Peter Schiff is one of the leading voices of the crisis. Your writer respects, and often uses Schiff as a source, but his recent article “Numismatic Coins are Fools Gold”, filled me with the need to respond. I would normally bow to Mr. Schiff’s knowledge and experience, but his well meaning article needs clarification.
I mostly agree with the general article, that numismatic coins may not make good investments. However this is akin to saying do not buy blue chip shares because penny shares are risky. Rare numismatics do make good investments and I take exception to the use of Numismatics as a catch all. This is either badly informed, or deliberately misleading. Numismatics is defined as the science and study of money in all its forms. Numismatics covers a period of six thousand years: from Cowrie shells, to 2011 issue coins, and paper currencies. We would classify less than 1% of this numismatic matter as items that could be called rare, and less than ten percent worthy of collecting.
THINK LIKE A PRO, NOT A SCHMO
I have long urged investors to keep 5-10% of their portfolios in physical precious metals, and add even more exposure when appropriate through the Perth Mint certificate program and mining stocks. This advice, far outside of the Wall Street mainstream, stems from my view of the kind of crisis we are approaching.
Many people assume that the crash I wrote about in the original "Crash Proof" was the credit crunch of October '08. They are mistaken. Though I did accurately forecast the economic events of 2008, my ultimate prediction was that these events would set into motion a larger crash to follow. That crash, the one I have been warning about for a decade, is a collapse of the international dollar standard.
This is the crisis for which the smart money is already preparing. The People's Bank of China, Reserve Bank of India, Goldman Sachs, Barclays Capital, John Paulson, Jim Rogers, and countless other big names are all protecting themselves from a global monetary breakdown by buying gold. But are they doing it with numismatics? Among the big players, the answer is universally no.
What Schiff is describing as “a collapse of the international dollar standard” is a collapse of our entire monetary system as structured, a system transformation. He is absolutely right; the smart money is already preparing for it. The question, “but are they doing it with numismatics?” is unequivocally, most definitely; yes! Rare numismatics.
Over the past two years we have successfully reduced our client base by half and focused entirely on those that we can help. Two thirds of our active client base are sophisticated and high net worth individuals. As reported in the Wall Street Journal last year:
WSJ Nov 09: "Today's coin market is largely defined by high-end investors grabbing the rarest of coins that infrequently come up for sale; 'It's easier to sell a $100,000 coin today than a $1,000 coin’."
NUMISMATICS ARE LIKE STAMPS, NOT STOCKS
The reason a numismatic coin can sell for double, triple, or even many multiples of the value of the metal it contains is that a collector values the rarity and/or beauty of the coin. As an investment, it is on par with a stamp or a baseball card. Some people do make money flipping these items, but it is usually an experienced broker who can buy at a steep discount and sell at a large mark-up - either to a collector who takes pleasure in owning the item but does not expect to profit from it, or to a naive investor who thinks he can make money selling it on to a collector (or a greater fool).
If you are buying numismatic coins, chances are you're making a fast-talking salesman very rich at your expense.
Here Mr. Schiff likens coins to stamps. So what? According to what I know, stamps have outperformed coins and stocks but are not made of gold! So what is wrong with that? He then opens with the statement that coins can double and triple in value and touches on why and mentions “flipping”. Because we specialize on collections by design, I think most of our readers are not buying coins to flip them. The most important step in starting your collections is establishing an objective: retirement, children/ grandchildren, privacy, control etc. Working with a dealer that understands what you want it is possible to significantly lower your risk profile, while achieving returns in line with growth stocks.
As for the greater fools, those greater fools include you dear reader, but also the house of Rothschild, Union Bank of Switzerland, JP Morgan, the DuPont’s, the Hunts and many others that choose to remain private. Additionally Mr. Schiff is an ally of Ron Paul who discusses his coin investments in his bestselling book End the Fed. Warren Buffett also touches upon his numismatics in Snowball, the only official biography of the world’s greatest investor. Some “greater fools” to be in the company of.
