Gold May Pay Only in Case of Maximum Despair: Jane Bryant Quinn
Arizona Coin Collector
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Gold May Pay Only in Case of Maximum Despair: Jane Bryant Quinn
Commentary by Jane Bryant Quinn
Oct. 22 (Bloomberg) -- Gold is for rich guys -- buying physical
gold, that is. The metal's highest and best investment use is
as insurance policy against a currency collapse. For that
purpose, you need a lot of it, stored around the world. Owning
20 or 30 coins is nice but won't protect your standard of
living in a world where dollars are dust.
Gold isn't even a reliable hedge against inflation. It reached
$850 an ounce in January 1980, a price not seen again until
January 2008. During those intervening 28 years, gold plunged
and reared but lost more than half of its purchasing power.
For a 1980 investor to break even after inflation, gold would
have to reach $2,200.
It might, but how long did you plan to wait?
For the average investor, gold boils down to a speculation on
higher prices. The latest run-up started in August 2007, when
the housing market visibly started falling apart. From $652,
it raced up to $1,003 an ounce last March, zig-zagged back to
$747 in September, jumped to $905, then slid to $772 as of
yesterday.
Hedge funds drove the market but individuals jumped in, too.
So far this year, investors have purchased 611,000 newly
minted, one-ounce U.S. gold coins, compared with 315,000 in
all of 2007.
``We've seen a switch in appetite, with investors moving
from futures to physical gold, either owning it directly or
going through exchange-traded funds,'' says Suki Cooper, an
analyst at London-based Barclays Capital.
Coins purchased strictly for their gold value, not their
numismatic value, are known as bullion coins. Many
countries mint them -- South Africa (Krugerrand), Canada
(Maple Leaf), China (Panda), Austria (Philharmonic) and
Australia (Kangaroo), among others. The U.S. Mint makes
Buffalos and American Eagles. For investment purposes,
you want the one-ounce size.
Supply Shrinks
That is, if you can find them. The yearlong run on bullion
has dried up the supply of coins for immediate delivery.
Everything was out of stock last week at the online dealer
onlygold.com. Kitco.com had Maples at 7 percent more than
the spot gold price.
``The premium will likely come down 1 or 2 percent when all
coin supplies improve a bit,'' says Jon Nadler, senior
analyst for Kitco Metals & Minerals in Montreal.
The various mints project the number of coins they expect
to sell each year and produce on demand. Toward the end of
each year, they let their inventories run down while
gearing up for next year's run. The surge of buyers left
them short of high- quality blanks.
Currently, the U.S. Mint is striking only a limited number
of 2008 Eagles. The wholesalers are on allocation. No
Buffalos are being shipped at all, although a small number
might still be minted before the end of the year. By late
December, dealers expect to start receiving 2009 coins.
Coin of the Realm
For U.S. investors, American Eagles are the bullion coin
of choice. You can put them into individual retirement
accounts as long as they remain in their original U.S.
Mint capsules. (It's not clear that Buffalos are allowed.)
Eagles also slip through a loophole in the tax reporting
law, says Scott Travers, author of ``The Coin Collector's
Survival Manual.'' Dealers have to report to the Internal
Revenue Service if you sell 25 or more Maples or
Krugerrands. They're not required to report your sales of
American Eagles and some other coins, although some may do
so. (Kitco, in Canada, says it does no tax reporting at all.)
Normally, one-ounce Eagles sell for 5.5 percent to 7.5
percent over the gold price, Nadler says. Small dealers
might mark up the price even more.
In this buying panic, I saw online dealers charging as
much as 13 percent more than spot gold. Their Web sites
warned that there might be a wait before your Eagles
could be shipped.
Fool's Gold
On EBay and the Home Shopping Network, coins sell at
fantasy prices. A set of Eagles in four different weights
was offered on HSN at $4,999.99. In gold, it's worth about
$1,450. Prices like these take advantage of neophytes. A
coin dealer might sell a four-coin set for $1,850,
Travers says.
A cheaper way of buying gold is through an exchange traded
fund. The most widely traded fund, SPDR Gold Shares, costs
0.4 percent a year in fees, plus your brokerage commission.
You don't own the gold directly. A trust holds large gold
bars (warehoused principally in London) and sells shares
against them, which are traded on the open market. You
can't redeem in gold itself.
It costs even less to buy bullion in a pool account, such
as the ones offered by Kitco. Like an ETF, a pool account
sells shares in a large bar of warehoused gold. You pay
just a hair over the spot gold price, and sell it back to
Kitco for just a hair under. There are no annual expenses.
For a fee, you can redeem in gold itself. As with ETFs,
you depend on the pool's trustee to support its guarantee.
Gold, by the way, is taxed as a collectible -- whether
you buy it in the form of coins, ETF shares or an
interest in a pool account. Your tax rate on long-term
capital gains would be 28 percent, compared with 15
percent on other assets. Only a significant price gain
(or currency collapse) redeems your bet.
(Jane Bryant Quinn, a leading personal finance writer
and author of ``Smart and Simple Financial Strategies
for Busy People,'' is a Bloomberg News columnist. She
is a director of Bloomberg LP, parent of Bloomberg News.
The opinions expressed are her own.)
To contact the writer of this column: Jane Bryant
Quinn in New York at jbq...@bloomberg.net
Last Updated: October 22, 2008 00:01 EDT
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