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THE GRINCH THAT SHUNNED
NUMISMATICS:
WHY I AVOID UNCIRCULATED
US $20 GOLDS AS A GOLD INVESTMENT
It’s fairly well known
that I do not favour uncirculated US $20 gold pieces as a way to
invest in gold. The reasons are simple.
·
They cost too much above their gold
value.
·
The convey no special benefit for
their higher price, and certainly no “immunity” from government gold
confiscation, highly unlikely in itself.
·
The commissions on them are too high,
from 10% to 25% as opposed to 3-3.5% on bullion coins.
·
The spread between wholesale bid and
ask is much wider than the spread on bullion coins, $25 - $30 versus
$4.00 – 5.00.
·
The demand for US $20s is
artificially stimulated by advertising and telephone sales.
·
They are not “rare” coins – plenty of
them exist.
·
Investing in US $20s interposes
another layer of risk between you and an investment in gold, namely,
the market behaviour of a particular coin. This weakens your
investment’s sensitivity to gold’s performance.
DO $20s REALLY OUTPERFORM?
From time to time the
claim is made that uncirculated US $20s will outperform bullion
coins. This claim relies on the history of the last 20 years and
assumes that the next 20 years will be the same. I fear they won’t.
This claim also ignores the far larger transaction costs and huge
commissions on uncirculated US $20s. Whatever the claims, in the last
six (6) years, investing in uncirculated US $20s rather than gold has
cost investors badly – very badly.
Let me qualify the
statements above. Obviously, some uncirculated US $20s are
genuinely rare, e.g., certain dates or mints or grades. I am not
talking about these, but just the mill-run generic uncirculated US
$20s, which exist in the millions. In fact, good uncirculated $20
Liberties (the design prior to 1907) are harder to find than St.
Gaudens (the design from 1907 on), because by the time the St. Gaudens
came along most $20s didn’t circulate. They sat in bank vaults as
reserves, or were shipped overseas for balance of payment
settlements. The point is, just because a coin is a $20 gold piece
doesn’t make it “rare” or even “scarce.”
GOLD IS GOLD IS GOLD
When inflation began to
kick up in the 1960s, early goldbugs bought US $20s at a small
premium. Gold was officially priced at $35, and I have friends who
bought them for $38.00 – yes, a $3.00 or 8.5% premium over gold
content. But their premium really got a kick in the 1970s when
inflation really kicked in and the hard money investing
industry sprang up. Around the country companies sprang up with
boiler rooms full of salesmen on WATS lines. They pushed $20 gold
pieces not because they were rare, but just the opposite: they were
so plentiful that it was easy to get them. Of course, when you employ
salesmen, they expect to make commissions for their trouble. That
meant that the premium on what they sold – US $20s – had to climb.
(Before the end of 1974 US
citizens allegedly couldn’t own gold bullion, so an elaborate ruse
arose where gold buyers all became “collectors” and bought “rare” $20
gold pieces. However, at the end of 1974 the provisions of the Gold
Reserve act of 1934 that forbade gold ownership were repealed, so
that reason for high premiums on US $20s disappeared.)
After the 1980 peak in
gold, one after another the gold coin sales companies have gone out of
business, so that upward pressure on the premium has gradually –
except for the brief Y2K interlude – been relieved. As you would
expect, the premium on US $20s has declined. In my opinion this trend
will continue for two reasons.
First, all premium on
fungible (essentially identical) commodities is illogical. Why should
an ounce of gold from the US mint cost more than an ounce of gold from
the French mint? An ounce of gold is an ounce of gold, period. In
the past 25 years as country after country hopped onto the gold
bullion coin bandwagon. First the Krugerrand – the first
exactly-one-ounce coin – took away market share from the Austrian 100
coronas and the Mexican 50 peso, and their premiums evaporated. Then
the Maple Leaf was issued at a 15% premium, and that quickly
evaporated because it was way above market. National mints have all
followed the successful pattern of the pathbreaking South Africans.