LIES, DAMNED LIES, AND STATISTICS
This salesman might have a chart showing the performance of "rare/collectible/numismatic coins" against "regular/bullion coins." Of course, the chart shows the numismatics performing much better. But these graphs inevitably track particular rare coins which are cherry-picked with the benefit of hindsight. For every one rare coin that outperforms, there could be ten that severely underperform. Only afterward would you know which coin you should have bought.
In addition, these comparisons typically measure times of relative affluence, when coin collectors are flush. The chart is likely to reverse during a recession, not to mention the inflationary depression we are likely to experience. When times are tough, coin collectors are just as broke as everyone else.
Finally, the comparisons often omit the dealer's high markups and markdowns that would more than wipe out the alleged profits for retail investors.
Everybody uses charts of past performance and everybody knows the worth, charts of the future are simply not possible. He does however again just touch upon an area of concern, the bait and switch. If you are shown a chart of item A and you buy item B, it the same as being shown a chart of Apple Computers when buying Patel’s software in Bangalore. It is comparing apples to pears, chalk to cheese, rare to common.
We take pride in being able to not only identify, research and locate our target coins. We are one of the few companies with the resources to buy them. He calls it Cherry Picking, we call it our job.
Mr Schiff further states above that comparisons are measured during times of affluence. Again, this is entirely wrong and easily verifiable.
As the Wall Street Journal wrote:
“The PCGS3000 Index of rare coins has returned an annualized 11.3% since January 1970. During that same period, the Dow Jones Industrial Average has gained about 6.5% annually.” Were the 1970’s a time of affluence? What about all the 1980’s?
On a closer time scale, during the 1990’s and early 21st century, the world was awash with cash. Unprecedented wealth was created, not just millionaires, but billionaires appeared literally over night. Coins remained flat during the 90’s with only the few buying, and still they beat gold and silver, which continued down to $250 from $800 and $48 to $5 respectively. Most gold bugs choose to forget the twenty years of darkness in their yellow metal.
According to James Blanchard writing in “not all gold created equal” October 1997: “When gold soared to its all-time high in 1979 and 1980, rare coins went up more than twice as much, and continued to go up in 1980 after the price of gold turned down. In 1982, the price of gold rallied and the following year, even as the price of gold turned down, rare coins went up three times as much as gold had in 1982, and continued to go up in 1984 and 1985.”
BULLION GOLD IS MONEY
By contrast, bullion gold is more than an investment. It something you own so you can trade locally for the stuff you need - food, clothes, a roof over your head - even if the other guy isn't a coin enthusiast. In other words, it is money. One of the characteristics that makes gold money is its uniformity - meaning each coin is the same as every other coin of the same weight. Diamonds, which are not uniform because they vary in clarity, color, etc., are not money. Numismatic coins, which vary in rarity, condition, date of issue, etc., are also not money.
Bullion gold coins will always have value to your fellow Americans, while paper dollars have less and less. As the dollar declines, the "price" of gold will continue to rise, reflecting the stable purchasing power of the yellow metal. What's more, in a volatile environment, bullion gold will carry a premium for being reliable and widely accepted money - just as the US dollar does now.
I don’t know where to start with this piece. Mr Schiff asserts that gold is money useable for local trade. For illustration lets agree that today gold priced in pounds, dollars and euro is around 1,000 an ounce and remains the same at some future period. How useful would that ounce (1,000 of your currency) actually be buying bread? Furthermore, how many citizens would actually have liquid cash of 1,000 at any point in time? I would guess just like today, the elite would use gold, while the peasants have copper pennies.
I guess what I am getting at, and this is what rubs me the wrong way with the mantra of returning to the gold standard. Many gold bugs are convinced that because they will own the gold in this future utopia they will automatically rise as the new Illuminati; the enlightened ones to rule as our elite. After all, were they not wise to corner the gold supply for themselves?
