Buying gold is an ultimate sucker bet. —Eli Lehrer, The Heartland Institute
PHOENIX — It didn't take too long for Bill Haynes, an Arizona gold dealer, to figure out that the person who kept calling about gold coin prices wasn't really interested in buying. Haynes, 67, is the president of CMI Gold & Silver Inc. in Phoenix and sells gold bullion products. The caller, who identified himself as Gene, said he had heard another gold dealer advertise on a Christian radio program. So he had taken $72,000 of his invalid brother's money and bought some collectible gold coins as an investment.
Haynes checked the coin price for him. They were only worth about $48,000.
Gene had been bit by gold — and learned the hard way that there are many different ways to invest in gold and many different types of dealers.
And he is not alone. A new Gallup poll found that gold is perceived as "the best long-term investment" with 28 percent of Americans preferring it over other investments such as real estate, stocks/mutual funds and savings accounts/CDs. The survey found Republicans are slightly more enamored with gold than Democrats, but this may not be surprising with some gold sellers (such as Goldline International, Merit Financial, Lear Capital, Swiss America Trading Corporation and Universal Coin & Bullion) advertising on conservative radio and television programs and on the Internet. Celebrity spokesmen such as Sean Hannity, Glenn Beck and Pat Boone also tout the precious metal as insurance against an uncertain future.
The World Gold Council reported gold bar and coin demand surged 24 percent last year. And gold continues to rise in value.
But how much of the buy gold frenzy is legitimate and how much is just glitter?
Gold on the rise
Andrew Schrage, editor and co-owner of Money Crashers (a popular and respected personal finance blog) has noticed the uptick in TV commercials espousing the benefits of investing in gold. "However, more companies are urging you to invest in gold because they're making money off of the deal, not because it's necessarily a sound investment," he said.
Schrage admitted the price of gold has increased in value by 83 percent over the last four years from about $900 per ounce to about $1,650 currently (gold hit an all-time high of $1,924 in September 2011). But history hasn't always been kind to gold. "In 1980, the price of gold dropped by more than 60 percent in a single year," he said, "and it was not until 20 years later that investors began to once again see positive returns."
Schrage said gold isn't a financially irresponsible investment, as long as people do not fall in love with it.
Eli Lehrer is not in love with gold. Lehrer is a vice president of The Heartland Institute, a conservative think tank, and oversees its Washington, D.C. operations. He thinks other conservatives' fascination with gold comes because of uncertainty, dissatisfaction with President Obama's economic policies and because of the "alluring myth" that gold is a safe haven.
"Buying gold is an ultimate sucker bet," said Lehrer, who invests in short selling gold. "Unlike the other things people invest in, it is literally good for nothing. Unlike stocks and bonds, it doesn't represent a claim on real business assets.
Gold is, of course, useful for jewelry. And it has some limited industrial applications in small amount, but Lehrer doesn't put it in the same class as commodities such as oil. "The only thing gold really reflects," he said, "is people's desire to buy gold."
But if Lehrer doesn't love gold, Steve Deeds, founder of Morgan Gold in California, does. Deeds has been a rare coin dealer and an expert in the field of precious metals for about 50 years. "Gold has been a store of value for five or six thousand years," he said. "It's always had a value — even when currencies have failed. … Every currency in the last five thousand years has failed. Why shouldn't ours?"
Gold shouldn't be seen as an investment as much as it should be seen as protection, Deeds said. He recommends putting 15 to 25 percent of a portfolio into gold. And the type of gold he recommends is the collectable numismatic coins.
There are two main physical gold markets. One is the bullion market — gold bars and almost-generic gold coins with value coming almost exclusively from the content of gold.
The other is the numismatic or collectable coin market — coins that have a premium cost above the intrinsic gold value. That extra value comes from the coin's condition, rarity and even its artistic beauty. This means people pay for the gold content and the somewhat nebulous collectors' value.
The coins do have a premium price over gold bullion, Deeds admits — but he said that is an advantage because the coins do not just act according to the changes in the gold market. The coins have fluctuations according to each individual coin type's supply and demand, he said, and so can hold value when bullion might fall.
On the other hand, Haynes, the gold bullion dealer in Arizona, doesn't like the premium cost aspect of collectable coins because it is hard for people to ascertain the correct value. He also cautions against the "spread," the difference between what a person pays for a coin and what a dealer is willing to pay to buy back the coin. The spread in collectible coins is greater than the plain bullion bars and coins.
But even the price of bullion gold can be nebulous.
When Savneet Singh first looked to buy gold he found the market opaque. "I was never sure what I was getting," he said. "I would get a different price every time I called. I never felt like I was being treated like I was purchasing a financial asset."
Since then, Singh became the founder and CEO of Gold Bullion International in New York City. The company brings gold bullion dealers together similar to the way LendingTree.com brings banks together to compete for customers.
Singh also cautions against collectible coins.
Singh had a client, an NFL player, who had purchased collectable coins from one of the gold dealers that advertises heavily. The coins were 12 percent higher than the price of gold. When the person went back to sell them, the dealer offered him five percent below the price of gold.
But when Singh began investing in gold bullion he learned later he had paid six to seven percent more than he should have.
Hedging against fear
Elliott Orsillo, a portfolio manager at Season Investments in Colorado Springs, Colo., likes products that are backed by gold — such as exchange traded funds or ETFs, which are basically mutual funds that can be bought in shares. "They are scalable and easy to understand in a low risk way to get gold exposure," he said. "The disadvantage is the commission."
Orsillo recognizes gold as a way to hedge against an "orderly decline in fiat currencies," not a catastrophic economic collapse.
Part of the urgency appeal of gold is fear of the decline of the dollar. But Pat Dorsey thinks its "insurance" or "protection" value is overrated. If it is insurance, Dorsey said it is important to classify what it is insurance against. Financial collapse? A decline in the equity market? A devaluation of the dollar?
Dorsey is director of research and strategy at The Sanibel Captiva Trust Company in Chicago. He said a business with pricing power — like Budweiser or Oracle — can raise its prices and could offset a decline in the dollar as well.
"Gold is a possible insurance against a dollar decline," he said. "It is not the only type of insurance by a long shot."
The first thing somebody should do when thinking about investing in gold is to decide when they would want to sell it, Dorsey said.
Are they going to keep it forever?
Do they plan to sell it when the price moves up to a certain level or when it declines to a certain level?
"Any time you buy any asset you need to know when you would get rid of it," he said. "Are you buying it to appreciate … or are you buying it as insurance? Why do you own it? You need to know that before you buy it."
The second question Dorsey said a person needs to ask is, "How much do I want in gold?"
He said most reasonable investors who buy gold keep it as a pretty small percentage of their liquid net worth.
If a person decides to take the gold plunge, Schrage with Money Crashers recommends spending some time researching the potential dealers. Avoid high-pressure dealers. Find out the return policy.
Knowledge about the types of gold and the premium cost over the gold value are essential. Knowing the spread between what a person pays and what the dealer will buy it back for is also important.
Golden last days
But buying gold as preparation for some apocalyptic future may not be wise.
"There is no way to safeguard against the end of the world or total economic meltdown," Orsillo at Season Investments said. "But even in that case, all you are going to have is a collectable coin that somebody with two chickens is probably not going to want to trade you for because he would rather eat the chickens than have a shiny coin."
Lehrer with The Heritage Foundation agrees.
"If it really gets to the point that you are in some Mad Max world, are gold coins going to be what is valuable or oil?" he said. "There's never been a post-apocalyptic movie where people are fighting over gold coins."