Precious metals coins provide investors with diversification and a refuge from the current volatility of stocks, writes Paul Dykewicz, editor of Stock Investor.
Gold (GC1:COM) rallied Wednesday, reports Bloomberg, with a midday range of 1342.50-1369.40.
With the prices of gold and silver falling during the past five years by 14.81 percent and 40.86 percent, respectively, the timing may be good to consider such purchases. It also would be in keeping with tradition for investors to use precious metals coins as a safe haven when the market slumps.
However, when venturing into the purchase of precious metals, investors need to tread carefully and use reputable coin dealers. For guidance, I contacted coin dealers who have rich experience in helping investors navigate the opportunities and pitfalls of buying and selling precious metals coins.
Silver or gold?
“The trend for gold and silver has been for silver to appreciate or fall by a greater percentage than gold,” said Patrick Heller, communications officer at Liberty Coin Service in Lansing, Michigan.
Gold and silver prices began climbing at the end of 1999 until they peaked in 2011, Heller said. The price of gold rose 563 percent by jumping from $288.25 an ounce in 1999 to $1,911 an ounce in September 2011. Silver soared 824 percent from $5.41 an ounce in 1999 to $50 an ounce at the end of April 2011, he added.
However, from those peaks to today, gold is down 30 percent (from $1,911 to $1,331.50) while silver has dropped 67 percent (from $50 to $16.34).
“Silver is a far smaller traded market than gold, so it tends to be more volatile,” Heller said. “Also, industrial demand for silver is a major driver for the price, unlike gold.”
Buying silver and gold
“From any particular point in time to another, either gold or silver could outperform the other,” Heller said. “Therefore, I recommend owning some of both metals. However, I do anticipate that silver’s price will outperform gold over the next five years, so skew my recommendation between the two toward silver.”
For buyers of both precious metals in the current market environment, Heller recommended an allocation of 60 percent to two-thirds silver and one-third to 40 percent gold.
“In silver, my current best recommendation is the U.S. 90 percent silver coins struck through 1964,” Heller said. “These can be purchased from many sources now at 1.5-3.0 percent above metal value if purchased in quantity.”
The 90 percent silver coins struck through 1964 have advantages other than price over the exact weight .999 fine ingots, Heller said. Those advantages, according to Heller, include: extreme divisibility, as one 90 percent silver dime has about 1/14 of an ounce of silver; familiarity, as the older general public can recall when these coins were in circulation; liquidity, in which the coins can be sold by almost any coin dealer and in the desired quantity (whereas a 100 ounce ingot would require the sale of an entire bar of silver); and reduced risk, as there is a small, but growing, problem of counterfeit products such as ingots and U.S. Silver Eagle Dollars.
When purchasing U.S. 90 percent silver coins in $1,000 face value bags (with about 715 ounces silver content), figure that the spread between the buy and sell price will run 8-12 percent, Heller said. The spread would be a bit wider for smaller quantities, he added.
Another fan of buying silver
Van Simmons, president of David Hall Rare Coins in Newport Beach, California, said he buys and owns both silver and gold coins. He also recommends the 90 percent pre-1965 silver dimes and quarters. Simmons said they are about 50 cents above the spot price of silver. A bag of silver coins with a face value of $1,000, consisting either of 10,000 dimes or 4,000 quarters, has 715 ounces of silver.
A buyer would take the spot price of silver of approximately $16.35 an ounce, plus 50 cents, for a total of $16.85 times 715 ounces and pay roughly $12,050, Simmons explained. There also is a shipping and insurance charge of about $50, depending on where the bag of coins will be sent, he added.
“I like silver; it is very cheap,” Simmons said. “The average mining cost is about $5.75 an ounce.”
Silver not only is a collectible but an “industrial metal,” Simmons said.
The weight of buying a bag of silver can pose a problem arranging storage, Simmons cautioned.
“If you buy $10,000 worth of silver, you have about 50 pounds,” Simmons said. “If you buy $10,000 in gold you can put it in your pocket.”
“Some investors or readers want to preserve the purchasing power of their dollar and prefer gold,” Simmons said. “Others want to speculate in metals or commodities and swing for the fences and prefer silver.”
Assessing the gold/silver ratio
“Gold and silver are currently both good buys, but they typically play a different role in your portfolio,” said Rich Checkan, president and chief operating officer of Asset Strategies International, a full-service, tangible asset dealer in Rockville, Maryland, that offers precious metals, rare coins and foreign currencies.
Investors who are looking to invest in either gold or silver may want to check the gold/silver ratio (GSR), which shows the amount of silver it takes to purchase one ounce of gold.
“Right now, the GSR hovers around 80.9, which means it takes approximately 81 ounces of silver to buy one ounce of gold, Checkan said. “At times like these, when silver is highly undervalued compared to gold, there is typically a rush to take advantage of lower prices in the silver market.
“When you see us talk about the GSR, we typically mention a ‘magic number’ of 80 for the ratio. The GSR has only reached 80 four times in the past two decades. Before today, the most recent occurrence was March 2016. Each of the three previous times it reached 80, the ratio responded by correcting downward roughly 40 percent to 60 percent! This effect was the result of silver outpacing gold as both gold and silver prices rose from the lows.”
Gold Eagle coins currently are available at “ultra-low premiums,” said Checken, who added investors still are buying and selling them at an equal pace.
Plus, gold prices tend to fluctuate less widely than silver, Checkan said. As a result, an investment in gold is more likely to hold onto its value in the long-term.
At today’s gold prices, the market is currently offering an opportunity that has not been seen in 40 years, Simmons said.
“The U.S. Twenty Dollar gold coins struck prior to 1933 are at extremely low premiums to the current price of gold,” Simmons said. “Over the last 40 years, these coins have sold at premiums ranging from 50 percent over the current spot price to 125 percent over the current sport price.”
Circulated grades of Extra Fine U.S. Twenty Dollar gold coins are priced at about 3 percent over the spot price of gold, Simmons said.
The Fast Money Alert trading service recommended the VanEck Vectors Gold Miners ETF (GDX) in its April 2 report. This gold and metals mining ETF seeks to replicate the price and yield performance of the NYSE Arca Gold Miners Index and has an expense ratio of .53 percent, while offering an .80 percent yield.
Dr. Mark Skousen’s Forecasts & Strategies investment newsletter recommends each of the coin dealers quoted in this column. For investors who are looking to sidestep market volatility and invest in something they can hold in their hands, silver and gold coins offer such an opportunity.