Copyright 2012 by John T. Reed
My parents both smoked. I assumed I would too. I thought it was something all grown-ups did. When I was a kid in the 1950s, they almost all did.
Then, in middle school, I noticed that a bunch of my classmates started smoking. Which classmates? The biggest slackers and losers in the class. I instantly resolved I would not smoke because it would look like I was following their lead if I did.
Good thing. My mom died of lung cancer. My dad had terminal pulmonary disease but I don't know if that is what killed him. That disease did prevent him from moving to Colorado to be near my brothers. Too high of an altitude. He died in New Jersey far from relatives.
Then there’s gold. I have heard about it my whole life. I have been an investor and/or investment analyst since I was 21. You would think I might have bought some gold. I never did. Never even seriously considered it.
A reader recently accused me of listing the 28% capital gains on precious metals just to “cover my ass.” I surmise, the background there is “everyone knows no one pays tax on gold gains.” Some other gold investors have confirmed that.
Oh. I was not aware of that.
The way I cover my ass is I never bought gold.
Reflecting back on it, I think it was the same mechanism as my smoking decision.
Gold owners have always had an image that is sort of conspiracy theorist, guns and ammo, tax evader, gold is my religion, obese, cabin in the woods, pawnshop, Mr. T, international criminal, coffee can buried in the backyard, royalty, infomercial pitchman, dictator, smuggler, third-world wealthy, numbered Swiss bank account, arms dealer, bling, pinky ring, disco shirt unbuttoned to the navel showing off gold chains, Arc of the Covenant, extravagance, pirate treasure chest, grizzled prospector, metal detector, wink-wink, elbow poke, pssst c’mere, G. Gordon Liddy. The kind of guys who have a police or sheriff’s association decal on their car.
Not my crowd.
I looked at buying platinum once. I very quickly decided I could only buy from the U.S. Mint. All the other sellers looked sleazy and untrustworthy. But I also quickly realized the Mint was not doing me any favors. They markup their platinum coins 15.7% over the platinum value of the coin. Is the U.S. Mint a reliable counterparty? Yes. But is paying a 15.7% markup smart investment? Nope.
I write a lot about real estate investing. One of the chapters in my book Best Practices for the Intelligent Real Estate Investor is about minimizing transaction costs, which are scandalously high in real estate. But by scandalously high, I mean 7% to 10%, not 15.7%!
When my wife and I got engaged, we needed to get her engagement ring. As always when something is a major expense or time commitment, I research it.
Very quickly with the engagement ring—a diamond only, she already had the gold ring she wanted the diamond mounted on—I learned that I, a laymen in diamonds—could not acquire adequate expertise to recognize value. The rule was to buy from a trustworthy seller. Who would that be? Companies like Tiffany whose retail image was so important to them that they would never dare risk a scandal.
We actually bought from H. Stern in Manhattan. They are a respected international company that started in Brazil. My wife knew them because spent an extended period during college in Rio de Janeiro, Stern’s original and headquarters location.
Was there a markup for Stern’s credibility? I am sure there was. Although my wife said the ring would be “an investment” to get me to go along with a relatively expensive one, I never bought that. But it was not a cubic zirconium nor did we get it from some local jeweler who stars in his own corny TV commercials. We were less concerned about overpaying than about being totally cheated by some con man. Mission accomplished.
So it seems to me in gold. If you buy from a national mint like the U.S., Canada, South Africa, or whomever, you will get what you were told you were getting. Any other seller, good luck.
The great philosopher Clint Eastwood said a man has got to know his limitations. I know mine. One is I cannot tell pure gold from fake or less pure gold. I checked into it to see if there was a fool-proof, simple test like density. There is not. The assay process is complex and actually requires drilling through the gold bar and all that.
So you have to buy only from a trustworthy seller. The only trustworthy seller of gold I can think of is federal governments of developed countries. They have their 15.7% mark-up. And what about when you want to sell? If one should only buy from a trustworthy seller, no one should buy from you.
The list of gold owners above seems to me to be people who probably are overconfident about their ability to assay gold to see if it’s real. And they must sell to similar people. A market where all the players are overconfident yahoos is not a normal market like stock and commodity markets.