They formed a marketing cartel for the Krugerrand to restrict supply
and keep premiums artificially high. When Reagan forbade importation
of more Krugerrands in 1985, it lost its market lead and its premium
dried up. Then after Y2K all those high-premium American Eagle coins
flooded back onto the market, and premiums on all sizes collapsed.
Another reason the long
term trend for US $20 premium may be headed down is the declining
economy. How can the public continue to pay rising prices for
semi-numismatic coins? They must have rising incomes. Without
rising incomes, the price of low-level luxuries like US $20 gold
pieces cannot be sustained.
This is the axiom:
over time, all premium disappears.
THE LAST SIX YEARS
The proof is in the
statistics. I examined the last six years’ wholesale prices. These
are the same ones I have published monthly in The Moneychanger
from September 1996 through September 2002.
The first chart, “Gold
vs. MS62 $20 St. Gaudens 20,
compares the raw price of spot gold to the wholesale Ask price
for US $20 Saint Gaudens, from 1996 to the present. The second chart,
“Gold vs. MS62 St. Gaudens $20,
year to year change,” looks at the
year-over-year change of both gold and St. Gaudens, but starts with
the peak in the price of $20s in 1998.. That second chart takes the
price on September 23, 1999 and divides it by the price on
September 23, 1998. That was 420/540, or 77.7%, a drop of
22.3%. The resulting graph shows the rate of change, or, the gain or
loss over the past year.
The statistics seem to
bear out my theory that premium is declining on St. Gaudens, or at
least, offers no advantage over bullion. From September 1996 through
September 2002, gold dropped from $316.6 to $385.05, or 17.8%. MS 62
PCGS certified $20 St. Gaudens (which I picked as the bellwether for
all the $20s) dropped from 513 to 420, or 18.1% -- practically the
same as bullion gold. No immunity to bear markets there.
However, those figures
don’t take into account the greater bid/ask spreads on $20s, and the
greater commissions. While the retail spread on bullion gold was
about 10%, the same spread on US $20s was 5% at wholesale plus a 25%
commission, or about 30% round trip. If you subtract those
transaction costs, then gold dropped 27.8% from 1996 to 2002 while $20
Saints dropped a punishing 48.1%.
That doesn’t seem like a
‘viable alternative” to me.
US $20s look even worse
from peak to trough. From the absolute wholesale high for US $20s,
which occurred in October, 1998 at $580 , they dropped to low of 330
on September 10, 2001 (about a year ago, a drop of 56.9% (not
including spread and commissions). Bullion gold dropped from a high
in the same period of $292.8 to $272.03, about 7% (also not including
commissions. As noted above, from bullion gold’s absolute high for
the six year period it dropped about 17.8% by 9/11/2002.)
On the Gold vs. MS62
$20 St. Gaudens
chart you will notice that $20s peaked late in 1998. I attribute this
to Y2K buying. Notice also that once that buying exhausted itself in
the spring of 1999, the price of $20s tumbled all the way until
September, 2001, and are only now recovering. Notice how much greater
distance $20s fell than bullion gold. Obviously, they are much more
volatile than bullion gold.
RELATIVE PERFORMANCE
The year to year change
chart compares the performance of US $20s to bullion gold. From
September 1999 forward gold outperformed $20 Saints, including almost
the entire rise from the September 2000 bottom. Basically, however,
the tracked together, with the Saints tending to lag bullion. Only
in the last three months have the $20s outperformed gold bullion:
·
120 % for bullion to 120% for $20s in
July
·
113% to 119% in August
·
116% to 127% in September
·
110% to 116% in October
This better performance,
however, also reflects $20s’ poorer performance 12 months ago, and may
just reflect their tendency to lag bullion.
Bottom line is, the
performance of US $20s in the last six years does not justify buying
them over less expensive bullion coins. When you factor in the $20’s
higher commissions and transaction costs, and well as the possibility
for lower demand due to economic distress, $20s become even less
attractive as an investment in gold.
-- F. Sanders
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