Sunday, March 29, 2009

Buffalo Silver Rounds

Buffalo Silver bullion round coins
Buffalo silver rounds are some of the most popular silver investment items being sold today. Like American gold buffalo coins, their design is based on the Indian Head nickel, also known as the Buffalo nickel, which was minted between 1913 and 1938.

Buffalo silver rounds are not produced by the US Mint, but rather by a private mints, with the most popular version being produced by the Wall Street Mint. They have no official connection with either the Indian Head nickel or the American gold buffalo coin, but is rather inspired by their design.

Buffalo Silver 1 oz rounds reverse sideOn the obverse of the Wallstreet mint issued round is a portrait of a Native American man along with the word "LIBERTY" at the top right edge. On its reverse is an image of a buffalo, along with the purity and fineness listing of ".999 FINE SILVER" along the top edge above the buffalo, along with the weight description "ONE TROY OUNCE" below the buffalo at the bottom of the coin. It has a diameter of 37 mm.

If you don't buy directly from mints or reputable dealers, be careful of fake buffalo silver rounds. I have heard reports of fakes made of silver plated copper, which can be spotted by their marking of ".999" or ".999 FINE" instead of ".999 FINE SILVER". Real silver 1 oz. rounds weigh 31.103 grams, but the fakes weigh 3-4 grams less than that.

Since they are not officially minted bullion coins but rather silver rounds, silver buffalos can be bought at significantly lower premiums than officially minted silver coins like the American silver eagle. They will, of course, sell for a lower price to, and since they are not world famous like silver eagles they may not be as immediately liquid. But silver bullion is silver bullion, and buffalo silvers are an efficient way to invest in silver at prices close to spot.

Friday, March 27, 2009

Investing in Gold Certificates

How Do I Buy Gold Certificates?
What are gold certificates? They are certificates that indicate you are the owner of gold that you do not physically possess. Normally, these certificates are issued by financial institutions from whom you buy gold, and those financial institutions physically store the gold for you. At least that's how it's supposed to work.

Possessing certificates of ownership is like having your money in a gold pool account. You give your money to the company who runs the program, and when you cash out they pay you whatever returns you may have accrued according to the current gold price. But they may not store any physical gold for you. Rather, they are thought to take your money, and invest in whatever they expect to get the highest returns rather than in gold, pay you the returns on gold, and keep the rest of their gains for themselves. That begs the question of what happens if they make some poor investment decisions and lose your money, and are unable to pay you your returns on the gold price? I don't know. What happens if the institution goes bankrupt what happens to your investment? If it's not a physical asset, I suspect it would vanish.

There are some positive aspects of gold certificate programs. One is that you can essentially invest in gold at the official spot price without having to pay any premiums for physical metal or pay any storage fees. Those premiums and storage fees can cut into your profits quite a bit, so gold certificates represent
an alternative that gives you the most efficient returns.

The Perth Mint, AustraliaOne option for gold certificates is the Perth Mint's gold certificate program. The Perth Mint's program is full backed by the government of Western Australia, which affords somewhat more of a sense of security than possessing gold certificates from a private institution that could go bankrupt and watch your non-physical gold vanish. The Perth Mint's gold certificate program charges 1.75% fees on all purchases plus a $10 certificate fee, plus a 0.75% fee when you sell. This is much lower than the current premiums on physical bullion which have skyrocketed during the current bullion and coin shortage. There are no storage fees. There is a minimum initial investment of $5000 Australian dollars. The Mint claims that every ounce you buy remains on the premises of the mint that can not be removed. Your investment is both government backed and insured by Lloyds of London. This is for basic unallocated storage (though again they do claim to have gold on premises for you, in some form).

The Perth Mint also offers allocated gold storage accounts, though this requires both storage fees and a fabrication fee (to mold the gold into whatever form
you choose to have set aside for you).

You can find more information on the Perth Mint Certificate Program here

Whether or not you invest in gold certificates will depend on how much faith you are willing to place in an institution to store your purchased commodity for you. I am personally someone who is prepared for the worst while simultaneously not paranoid, and seeking the best returns possible. That has lead me to the conclusion that holding a stack of physical bullion as the base of your portfolio is important, but that on top of that base it is fine to diversify and hold certificates or other kinds of gold accounts that do not have allocated storage. I personally do not take part in the Perth Mint program or similar ones, but I do have an e-gold account. I think those are fine as long as you know that there is some degree of risk, and watch the markets with the willingness to sell your certificates or digital gold if gold market demand really heats up. I would personally feel very little stress in investing in the Perth Mint's program, though I would probably avoid a financial institution's certificate program.

Thursday, March 26, 2009

How will $1 Trillion Dollars of Inflation Affect The Price of Gold?

Gold as hedge against inflation and collapsing dollarA little over a week ago we heard of plans for the US Federal Reserve to buy $300 billion in US Treasury Bonds as well as $750 billion in mortgage-backed securities. You do the math, this amounts to the printing of over a trillion new dollars to be pumped into the US economy. This is separate from Obama's stimulus plan which will spend $787 billon dollars into the economy this year and next, money for which will also need to be borrowed from the Federal Reserve.