The fact that one needs to buy from a trustworthy seller, and that you are not a trustworthy seller when you go to sell, suggests that those fond of buying gold have not thought the venture through. That is also a common mistake in real estate investment. Everybody thinks investing in gold and real estate is buying and holding. Not so. It also includes selling.
1. How are you going to buy it to make sure you get the best possible value—purity, weight, and cost?
2. Where are you going to store it to avoid burglary, fire, or other loss risk?
3. How are you going to sell it for maximum price promptly when you decide or need to sell it?
Most gold investors think too little about how to get maximum value when they buy. They think even less in advance about storage in many cases. And they barely ever think at all about selling. This is infantile, novice, behavior in the investment world.
How are you going to do that? How do you get credibility about the purity of your gold? Maybe buying gold from the U.S. mint and leaving it in the sealed container they sell it in. Maybe by paying a trusted assayer to verify your gold’s purity and weight. Maybe by buying established gold coins like Krugerrands—although I would never buy such a thing trusting that it was a Krugerrand because it looked like a Krugerrand—not at $1,700 a coin. I would buy junk silver trusting its appearance, because I had those pre-1965 coins in my pocket for 15 years as a kid, plus there is far less incentive to counterfeit a 1964 dime than a one-ounce gold coin.
Then there is the traceability issue. I surmise one of the big attractions of gold to these folks is they can conceal their ownership and disposition of the gold from authorities and maybe colleagues or customers. It is like cash to drug dealers. It is easier to cheat on your taxes and other financial obligations if there is no record of your ownership or sale of the asset in question. If true, this is not a nice group of people to associate with or trust or do business with. If they will cheat their government or their colleagues or customers, they will cheat you.
But they tell me there is no problem with purity if you buy from a reputable dealer. Oh, and does reputable dealer in the gold business also mean a guy who does not issue 1099Bs or keep records that the U.S. government can subpoena?
Because of it uniquely high value density, gold is the easiest asset to hide per thousand dollars of value. Again, what kind of people need that feature? Smugglers?
I think much of gold’s attractiveness to the dysfunctional crowd in the above image list is its connotations of cynicism, dishonestly, illegality, gangster cool. In marketing, this is called positioning. Both Virginia Slims and Marlboros are small piles of dried, shredded tobacco wrapped in a cylinder of semi flammable white paper. But one is the epitome of feminist independence and the other is the epitome of the macho cowboy. Bull!
Similarly, gold seem to be the Oakland Raiders of investments. Again, the Oakland Raiders are an NFL team like any other. Their bad boy image stems from their logo and occasionally after-the-play, off-the-field things, like the way their original owner dressed. But its just image. Between the wihte lines and the ready-to-play and end-of-play whistles, they are just another NFL team.
So it is with gold. By buying it you acquire sort of worldly, shrewd, cool, hip, Vegas baby image.
Stock and commodity investors know how to sell their investments. They just call their brokers and say sell. If you asked what their net proceeds of the sale would be, they would give you an accurate number.
One of the failings of real estate investors is they do not think through the final stage—the stage that is the whole reason for investing in real estate to begin with: selling the property and turning your gains into cash or other things.
The fact is, selling real estate investment property is not easy and the transaction costs are high. They talk about the current market value—probably exaggerated—and don’t like to talk about transaction costs. You need to interrogate them at gun point to get them to state a true net proceeds amount.
Gold owners sit around looking at the reports of today’s gold price and beating their chests. $1,700 baby! Am I an investment genius or what?
As I write this on 4/10/2012, goldprice.org says gold is worth $1,657.73. Oh, really? So go sell it for that.
Report back on the price you got, whom you sold it to, what shipping and other costs there were so we can get to the net proceeds, did the buyer give you a Form 1099B, how did you convince him of the purity, how much did you pay to store it? I’m an investigative reporter. I’ll check it out by publishing it here.
All those guys running gold ads on TV—buy from one of them then immediately resell, and report back on your total purchase price, how long it took to get the gold, and how much you got when you sold it, net of costs, and whether you were given a Form 1099B from he seller.
