Esoteric Reading? Some Thoughts on Gold Coins.

For some time now, the darker corners of my brain have been rummaging about writing on a much misunderstood and probably little known topic: collecting gold coins.

It is also true that LinkedIn is being swamped with posts on gold's rise, how we should all pile into gold and how it will go to the moon. This unsettles me a little bit because the discussion should not at all be about gold rising. Gold should not at all be taunted about as an 'investment', or an opportunistic speculation.

I bet it was the photo which lead you to this article, not the topic itself. This article is way less sensationalistic, than the photo invites you to think but I thought it would pique your curiosity. Stay with me. It will be an entertaining and refreshing read you probably never read, or hear anywhere else.

Allow me a disclaimer first. No, I am not a gold coin dealer. I do own a humble handful but vagaries of life have brought me into contact with coin dealers. Not only did I learn a lot but I also grew to love the field. Since I consider myself an history buff and an aesthetic, in hindsight, this does not surprise me at all.

Introduction

Now, I realise this topic may be an esoteric one for most of you and probably out of place on this social network. I think so too but recent developments lead me to think, a sufficient number of better paid professionals are starting to wake up from their 40 year old slumber of ever lower interest rates, a turbo boost to money supply by ever larger quantitative easing policies and fiscal deficits, while kidding themselves with couch based investing via ETFs momentum driven stock bets. You would be hard pressed to do anything wrong. It is my contention that the couch has been bad for you and that these 40 year old comfy conditions are coming to an end.

My main area of interest in economics is retirement security and this interest grew out of personal experiences with my retirement planning. Out of this grew my interest in the savings industry and by consequence, in its destruction by ever more interventionist central bank policies. It is my contention that we do not save anymore. We were forced to start to invest and nowadays we speculate. This is where gold comes in.

You see, gold has been considered a "pet rock" for 40 years, something for dinosaurian and contrarian thinkers, losers and eccentrics.

What is Gold?

Well, yes maybe but the fact is that under the hood, gold is money and what we use daily as money is, in fact currency and currency is what central banks issue as reserves into the banking system and that is in fact credit, a liability on the central bank's balance sheet and thus credit. Let this sink in. It is both profound and a dry fact.

It so happens that credit has a life cycle. It is only as good, as the financial health of its issuer and I think we can all agree that the financial health of the world's leading issuers of credit has been deteriorating since De Gaulle send a cruiser to pick-up France's gold stored at the Federal reserve Bank of New York . Soon after, Nixon suspended the US$′s convertibility into gold and since then, our currencies have been backed by monetary policies of central banks and the fiscal strength of their governments. That backing shows up as a higher, or lower inflation which translates into a faster or slower deterioration of the purchasing power of the currency unit in question.

What does that have to do with savings, you may ask?

Well, first of all, depending on your age, you may be surprised to learn that there is saving and then, there is investing. Yes, there is a big difference between the two.

Saving is for the many and investing is for the few. This is true in a world, where money is not currency but in our post gold convertibility world, where currency is sold to you as being money, saving has been a losers game and investing is what you have been forced to do, so that you could achieve what saving has done for you in the times when money was the base, on which currency was issued. What in the past was for a few, is now good & sound for the many.

The graph below shows the amount of money, I mean gold, you have needed to buy the currency based DOW stock index over the years. A low ratio shows a losing DOW and a high ratio means a gaining DOW. Look at the volatility, look at all the costs and effort it took you to save in the DOW and see where it lead you. It lead you to the same result as having saved in money over the years, without all the anxiety and barriers of entry to be able to "save" in the DOW. It includes reinvestment of dividends and it excludes capital gains tax. If you do it right, gold is exempt from capital gains and VAT (Sales) taxes, about which later.

You thought it would be much different for the S&P? Nope:

The reality of course is a bit darker. Not only has the post convertibility world forced you to invest instead of to save but in fact, you have been encouraged to pile into debt because debt creation is what a credit based monetary system needs, in order to stay afloat. Ever more debt is needed to pay back past debt.

Am I a gold bug? No, of course not and this is because I do believe that the credit based monetary system can work. I do believe that going into debt can be a good thing. It is, however, only a good thing in case it creates, at a minimum, the wealth necessary to pay back that debt. This is what productivity growth is and this has not happened since the Great Financial Crisis, at a minimum. Instead, currency has been issued in ever vaster quantities. So much so that currently, investing in the DOW, or equities in general or real estate for that matter, is not investing but equivalent to speculation. This may be another term you may have to revisit. We have seen that saving has been taken over by investing and I challenge you to ponder if investing has not been taken over by speculation.