The intention here is to stimulate markets and getting them moving upwards again. But remember that "stimulate" is a euphemism for "inflate", so even though we will see market prices going up, the value of everyday goods will also be going up as the dollar becomes devalued. It is impossible to pump 1 trillion dollars into the economy without prices inflating, unless people start saving all their money without spending. But that's the whole point - for people to spend and for this money to circulate. The government wants inflation. They want to avoid deflation at all costs, even at the cost of our buying power. Why? I suppose because deflation causes immediate problems that are politically unpopular, while inflation, if it can be controlled, wreaks its havoc slowly without the public really noticing. If it can be controlled.

I think the significance of this for gold and silver investors is pretty clear: while the US moves out of deflation and into inflation, the dollar will become devalued and lose much of its buying power, while the gold price will rise as its role as a safe haven and as real money will become solidified. With the inflation will come rising commodities prices in general, as economic activity creates demand. Oil prices will likely skyrocket once again, and since silver's function as an industrial precious metal makes its price somewhat follow the price of oil, silver will once again rise in price. This is not really new information, but the Federal Reserve's plans give a new indication that these conditions are just around the corner.

Gold & inflation of currency supplyHow much will a 1 trillion dollar injection inflate prices? To be honest, I don't know. The reason I don't know is because there used to be something called the M3, a wide measure used by the Federal Reserve to indicate how much currency is in circulation. In 2006 the Federal Reserve decided to stop publishing the M3. My guess is that they knew they would soon be pumping trillions into the economy, and seeking to hide the currency inflation they stopped publishing the M3. But in 2005 the M3 was around 10 trillion dollars. This doesn't account for all US money, since there are so many lines of credit and electronic dollars created through fractional reserve banking and other kinds of fancy "money", but the M3 was some kind of reliable measure. If the M3 was 10 trillion dollars and you added an extra 1 trillion dollars, you can see how big of an effect there could be. But what if this new money fails to stimulate the economy? People are scared, and may save all their dollars. Well, I predict the Federal Reserve will print more and more in desperate attempts to stimulate the economy. And eventually, all of those desperately printed dollars will make their way into the economy. And when they do, we'll see big inflation.

I think with all the economic news coverage we've become desensitized to just how big a number "trillion" is. Trillions do not even fit on the display of my calculator, the number is too big. With such a mindboggling number of new dollars being printed into existence, be weary of the gains you are going to see in the stock market. Those gains will be offset by highly inflated dollars. Gold will be your ultimate safe haven against this inflation. And as economic activity speeds up, commodity prices will skyrocket. I just shifted more of my money into the gold market, particularly the gold mining sector, into energy, and into agricultural commodities. And I'm continuing to stack gold and silver with the expectation that much of the value lost by the falling dollar will shift to precious metals.


Wednesday, March 25, 2009

What's the difference between coins, rounds, and medallions?

When shopping for bullion coins you may have encountered something called rounds, and been confused about the term and what it means. Similarly you may have encountered medallions and wondered how they differ from coins. The basic difference between a coin and a round is that a coin is officially minted and is legal tender, while a round is not legal tender, and is usually privately minted. In its most standard usage, the word "medallion" refers to a metal piece that is, similarly to a round, not legal tender. But the word "medallion" tends to be used for a lot of commemorative coins aimed at collectors, whereas "round" tends to be used for bullion coins aimed at investors.

An example of a bullion coin is an 1 oz. American gold eagle or American silver eagle, since they are legal tender and officially minted by the US Mint.

An example of a silver round is this North West Territories (NWT) Mint one ounce silver round. I can't give you an example of a gold round, because even though I know they exist they are rare. Gold is so much more valuable than silver that investors prefer the safety of officially-minted and well-recognized coins.

An example of a gold medallion is this Winston Churchill commemorative medallion.

It should be noted that while the above definitions are the most common specific definitons, the word "coin" is often used in a general sense to refer to all
coin-shaped items. But a true "coin" will have a clearly marked face value in the currency of its country of mintage. For example, a 1 oz American Gold Eagle has a face value of $50. A generic silver round will not have a face value indicated, but just the precious metals weight and purity. For example, "1 troy ounce .999 fine silver" as printed on the NWT silver round. Commemorative medallions sometimes don't even have the precious metal content and purity written, so to determine that information you need an appraisal or certificate of authenticity.

Are there any advantages of coins over rounds and medallions?

Well, as mentioned before, officially-minted coins are easier to trust and feel secure with, since you know that your bullion purchase was made in accordance with all laws and regulations. In addition, officially minted coins, especially major ones like Maple Leaves, American Eagles, Krugerands and the like, are highly recognizeable and very liquid because of their visibility. The downside of officially minted bullion coins is that they carry a relatively high premium, partly because of higher demand but partly because they are not sold directly from the mint to individual investors, they first go through middle men. The US Mint for example sells its coins to distributors called "Authorized Purchasers". The authorized purchasers then mark them up and sell them to bullion retailers, who also mark them up before selling them to you. So in the case of an American silver eagle, you pay a significant premium over the spot price of silver to pay for the operations of distributor and bullion retailer.