I think if I could get the actual answers to those questions, most of my readers would think being in the gold business made more sense than buying the damned stuff. One of my readers who is a former jeweler responded to my article on the disadvantages of gold by telling how customers came in time and again offering their gold for sale, left in a huff when they heard the price, then sheepishly came back a month later to ask if the price quoted on their first visit was still good.
I see tons of signs saying “We buy gold,” but not a damned one saying at what price.
One famous gold guy told me he likes to ask his audiences how many bought gold. Many hands go up. Then he asks only those who have sold gold to keep their hands up. He says virtually all the hands go down. The vast majority have bought it but never sold it. That suggests gold is some sort of roach motel: investors check in but they never check out.
He also says that if you bought gold from a reputable dealer then immediately sold it back to him, you would lose about 3% to dealer transaction costs. Try to buy and sell gold from less reputable people—apparently most of them—and you will lose a lot more than 3%.
If you ask a real estate investor how he decides what a rental property is worth, he will recite the three approaches to value: replacement cost, market, income, or at least some crude version of that.
Ask stock investors the same question and you will hear about the value approach, fundamentals, technical analysis, etc. Stock investors are generally full of crap, but there is an internal logic to their analytical technique and some of the valuation methods, like value, actually make sense during moderate periods in the market.
Even gamblers, whom I have studied to gain insights about real estate investment, have analytical techniques that make sense. They can almost all tell you when they sit out the race or game or hand because they lack their advantage they are disciplined to wait for before making a bet.
Then there are the gold morons. They have no valuation approach. They never sit out the market. No price is too high.
If you’re an investor in anything, you must have criteria as to when you buy and how much you pay and how much you will not pay. As far as I know, all categories of investors have at least some semblance of a way to value the asset in question and know when to fold ’em criteria—except gold guys. For them it is a religion, or, according to American Indians, a psychiatric disorder. “Gold is the yellow metal that makes the white man crazy.”
A reader directed me to the recent South Park episode titled “Cash for gold.” Very funny. Lots of street corner sign men waving “cash for gold” arrows. Their point was that gold in the form of jewelry is sold by con men to seniors who give it to younger people who trade it in for cash—$8 for an item purchased for $6,000 at one “Cash for gold” store. South Park then claimed a confusing path of the jewelry cycling to sweat shops in India where child labor makes cheap jewelry that is then sold on a shopping channel to gullible seniors and so on—with some going to gold smelters where is it melted down to become pure gold. I don’t know how many legitimate facts are presented in the South Park episode, but I think the representation of the universal disappointment of would-be gold sellers when they hear how much cash they can get for their gold is based on reality.
If you are “investing” in something sold by a guy swinging a “Cash for Gold” sign on a street corner, you probably need to review the definition of investment.
Here is an email from a reader:
Hi Jack,
I just read your "What kind of person buys gold" article and thought I'd give you some comments from someone who has bought and sold it.
Personally, I started buying gold and silver a few years ago just as a way to make some cash less liquid, without making it TOO hard to get at. I'm a software consultant. I was laid off about three years ago, and went independent which meant that my income shot up tremendously. Since I'm used to thinking of the cash in the bank as "discretionary plus bills" having an extra $10-20k in the account could end up in me nibbling away at that a bit too much. I figured that the price of gold doesn't move THAT much, and I could sell quickly if it started to crater, so my downside is limited. You can say I lack some discipline, but this worked for me. Personally, I would have been perfectly satisfied if gold had stayed around $1000. I'm very happy that it went up over 50%. Last year I needed some cash, so I liquidated most of my "hoard." I kept track of the dates I purchased, and how much I spent, so the tax reporting was pretty easy.
- As to the logistics of buying gold...
While the US Mint sells gold and silver products, if you're buying from www.usmint.gov, you're buying collectables, not bullion. That's how the Mint justifies the higher costs of those products. Some (e.g, proof coins) are manufactured in a special way that increases the cost slightly. Typically, bullion coins are not as "pretty" as uncirculated or proof coins, because of the different manufacturing process. If you want to buy genuine US Mint bullion, you have to go through their network of authorized purchasers, as well as local coin dealers. The number of authorized purchasers is small (around 20 companies, I believe). A few of them will sell at retail.
