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Play Gold Premium and Win
By Patrick A. Heller
September 03, 2013

 

The sudden decline in gold and silver prices in April and June spurred enormous worldwide demand for physical precious metals. Still, in the United States, demand from the general public has not soared to the degree that it did when metals prices dropped in the summer of 2008.

Is that about to change? Will that send the prices of older collectible gold issues higher? Let’s look at the background.

During the summer of 2008, the price of gold peaked at around $975 then dropped over two months to about $750. Prices fell even more dramatically for silver. For the balance of 2008, physical gold and silver demand was so frenzied that delivery delays extended months into the future and premiums rose.

Once the premium for short-delivery bullion-priced gold coins and ingots shot up to levels where common-date circulated pre-1934 U.S. gold coins were priced similarly, so eager buyers jumped to buy these coins as well. Naturally, this resulted then in a significant price and premium jump in the prices of such U.S. gold coins.

Those who owned these coins could profit from them in two ways. First, they made money on the renewed advance in the price gold. Second, this profit was amplified by the rise in the premium. For instance, my records show that on June 10, 2008, the spot price of gold settled in the U.S. at $879.75. At that time, we were selling common-date U.S. $20 Liberty Head coins in extremely fine condition for just over 10 percent above in the intrinsic gold value of the coins.

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The frenzy was still hot on Jan. 7, 2009. That day, the gold spot price closed at $845. We were then selling the EF $20 Liberty Heads for almost 40 percent above their gold value (and, by the way, they were exceedingly difficult to locate at the time).

An expansion of the premium from 10 to 40 percent is a major market event. In that way, the premium stretched from $90, in round numbers, to almost $340 per coin. This increased the value of the coins even as the price of an ounce of gold had temporarily dipped.

With major gold mining operations being closed around the globe because they are not profitable at current prices and with the COMEX and exchange traded fund inventories falling precipitously, a major shortage of physical gold is developing.

Before the end of the year, I would not be surprised to see eager bullion buyers once again turn to acquiring the lower-premium pre-1934 U.S. gold coins, as they did in late 2008. I don’t know how high premiums might rise from current levels, but the $20 Liberty Heads in EF that are now selling for about 15 percent over intrinsic gold value could cost a lot more in just a few months.

If you already own these common circulated dates, you might once again have a great opportunity. I am not urging people to purchase such coins as a way to acquire bullion-priced gold. You can still acquire most bullion gold coins and ingots at near normal, and much lower, premiums. Those are the products you should acquire for your physical gold position. But, if you already own some common-date circulated pre-1934 U.S. gold coins, you just might have an opportunity in the next six months to swap them for the bullion issues, which have lower premiums.

The upshot is you would be trading coins with higher premiums for gold bullion coins with much lower premiums. Even though at the time of the swap the prices of coins in both sides of the trade are equal in paper dollar terms, the end result could be an increase in the number of ounces of gold that you own without having to lay out any more cash.

That is desirable in itself.

However, if premiums on the common circulated gold coins do a round trip back to the 10-15 percent level as they did from 2008 to the present, having that extra gold in your possession in bullion coin form will serve as your reward for having seen an opportunity and taken it.



Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.



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