In the case of a silver round, you can order directly from the mint, or retailers order directly from a mint, so you pay a lower premium over the spot price. This difference in premium can be quite hefty, for example the current spot price of silver is around $13.50, but an officially minted 1 oz bullion coin will probably command at least $18 while a silver round could be bought for as little as $15. If you are buying in large quantities, silver rounds could help you accumulate a significantly larger stack. When selling your silver rounds, they will of course command a lower price than officially minted bullion, but you should be able to get at least the current spot price. If you are living somewhere where your round is not recognized (or in my case, the silver ingots I bought in Japan), then you may have to sell your metal to a melter at less than spot. But you can always sell back to the mint you bought it from, at a small price spread. So basically, while officially-minted coins have the benefit of immediate recognizability and liquidity, rounds are more of a direct investment in physical bullion. When it comes to silver I personally prefer to hold about 1/3 of my stack in widely recognized bullion coins, and 2/3 in silver rounds. That way I have some guaranteed liquidity for emergencies, but still have the benefit of buying at lower premium rates.

As for medallions, if they are not in high demand then they can be treated like a round. But if they are sought-after by collectors then they will likely command
a numismatic premium well beyond the spot price of gold or silver. I personally stay away from almost all numismatic coins because I'm much more of an investor than a collector. But if I find a medallion at close to the spot price, I might buy it. The problem is making sure that you know its constituent metals, weight, and purity which are not always indicated.

A note of caution: there are a large number of rounds and medallions that are replicas of officially-minted coins. They are legally allowed to reproduce the images of officially minted coins, but they can not be the same size and dimensions as the original. You may encounter some 1 pound or 1/2 pound "American Eagles" for example (see the example below). If you buy them from a legitimite private mint, then you can trust that their precious metals content is genuine. The weight and purity should be written on the round. Please be aware that such replicas exist, and understand what you are buying. Some of the private mints have names that sound official, like "Washington Mint" or "American Mint", so novice investors may assume they are buying an official proof coin. And there are vendors, especially on Ebay, who will avoid telling you that these are replicas. Be sure to examine the pieces you are interested in buying, check for a face value, and if the coin is of an unusual size, do your research to see if such a large version was ever officially minted. You can quickly find out a lot of this information online, as long as you know to look.

Tuesday, March 24, 2009

How to Spot Fake Coins and Replicas on Ebay

In my last blog entry I talked about buying silver on Ebay, and over the past couple of days I've been looking through a lot of Ebay and Yahoo Auction listings. Despite online auctions presenting a unique opportunity to trade precious metals from peer to peer, there are dangers of fraud that you need to be aware, most notably fake coins and replicas being passed off as official coins. What got me looking into this issue was a listing about a 2002 1 kilogram Silver Panda coin. Immediately I thought "Wow, the Central Mint of China must have produced some large size proofs of the Silver Panda! I have to get one!" Then I clicked on the listing and had a look at the photos and desription. My instincts alerted me that something was wrong, and I didn't bid on the item. Something about the coin didn't seem right. Here's the photo of the "Silver Panda" on Ebay.

Fake 1 kg silver Panda coin on Ebay

The reverse of a fake Silver Panda or replica on Ebay

Real Silver Panda 1 Oz coinI went straight to Google images and searched for a 2002 1 kilogram Chinese Silver Panda, but couldn't find one. So I looked at some 1 oz silver pandas, and right away I noticed a few differences that confirmed by instinctive feeling. The 1 kg giant Silver Panda was not a Silver Panda at all, it was either a legal replica of a silver Panda and struck by a private mint, or an illegal fake. Either way I was highly suspicious that this coin was made of real silver, at least not pure silver. The obvious differences between the 1 kilogram item and a 1 oz Silver Eagle's design are the lack of a face value in Yuan, signifying that this is not legal tender, and the lack of the purity indication "1 oz Ag .999" (instead it simply reads "1 oz"). The implications of that are most certainly that this replica is not made of silver at all, but probably nickel or a cupronickel alloy. My guess is that because those markings are removed, this coin is a legal replica in China but that the vendors are fraudulently passes these off as real silver bullion coins when they are not.

Yesterday I saw at least a dozen identical items listed on Ebay, all originating in Hong Kong or China, several having the exact same photos and description page but different user names. Today it seems that all of the listing have been removed as complaints come in and Ebay closes the offending accounts. After looking around the Ebay forums I discovered that there is a huge problem with counterfeit coins and misrepresentations coming out of China. There are items like the above misrepresented replica, but there are other items which are the same as real bullion coins in size and design but have either reduced precious metals content or no precious metals content.

How can you prevent falling for fake precious metals scams on Ebay? Well, the first step I would take is to avoid purchasing from anybody in China, or in any other country where I think that regulations are lax. But beyond that there are signs to watch out for. Many of the fake Chinese Panda coins and others have a very low starting bid, often less than $1 US. But they have exorbitant shipping costs, which the seller keeps for himself. In the case of the 1 kg Panda replica above, the starting price was $89 US, but free worldwide shipping was being offered. Would a legitimite individual vendor really offer free worldwide shipping on a 1 kilogram item? I really doubt it. Another sign was the vendor's sales page, which looked like a desperate attempt to seem like a professional page but totally missed the mark. And another key indicator was that the vendors often had 0 previous transactions or a small number of previous transactions. That's because they're constantly getting banned and signing up with new accounts.