Here's the link from the Mint's website about buying bullion for investment, which includes links to precious metals dealers around the country: http://www.usmint.gov/mint_programs/american_eagles/index.cfm?action=american_eagle_bullion
There are a number of reputable online dealers that sell bullion, and their prices are clearly listed on their websites, and are updated daily, if not more frequently. Usually there's only a 3-4% spread between the buy and sell price. Here are a few:
www.apmex.com (they're one of those Mint authorized purchasers)
www.kitco.com
www.golddealer.com
Because I live in Los Angeles, the way I bought most of my bullion was by going to California Numismatics Inc (golddealer.com). They're about a 15 minute drive from my apartment. Or Wilshire Coin, which is two blocks away. I'd walk in, hand them cash, and they'd hand me the bullion. Walking home with an eight pound bar of silver in your bag is an interesting experience. When I needed to sell, I drove to CNI, because they had better prices than Wilshire Coin, and while I insisted on payment in checks, they were more than happy to give me cash, if my bullion sale was less than $10,000.
CNI has a big board in their store listing the buy and sell prices for various forms of bullion. I'd generally go in the afternoons, when the market was closed, so I don't know how they handle the changing prices during the day.
There are many different kinds of bullion products. The biggest bullion producing government mints (in no particular order) are the US, Canada, Austria, Australia, South Africa and (maybe) China. Many other countries make bullion coins, but these are the biggest. For various reasons such as popularity, different coins from different countries will have different prices, even if they have the same "melt" value. When it comes to coins, it's pretty easy (if you're a pro) to tell if they're real. Gold is so dense that you wouldn't be able to make a convincing counterfeit with the same weight and size very easily. For bars, the dealers usually look for drill marks.
As for storage, the gold was kept in my safe deposit box, while the silver was stashed away in my apartment where they're not going to get found. I live in a secure building and there's a lot more "easy access" stuff that they'd take first before lugging a bunch of heavy metal bars. Even if they knew what they were. I heard a story about a guy who had a 1000 ounce bar (over 80lbs) that he painted and used as a doorstop in his house.
- About gold bugs...
There's a local radio station that plays infomercials on weekends. One them is "The Gold Show" by the Capital Gold Group (http://www.startwithgold.com/ they have the current "episode" streaming on their site). The infomercial is a painful mix of real information combined with half-truths and sales BS that result in the conclusion that "it's always a good time to buy gold!" You know the drill. If gold drops, well, it's a buy opportunity! And if it goes up, well, BUY NOW BEFORE IT GOES HIGHER!! It would be funny, except that there are people who are making financial decisions based on this tripe. What always gets me is that if you are to believe the hype, you should put ALL of your money in gold, right? But recently they've added a line to their patter where they say "Don't put all of your money in gold because that wouldn't make sense!" without explaining why it would make sense. I guess someone complained or sued them after putting their life savings into gold last year when it hit $1900.
- Other places to buy gold
Everyone and their brother is buying gold these days, as you noted. I was staying in a hotel a while back where one of those "cash for gold" guys had set up in a meeting room. I went over to check it out. They had all the equipment to perform the acid test, etc. But they were paying something like half of spot. As far as I'm concerned, these guys are one step above crooks and are pretty sleazy. If I knew anyone who had old gold jewelry to sell, I'd send them to a place like Wilshire Coin or CNI. They still wouldn't get much, but they'd get more than what those guys operating out of hotel rooms and TV commercials would. Typically, I think they give about 10-20% under spot for jewelry. It mostly just gets sent to a refinery to be melted down.
- One last thing
As you know, gold is very dense. Different mints make coins different ways. The US Mint, for example, likes to make their coins of a similar thickness. So a 1-oz gold coin has a smaller diameter than a 1-oz silver coin. The Austrian mint makes their "Philharmonic" coins of a uniform diameter. I used to have a gold one, and silver one. I found it interesting to see how much thinner the gold coin was.
