Gold Coin Scams

Gold seems to be mounting a comeback.  A weaker than expected jobs report released Tuesday – more than two weeks late due to the recent government shutdown – came in at just 148,000 new jobs for September, weaker than expected by some 32,000.  With an upward revision to August and downward revision to July, the net gain is still 23,000 less than expected.

The gold price jumped $37 after the report to close Tuesday at $1,342, the first close above its 100-day moving average in over a month.  Gold’s short term outlook has improved on the expectation of continuing monthly stimulus from the Federal Reserve.

With new job creation far short of the Federal Reserve’s hopes – averaging only 185,000 new jobs monthly over the past twelve months, well below the desired 200,000 per month – the Fed is now expected to continue with its monthly bond buying program unchanged until at least March 2014, perhaps even into June.  Continued stimulus means continued weakness for the USD, which in turn means continued strength for equities, bonds, and gold.

As gold rises, so do gold coin sales – and gold coin scams.  Ever wonder how television adds can offer gold coins with a claimed $50 value for just $19.95?  It doesn’t take a genius to suspect something’s awry.

With something as easily tradable as gold, you have to wonder why a vendor would choose to sell you gold for a price far below its value when they could just as easily turn to the market for a better price.  There must be something about it that makes it less valuable to them than what you are paying.

Numismatic Sales

Coins with special and valuable attributes are numismatics, or collectables, and are legitimate investments.  But they are not the same as ordinary bullion.  Where bullion coins and bars have just one value, the value of the metal in them, numismatic pieces have two values – the value of their metal plus an added attribute that makes them special in some way, such as a special design, its age, or its rarity, as in the case of a limited special minting.

Where authentic numismatic pieces do trade for more than their metal content and their stamped face value, anything selling for less than its declared value has to be suspect. Are you paying for the metal and getting the workmanship for free? Or paying for the design and getting the metal for free? It doesn’t make sense.

Remember that any coin manufacturer can stamp “$25” or “$50” on a coin, along with a nice engraving of a buffalo or eagle or the American flag.  If its design is worth that much to you, then it’s a good deal.  Just be aware that others may not ascribe as much value to the coin as that.

Other warnings to watch for regarding numismatics or collectables:

• If an ad mentions “tribute copy,” it means it is a replica, not an original.  Adds will often display a valuable original coin, only to offer you a replicated tribute to it.

• If they mention “private nonmonetary minting,” it means it was stamped by a private company, not a government mint.  While private companies can stamp coins, these are not considered legal tender.  The coins can display any value the company chooses, like Parker Brothers does with Monopoly money.

Misrepresentation

While the above mentioned ads are not really misrepresentations, but rather just cleverly worded sales pitches, there are a growing number of practices that are outright frauds.  Here are just some to watch out for:

• Shares or certificates of “pooled” or “escrowed” gold holdings are often sold to investors at the going spot price of gold.  There are no extravagant claims and no super bargains to arouse your suspicion.  The problem is that in many cases there is no gold either.

• Online purchases of gold coins or bars from companies with no shop or office you can visit, just an offshore address that often turns out to be a lawyer’s office where the company’s papers were filed.  You never get your gold, but they do process your credit card payment, often under a different company name.

• Packaged coins or bars that you are not permitted to open on the claim that breaking the seal would lessen the piece’s value.  The truth is that inspecting the piece would only reveal its lesser value.  A cheap imitation using a gold-copper alloy needs to be closely inspected to be detected.

• Falsifying the coin’s or bar’s condition and grade.  Grades are based on a point system ranging from 0 to 70 as follows: Poor (1), Fair (2), About Good (3), Good (4), Choice Good (6), Very Good (8), Choice Very Good (10), Fine (12), Choice Fine (15), Very Fine (20 & 25), Choice Very Fine (30 & 35), Extremely Fine (40), Choice Extremely Fine (45), About Uncirculated (50), Choice About Uncirculated (55 & 58), and Mint Condition (60-70).

Oftentimes, the only difference from one grade to another is a slight scratch.  But the difference in price between grades can be significant; where a 63-grade 2002 $50 Gold Eagle is worth $1,915, the same coin of 70-grade sells for $2,850.  Can you tell the difference just by looking at them?  You could be paying a 70-grade price for a 63-grade coin.  If the vendor doesn’t have or won’t allow an appraisal by an independent third party, there might be a reason.

The Legitimate Gold Market

Investors wishing to participate in the gold market would first have to ask themselves which market they want to invest in: the bullion market or the collector coin market?  Both are fine choices, as long as you know what you are getting and from whom.

If you want something with the potential to appreciate more than the price of gold itself, then a collectible coin would be perfect.  Not only will its metal content keep pace with a rising gold price, but its numismatic value based on design, history, or limited striking should also rise over time, giving that much more price appreciation over just the performance of gold itself.

But if you want something that tracks the value of gold as closely as possible without paying a premium for aesthetics, then you would want to stick with those plain and simple bullion bars, which trade at only a very slight premium to the gold price to cover the vendor’s expenses.

Of course, there are other choices of investing in gold, such as shares – although many will dismiss paper gold investments as skewed and manipulated by banks, who induce volatility by triggering cascading bouts of buying and selling.  But if you can handle the volatility, they might serve your needs as a low cost and low maintenance alternative to physical gold.

Paper investments that track gold most closely are large exchange traded funds, the largest of which is the SPDR Gold Trust (NYSE: GLD).  The fund does charge a slight management fee, so it will slowly fall behind the gold price over time.  But in terms of ease of execution, there is no simpler way of investing in gold.

Another popular paper choice preferred by many is shares of gold mining companies, which can actually give you income through quarterly or annual dividends where gold itself generates no income of its own.

Just keep in mind that companies do have expenses, which can sometimes run out of control.  Taxes, royalties, labor benefits, and mining and exploration costs can cut into a company’s profits, especially in years when the bullion price drops.  While gold companies can make a great long term investment, their stocks can run well ahead or lag well behind any short term moves in the gold price.

The choices available to gold investors are varied, with each offering something unique – with ETFs offering ease and low cost, mining stocks offering profit-sharing, and collectible coins offering added value through special attributes.  Just keep in mind that while all are legitimate choices, not all come from legitimate sources.

Joseph Cafariello

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