In addition to intentional fraud, there must be a lot of sellers out there who unknowingly bought fake bullion and are now reselling it without bad intentions. I read on the Ebay forums that one man bought a lot of American Silver Eagles, exclusively from vendors with excellent feedback scores, yet still 10% of his coins turned out to be fake when he sold them to his local bullion shop. The way to avoid this is to determine whether your purchase is authentic upon receipt. You could always have the item appraised by taking it to a local vendor and acting like a potential seller. Another simple way could be to weigh the coin, since a 1 ounce silver coin should weigh 31.1034768 grams, or 1.097142857 ounces (remember that troy ounces and Avoirdupois Ounces used for weight are slightly different). Nickel and copper for example are lighter than silver, so a cupronickel fake Silver Eagle would weigh less than a real Silver Eagle, assuming they were both the same size. There are also acid test kits you can buy. You apply a drop of acid to the bullion, and depending on the resulting color you will know the purity of the precious metals content. These are widely available through online shopping, such as If your bullion does turn out to be fake or of a different quantity or purity than you were led to believe, then you should contact Ebay immediately to file a dispute. If you pay by Paypal it is supposed to be easier to dispute purchases and get your money back. Though in the case of fraudulent vendors who make one sale then vanish, I'm not sure you will get any money back.

I don't want to discourage you from using online auctions to increase the size of your gold and silver stack, but I hope you take precautions and don't let the
ticking auction clock prevent you from doing your due diligence when shopping.

Monday, March 23, 2009

Precious Metals on Ebay

Maple Leaf auction and Silver Eagle dollars auction on Ebay
It's normal that gold and silver coins fetch a premium above their spot gold price, and that's to be expected since it does require money to manufacture, deliver, and stock the items. But lately the premiums have been increased because of ballooning demand for physical bullion. Lately I've been more interested in buying silver than gold, and I've been pretty surprised by the premiums especially on silver. It seems that there are almost two separate spot prices for silver, one official spot price which takes into account all silver that is accounted for on paper and on computer screens (ie. silver that may not physically exist but is simply owned as a promise to deliver), and a separate, unofficial market-driven spot price for physical silver bullion. Buying silver coins online in the USA, 1 oz bullion coins typically cost around $18 before shipping. I hear reports that buying in store costs over $20 in the US. Privately-minted silver rounds seem to be a couple of dollars cheaper.

At first I felt I was being ripped off when paying such premiums, that the shops were trying to gouge me. But when looking online at Ebay and other auction sites Y (Yahoo Auction is popular in Japan and some other parts of Asia) I saw that the going rate on those sites is just as high as the premium price charged in shops. I thought that this was a result of overzealous aution bidding, which might be partly true, but the prices are quite consistent, which suggests that on Ebay we can determine the real market value of physical bullion. And investors know, either consciously or intuitively, that physical bullion as a tangible asset has more value than a paper promise to receive bullion. That's why the market value of physical bullion is above the official spot price.

Unrecognized silver rounds and bars (unrecognized meaning that they are produced by private mints that are not as widely known as the state-run or other major mints) seem to go for around $17-$18 on Ebay, and well-known bullion coins like American Eagle Silver Dollars and Canadian Silver Maple Leaves seem to command $20-22. That is relative to the current silver spot price of approximately $13.85. Most of the sellers seem to be offering free shipping within the US, or a small shipping fee even on an order of a single coin.

Let's compare those price trends with the prices on a big online bullion dealer. At you can order 1 oz Silver Maple Leaf coins for $18.13 right now, and the somewhat less recognizeable but still popular Vienna Philharmonic silver coins for $16.28. These are obviously cheaper than the price trends on Ebay, but you have to pay shipping at a flat rate of $30, no matter how much you buy, plus insurance ($24 per $1000 of silver, but only $4 per $1000 of gold). So when buying small quantities of silver, the higher premium price on Ebay is made up for by cheaper or free shipping. It seems like here the market has naturally determined what individual investors are willing and able to pay for small quantities.

Perhaps the most important feature, though, of online auctions is that you can recoup the premium when you sell. When you sell back to Kitco, you get hit by the buy-sell price spread. For example, even though they charge you $16.28 for a Vienna Philharmonic silver coin, they will pay you only $13.66 to buy it back. But on Ebay or another auction site, there is no spread. Every transaction is independent of all others. And since the premium price trends seem very consistent, you can sell your bullion at a similar premium to the one you bought it at. I'm no expert in online auctions, but in the future when I am ready to sell some of my precious metals stash, I will look into selling via auction to get the full market value of the coin without paying a shop's overhead through spreads and fees.

After doing some shopping on ebay I appreciate its peer to peer quality so much more than before. When trying to order from a large vendor I'm asked to use a cashier's check or send a wire transfer and pay a large fee for the wire transfer, fill in all kinds of personal information, get faxes and verification forms and other things to make sure I'm not an international criminal or terrorist or whatever. On Ebay you simply decide how much you're willing to pay for the bullion item, and enter your paypal address then presto. The goods are on their way. This is the way the free market should be.

Sunday, March 22, 2009

2009 Ultra High Relief Double Eagle Gold Coin

2009 Ultra High Relief Double EagleThe 2009 Ultra High Relief Double Eagle Gold Coin's release was anticipated with a hype verging on mania. Demand for the Double Eagle has been so high that the US Mint currently has a backlog of orders that will take up to 9 months to deliver. Over 40,000 of the coins were ordered during the first five days of sales. Undoubtedly the current gold coin shortage is affecting the production time of the High Relief coin, because most gold stocks are being set aside for American Gold Eagles, whose production is legally obligated to meet public demand.

