Mullen Coins Collection Blog provides valuable articles and content about coin collections, rare coins, currency, antiquities and interesting reviews of news and events within the numismatic community.
Should you buy gold as an investment? This is a perennial question, but especially relevant when the economy looks less stable and times begin to look more…interesting. At Grand Rapids Coins we advise our clients to invest in gold and other precious metals as part of their investment portfolio. Why do people choose to invest in gold? Below we list some very good reasons.
The Value of Money
Does money have intrinsic value? This is a cornerstone question of economics. Money is an instrument of exchange, in its essence. We expend our knowledge and energy, our life force, in pursuit of our goals. Because most people don’t have the skills, the time, or the desire to make everything they need, they take the money they earn and spend some or all of it on things they want or need. What’s left they need to store. This is why we have money.
In the past six months, inflation has become much more of a concern for Americans. In February, record inflation was observed with the CPI indicating a 7.9% increase year over year, a number not seen in 40 years. Obviously, inflation makes everyone nervous, but it especially makes investors nervous. We do not know if this period of inflation will be short lived or longer term, but in the meantime, the price of gold is rising. Does the relationship between inflation and gold prices tell us anything?
Inflation and Gold Prices
In the past few months, the price of gold has increased - briefly hitting $2,070 an ounce - but it has also experienced some volatility with announcements by the Federal Reserve about interest rates and the war in Ukraine and sanctions against Russia both escalating. Obviously, there’s more going on than just inflation, but in insecure times people tend to look to gold as a hedge or a safe haven.
Gold is a highly coveted precious metal that has held its value over time. Grand Rapids Coins buys and sells coins and currency, but we also buy scrap gold and sterling silver. If you’ve ever wondered about the value of your gold jewelry or silver items, in this blog we will go through the differences between types of gold and silver. We will also discuss how scrap gold is processed into investment grade gold bullion.
Different Kinds of Scrap Gold
Gold is a very precious metal that has held value over time, unlike many other mediums of exchange. There is currently a great deal of interest in gold because the price of gold has been high and rising for some time. That high price is an incentive for people who may have jewelry or other gold items lying around that they do not use. Those items can be sold as scrap gold for cash.
While supply and demand are the primary factors in determining the price of most goods, including coins, the price of gold and precious metals is affected by a number of more complex variables. One of these is political or economic instability. The U.S. economy has experienced a great deal of instability over the past decades and was nearly brought down entirely by the Financial Crisis of 2008, the worst economic disaster since the Great Depression. The fear that accompanies these types of events directly impacts the price of gold. This is why we saw the price of gold skyrocket in the years following 2008.
For anyone who has accumulated any wealth, asset security is a real concern. For decades the stock market was seen as a place where one could get a reasonable return on an investment, especially over longer periods of time. After multiple stock market crashes, the collapse of the tech bubble, and the near total collapse of the market in 2008, that is less true. Risk averse investors will now accept a lower rate of return for the assurance that their assets will not disappear overnight, and gold is one of the safe havens they flock to when currency markets are volatile. Gold coins and bullion at least are tangible assets in a way that paper stock shares can never be. It’s hard to have true confidence in numbers on a computer screen. It’s not like holding a bar of gold in your hands.
In an earlier blog we discussed the various forms of physical gold that buyers can purchase and invest in and how their value corresponds to the market “spot price” at any given time. Gold has always been valuable, but how valuable it is currently corresponds to any number of factors. In a souring economy or one with unstable investment options, gold can look like a safe haven for the investor. In a booming economy the demand for gold tends to abate somewhat.
While gold is a solid investment choice and Grand Rapids Coins endorses the philosophy of investing 5%-10% of one’s total assets in physical gold and silver as a hedge against the unknown, it’s important to be careful when purchasing. There are many gold scams out there for the untried or unwary buyer. In fact, there are so many that the Federal Trade Commission has a page on its website addressing questions about buying gold, and recently the office of the Texas Attorney General issued its own tips for avoiding fraud in the gold market.
When Minnesota governor signed H1A into law, it was great news for Minnesotans who want to invest in bullion. This is because the bill contained a sales-tax exemption on precious-metals bullion, ushering Minnesota into a group of 35 states that have a full or partial sales and use tax exemption on precious-metals bullion and coins.
While it may seem against Minnesota’s best interest to collect less in revenues from businesses selling bullion, studies done in other states show that the sales tax revenues from other sources are increased by these kinds of exemptions. Because some states do not charge sales tax, buyers from other states will purchase bullion or collectible coins in those states rather than pay taxes in their own state. This is terrible for local coin dealers in states that border states with exemptions, as was previously the case with Minnesota. The competitive disadvantage for them translates into fewer sales, fewer employees, and less money in payroll and income taxes collected.
Previously we talked about the Great Depression and what its effects were on coins minted during that era. However, the largest coin disaster of the 1930s was Franklin Delano Roosevelt’s infamous gold confiscation. His Executive Order 6102 of 1933 strikes fear, or at least anxiety, in the hearts of some coin collectors (and gold bugs) even now. Many coin collectors view the U.S. government’s confiscation of gold with anger and loathing as well as feelings of foreboding for the future. When a government has the right to or enforces a perceived right to confiscate gold bullion and gold coins from its own population, what does that mean for coin collectors today? Well, it’s not as ominous as you might think.
While what happened is a tragedy for historic gold coins and collectors, it’s unlikely to reoccur today because FDR’s confiscation of gold was done to bail out the Federal Reserve which in years prior to the Depression had issued millions more in gold-clause notes than it had gold to back them with. Today the Federal Reserve no longer has to pay back its liabilities in gold. It hasn’t since 1971 when President Richard Nixon closed the international dollar-gold exchange window.