It is precisely this train of thought which brought me to gold. If I refuse to be pushed into investing or even speculation but want to stick to my boots and save, and I cannot save anymore because my currency is not money, then I have to buy the money with the currency I have. That money is gold and to a lesser extent, silver.

This is how I started to think around 2017 and when I started to discover the fascinating world of precious metals bars and coins.

Due Diligence

I was overwhelmed. The detail and knowledge an average saver needs to know is astounding but then I learned that from our grand parents backwards, this knowledge was widely held and applied every day. Illiteracy may have been high but folks back then, surely knew how to measure the value of a gold, or silver coin and they for sure knew, how to spot a fake one. So did the Roman legions by the way, when they got their weekly wages in Sestertius.

In the following, I shall share with you what I learned and what my current view is on how to proceed when contemplating to save in money, not currency and not by investing or speculating.

• 1) The first thing you have to do is study and truly appreciate, on a subconscious level, that buying gold is not investing. You are not buying gold to invest. You are buying gold to hold currency in a non depreciating form, much like you buy a ′strong′ currency and hold it in an interest bearing savings account. This is what saving is about. Investing is a different animal.

Thus, buying gold means you believe that currency is going down. It is depreciating while gold keeps its value. Thus, you do not invest in gold to make a profit. You save in gold in order not to lose purchasing power, much like you would save in a currency paying you a high enough interest rate to counter its inflation plus an acceptable real return. Which currency offers this nowadays?

Thus, buying gold is like buying a foreign exchange currency. You sell your currency to buy another. In the case of gold, you sell your currency and buy money. I follow Luke Gromen , Lyn Alden , Alasdair Macleod and Lobo Tiggre on YouTube and learned a lot from them. For price technicals I follow brilliant and very experienced Michael Oliver .

• 2. The second thing to realise is that buying gold is much more work than reading sell side hit pieces called research, listening to pod casts, emulating leading financiers and ′sages′ like an eminent one in Omaha, and pressing buy and sell buttons on digital apps.

No, it is work. You need to learn the tricks of the trade. You need to interact with people and you need to use your observation skills, acquire a critical eye and sometimes move fast.

There are however ways to make your life easier and as you walk up the learning curve, you may opt for an easier and easier saving strategy. You will acquire money with low effort and little anxiety. Hopefully, this article will show you the way.

What may indeed happen on the way, however, is that you fall in love with coins and indeed end up looking forward to all the ′work′. This would mean that your effort to save could also turn into a passionate hobby. Be forewarned! Being a gold bug is a joking term with no practical consequences in our daily lives. Being a coin bug is something quite different and has a huge impact in your daily life, starting with your partner in case you have one! I do not and so I am surviving well...

• 3) The third issue is to study the difference between holding paper gold held and managed by the financial system, much like bonds and equities and hold it physically yourself.

One thing is to hold gold with counter party risk like custodians, paying agents, trustees, bank accounts and so on. There are plenty of financial instruments offering gold but none gives you outright ownership of it and many are not even backed up by physical gold, equal to the amount of your own purchase. Rather they represent a fractional ownership, much like bank deposits which are fractionally backed by real cash by banks. Most of your bank deposit is loaned out.

Another is to hold gold in physical form and under your control. Here, there is no counter party risk and you do not depend on anyone to sell, buy, hold, or for pricing. You are your own sovereign so to speak. All you have to know is how to secure your holdings.

It seems counterproductive and inconsistent to distrust currency but trust its financial system and infrastructure. This article is about physical holdings only.

• 4) Fourth, you need to know some chemistry. Gold coins are rarely pure gold but are mixed up with other metals, mostly copper or silver. This is because gold is very soft. So that coins survive usage and the ages, it is mixed with harder metals.

Thus, when pricing a coin of pure gold, you take its weight and multiply it by the gold price, typically one gram per currency unit. A 10 gram pure gold coin would cost €720 with the gold price at €72/gram. However, many coins have a gold content of 90%. This is shown in the trade as being .900 gold, or 900 gold. In this case, you multiply the weight of the 10 gram coin by .9 and you get the net gold coin weight of (9 grams) and thus its value in gold terms (€648).