Reverse of High Relief Double EagleThis coin recreates the design of the old Double Eagle gold coin which was struck between 1907 and 1933. The old Double Eagles contained .9675 oz of gold, which on the gold standard of that time equaled $20.67, giving double eagles a face value of $20. The design was created by Augusts St. Gaudens, a renowned American sculptor. His design for the Double Eagle is a classic and is considered one of the best coin designs in American history. St. Gaudens' design was originally struck into the coins in high relief, giving depth and stunning clarity to the images on the coin face. However, the coin was quickly changed into a low-relief version, because the high relief coins needed to be repeatedly struck to bring out their details properly, and their high relief made them awkward to stack. St. Gauden's high relief work of art had to be compromised for the sake of practicality.

But 2009's reincarnation of the Double Eagle comes closer to St. Gauden's original vision, featuring a high relief design with stunning depth and contrast between foreground and background images. The images were reproduced by digitally mapping the original coin plastes from 1907, following St. Gauden's design with amazing accuracy. A couple of small modifications were made to make the coins current, including an increase in the number of stars from 46 to 50, to reflect the current number of US states. And of course the date was changed to the current date of 2009, written in Roman Numbers as "MMIX". The original DOuble Eagles were some of the only US coins to have ever had the date written in Roman Numerals. One other modification is the addition of the motto "In God We Trust" at the bottom of the reverse side.

Despite the overwhelming similarity of design, this 2009 can not be considered a replica or reissue because there are some important differences. While the original Double Eagles were struck in 90% gold and 10% copper, with a gold content of .9675 oz, the new 2009 incarnation is a 24 karat (.9999 fine gold) bullion coin, containing exactly one troy oz. of gold. And because they are struck in high relief, the coins are double thickness, measuring 4 mm thick rather than the normal 2 mm thickness of an old Double Eagle or standard bullion coin. They do, however, contain the same amount of gold as a standard low relief coin so its diameter is reduced to make up for its extra thickness. Its diameter is 27 mm instead of the standard 34 mm. One probably reason for striking the coin in 24 karat gold is that it is soft, and easier to strike in high relief than the old 90% gold alloy.

The 2009 High Relief Double Eagles are of uncirculated quality with a special finish. They sell for a higher premium above the gold spot price than standard bullion coins, but in my opinion unlike proof coins uncirculated coins are not prohibitively expensive. It looks like this coin sells for around 25% above the spot price of gold. If you are looking strictly for an investment, then a standard American Eagle is a better bet. But if you are looking for both an investment and a beautiful, precious collectible, then this uncirculated masterpiece may be a good balance between the two. I have hear nothing but rave reviews from owners of this coin. I guess the only thing left to do is to decide whether the beauty and uniqueness of this coin is worth a wait of 9 months!

Below is a photo of an original Double Eagle from 1908. Notice some of the differences in design mentioned above. Also notice the color of the coins, which is somewhat orangey, similar to a krugerand. This is because of the copper alloy used in the coin, as opposed to today's pure bullion version.

US Double Eagle 1908

American Gold Buffalo Coins

Obverse of American buffalo 24 karat coin
The America Buffalo Gold Coin is a gold bullion coin produced by the US Mint, which started being sold on June 22, 2006. The most notable difference between US American Eagle coins and American Buffalo coins is that the American buffalo is 24 karat bullion gold bullion, in other words 99.99% pure gold. The flagship American Eagles are 22 karat gold, in other words .9167% pure gold, with the remainder being a silver and copper alloy. Buffalo gold coins were introduced as a result of increasing global demand for 24 karat gold coins, and the popularity of Canadian Maple Leafs, Chinese Gold Pandas, and other 99.99 pure gold bullion items.

Reverse side of Gold Buffalo Coin 1 oz.The 1 oz gold buffalo coin has a face value of $50. But as with other coins, this amount simply denotes that the coin is legal tender and has no real connection to the coin's true value, which depends on the current gold spot price. The design of Gold Buffalos is based on that of the Buffalo Nickel, which was minted from 1913 to 1938. The design, by James Earle Frase, features an image of a Native American man on the obverse, and an image of an American bison (buffalo) on the reverse. The obverse face also includes the date at the bottom left, and the word "Liberty" along the top right. The reverse face features the words "United States of America" along the top edge, below that to the righthand1935 Buffalo Nickel Indian Head Coin( side are the words "E PLURIBUS UNUM" which is Latin for "Out of many, one" (a motto used in many official American symbols). It also reads "In God We Trust" at the bottom left, and at the bottom the face value, and below the face value the coin's weight and purity of ".9999 Fine Gold".

The American buffalo gold bullion coin is also available in fractional sizes of 1/2 oz with a face value of $25, 1/4 oz with a face value of $10, and 1/10 oz with a face value of $5.

Buffalo gold coins have also been minted in uncirculated and proof versions of higher production quality (and high premium pricing), but these have been cancelled for the year 2009 because of unprecedented demand for gold bullion coins. In addition, 2009 production of the standard bullion buffalo coins have been delayed until further notice. Most of the increasing investment demand is for American gold eagles, so the US Mint is setting aside most of its gold stock for their production.

American buffalos struck in previous years can be found in coin shops and bullion shops. But you may have to shop around to find one because there is no supply of new coins this year.

