Wednesday, June 26, 2013

How are those Gold and Silver Coins Working Out?

From the Desk of Joe Rollins

Every morning I watch the financial news for about an hour and a half before getting ready for work. I don’t know why it took me so long to notice, but it occurred to me this morning that there wasn’t a single commercial for gold and silver collectible coins. There also was no mention of the world coming to an end, money being worthless, or life as we know it ending soon.

As I have explained many times before, I do not invest in gold because I consider it to be speculation, not investing. (See my previous blog on that particular subject.) The reason I don’t invest in precious metals is because there’s no way to evaluate whether the price is reasonable or even fair. How do you evaluate something that has no earnings, no cash flow (no dividends), is not particularly scarce, and only changes hands on an individual basis? I vividly remember when gold (GLD) and silver (SLV) ETFs started, with the exclamation that it enabled average investors to purchase gold and silver without actually having to take physical delivery of the metal.

Since the first of the 2013 year, GLD is down a stunning 23.79%. It’s even more pronounced when you take the current quarter into consideration, noting it’s down 20.07%. The same goes for SLV; it’s down 35.6% for the year-to-date and 31.15% for the quarter. As of yesterday, the S&P 500 is up 12.5% year-to-date. Does it surprise you given those statistics that you do not see any advertising right now for gold?

As I have mentioned many times in the past, these gold and silver coins that are advertised on TV are even worse investments. They have virtually no market except generally from the person who sold them to you. They contain very little of the precious metals and would have to be melted down in order to obtain even a small percentage of the metal. Therefore, from an investment standpoint, these coins are virtually worthless.

When the actual metal is put in perspective, it’s interesting to see how the market reacts to the price. As the price of any commodity goes up, more and more of the commodity is mined. It’s a simple definition of supply and demand. If the prices get high enough, people will spend the money to mine it. As the price of gold and silver continued to rise over last few years, increased production of the precious metals have made the supply increase, reducing the value of the commodity.

It was once said that gold was the ultimate hedge for inflation, and therefore, you should purchase gold if you wanted to inflation-proof your portfolio. That seems to fly in the face of the increase in gold over the last few years, since inflation has been extraordinarily low. Then there are those who argue that gold is really the protection against deflation. You couldn’t really argue with that since there’s not been deflation in the U.S. for many years.

In summary, investing in precious metals is not like investing in stocks and bonds. With financial instruments, you can actually evaluate their cash flow, earnings and market reaction to those known facts. With precious metals, however, there is no cash flow, earnings or anything else to evaluate except public sentiment. Since I cannot evaluate that, this is an asset class we avoid.

For those of you who bought commemorative gold and silver coins, I suggest you dig them out of your underwear drawer today and see if you can sell them back to whoever sold them to you. I think that’ll help you see how investing is different from speculation.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins

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