goes up.

If gold fails to rally, the banks may fear gold will stay down for a long time, prompting them to resume selling. This, too, would cause the old U.S. gold coins to fall in price, shrinking the premiums at which they sell over spot.

Since 1989, PCGS and NGC have “slabbed” over a million Double Eagles rated MS-60 or higher. Now, the two services are grading 200,000 to 300,000 coins a month, with tens of thousands being Double Eagles. Millions of lower-grade coins (VF through BU) do not even warrant being submitted. Yet, they are sold as “non-confiscateable” semi-numismatic coins. Low- grade coins that have no real collector value are called semi-numismatic. VF/XF common-date Double Eagles are semi-numismatic coins.

Add in the uncounted smaller denomination old gold coins ($10 Eagles, $5 Half Eagles, etc.) and the number of available old U.S. gold coins grows even bigger. There is no way the old U.S. gold coins being promoted as “non-confiscateable” have a “recognized special value to collectors of rare and unusual coins.”

The concept of “non-confiscateable” gold is counterfeit. The idea lives only because dealers continue to push it for their own benefit. Investors who do not have the facts are unable to know otherwise. Monetary Digest readers, however, need not be victims to the hype and promotion so prevalent in the gold coin industry.

Old U.S. Gold Coins

Old U.S. gold coins encompass U.S.-minted gold coins that served as money in this country until President Franklin Roosevelt’s 1933 call-in. They include the $20 Libertys and the $20 St. Gaudens (commonly called Double Eagles) and the $10, $5, $3, $2-1/2, and $1 coins, both the Liberty type and the Indian Head type. Double Eagles are by far the most commonly promoted.

Old U.S. gold coins are good buys only when they sell at spot gold or at small premiums over the value of their gold content. Repeat: old U.S. gold coins are good buys only when they sell at or near spot! Study closely the graph. It tracks VF-grade $20 Libertys against the spot price of gold.

Note that at times VF $20 Libs have traded at spot and that other times they carried big premiums over spot. Graphs plotting higher-grade Double Eagles against spot show the same relationship. In 1990, MS-62 Double Eagles sold at only $20 over spot; today they carry premiums reaching $200.

A sophisticated strategy is to buy bullion coins when old U.S. coins carry big premiums (like now). Then, wait patiently for the premiums to come off the old coins and trade the bullion coins for old coins, usually Double Eagles. When old gold coins again pick up premiums, trade them back for bullion coins. This strategy increases the total ounces of gold an investor holds without further cash outlays.

Example: in the late 1980s, a CMI client purchased 192 VF $20 Libs. By looking at the graph, you can see the client bought the coins near the spot price of gold. Recently, the client traded the 192 VF $20 Libs for 236 Gold Eagles, a 50-ounce increase. (It was a 50-ounce increase because a Double Eagle contains .9675 ounce of gold. So, the client traded 186 [192 X .9675 = 185.76] ounces of gold for 236.)

Old U.S. gold coins now carry big premiums, and investors owning them should trade for bullion coins. By taking advantage of the premium swings in old U.S. coins, investors can earn “interest” on their gold. If you own old U.S. gold coins, call Certified Mint for details and trading ratios.

PCGS, NGC, and “Slabbed” Coins

In the mid-1980s, over-grading became wide spread. It was common for circulated coins (below MS-60) to be put in plastic holders (“slabbed”), labeled MS-62 or MS-63, and sold to unsuspecting investors.

Since the buyers usually could not detect the over-grading, they did not know they had been taken advantage of until they sold. One investor in the late 1980s put $150,000 into old U.S. gold coins, many of which had been graded MS-62 or MS-63 by the firm from which he bought them. Three years later – at the suggestion of CMi – he submitted them to PCGS and learned that most of the coins had been over-graded by as much as five grades. His $150,000 investment was worth less than $35,000. Unfortunately, this investor’s situation was not unique. Thousands of investors have suffered similar losses.

Ethical numismatists decried the over-grading and screamed that it was damaging coin collecting. In an attempt to solve the problem, two grading services sprang up: Professional Coin Grading Service (PCGS) and Numismatic Guaranty Corporation of America (NGC).

There are thousands of skilled numismatists across the country, and while most of them do not always agree with PCGS and NGC gradings, PCGS and NGC are now widely accepted. The two services grade 200,000 to 300,000 coins a month and no major retail firms now “slab” their own coins. (Putting a coin in a plastic holder with its grade marked on the holder is called “slabbing.”)

PCGS’s and NGC’s coin grading services provide a greatly needed benefit to investors who purchase old U.S. gold coins. Now, investors can buy coins that probably are graded accurately. Although coin grading has definite guidelines, coin grading remains as subjective as a beauty contest. A coin can be slabbed MS-62, and two knowledgeable numismatists — both with more experience than the PCGS or NGC graders — can disagree. One may say it’s a MS-61, while the other says it’s a MS-63!