Friday, March 20, 2009

Paying Tax on Gold

In some countries, a sales tax is charged on the sale of investment-grade gold bullion. I think this is thoroughly rediculous, since investments are normally taxed upon liquidation, with the capital gains being the taxable income. In the USA and in the European Union, there is no sales tax on gold (but in Europe there is VAT tax on purchases of silver). I have heard reports that in some US states the state government tries to collect income tax on gold bullion coins such as the American Eagle, since coins are seen as more of a taxable "product" than bullion bars, but I haven't been able to confirm this. Basically, there is no sales tax on gold in the US. As is the case for silver in the US.

There is, however, a gold capital gains tax, just as their is for profits you take from selling anything else in the US. The rate of capital gains tax on stocks and typical securities is 15%. But, and this is a big but, in the US gold is taxed as a collectible. The rate of capital gains tax on collectibles is 28%! The government gouges us on gold. This does not apply only to collectible numismatic gold coins, this also applies to investment bullion coins as well as bars. It also applies to mutual funds and ETFs that purchase gold on your behalf, and also to gold futures.

The one way to get around this high rate of taxation is to invest in gold mining stocks. These are taxed at a rate of 15% of capital gains, because you are not investing directly in gold, but rather in the company that produces the gold. I'm no tax expert, but maybe those taxes are paid at the company level so they do affect the company profits and your returns, but basically you don't have to worry about it. You pay 15% of your gains.

One interesting thing to note, however, is that in the US there are no requirements for either the buyer or the seller of gold and silver to report the transaction to the government. The only reporting required is for cash transactions of more than $10,000. This applies to any purchase, and not just the purchase of precious metals. If you buy less than $10,000 worth of gold, or if you pay by some other means, then the government will not know that you have the gold. When you sell the gold, the dealer is only required to report the sale for some larger quantities of coins and bullion bars, and not at all for American Gold and Silver Eagles. I suppose this means that you could easily sell your gold without paying taxes on it, especially if you sold it abroad. But I won't recommend this, because who knows what the government really knows about what you do. They may have ways of watching your transactions even without official reporting.

Basically, when you buy physical gold there should be no sales tax, but there will be a tax on selling gold, of 28% of capital gains, that you are legally obligated to pay, as rediculous as it is to classify investment bullion as a "collectible". This is the basic information. But please look into detailed professional advice when determining how to pay taxes on your gold.

Monday, March 16, 2009

Gold Shortage Discontinues Proofs

Shortage of American Eagles. US Mint stops proofs and uncirculated.
Today I was browsing the website of the US Mint (by the way, do not mistake this with "American Mint" which is a dealer of high markup numismatic coins), when I noticed something very interesting. Production of proof and uncirculated editions of the American Gold Eagle coin have been suspended because of an overwhelming demand for bullion investment coins. If you don't know what proof and uncirculated coins are, the basic idea is that they are struck at a higher quality without blemish and are intended to be collectors items, rather than investments. Their value is partly determined by their metal content, but also by their limited minting status and rarity, their superior image striking and absolute mint condition. Thus they are sold at a significant premium over the spot price of their constituent precious metal. Bullion coins, however, are priced based on their precious metals content alone, plus a small premium.

In this unstable economic climate, investor demand for gold, platinum, and silver has has exploded, leaving the US Mint scrambling to fill public demand. The interesting thing is that the mint is required by law to produce enough bullion coins to reasonably satisfy public demand. From the United States Mint's website:

the United States Mint is required by Public Law 99-185 to produce these coins “in quantities sufficient to meet public demand . . . .

Being legally bound to produce bullion investment coins, the mint has suspended all minting of proofs and uncirculated coins because all available gold blanks are being allocated to bullion coins. This applies to silver and platinum versions of the American Eagle coin series.

But this shortage does not affect only proofs and uncirculated editions. Even bullion platinum coins are behind on their deliveries. Here in Japan Platinum American Eagles are nowhere to be found. The same is true for Platinum Canadian Maple Leafs. Gold Maple Leafs are available, but an increased premium is being charged over the spot price. My most recent coin purchase (a Maple Leaf) had a premium of nearly 20%. That's probably double the standard premium. From what I have read and heard from fellow investors online, this is the case all over the world (though in Japan premiums do tend to be higher than many other places).

What this shortage of physical gold and the subsequent increase in the above-spot premium tell me is that the economic climate is convincing a lot of non-investors
to buy gold. By that I mean people who don't buy mutual funds or stocks or anything but usually keep their money in cash are seeking safety in gold. It could also be that people have grown weary of invisible electronic investments that send their money off somewhere to potentially vanish. With the Dow falling so hard, and with people losing their life savings to scumbags like Bernie Madoff, people are realizing that if you can't hold it in your hand, it can potentially vanish.

Real physical gold in your own possession is the safest and best way to invest in gold. The proof is in the demand.

Friday, March 13, 2009

1/10 OZ Gold Maple Leaf

With the gold price dipping below $900 per oz. on March 10 and 11 this week, I saw a buying opportunity and made sure to put some money into e-gold and buy some physical bullion. But not wanting to overextend myself and run out of cash, I bought a small denomination of bullion, just a 1/10 oz Canadian Maple Leaf coin. 1/10 ounce of gold equals 3.11034768 grams of gold.