Put simply, “Meet the New Boss, Same as the Old Boss”. Under this future golden paradise of equality the prime buyers for gold will be the central banks and governments. After all, they have sold most of their bullion holdings and both will be using taxpayer money to buy it back. Some utopia for us all to look forward to.
THE WORST TIME FOR NUMISMATICS IS NOW
If we enter into depression conditions, numismatics may actually drop in value while the gold price rises. As I mentioned above, numismatic coins depend on the demand of collectors. Collectors are folks with plenty of discretionary income. When inflation is eating away savings and the economy is contracting, who are these mystery millionaires that are going to buy your stash of St. Gaudens Double Eagles? Chances are any collectors will also be liquidating their collections as they lose their jobs and their investments go south.
Sure, the coins' gold content will provide a 'floor' to their value that stamps and baseball cards don't have, but the gold value is typically only a fraction of the retail price of a numismatic coin. If you pay twice the bullion value to buy a rare coin, bullion could double in value and you still might not be able to sell your coin for a profit. If you buy a regular bullion coin, the gold price only has to rise the amount of the mark-up above spot before you profit.
“The worst time is now?” Why? Those that know Mr. Schiff will be aware he is an ardent inflationist who deeply convinced hyper inflation is on the way. Surely he knows that you should sell what is expensive and buy what is cheap? An ounce of gold is up 460%, a one once Carson City piece, 200 known, is up 300%. Where is your money going?
He further ignores the facts, or simply did not bother checking, when stating coins go down gold goes up. This very well could be true with any asset on a daily or weekly basis, but all numismatic holdings should be long term.
Furthermore, the mystery millionaires he mocks are the same ones the Wall Street Journal wrote about, and many others still yet to question conventional wisdom. Maybe this is why this has fired me up so much. Peter Schiff could and should do a far better job of this article than he has. There are dealers out their charging three and four hundred percent over wholesale prices and his readers need correct information.
DON'T BUY FOOL'S GOLD
In short: the idea of numismatic coins as investments should be put to rest, once and for all.
Gold is a commodity. Bullion coins are pre-measured units of this commodity, stamped with a design as a quick signal of authenticity. Gold is also history's most reliable form of money, which makes it a good commodity to own when the world's paper money system is in upheaval.
But just like buying an Armani suit is not an investment in wool, numismatics are not an investment in gold. The only people who should be buying numismatics are those who appreciate the coins for their aesthetic value and take pleasure in owning them, not those hoping to preserve their wealth.
Gold still has a long bull market ahead of it. It's not too late for Americans to dump their dollar for a real store of value. The key is to find a trustworthy dealer with fair markups - and avoid dealers with teaser prices on the bullion coins you want and aggressive pitches for numismatics you should avoid.
There are a few things I can agree with here, and again there is a lot missing. Gold definitely is history’s most reliable form of money, but it is also the yesterday’s, today’s and tomorrows greatest crime scene. Murder, theft and mayhem have been wrought by gold for thousands of years.
I am sure Mr Schiff would acknowledge that fraud on a massive scale is being carried out daily in the gold and silver markets right now. As a model of what could happen with the gold market look what happened with the Madoff Ponzi scheme: all investors were chased for the money they received, and what came back will be distributed again, equally, amongst them. (After deducting fee’s of course).
Most of the clients I deal with are building an asset of last resort, a time capsule for use in the future. Many would sell the yacht, the Rolls Royce, maybe even houses and business before the coin collection. Think about it; the house gone, the car gone, and the business, yet as you walk away to start a new life, the million dollar coin collection in your pocket, and all you have to do is head to Christies and find a “greater fool”.
Or perhaps, the fool is holding his million in gold? Discreetly trudging away with his 25KG hidden in a bag ready for CashMyGold at his local Tesco supermarket. Only you know what you want; risk and speculation, or safety and privacy.
That only leaves me to say, how disappointed we are that such an eminent commentator has not taken the effort to question convention before attacking it. Come on Peter, you are better than that, and in these times your readers really need to explore every possible avenue.