Regards,
Seth
Email from Kenneth W. Royce: [John T. Reed comments in red]
Report back on the price you got full spot price of $1,658, in
cash [“Full spot price” is apparently no great deal. Apparently it is common to sell for $20 plus or minus around spot. When you buy you pay more like $50 over spot, in which case the buy-then-immediately-sell would indicate a current round-trip transaction cost of about $30 to $70.]
whom you sold it to? local coin dealer [That is not whom. We knew that before you did it. What is the name and contact information of the dealer so my readers or I can confirm the sale? Mr. Royce found this article without any help from me, but he either has not found these two questions or chooses not to answer them.]
what shipping and other costs? zerot
did the buyer give you a Form 1099B? no (only required for 25+ oz. of certain coins in futures contracts)
IRS Procedure 92-103 (also see 26 CFR 1.6045-1)
Contrary to the scare stories, very few things are reportable when you sell. Under 26 CFR 1.6045-1 and
Rev.Proc. 92-103, dealers need only report customer sales of 25 or more (but not fewer) Krugerrands, Maple
Leaves, or Mexican Onzas, five bag lots ($5,000 face value} of US
90% silver coin, kilo gold bars, 100 oz. gold bars, 1,000 oz. silver bars, or 50 oz. or 100 oz. of platinum. If
you sell lots smaller than these, the dealer reports nothing.
-- http://www.the-moneychanger.com/numismatic_files/coin_con.phtml
how did you convince him of the purity? what "convincing" is
necessary for a common Krugerrand?
how much did you pay to store it? zero
Yep, sounds like a bogus way to store and retrieve wealth!
As to gold's counterfeit risk, accept only common bullion coins and verify them with a pocket
Fisch tester (http://www.fisch.co.za/home.htm). Or, use a scale and calipers. No . . . big . . . deal.
(Quite frankly, this issue rarely comes up amongst those who regularly handle gold bullion coins.)
[Royce put a bunch of other comments denouncing me at his web site. I did not find anything in it that I need to put here. I have written on a number of occasions that payers of money do not need to issue 1099s unless the amount was $600 or more per year and the payee was not a corporation. I am surprised to hear that purchasers of gold need not issue a 1099 unless the amount is 25 x $1,639.36 (goldprice.org 4/25/12) = $40,984. Seems astonishingly inconsistent, especially in light of the government’s hostility to gold in various laws. Here is a link to a discussion of the reporting-to-the-IRS requirements. Also, the issue is the 28% tax on precious metal capital gains, not the informational paperwork or lack thereof. That is at [IRC§1(h)(4)(A)(i) and §408(m)(2)]. Whether a 1099 is issued to you and the IRS or not, you owe the tax. My warning that a 1099B would be issued when you sold the gold was along the lines of saying, “So don’t think about evading the tax.” Is Royce’s point that you should think about evading it when there is no 1099B?
He also says I said the best inflation hedge was owning foreign cash in a safe deposit box in a foreign country. That is not what I said. You can see what I did say by doing a search for the word “currency” in the internal search engine at the top of each of my web pages.
One of my articles lists disadvantages of gold. One of those is capital controls that order gold bullion owners to turn it into the nearest Federal Reserve Bank as they did in 1933. If that happens again, which seems almost certain since the government cannot accomplish the goals of monetizing the debt if they allow other currencies like gold to be used, then Mr. Royce had better have his gold in a foreign safe deposit box. Above he says his cost to store his gold was zero. We can guess what that means. You read above of one guy who painted over a 70-pound silver bar and used it for a door stop. Smart, as long as it works. Of course, the fact that I know about it suggests that he could not keep it secret. And the fact that one guy famously did that will cause those who heard that story to look suspciously at the door stops or other seemingly innocuous painted hunks of metal in the homes of those who might own gold. I would not be surpised to learn that Mr. Doorstop’s third wife threw it away and replaced it wint a rubber wedge hardware store door stop. Or that Mr. Doorstop died without ever telling anyone about the silver and a subsequent owner of the home threw it away.
As Royce and I have both pointed out, putting any assets in a foreign safe deposit box is very inconvenient and has high transaction costs—travel expenses. The 28% capital gains tax on gold gains from 24 ounces, however, will pay for a lot of travel. If gold or foreign currency stored in a foreign country or foreign account is converted to an uninflated foreign currency in a foreign country and spent there, the question arises whether you had a gain at all. They use the word “functional” currency as the base for calculating currency gains.
If you are an outlaw, then many of the disadvantages of gold are irrelevant to you—unless and until you get caught. Same applies to spending zero on safeguarding your gold from fire, burglary, or robbery.]