The British gold sovereign is another coin that was designed and minted as a result of a politics.
People unfamiliar with the strife, plotting, unseating, and court intrigue that resulted when Henry of Bolingbroke, one grandson of Edward III, rose up and deposed Richard II, another of his grandsons, might be interested to know that the civil war depicted in the popular television show, Game of Thrones, is loosely based on the chaos of this period - the Wars of the Roses - in English history. For nearly a century, the country saw assassination attempts, imprisoned kings, secret marriages, brothers betraying brothers, and, of course, the famous missing and murdered Princes in the Tower.
American history has frequently been one of fads and extremes, and the fifth decade of the nineteenth century gives us another fine example: the California Gold Rush. While Americans had been moving westward almost since they put foot on Plymouth Rock, on January 24, 1848, at the time gold was discovered at Sutter’s Mill, what we know today as California was a part of Alta California, a Mexican territory. San Francisco was tiny; only 200 people lived there in 1846.
That changed almost overnight. Despite the fact that there was at the time no straightforward or fast way to get to the West Coast from the East, a flood of Americans and immigrants set off by ship traveling either all the way around the tip of South America or down to Panama, overland, then up the coast via the Pacific Ocean. Others drove wagons west on the California Trail. The influx of 300,000 people from all around the world created a number of problems, and one of them was currency.
Buying gold as an investment might seem pretty straightforward until you begin to consider all your options. Gold comes in many forms and values vary accordingly. Perhaps more importantly, future values are dependent upon the form of gold you own, and whether gold prices are trending up or down at any given future time. Let me explain.
First, you may invest in physical gold or in gold contracts. While you can buy gold contracts, gold futures, gold stocks and other paper investments, for purposes of this discussion, we will focus on physical gold. This is gold you take possession of and put away in a safe place.
Today we continue our discussion of bullion as an investment strategy. As a Grand Rapids coin dealer, we can provide some thoughts on what affects the prices of precious metals, although of course we urge all of our clients to do further research before making a move.
Historical Gold Prices Gold is the most popular precious metal for investment, and as we stated earlier, historically gold has performed very well in slow economies. In fact, adjusted for inflation, the all time highest price of gold was in 1980. Since 2000, the gold price has been steadily rising with each year, but we have not yet the all time highest inflation-adjusted price.
Historical Silver Prices In general, historical silver prices have also been rising each year since 2000. There is a bit more fluctuation within the silver prices each year relative to gold prices. For example, in 2008, there was a 136% change in price within the year. The fluctuation within silver prices is related to the fact that the price per ounce is lower, so it is easier for investors to purchase small coin denominations, and to enter and leave the market.
What affects the spot prices of precious metals? The prices of precious metals fluctuate by the minute, and are actually affected by many variables at once.
Precious metals, like any commodity, are used in industry and manufacturing, so industrial demand affects spot prices. Demand for jewelry affects spot prices as well.
In other respects, precious metals are different than other commodities, and some are affected primarily by sentiment (or demand) more than supply, meaning that investors’ decisions to save or liquidate affect the spot price.
The spot prices of precious metals are affected by inflation, and global social and political unrest.
And finally, when governments such as China and India decide to invest in bullion, their investment affects the market and spot prices on metals as well. Today, some nations’ central banks are buying gold, which affects the overall price.
Gold: a volatile asset The gold market is subject to speculation, particularly through the use of futures contracts and derivatives. However, gold's low correlation with other commodity prices and its pricing in relation to fiat currencies during the 2007–2012 global financial crisis suggest that gold behaves more like a currency than a commodity.
What’s happening today with bullion? To understand prices and expectations today, we first should look at historical data mentioned previously, and realize that today with bullion, two main market forces are fighting to a standstill. In the United States, the Federal Reserve announced that it will continue quantitative easing until unemployment gets to 6.5%, increasing inflation expectations and making investors interested in buying gold. On the other hand, some indicators also point to a chance at continued recession, so other investors are selling gold.
Am I paying too much? If you pay the spot price for a precious metal, you may still wonder if you are entering the market at a good time. For precious metals, the price is what it is. We can only base our decisions to invest on the history of the performance of precious metals, and our confidence in other investment vehicles in this economy.
What should I expect from my investment in bullion? Ownership of physical gold or silver means that you possess the asset, or in the case of IRA holding have it in the custody of a holding firm. While it may rise or drop, it will not zero out. Those who are brave (or foolish) enough to predict the future may be buying or selling at any given time based on their personal portfolios.
Where are the precious metals headed? As with any investment, it is not possible to tell with certainty where the market for precious metals is headed. It is reasonable to expect them to continue to be a very effective store of value.
Do foreign investors buy a lot of bullion? The governments of China and India, in particular, invest in bullion. Individual investors in foreign countries also tend to invest in gold depending on the stability of their currency. And in certain cultures, such as India, gold is a very popular investment as a store of value.
Possible bullion investment strategies: Possible bullion investment strategies include the following:
At Mullen Coins, we have had a lively uptick in bullion sales for investment purposes this year. We’re often asked where gold and silver prices are headed – if we knew with absolute certainty, we’d be living a life of leisure and luxury! As a Grand Rapids coin dealer, one of our services is to help novices understand the fundamentals of investing in gold and silver, although we urge all of our clients to do further research before making a move.
Unlocking value from personal accumulations of gold and silver jewelry is easy to do… if you are armed with the facts, and deal with a reputable gold/silver buyer.
