The Future of Generic Gold Coins

Posted on 8/18/2011

The subject of gold is almost a daily news story...

The subject of gold is almost a daily news story. Most recently, everyone is concerned about the implications of the United States government defaulting on the national debt. Before that, it was one European partner after another in the Euro zone seeking a bailout. The list of concerns over sovereign debt around the world will continue for the foreseeable future. The developed world has made promises to its citizens that it cannot keep. The US national debt now tops $13 trillion. The annual deficit tops $1 trillion per year. It does not take a rocket scientist to know that this spells trouble for the American dollar.

Until the last few years, gold has been viewed by the investment community as an antiquated relic of the past. Many central banks sold a large portion of their holdings in the last couple of decades. Gold was considered an unproductive asset. Alot has changed in the last few years. Now, most understand why gold has been a time tested, monetary safe haven for over 2000 years. It is now considered more of an international currency instead of a commodity. Even the standard financial media is giving gold its proper coverage. Last week, while watching CNBC news, I saw an interview with the popular financial guru, Jim Cramer. When asked about gold, he boldly stated that everyone should have 5% of their assets in gold. Not as an investment, but to be viewed as insurance. He was then asked if he preferred gold stocks or an ETF (exchange-traded fund). His answer was to purchase coins. Physical gold is the best protection against a financial catastrophe. Pretty amazing answer coming from a hard core Wall Street player!

Although owning physical gold appeals to many looking for the ultimate protection against financial calamity, others are quite interested in the pure investment potential. Taking delivery of actual gold coins can be expensive when considering shipping, insurance and storage. There are also security risks to be considered when handling physical gold. Even a handful of gold coins represents thousands of dollars. Many individuals have chosen gold ETFs for investing in gold. Others have picked gold stocks or actual contracts on the commodity exchange. Investors have poured billions into these investment vehicles in the past few years.

Many wonder if someday they might be able to invest in generic US gold coins that are traded in an ETF. You can be sure that this has been explored by many of the large players in the gold coin market. With the premiums for most generic US gold coins trading at historically low premiums, the timing could be perfect for such a thing to materialize. US gold coins offer many advantages that a pure bullion play does not — primarily that coins could go up if gold prices remain stagnant. Vintage gold coins are also considered by many to be a hedge against falling gold prices. The coins could retain collector value in a sharply falling gold market.

Mark Salzberg, chairman of NGC, believes it is only a matter of time before we see a generic gold ETF come to fruition: "There are already products available to investors that serve as a good model for how this can be done. We also know that there's significant demand for investments tied very directly to physical gold. One major barrier to generic gold ETFs has been quantity - there has been insufficient supply to support this kind of venture. When we here about a glut of generic gold in the marketplace it shouldn't be seen as a bad thing because it can open our industry to new opportunities like an ETF."

Vintage US gold coins have the advantage of being available in limited supply. Since they are no longer minted, the supply is relatively fixed. There have been several occasions in the past when there has been a run on US double eagles. Remember Y2K and the boom years of 1989 and 1990. The premium for generic gold is currently the lowest seen in years. The negative factors that have caused this (weak economy and oversupply) will not last forever. If a Wall Street firm or some other entity created a trading fund for generic gold coins, the market would literally change over night.

Let’s explore how such a market could be possible. First, you need large players other than the current gold coin importers. Currently, most of the business in this area of the rare coin market is conducted by the large firms that have import operations of generic gold coins coming out of Europe. Several of the large players post daily buy and sell prices. At the end of the day however, they want to be net sellers and there is an inherent conflict of interest when posting buy or sell prices. Currently, it is too easy to post a bid for five coins, when you actually have 500 ready for sale. A large financial firm or hedge fund could resolve this issue by keeping everyone honest. This would also require substantial capital to ensure liquidity in the market for the generic issues. In a world where billion dollar deals are commonplace, capital should not be a problem.

There would also need to be a marketplace agreement on the issue of copper spots. Some US gold coins display light and sometimes miniscule areas of red spotting. This is the result of the 10% copper alloy found in the production of the coins. In most cases the spotting is minimal, and should have little if no effect on the value of the coin. Some marketers reject any coins with copper spots and this has caused confusion in the past about the true value of the coins. Hopefully this problem can be resolved so that a true sight unseen market for large quantities of vintage US gold coins can be developed. If generic US gold coins cannot be traded with confidence on a sight unseen basis, then no other coins have a chance.

Transparency would also be critical for a viable market in generic gold coins to develop. Actual trading activity and true bid and ask pricing would be very important. One of the reasons investors are interested in gold is the lack of a perceived playing field on Wall Street. Whoever attempts to create a trading fund would need to assure investors of a fair shot. There would undoubtedly be some government regulation and that would need to be followed to the letter of the law. Some states still impose sales taxes or use taxes on the purchase of rare coins. Not taking possession of the coins should resolve the issue, but every state is different.

Large pools of money have already discovered rare coins, but usually on a coin-by-coin basis. It is very exciting to think how a genuine, trading fund would affect the rare coin market. The world is rapidly changing and there is a true thirst in the investment community for hard assets. In a capitalistic society, if there is a need, someone will usually try to fill the demand. I’m thinking limit up!!!

Jeff Garrett bio

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