By Joseph Presti
An analysis of bullion vs. $20 Saint Gaudens by Joseph Presti 12/20/2012
There is no doubt about it, gold has been the darling investment, having risen from $280/oz. in January 2002 to approximately $1725/oz. at the end of 2012. That type of appreciation has propelled gold bullion (bullion) from a fringe investment to the mainstream having attracted Wall Street attention.
There are many ways to own gold with the two most popular being Exchange Traded Funds (ETF’s) and physical ownership. For over 23 years at Rare Coins of New Hampshire (RCNH) we have always been a proponent of physical ownership for a variety of reasons. Questions have always circled around gold ETF’s that have made us uncomfortable at RCNH. Some of these questions appear to be quite frankly outlandish but others make you pause and think for a minute. Speculation about whether the gold actually exists that under pin the value of the ETF shares, is the “gold” in the vaults really gold or gold plated tungsten bars, is the gold leased or owned by the ETF, why can’t I take physical possession of the portion of gold I own, these are all questions that have arisen concerning gold ETF’s. It seems the only advantage ETF’s have is that they are easily bought and sold like stocks.
Physical ownership has always been the preferred form of ownership at RCNH for a variety of reasons. Simply, when the metal is in your possession it is yours versus a paper asset. The costs are slightly higher to own the physical metal as opposed to ETF’s but that reflects slight dealer premiums and manufacturing costs compared to the fact that the proportional share price of a gold ETF represents the raw form of the metal as traded in contracts on the commodity exchange and does not represent the price if you wanted or could take possession of the metal. Owning physical metal also offers portability and the security that paper assets cannot.
Within the last two years Morgan Stanley had agreed to pay a multimillion dollar damage assessment for failing to actually buy and holdphysical bullion on behalf of their clients. In addition, a second class actionlawsuit has also been filedagainst UBS Financial Services, alleging that it defrauded investors into believing they were purchasing physical silver when, in truth, the brokerage house actually provided a “position” in silver by means of unallocated storage at a UBS affiliated vault. Follow this link to read more on this story, Did UBS mislead investors about "stored" silver? Both of thesestories and others concern depositories that store bullion for individuals in unallocated accounts. This is different than depositories that store bullion in allocated accounts. An example of an allocated account would be an IRA account. When an individual purchases gold or silver to be held by a custodian the bullion is segregated in an account with your name on it, that is why if you “deposit” a 1986 gold eagle when you cash it in you get a 1986 gold eagle in return, it is the same coin. An unallocated account is when a trustee comingles bullion of many individuals into one account. This is advantageous for the trustee because they can make extra money on your deposit of bullion by loaning it out to ETF’s so that the ETF can show that they own the required amount of gold to support their share price. The main disadvantage for the depositor or buyer of the ETF is that should the trustee become embroiled in a financial scandal you are considered an unsecured creditor which means in all likelihood you are only going to receive a portion of your investment back.
Over the past couple of months we have discovered a disturbing trend in the bullion market, that of counterfeit bullion products. There was a case in N.Y. City where a dealer purchased four 10 oz. gold bars that turned out to be genuine bars that were hollowed out, filled with tungsten and then expertly sealed, that was a $70,000 mistake. There was also a case of a bullion dealer in the Midwest who purchased 30 counterfeit Krugerrands and there have also been reports of fake Engelhard silver prospector coins entering the market place. The answer to this is to have your bullion certified by one of the two major grading services but that adds a cost of $16-$30 per coin. I want to emphasize that counterfeit bullion products have not become a problem yet but if the trend continues, it could. At RCNH we cannot overemphasize how important it is to buy from a reputable source. That source should have a long history, preferably decades of dealing in coins and bullion and have an “eye” developed enough to not only grade coins but to spot counterfeits. The professionals at RCNH not only have that experience but have also kept current on new technologies by consulting with industry experts and attending counterfeit detection classes. We are also heavily involved in consumer fraud protection and through our staff numismatic attorney who has been instrumental in recovering hundreds of thousands of dollars for fraud victims.
Since gold has captured the hearts and imagination of the investing public, numismatics (rare coins) have taken a back seat even though they have historically outperformed bullion. Using our starting point of January 2002 a gold eagle bullion coin would have cost approximately $290 while a MS-64 $20 St. Gaudens retailed for $545 and an MS-65 for $1,025. These gold coins contain exactly .9675 oz. of pure gold and these prices reflect a numismatic premium of 94% and 365% over their intrinsic value. Today these premiums have fallen to 40% and 51% over the intrinsic gold value. As one can clearly see while gold has increased in value the numismatic premiums for these high quality coins have clearly fallen. Many reasons exist for this decrease in premiums with the most likely explanations being that bullion is easier to understand for most people and secondly that most coin dealers today do not take the time to educate their clients on the intricacies of numismatics.
In order to make an informed decision about which product would be most suitable for you let’s examine it at the most basic level. Gold Eagles are made solely as a bullion item even though they are denominated they are not and were never meant to circulate. As such most of everything that has ever been minted will survive in very high quality. The government can theoretically mint as many as they want as long as there is gold being mined. Saint Gaudens $20 gold coins are legal tender coins that were minted to circulate from 1907-1933 with a total mintage of approximately 70 million coins. PCGS and NGC have graded a total of just over 1.7 million coins in all grades including duplicates which represents about 2.5% of all coins minted. Since these coins were also used to pay off U.S. debts at the time we may reasonably assume that about 7.5% of the total mintage still exists ungraded, the next legitimate question is what happened to the rest of the coins. The answer is simple, Fort Knox. When gold was confiscated in 1933 by President Roosevelt the coins that were turned in for paper currency and the gold coins that were sitting in the vaults at the treasury were melted into gold bars and stored at Fort Knox where they presumably reside to this day.
So your choice comes down to do I want to own something that is minted as a bullion coin only and the mint can coin as many as they want and most of which still exist in high quality? Or, do I want to own a regularly issued gold coin with a total surviving mintage of anywhere between 2.5-10% of the original mintage of which only 1-3% survive in investment quality. Don’t forget that the $20 gold coin contains .9675 oz. of pure gold and will give you a double play on both the bullion and rare coin market for not too much of a premium over the intrinsic value of the metal?