Part 1

Investing in gold is like going to war … you need an exit strategy !

• Nobody makes money from ‘holding‘ gold,
  • they only make (or lose) money when they sell their gold

• Nobody knows what the gold price will be in the future, they are merely guessing
• Some may claim to be making ‘informed’ (but nevertheless, speculative) forecasts
  • I am not going to hazard a ‘speculative‘ guess
  • I am merely stating the facts re today’s ‘spot value’ of the gold content of popular coins (at their full weight)
  • Please bear in mind that …
    • gold coins can lose weight through ‘wear and tear’ if they ‘circulate’ over a long period of time
    • gold coins can lose weight through ‘regular polishing’ if used as jewelery over a long period of time

• Mintages
  • O’Brien Coin Guide: Mintages for British Gold Sovereigns
  • O’Brien Coin Guide: Mintages for modern US ‘bullion’ coins
• Market Values
  • O’Brien Coin Guide: GB & Ireland Gold Sovereign of George IV
  • O’Brien Coin Guide: GB & Ireland Gold Sovereign of William IV
  • O’Brien Coin Guide: GB & Ireland Gold Sovereign of Victoria
  • O’Brien Coin Guide: GB & Ireland Gold Sovereign of Edward VII
  • O’Brien Coin Guide: GB & Ireland Gold Sovereign of George V
  • O’Brien Coin Guide: GB & Northern Ireland Gold Sovereign of George VI
  • O’Brien Coin Guide: GB & Northern Ireland Gold Sovereign of Elizabeth II

 

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Part 2

• Caveat emptor … buyer beware !
• Historical gold price charts can be very misleading if not taken with a hefty dose of reality (see below)

• At first glance, everyone can see that gold prices have risen over this period
• The data is misleading, however.
  • Firstly, it does not reflect vendors full selling price, inclusive of fees, taxes, P&P + insurance, etc.
  • Secondly, it does not reflect vendors ‘buy back’ prices – which are substantially less than their selling price.
• Lesson # 1 = Costs have to be taken into account before any profit can be taken
  • And there are other ‘hidden’ costs – see below.

•  Anyone that bought gold between 9th December 1986 and 20th Feb 1996 did not break even until 21st October 2004.
  • During this 18 year period, their investment(s) made zero profit.
  • I repeat, 18 years with zero profit !!!
    • During this time, they might have also had to pay fees to a bank to hold their gold safely.
    • If they kept this gold at home, they might have had to pay additional insurance premiums and buy a safe.
    • I think this proves, beyond all reasonable doubt, that gold is not a 100% safe investment.
• Lesson # 2 = Gold is not a 100% safe investment even in the long term

• If we look more closely at the above statement, we will find it is inaccurate as well, i.e. we have made no allowance for inflation during the 18-year period between 1986 and 2004.
  • During this period, inflation reduced the value (buying power) of the US Dollar by 52%
    • I am using the USD as an example – most other major currencies experienced inflation during this period as well
    • Buying and selling in different currencies adds an extra layer of risk and complexity (obviously).
  • Therefore, to break even, the price of gold would have had to risen by 72% in order to actually break even.
  • In other words, the buying power of US $1,000 in 1986 is equal to US $1,723.54 in 2004 (Inflation Rate Calculator)
    • Thus the “US $409.25 per ounce” on 9th September 1986 would have to have reached “US $705.34 per ounce” on 21st October 2004 to break even.
    • Gold did not exceed US $705 per ounce until October 2007
    • Meanwhile, there was another 3 years of inflation (Oct 2004 – Oct 2007), so we didn’t really break even then either
• Lesson # 3 = The longer the period of holding, the more inflation erodes any potential profit on the original investment 

• More recently, everyone that invested in gold between 6th January 2010 and 1st September 2012 (and held on to it) has made a loss to date (13th August 2015. This statement does not take into account the following :-
  • the difference between selling price and buying price
    • plus, the combined costs of buying and selling (fees, taxes, P&P + insurance, etc.)
      • plus, the cost of inflation
• The first set of costs probably amount to 20% (or more) which probably includes all buyers as far back as January 2009 !  
  • Inflationary costs also have to be taken into consideration !!!

• Lesson # 4 – always take costs into account before attempting to calculate profit

Part 3

We have, so far, looked at

a) the need for an exit strategy

b) the fact that historical performance is not a good guide to future performance, i.e. everybody is merely guessing at what the future gold price will be

c) the hidden costs of holding an asset such as gold, i.e. inflation and the decrease in the value of money over time

Now we need to look at (d) the cost of buying and selling gold

At auction, there are three prices

1. the Hammer Price, or Price Realised
2. the price the buyer actually pays (Hammer Price + Premium + Tax)
3. the price the seller gets (Hammer Price, less Commission + Tax)

Example 1:

• If the Hammer Price = €1,000
• Buyer’s Premium = 20% = €200 + VAT @ 23% = €260
  • Note: the auctioneer only applies VAT to the commission
• Hammer Price, plus Buyer’s Premium = €1,230

The buyer, therefore, pays €1,230 for the item (auction lot), which (for gold coins) usually = the gold price, multiplied by the amount of gold in the coin.

Note: not all coins are 100% gold, so this has to be calculated, e.g. older gold coins tend to be 90-91.7% gold. Wear and tear can reduce the original weight, and a hole can reduce it further – caveat emptor !

• If the Hammer Price = €1,000
• Sales Commission = 20% = €200 + VAT @ 23% = €260
  • Note: the auctioneer also has to apply VAT to the commission
• Hammer Price, minus Sales Commission =  €740

The seller, therefore, receives €740 for the item (auction lot)

• The auctioneer keeps €520, or 36.5% of the actual price paid
• The seller gets 63.5% of the actual price paid

• If the buyer tries to sell this item for the same price the following day, they will incur a loss of €520, or 39.84%

In order to get their original purchase price of €1,230 back, the buyer has to sell this coin for €1,631.31 (Hammer Price)

• If the Hammer Price = €1,631.31
• Sales Commission = 20% = €326.26 + VAT @ 23% = €401.30
• Hammer Price, less Sales Commission of 20% + VAT =  €1,230.01

• If the Hammer Price = €1,631.31
• Buyer’s Premium = 20% = €326.26 + VAT @ 23% = €401.30
• Hammer Price, plus Buyer’s Premium = €2,031.61
  • This equals a 65.2% price rise (just to break even)
  • Clearly, buying and selling physical gold (gold coins) at auction is not a good hedge against inflation, since the fixed costs (auction fees) plus inflation itself makes the margin to break even almost impossible to bridge

Notes:

• VAT = value added tax (sales tax)
• The VAT rate in Ireland is currently 23% (2015)
• VAT rates in other European countries can be higher and some are lower, e.g. Luxembourg = 17%, whereas Hungary = 27%
• VAT is not chargeable to buyers outside the EU but other taxes (Customs & Excise and/or Sales Tax) may be payable in the buyer’s country of residence

Advice:

I am not an asset management professional but I have three pieces of advice for ‘wannabe coin investors’

1. Do not buy bullion coins at bullion prices ‘as a hedge against inflation’, or as ‘an investment’
2. As a long term investment, buy rare coins in the highest grade possible. These coins do not sell for their intrinsic (bullion) value, they sell for their collectible value, i.e. rarity + demand !
3. Before you buy coins as a long term investment, you must first collect coins and learn about numismatic market value

The only safe way to invest in rare coins without first ‘collecting & learning’ is to hire a numismatic expert to buy on your behalf. 

Choose your ‘numismatic expert’ wisely !