I bought this coin at Ginza Tanaka, the retail store of Tanaka Precious Metals which sells precious jewelry and bullion, mostly gold and platinum. They normally sell Platinum American Eagle coins and Platinum Maple Leaf coins but they were sold out, which seems to be happening across Japan. There was a notice on Tanaka Precious Metal's website stating that Platinum investment demand has exploded recently and that mints around the world are struggling to keep up with the demand. They also state that while they are happy to continue buying and selling platinum, the specific products they offer may be limited. If you can read Japanese, have a look at the Tanaka Precious Metals website.

I had planned to buy a platinum coin yesterday because the platinum prices are low but starting to rise again. But I really wanted a coin, and all they had were bars. So I stuck with gold. Have a look at my purchase in the video.

Monday, March 9, 2009

Gold Outperforms Whole Mining Industry

Commodity Recommendation: buy commodities in general, but especially gold.
The metals mining industry is preparing itself for a protracted period of low prices as industrial demand for metals has slowed along with the world economy. Prices of copper and aluminum for example are down approximately 60% since last summer.

For several years, booming metals prices were the result of consumption in the developed world and in rapidly industrializing China. But with both undergoing an economic recession, consumption has slowed. Particularly in China, where massive government investment in infrastructure projects pushed commodities prices higher. But this has slowed during the current economic crisis.

The mining companies were hoping that government stimulus packages would prompt a quicker recovery of economic activity that would increase demand for industrial metals, but this looks like a bleak prospect for now and they aren't expecting a rise in commodity prices until late 2010.

Commodity price gold highest of all.But despite the huge drop in industrial metals prices, gold has for the most part retained its high price. It has come down from its peak of over $1000 per troy oz, but will likely rise again soon. Its resilience is due to its status as "real money" and a "safe haven". So even when industrial demand for gold declines, it retains its status as a store of value and a real medium of exchange. And as I expect the current economic situation to get worse and continue for quite some time, I know we will see greater movement of investors into gold.

I personally see low commodities prices as a blessing because it gives me an extended buying opportunity. The fundamentals of commodities in general are very strong, and if you buy now on these lows you have a definite chance to make big gains. But I will also continue buying into the gold market because despite the commodities bull market (which is not over but interrupted), I think the fundamentals of the US economy are so bad that gold's value as a safe haven is still vastly underrecognized.

Reference: Reuters

Thursday, March 5, 2009

Are Gold Stocks Good Investments?

Are gold and silver mining stocks good investments today?
Owning physical gold is the single best way to invest in gold and benefit from increasing gold prices. But one way to diversify your gold investments is to own gold mining stocks, which are a solid investment. They have the reputation of being risky ventures that can collapse and make your investment evaporate, but that fear only has a basis if we're talking about junior exploration companies. These junior gold companies which have little or no gold discoveries yet can see their share price absolutely skyrocket when they do make a discovery, offering huge exponential returns. But these companies are also huge risks. When we look at the established major mining companies who already control extensive gold deposits, it is a different matter. It is those established players that I'm concerned with.

What are the pros and cons of major mining stocks?

One of the benefits of gold mining stocks is that they perform extremely well in deflationary environments, because the gold price rises during deflationary times but
the costs of the company's operations decrease due to deflation. Because of this diverging movement of costs and earnings, your return on investment can be much greater than on gold bullion. As the United States seems to be headed into a deflationary era, gold mining stocks will likely perform very well. Gold stocks
performed extremely well during the deflationary period of the 1930, also known as The Great Depression.

However, a drawback of investing in gold mining companies is that they may not perform as well as physical bullion during times of inflation. That is because even though the price of gold will certainly increase during times of inflation, the costs of production will inflate, and if the cost of production increases more sharply than the price of gold, profit margins will narrow. Such inflationary costs include the price of oil, but also other materials, labour, etc. In the case of a slow grinding inflation, the gold stock may underperform physical gold, but if the rate of inflation increases to the point that it worries investors into seeking a safe-haven, then the price of gold may rise sharply enough to make up for the increase in operation costs.

So gold mining stocks are a good bet in general, but an amazing catch in deflationary times. The key is to guess whether the US government and federal reserve's measures to inflate (AKA "stimulate") the economy will be successful. I tend to think they won't be, if we look to the 1930s as a model. When the US government threw piles of money into the economy, credit was still scarce and the economy still deflated. In fact, the extra money injection created more debt that
prolonged the deflation. This will quite likely be the case again. If this is the case, gold mining stocks will be the place to have your money.

Some industry insiders report that labour costs, at least in North America, have been falling in the gold mining industry, because of mine closures in the base metals industry, particulary copper mines. With an oversupply of laid-off mining workers, labour costs are coming down, increasing the profitability of mining companies. This is a deflationary sign. The price of copper is commonly viewed as an indicator of which direction the economy is going. With the price of copper having dropped drastically and copper mines shutting down, we know that the global economy is in the beginning of a deflationary period, which is resulting in less industrial demand for copper.

I personally don't own any individual gold stocks. I do, however, invest in the Blackrock World Gold A2 fund which consists of a basket of the top gold producers (around 70% of the fund's total), along with a certain amount of exposure to producers of the other main types of precious metals: silver and platinum (around 30% of the fund's total). I like this fund because it's diversified and thus limits the risks to individual companies or countries due to labor disputes, complications with environmental regulations, etc. So I can invest in the general movement of the gold mining industry. And even though this is an investment in companies, and not in gold itself, you can see from the comparison below that these companies' stock prices more or less follow the price of gold, at least its general trends. It's no match for the physical gold bullion that I'm holding in my hand, but it is a way to invest in precious metals inside my retirement fund, which currently does not have an option for physical gold.