• 5) Fifth, you need to spot fake coins. The industry makes a big theatre of it, so that it can charge you high premiums over the gold price by overselling their services. They play on your fear but fake coins are actually very rare, except of course you buy from the usual suspects in the East. They are also easy to spot with a bit of education. Thickness, diameter, weight, colour and tone, as well as mint quality and wear & tear, all make it pretty easy to spot a fake. Naturally there are professional fakes but these are for very expensive coins in the thousands and ten of thousands of currency units, or for the most popular mass produced coins. Why? Because professional fakes are actually quite expensive to produce. Either you get your money back as a counterfeiter by selling a few very select coins, or you mass produce them for a large market. Once a coin is identified as fake, all its production run is as well and as a counterfeiter, you tend to lose your investment in all the set-up pretty fast.

There are instances where counterfeit coins were either produced on purpose, or with a mark distinguishing them as such. The British Sovereign coin is one such example but any interest in that historic quirk will have to wait for another article.

• 6) Sixth is the first strategic decision you will have to make. Are you looking to save in gold bars or rounds, bullion coins, numismatic coins, or a mix of the latter two? There are also medals. These are 'coins' which are not issued by a mint of a sovereign with a currency denomination on them and often do not even have a date on them. We shall not discuss these, ok? For saving, they can be useful but they are not really relevant.

Confusing, right?

Well, it gets easy quickly. Yes, of course there is also a quirky but quaint market in collectible gold bars but I do not recommend saving in bars. Please do not get me wrong. Collectible bars are fascinating and beautiful. They document a lost world of mine entrepreneurship, individual honour, integrity and credibility, when any self respecting mine and jewellery shop would produce its own gold bar with all sorts of marks and symbols. They come in all shapes and forms, some with elegant designs, others rough and rustic. These would be used as payment for real life transactions or for saving purposes by the Bourgeoisie of the times. I even came across a German collector, who specialised on gold bars from Portuguese jewellery shops and asked me for help to identify a specific bar. Naturally, it had long closed up shop and its address was now a souvenir shop. Oh well...Tempora mutantur, nos et mutamur in ellis...!

https://www.instagram.com/reel/C_6rvjMJjv-/?igsh=MTRvcmxxajE4cmp3Zg==

or a wider selection:

https://www.instagram.com/unique_goldbars?igsh=ajZuMHZyeXFubDJ6

(Examples of quaint and quirky gold bars)

Modern day bars are actually quite easy to counterfeit and much more likely to be used for unsavoury business deals. When of the same make and model they are practicable indistinguishable, except for a serial number if they have one and that one is easy to replicate. Besides, they are boring to look at and have no history behind them, no charisma. Leave bars to the vaults of central banks and millionaires. In case you are one, Matthew Piepenburg offers an excellent product. I follow him and learned a lot from him.

When deciding on coins, the first thing to be done is decide on bullion or numismatic coins.

Bullion coins are typically modern day, mass produced coins, where the price is the gold price plus a small premium of say 5% tops, when bought long after its production. Their price is made up of the gold price plus their production and distribution costs. Therefore, new coins bought from mints are always quite expensive in terms of premium over the gold price. Over time this premium tends to evaporate, either because the gold price went up, or because the second hand market for the coin dropped to the gold price level. I would never buy a freshly released bullion coin.

There is a theory out there, whereby modern day bullion coins will become numismatic coins as the time passes. Numismatics do carry a premium over the current gold price, sometimes substantial and even dramatically so. Yes, that may well be true but not all bullion coins will gain that type of popularity and there is no way of knowing which ones will. Choosing which ones would amount to speculation and we are savers, not speculators. There are modern day mints, whose bullion coins do become collectible but they are few and only some of their coins do so.

The advantage of buying bullion coins is that their price closely mirrors the gold price with almost no premium. When selling back you may lose the bid/offer spread but are always assured a steady market, in other words liquidity. This is because worse case, if no buyers can be found for your bullion coins, the bid is always there from smelters which buy back bullion coins for melting back into new produce. Recycling gold is a big business, a business I wouldn't mind getting into by the way.

I consider bullion coins to be boring but an essential hold. This is because they are a hedge to variations in the premiums of numismatic coins. Inversely, numismatic coins give you some hedge for the volatility of the gold price in currency terms.

This is why I believe saving in numismatic coins makes sense to any saver in money. Numismatic coins are not only for the collector, the discerning eccentric or ego driven millionaire. Numismatic coins is what we shall discuss next.

• 7) Numismatic coins are coins from a sunken worlds, distant in the past in some cases but quite recent in others. Their age ranges from Roman and pre-Roman times to our recent past when the gold standard ruled over our monetary policies. The gold standard effectively died on August 15, 1972, when President Nixon 'suspended′US$′s convertibility. Until then, gold was used by sovereigns to settle their trade balances and before the 2nd World War, they were even used to purchase goods on Main Street. Indeed many gold coins issued by sovereigns are termed as 'Trade Coinage'.