Just because a coin is slabbed doesn’t mean its grade is final. Many coin dealers resubmit coins, asking for a higher grading. Often, they get it. Other coin dealers frequently bust the coins out of their holders and resubmit. Coin grading is that subjective.

In fact, slabbed coins trade “sight-seen” and “sight-unseen.” Sight-seen means buyers have to see the coins and agree with the grading before paying. Sight-unseen means buyers will take the coins without seeing them.

One longtime numismatist claims that “a coin’s unique appearance, luster, toning, depth of strike or peculiarities can affect offers as much as 100% in rare cases.” Unique coins usually trade “sight-seen,” while common-date MS-61s, -62s, and -63s trade “sight-unseen.” It takes great knowledge to profitably trade in old U.S. gold coins.

Gold investors should avoid old U.S. gold coins at this time and the numismatic market just about all the time. Many first time gold investors respond to advertisements of Gold Eagles or Maple Leafs and get switched to rare coins. Numismatics (coin collecting) is a world of its own. Many pitfalls await novice investors. For example, several “coin collector” publications circulate within the industry showing coin prices significantly above the real market. Promoters use the publications to mislead investors as to what “great values” they are getting.

Although over-graded coins ceased to be a problem after PCGS and NGC started slabbing coins, overpriced coins remains a major hazard for gold coin buyers. Furthermore, liquidity can be a major problem.

The longtime numismatist mention above recommends “allowing at least 30 days for a dealer to sell your rare coins.” He says “sudden emergency liquidation can reduce your realized price by 5% to 20%.” That’s a generous evaluation of the numismatic market. If you’re sold overpriced coins, you can watch 50% of your investment disappear regardless how much time you give a dealer. Besides, do you really want to put a part of your life’s savings in something that may take 30 days to liquidate? What if it takes 60 days, or 120?

The unfortunate incident about the man who invested $150,000 but received coins worth $35,000 is not unique. A husband and wife not long ago had CMI evaluate a group of common-date “slabbed” MS- 62 Double Eagles. They had paid $72,000 for the coins. Sadly, they should have paid no more than $48,000. They suffered an immediate loss of $24,000, one-third of their investment.

In early 1998, another investor who wanted only to invest in gold called a firm that advertises Gold Eagles extensively. However, after being told that numismatic coins were “not confiscateable,” he put $27,000 into a variety of old U.S. gold coins graded MS-62 through MS-65. He subsequently learned that the coins were worth only about $21,000. The man suffered an immediate 22% loss of $6,000. Such losses can be avoided by investing in bullion coins. Don’t take unnecessary risks with your money.

If you own old U.S. gold coins, trade them for bullion coins. The high premiums on old U.S. coins make this a unique opportunity to increase the amount of gold you hold without putting out any more cash. Don’t pass up this opportunity. At some time in the future, the premium on old U.S. gold coins will disappear. Then, you will want to consider trading your bullion coins back for old U.S. gold coins. Call Certified Mint for more details about how you can profit from this strategy.

Recommendations

As this issue of Monetary Digest reveals, Certified Mint continues to believe that silver is the best investment of the precious metals, maintaining it will produce greater profits than gold or platinum. Silver also will cover more bases than gold or platinum if we suffer a financial meltdown.

Platinum will probably provide a better return than gold over the next few years. Platinum is primarily an industrial metal, however, and it has not functioned as money on any widespread basis, If platinum picks up a premium of $200-$250 over gold, it should be traded for gold or silver. Investors who want more excitement in their metals portfolios should buy platinum.

Regardless, gold remains the ultimate money, having had value in all civilizations. Its high value makes it ideal for investors who cannot handle silver’s bulk and weight.

Special Recommendation: Seriously consider trading any Double Eagles you have for gold bullion coins. Or, if you prefer, for silver or platinum. See the articles Old U.S. Gold Coins and Myths, Misunderstandings, and Outright Lies in this issue for reasons why.

  1. Brilliant uncirculated (BU) 1964 Kennedy half-dollars. Silver continues to offer the best upside potential of the precious metals, and BU Kennedys are the best way to own silver.
  2. Pre-1965 U.S. silver coins are second only to the BU ‘64 Kennedys. Currently, they sell near spot. The premium should rise as more investors come in the market. In the 1970s, 90% circulated coins carried premiums of $2.50-$3.00/oz over spot. That premium should return in a sustained rising market in which the public is participating.
  3. Platinum. Because of unstable supplies, platinum holds greater upside potential than gold. However, be prepared to endure wide price swings. Go with either the new U.S. Platinum Eagles or the Canadian Platinum Maple Leafs. Maple Leafs are slightly cheaper.
  4. Gold bullion coins: Gold Eagles, Maple Leafs, and Krugerrands. You cannot go wrong with gold bullion coins. They sell at small premiums over spot. Buy them and put them away.