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Tuesday, July 3, 2012

PM Caveat Emptor

This past Saturday, I saw the result of the biggest screwing I've seen with regards to buying numismatic (collectible) coins.  As my staff and I noted afterwards, he had, uhm, involuntarily engaged in a form of sexual congress which is illegal in many states.

This guy came into our PM store with a certified coin by one of the reputable grading companies.  These certified coins are called "slabs" as they are encased in a clear plastic case, which if broken, invalidates the certification of the coin.

He asked me if I had ever seen this coin before.  It was a 1907 $20 Saint Gaudens gold piece.  It was a special variation which had a flat rim.  It was graded AU55.

Coin grades range from 1 to 70.  The higher the number, the better the coin.  The 50's range is called About Uncirculated (or AU).  These are coins which have very little wear from circulation.  An AU53 has more wear than an AU58 - this last grade being just below the 60's range of Mint State (or MS - uncirculated).

Slabbed coins have a serial number on them.  You can go to the website of the grading company, and verify that the coin in the slab is in fact the coin that was graded.

I keyed in the serial number, and I verified the coin.  With certain coins, the grading agency will estimate the market value of the coin.

This coin had a market value of $14,000.  Yeah, fourteen thousand dollars!

To put that into perspective, the coin contained about $1,550 in gold.

The vibe I got from the guy was that he didn't know what he had.   I asked him if he knew that he had a very special coin.


I asked him how much he paid for the coin.


Sweet!  Twenty-six hundred?

Nope.  Twenty-six THOUSAND!  Actually, twenty six thousand, five hundred.

Oh crap.  When did you buy this coin?

This week.

I did a bit more research, and found out that the value the grading company affixed to the coin was high.  By about $2000.  [Note:  These companies are guaranteeing the grade of the coin, not the value.  They all tend to pump up the price to make themselves look like they are the ones that handle all the pricey coins.]  I could probably get my hands on the same coin for around ten or eleven thousand, and would retail it to him for about twelve or thirteen thousand.  Tops.

He had purchased a half dozen coins.  All graded.  All over priced.  He remembered the specifics on two of them and paid more than double what he should have for each of them.  He only got screwed out of a couple of thousand on each of those coins.

I asked him about the outfit that sold him the coins.  It is located in Texas.  They promised him that he could return the coins for a full refund if he wasn't satisfied.  He said that, if he must, he will go to Texas to get his money back.

If he gets his money back, I will make a campaign contribution to Obama.  My money is safe.

I asked him why he was buying numismatic coins as opposed to bullion.  His reasoning wasn't horrible.  He was putting his retirement funds into collectible coins, since he had heard that they retained their value better than straight bullion.

I told him that, if buying collectibles was his investment strategy, now really is a very good time to do it.  The premium for collectibles is way down.  It's a good time to buy them, and a bad time to sell them.

I asked him if he understood the risks involved.  His coin, for example, even if he had only paid market values, still had greater than an eight-fold premium assigned to the value of the coin.  I told him that personally, I don't want my investments dependent upon someone's opinion of its value.  Market risk is enough for me, thankyouverymuch!

I gave him my card, and told him to come back when he got his money back, or when he was ready to spend some more of his retirement on coins.

You guys have seen these ads on TV.  The "Gold Buffalo Tribute Proof".  If you don't know what I'm talking about, go here [link].

They've taken the US mint's pure gold $50 Buffalo coin (with about $1600 in gold in them), and made a "tribute" proof coin.  They tout the coin as containing 14 milligrams of pure, 24 karat gold.

They tell us that the coins were originally slated to be offered at $50 each, but it's just your luck that they're going to give them away for ONLY $9.95 (plus $4.95 s/h).  Fifteen bucks all in.  You're strictly limited to only 5 coins.  Act now!


Let's do some math.  Let's say an ounce of pure gold is going for $1600.  There are roughly 31.1 grams per troy ounce (troy ounces are used in measuring precious metals).  So, one gram of gold is worth $51.45.

A milligram is one one-thousandth of a gram.  That would make one milligram worth around 5.1 cents.  Multiply that by the 14 milligrams and the gold value in the Tribute Proof is valued at 72 cents.

The coin itself is made from bronze and weighs about an ounce.  I have no friggin' idea what an ounce of bronze would cost.  Bronze is around 90% copper.  That runs $3.50.  A POUND!  Since there are 16 ounces to a pound (NOT a troy pound) that gives us -  at most - another 22 cents.

Let's round this up and say there's a buck's worth of metal.  And you can have one delivered for $15!

I wonder if my Saint Gaudens guy has heard about this great deal.....

Accept The Challenge

When making any kind of investment, knowledge is king.  It's clear that the guy that paid $26,500 for a coin worth half that had no idea whatsoever about what he was doing.  None.

No one would knowingly spend twice what they had to for a given item (unless you're a government agency).

I think this has to do with how our society has been trained by our schools and other government institutions to simply follow instructions.  Don't drink this.  Do eat that.  Don't buy this.  Do buy that.

His very skillful - if dishonest - salesman told him to buy these coins, and he did so.  Unquestioned obedience can be expensive.

If you're going to buy precious metals - numismatics or bullion - do yourself a favor and read this post of mine from April of last year [link Entering The PM Pool].  It has links to 5 other much more detailed posts I've written on most facets of buying precious metals.

These posts shouldn't be your be-all-end-all for PMs.  They could be your starting point.

They could overwhelm you and make you more confused.  If that happens, you shouldn't buy PMs.

If they pique your curiosity, dig deeper.  Get more education.  Go to a coin shop and talk to the staff.  Find out their opinion and why they believe as they do.  Does their view jibe with yours?

Start slow.  Be alert to market influences.  Stay educated.

Oh, and don't buy crap off of TV or from some faceless voice on the telephone.  Those TV ads and bullpens full of telemarketers don't come cheap...

Copyright 2012 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Unknown said...

I once heard that you should never invest in anything you do not understand. This case seems to make that point. Had this fellow even spent 5 minutes on google he wouldn't have gotten ripped off.

The Other Mike S. said...
This comment has been removed by the author.
Chief Instructor said...

TOR, it just amazed me. Right after I wrote the post, I got an email about another variation of the same 1907 coin sold for $2.76 MILLION. What so many people that are buying numismatic coins don't understand is that the values of coins don't track in a straight line with the grades. Meaning a MS64 is not just 1/70 more valuable than a MS63. Sometimes they can be valued exactly the same, sometimes there can be tens of thousands of dollars difference between single grades.

You don't want to just jump on in. Dip your toe first!