This is a 5 year history of the Blackrock World Gold A2 fund.
Blackrock World Gold Fund A2 - diversified gold mining fund

And here's a 5 year history of gold spot prices.

5 year gold price chart, compared to gold mining stock prices above

Wednesday, March 4, 2009

Current Drop in Gold Prices Temporary

Current Gold Price Dropping on selloff On March 3rd gold fell for the eighth straight day, in its longest consecutive drop since June 2006. This is thought to be for several reasons. The first reason is that government efforts to stimulate the economy reduced fears of a worsening recession, thereby reducing demand for gold as a safe haven. The second reason is that after gold's recent rally that brought its price up over a $1000 once again for the first time since March 2008, many investors and traders were selling off their gold to take profits. Because of these investors getting out of gold, the gold price dropped to $906.65 per ounce at its lowest point on March 3, and coming back up to around $911. The spot gold price may hit $900 in the short term.

But there is very little doubt that these declines are temporary. The first cause of the recent drop in the gold spot price is reduced demand for a safe haven because of government stimulus efforts, but in the long run these massive injections of new currency are guaranteed to weaken the US dollar (and fiat currencies of other countries that print new money out of thin air) and compound economic problems, trading a big storm now for a huge storm down the road. So while in the short term people may feel relieved of their need for a safe haven, in the medium term they will definitely be looking for that safe haven once again.

The second cause of the current drop was a simple selloff as people tried to take profits before everyone else did. Traders will always cause this kind of swing in prices as they try to sell high and buy low at frequent intervals. Their impact is negligible because they will likely put their money back in as soon as they see prices are rising again. Similarly, longer term investors will likely put their money back into gold when they realize that the precious metals bull market is far from over and that gold market prices will continue to rise.

Indians sell unwanted gold jewelry while gold prices are high.Another phenomenon that may be leading to dropping prices is a selloff of gold jewelry and scrap gold in India, in response to the recent rally in gold prices. But many of these sellers' simply know how to sell gold jewelry at high prices and buy it back when prices drop, as is happening now. So there was a reduced demand as prices increased, and there will be increased demand now that prices are dropping. There is an equilibrium here, and the impact of the Indian selloff of gold should be seen as a simple deviation from gold's upward trend. Some Indians sell unwanted gold, simple scrap, when prices are high with no intention of buying it back. But this scrap gold will likely be melted down and used to feed the demand for investment bullion.

Several people I know including my mother have called and tried to convince me to sell my gold, thinking that the prices are in free fall. But I have deep confidence that gold will continue rising in value for the foreseeable future, with periodic selloffs as is to be expected. Gold's fundamentals are strong especially in light of the economic stupidity being enacted by governments around the world. I don't see how gold can not rise. So I will not be spooked by peaks and dips, which are a fact of absolutely any financial chart.


Tuesday, March 3, 2009

Countries Seek To Increase Gold Reserves Over USD

Fears of a sharp decline in the value of the US dollar are making emerging economies such as China and India anxious to increase their central banks' gold holdings.

World central reserve banks increasing goldChina has $2 trillion of reserves, but only 1% of that is in gold while the rest is almost entirely in USD. China currently holds about 12% of US treasury securities with a total value of $681.9 billion. It was reported in November of 2008 that China's central bank is aiming to increase it's gold reserves, which currently rest at 600 tonnes, by 4000 tonnes.

European central banks are also reportedly selling an unusually small amount of gold, as governments are keen to hold onto and increase their gold stocks as a hedge against the worsening markets and the US economic crisis. This is clearly a sign of their lack of confidence in the dollar.

The US dollar is currently appreciating in value against other world currencies, but that is largely due to liquidity and will reverse in the not-too-distant future. The massive American bailout packages and America teetering on the edge of a depression leave the dollar's value extremely uncertain, and very likely to fall hard as foreign investors lose confidence in the US economy. With the US government's very deeply engrained habit of funding its deficit with debt and by printing new money that inflates and devalues the currency, it's very unlikely that the world can maintain its faith in the US dollar throughout this crisis.

Countries increasing gold reserves to hedge against falling US dollarThe good news for gold investors is that as demand for dollars in reserves decreases, demand for gold will obviously increase. China's desire to accumulate 4000 tonnes of new gold reserves is impressive, since global annual gold consumption is around 4000 tonnes, and global annual mining output is only 2500 tonnes. This demand will be hard to fill. And the law of supply and demand dictates that commodities that are in demand hold more value.

And of course, there will be increased demand from individual investors seeking a safe haven from the dollar as it becomes more and more devalued. When the average person realizes that the major players have already begun abandoning the US dollar in favor of gold, that's when we will see a huge transfer of value to gold as demand suddenly shifts.

I can not envision any scenario in which the value of gold does not continue to increase in the future, at least for the duration of this crisis, which I think will be very long. I always watch what the very big players are discreetly doing, and they seem to know that the gold market is currently the best market to be in.

Reference: Reuters, Dow Jones Newswires