Numismatic coins are thus generally speaking all those coins issued before 1972.

Numismatic coins enjoy a wider audience and deeper markets than bullion coins because they carry both the 'saving' appeal and the collectors appeal. This collectors appeal is priced in terms of the premium over the coin's gold value.

Thus, you benefit from an increasing premium as the coins become scarcer and more and more dated, turning them into ever more attractive coins. Effectively, they become antiques.

The premium of such coins vary according to three main attributes:

1. The size of their collectors market and relative rarity;
2. Their condition and
3. Their historic significance.

Let us explore each in turn.

1. The richer and bigger a country is, the more likely it is that its formerly bullion coins turn into numismatic gold coins, or historic gold coins. They enjoy a deep and active market with many participants of all walks of life, domestically and internationally! Examples for such coins are the ones from the USA, UK or Germany for example. Smaller countries like Peru or Portugal may have beautiful and high quality numismatic coins but they lack a strong home market. Rarity mainly derives from the mintage number. For coins series issued over many years, the mintage varies from year to year. Thus, there can be years where the premium is huge compared to other years, even for bullion coins, when their mintage was very low compared to other years. Knowing the mintage of your coins is a must and I use numisma.com for research.
2. Condition is an absolute killer for numismatic coins. The smallest variations in condition have outsized impacts on pricing. Explaining what a good condition means fills whole specialised books. Suffice it to say that many numismatic coins carry bullion coin prices if in poor condition. This is why collectors have international renowned companies at their disposal which offer internationally recognised certification and grading services and package coins in their tough slabs. Coins , Comics & Cards (NGC, PCGS, ANACS) is such a company and once graded, such a coin is guaranteed as genuine and internationally tradable, identifiable with an unique bar code and transparently priced worldwide. You can register your ownership of such coins on NGC′s website.
3. Depending on the history of each country, there are coins from certain years and/or carrying the bust of a certain personality which carry an inherently higher premium. An example would be coins issued by Napoleon or William I of Prussia.

Quality Graded Coins

Gold coin savers often fret about the premiums of graded coins but it is truly irrelevant. The grading premium is invariably realised back, when selling the coin. Indeed, if graded by grading companies such as NGC or PCGS, coins in their slabs are as good as currency worldwide and easily turned into liquid $ or € currency. Their acceptance is as good as gold, pardon the pun, and makes the transaction easy and smooth, as there is no room to haggle and negotiate about the coin's condition. It is set in stone and priced objectively and transparently. Furthermore, you will always know where you stand. The number of graded coins of which you own one, in which grading quality, how many with a higher and lower grade is available to you on NGC′s website. This helps you judge the value of your coins even years and years after you bought them. Besides, what kind of an adrenalin kicker is it to know that you are the single owner of a MS graded coin with that specific grading level? How about being the holder of the highest rating of a particular coin? This coin would be called a "Top Pop"! Yes, I achieved both honours with a few coins.

The internet offers a wealth of pricing sources. NGC for example even offers its own pricing guide and specialised auction houses publish their auction results going back many years. As already mentioned, I use numista.com, an online catalogue, to get a first idea.

The other benefit of graded coins is that their condition is immutable. The slabs preserve the coin safely. It is more difficult to lose them and you do not have to worry when handling or transporting them.

Graded coins also allow you to easily keep improving your collection, or rather your savings plan. Because of their wide acceptance, they are very liquid and easily sold when you find the same coin with a higher grade. I tested this myself. I went to a numismatic fair and I sold four coins quicker than getting currency out of an ATM.

Now, I hear many times that the risk with numismatic coins is the relative popularity among collectors of certain coin types and their countries of origin. Yes, as with all collectables this is true. What is in fashion in one generation may fall out of fashion in another. So while you will always receive the intrinsic gold value, you may lose on the premium. I do not worry about this at all and for two reasons.

First, as gold only moves up in price over the longer term, a lower premium when selling the coin is easily recouped.

Second, as a beginner you should stick to consecrated gold coin types and countries. Those have an established market, by definition conservative and if anything, as such coins supply is finite, the collectors premium only increases.

After a while, you will know what safe & established coin markets are and you will even discover which markets are relatively undervalued. You will take a view on which markets will enjoy higher premium growth than others. Needless to say, I hold such views. Equally, there are coin types and issuing countries, I would never enter even for numismatic coins.

