Gold and Silver: Collecting vs. Portfolio

Gold and Silver: Collecting vs. Portfolio

February 14, 2021

I am a numismatist, otherwise known as a coin collector.  It is a wonderful and enjoyable hobby for me.  I thought this would be a great way to introduce the topic of coin collecting and I have found it has helped me in my career as a financial planner.  Clients often ask about incorporating precious metals into their portfolio, so this first article will be devoted to discussing precious metals from two perspectives: investing and as a hobby.

Before 1986, Americans who wanted bullion often purchased it from other countries. One of the most popular was the South African Krugerand, which actually had its 50th anniversary in 2017. In 1986, however, President Ronald Reagan and Congress passed a law creating the American Eagle bullion coin in both silver and gold, and it has been a thriving business ever since, for collectors, dealers and investors around the world.  Each year, the US Mint makes bullion Eagles and Proof Eagles. The proofs are generally collected by numismatists.  In 1986, the US Mint made 5,393,005 silver bullion eagles; in 2016, it was 37,701,500!  In 1986, the mint made 1,362,650 gold 1 oz. eagles (they make other weights as well) and in 2016, they made 817,500.[1]

A gold and silver eagle (1 oz. each)

 

 [2]

 

 Silver and gold are also often considered as part of an investment portfolio.  The pandemic of 2020 led to these bullion coins rising in popularity; many people consider them to be a safe investment because it is a physical commodity.  Like any investment though, there are risks.

The above chart [3] shows gold prices from 1970 to 1-11-2021.  You can see the runup in 2007-2010 due to the financial crisis at the time.  I remember having a few clients who caught the gold bug at the time and started investing monthly in gold mutual funds, or they bought physical gold.  Unfortunately, once the crisis subsided, gold prices went down and they lost a great deal. Gold’s spot price (price per ounce) peaked in the $1770s and went down as low as the $1090s in 2016; that’s a 38% drop. In 2020, the COVID crisis caused another spike and gold currently sits near all time highs.  Silver has gone thru similar surges and declines.

There are two important components to buying gold - understanding the market and understanding how to buy gold.  If you were to look up the spot price during the day, you’d see a certain number – for example, on 1-12-21, it was $1847.16 at 9:21AM. [4]  If you look at bullion for sale at that same time, you’ll see such prices as $1949.41 – that’s a $100 difference, or in this case, 5.5% higher price.  That’s because the gold seller has to make a profit.  So be aware that you’ll pay spot price plus a commission or mark-up.  Buying gold can also be a little nerve-racking if you do it over the internet or via mail.  You’ll send someone hundreds or thousands of dollars and then wait to receive your gold in the mail, so do some research on the dealer to make sure you’re not subject to a scam.

As a numismatist, this presents an interesting dilemma.  I like to collect coins, so if I’m seeking a gold or silver coin, it’s smart to wait until spot prices drop.  For example, a very popular collectible coin is the St. Gaudens Double Eagle, which has a $20 face value and was minted between 1907 and 1933; it’s often considered the most beautiful coin the US has ever made.  The story of its creation is very interesting too (for another article)!  A St. Gauden’s Double Eagle costs between $2000 and $2400 in January 2021, depending on its condition.  However, 3 years ago, it could be found for $1300-$1400. In collecting, we often refer to inherent and numismatic value.  A 1 ounce gold coin has a melt value equal to the current spot price, but it has a value as a collectible as well.  As of January 2021, gold is around $1950 per ounce so if a St. Gauden’s is selling for $2400, that means it has $450 of numismatic value. 

So, are silver and gold an appropriate investment? Like most investments, it depends on your goals and the other parts of your portfolio, but precious metals can play a role as a hedge against inflation and crises (2008 and 2020 for example). But how about as a collectible?  Current bullion coins from around the world are very artistically interesting and because of the metal content, present a way to collect and have something of inherent value.  I and many other numismatists also enjoy the historical context of collecting coins.  If you’re curious to learn more, check out the footnotes and some of the non-profit organizations for numismatists such as the American Numismatic Association (www.money.org).

 

* Investments involve risk, including loss of principal amount invested. The precious metals, rare coin, and rare currency markets are speculative, unregulated, and volatile, and prices for these items may rise or fall over time. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future. The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results.