A number of people have told me that experienced gold guys can spot counterfeit coins. I am skeptical. Seems like you would have to take a test where various counterfeits were shown to you along with real things and and the real ones would have to be confirmed by some tight chain of custody or assay. But even if true, I am not an experienced gold guy and the TV and radio ads are not aimed at experienced gold guys. Furthermore, I see no wisdom in becoming an experienced gold guy because all the other disadvantages of gold like inconvenient denomination, likely contraband status, 28% capital gains tax, theft risk, etc. still apply even if you eliminate counterfeiting risk.
As I said in one of my articles, when a news organization bought gold jewelry from a number of stores around the U.S. then had it tested by the top assayer in New York City, they found a high percentage of it was less pure that claimed in written certificates from the stores that sold it. When confronted, the jewelers, experienced gold guys, just shrugged it off and said they must have been cheated by their suppliers. So much for experience, or perhaps, when they are dealing with laymen, motivation to use their experience on behalf of the retail layman customer to avoid counterfeits.
Why not prefer, say, the Canadian dollar? That country’s debt-to-GDP ratio is 84% and falling. Ours is 104% and rising. Such a low and falling ratio indicates that Canada is not under pressure to inflate so it can pay its bills like the U.S. is. Transaction costs if you go from another currency Canadian dollars are similar to the best claimed in gold. There is no storage or shipping. There is no denomination at all so you can spend it in any denomination you want. If you never convert the Canadian dollars back into U.S. dollars—like spend them in Canada—I am not sure what basis there would be for saying you had a gain. They can be accessed all over the world via ATMs for about 3% or 4% if converted to another currency—no such charge at all in Canada if you receive Canadian dollars from the ATM. And while Canadian dollars may be declared contraband inside a hyperinflated America, they would always be quite legal in Canada and most other countries at the time they were contraband in America.
The empirical evidence—in books and movies about past hyperinflations—is that selected foreign currencies work far better than gold in past episodes of hyperinflation around the world. So why do the gold people snarl at me?
They never thought foreign currency through. Not-invented-here syndrome. They formed opinions without researching the history. And gold is their religion so there is nothing to analyze or debate. They have bragged about their gold at so many back-yard barbecues and in so many tarverns and barbershops that their position is now in concrete. If they revisited the evidence—or maybe looked at it for the first time, they would lose face.
I am more concerned about losing ass. In 2010, I said foreign currencies were no good because all countries used the U.S. dollar as their reserve currency and all currencies were interconnected through trade and bank loans. Then I researched actual hyperinflation experience in various continents and learned foreign currencies were the main liquid asset to have in monetary crises and changed my advice. I was right about reserve currency and trade and banking relationships, but I was wrong about the best foreign currencies. The decision to “print” too much money in foreign countries is not automatically related to the U.S. decision to do so because of reserve currency, trade, and banking. It is more related to a nation’s ability to pay its bills without inflation and their integrity.
The “gold forever no matter what the price” people lack the character and maturity to make similar analysis, learn, and admit they were wrong.
Here is an email from Tom Micheaels
Silvertowne, Tulving and APmex among many others, three of the biggest precious metal outfits in the US, post up to the minute buy and sell prices on their website. Completely transparent. Shipping is very cheap, at Tulving it is usually free. As I wrote to you earlier, premiums have risen on gold bullion coins over the years to the point where a seller can expect to get well above spot price for his coins. As I type APmex is paying $1706 for a 1 oz. Gold Eagle with spot at $1661.
There is no real "convincing of purity" necessary for a gold bullion coin. A novice need only a coin reference book or smartphone to look up specs, and and a $10 digital scale and $10 calipers, or a Fisch instrument. Due to the specific gravity of gold it is cost-prohibitive to attempt to strike a coin in anything other than gold. Tungsten comes close but tungsten but it has the opposite properties -- hard and brittle. In short tungsten simply does not work for coins. It would shatter if struck in the manner that all coins are when they are minted. A gold-plated tungsten coin is possible in theory, but it would have to be cast and cast fakes are fairly easily detected. A "fake gold bullion coin" cast in some other base metal will be either two large or too light, no way around it.
John T. Reed