Wednesday, May 5, 2004

Insuring your finances with gold

You have insurance on your life, your home and your car, but do you have insurance on the one possession that may have the greatest long-term effect on you and your family’s wellbeing — your investment portfolio?

Prudent investors use precious metals such as gold to balance their investment portfolio against inflation, the continuing devaluation of the U.S. dollar or even worse, a major national crisis in which hard currency such as gold coins become a powerful medium for exchange. The price of gold typically moves inversely with stock prices and provides a sort of “insurance” against a flagging economy and worldwide turmoil.

A perfect example of the “insurance” value of gold is seen in the following comparison of the Dow Jones Industrial Index and the London PM Gold Price fix during the period of Oct. 6-26, 1987 at the time of the last great stock market crash.

Oct. 6: Dow Jones, 2,548; London, $458.00

Oct. 14: Dow Jones, 2,412; London, $460.80

Oct. 16: Dow Jones, 2,246; London, $456.25

Oct. 19: Dow Jones, 1,738; London, $481.00

Oct. 20: Dow Jones, 1,841; London, $464.30

Oct. 26: Dow Jones, 1,793; London, $475.00

During those 20 days of extraordinary volatility in global markets, gold provided its investors with a very valuable combination of financial protection, time to study the situation, a cushion against losses from other investments and the opportunity to make a profit in the gold market. More recently, gold again showed its value as financial insurance during the Sept. 11, 2001 World Trade Center attack when gold advanced over $15 an ounce.

As 2003 closed we witnessed an overall improvement in the U.S economy and a bullish sentiment on Wall Street. Yet, gold has risen over 36 percent since March 2002 and has recently broken though the $410 level. The main reason for the bull market for gold is the continuing decline in the value of the U.S. dollar. Since 2002, the value of the dollar has dropped 25 percent and experts predict further declines as the current administration in Washington attempts to “inflate” our way to prosperity during this election year. It’s a combination of more dollars buying the same amount of gold and investors selling dollars and buying gold. Most experts believe that the current rally in gold is sustainable through 2004. The continued devaluation in the dollar combined with strong demand for gold in the booming economies of Asia has analysts calling gold at $480 to $500 per ounce this time next year.

For investors who value the ease with which coins may be bought, sold and converted into cash, bullion coins make an excellent choice. Guaranteed by the issuing nation, a gold bullion coin is usually a legal tender coin with a nominal face value. We highly recommend the 1-ounce, $50 American Gold Eagle bullion coin which can be bought and sold at hundreds of precious metals dealers worldwide. As with all bullion coins, the 1-ounce American Eagle sells at a small premium over its intrinsic gold value. Other gold bullion coins to consider are the Canadian Maple Leaf and Australian Kangaroo and the Panda coin from China. Bullion coins usually have no collector value, with the exception of early date issues of the Panda coin, which are valued both for their bullion content and numismatic appeal.

Numismatic coins, such as pre-1933 $20 Gold coins (Double Eagles) are highly sought after by astute collectors and investors for the beauty, historical value and investment potential. Double Eagles weigh just under an ounce and are available in two varieties, the Liberty Head minted from 1850-1907 and the Saint Gaudens type, minted 1907 to1933. U.S. Double Eagles offer the best of bullion and numismatics (rare coin value) in one investment. They contain the intrinsic security of bullion and can also offer extraordinary profit potential regardless of the price of gold. The precious metal value of these coins is only a small factor in determining value that is almost solely based on the coins condition, demand and rarity.

Many investors appreciate the private nature when making a purchase of U.S. $20 gold coins. U.S. $20s are one of the few remaining investments that can be accumulated privately. Because coins are highly liquid and transportable, coins are attractive to investors who do not want the rest of the world knowing their business. Also, under current federal law, gold bullion coins may be confiscated by the federal government in times of national crisis. As collectibles, $20 Double Eagles (rare coins/collectibles) do not fall within the provisions permitting confiscation.

We are currently recommending that our clients purchase the American Gold Eagle and the China Panda bullion coin. The Eagle is the best selling bullion coin in North America and the perfect “insurance” against the continuing decline in the dollar and the almost certain increase in inflation during the second half of 2004. We also recommend the 1-ounce China Panda coin, as with its yearly design changes, it is the only bullion coin that has a mass collector appeal, and is the most popular gold bullion coin in the booming countries of Asia. For overall profit potential we recommend a combination of $20 Liberty Head and St. Gaudens type Double Eagles grading a minimum of uncirculated Mint State-62 and independently graded by one of the two leading independent grading firms, Professional Coin Grading Service (PCGS) and Numismatic Guaranty Corporation ( NGC).

We urge investors to maintain between 10 percent to 20 percent of their portfolio in hard assets such gold and rare coins as a hedge against future economic uncertainty and possible political upheaval. We look forward to talking with investors so that we can build a portfolio of gold bullion coins and U.S. numismatic gold coins to match their investment goals, investing time frame and specific needs.

For more information, contact Mr. Ken Smaltz, senior numismatist, Eastern Numismatics, Inc. at (800) 835-0008, Ext. 241.

— David Herman

Senior Economist

Eastern Numismatics, Inc.

Courtesy of ARA Content