With increasing experience, you will even start to distinguish bullion coins with numismatic appeal from the rank & file ones. Becoming increasingly knowledgeable will greatly increase the interest rate on your 'savings plan'. It is like an equity quicker in a convertible bond. Only that pricing is in money and not currency...

As a saver turned numismatist, you will graduate when you start finding good quality numismatic coins, or still bullion coins with an appeal to become numismatic ones over time, both of which are not graded and which you can submit to a grading company yourself. You will learn to have a guess at the possible grade and if successful, you will receive back a coin you bought at bullion prices with a numismatic or grading premium. This is an immediate unrealised profit and like cash in the bank. Naturally, there are risks here and as saver in money, this is not for all of us and should only be attempted in case you fall in love with numismatics.

The Coin Grading System

Let me now add a few sentences about coin grades. There is an internationally accepted nomenclature for them.

It is quite simple, as I see it. In essence, there are two grading worlds. The lower half is for circulated coins starting with AU58 downwards and mutating into all sorts of different classifications including some for antiquity coins and the upper half for uncirculated coins starting with MS60 all the way to MS70 in increments of one digit.

From the 60 to 70 range in steps of 1, you can deduce the extreme attention to detail given when graduating coins and also, how difficult it is to achieve a MS70 grading. However, it has a positive twist. It also means that you can own an uncirculated coin with quite a lot of blemishes and scratches to it and profit handsomely from owning MS graded coins.

When I started to study NGC graded coins, I was quite surprised to see some, although beautiful, coins graded as uncirculated. This is because not all wear & tear looking issues are really wear & tear. There are the wear & tear blemishes which are due to the minting process and equipment. Those issues do not count and do not deduct points from the coveted MS70 grading. Naturally, the older the coin the less perfect the production system, the less automated and the less mechanised! This means that the more modern the coin, the harder it is to get a MS70 grading! This of course creates a scarcity issue and a whole new world of collectors opens up. As a saver, I would not care much about those crazies chasing MS70 coins!

As a saver, I would focus on MS60 to MS63 coins. A MS64 grading is already quite cool and carries a truly considerable collectors premium. Also as a saver, I would stay out of post 1970 but graded coins. These are graded bullion coins and it needs another article to go into that topic.

Collectors have different priorities. For them, an AU58 coin can be superior to the same coin in MS60. For rare coins, or the coins they need to complete a difficult collection series, they are quite willing to pay considerable premiums, even for AU grades or lower.

Before I end the section on grading classifications, let me add a little quirk. There is an equal grading system but starting with the letters PF. They stand for ′proof′. Proof coins are beautiful coins, where the background is polished to a mirror like degree and the design as such, stands out in a rougher, unpolished or silvery look. Nowadays, proof coins are produced on purpose but going back to just the years before the 1st World War and going further back, they were not. Such proof coins are extremely coveted by collectors. Proof coins from 1800s run into the thousands of currency units. This is because such coins were minted with new and virgin dyes which pressed down the metal perfectly, cleanly, consistently and evenly, giving them a mirror like appearance.

As a saver, you do not have to know about these things but knowing the wealth and richness of the numismatic world, should give you confidence that you will never feel lonely when sharing or selling your coins. You will make plenty of friends and always find good company.

I wonder how many readers made it this far but the next topic is the second last section of this article. It will be a short one and as I am not a learned specialist, it will be really short. It's about tax.

Tax Issues

That tax should be a topic for saving in money which gold coins are, as explained above and as backed by 5,000 years of human civilisation, is a travesty in itself. Since when do we pay VAT every time we use a currency bank note? Another way to put it is, why on Earth do we have to pay a consumption tax like VAT, or sales tax on something which is not consumed? What exactly is the value added to be taxed when buying a coin produced a long time ago? If we sell a second hand T~shirt or laptop, such taxes only fall due once. After all, we do not pay such taxes when we buy an ETF or a bond, do we? Would a learned and independent thinking mind also come forward and explain, why we have to pay capital gain taxes on money going up because currencies lose their purchasing power?

Alas, depending on your tax jurisdiction you won't have to pay any tax on your gold coin transactions. Please consult your fiscal advisor.

Most (Western) jurisdictions have murky and little known provisions exempting precious metals from VAT and capital gains. When I write 'exemptions' you have to take those with a grain of salt. They mostly apply to specific coin types, mostly coins issued as legal tender in their home countries. Yes, this applies particularly to bullion coins. There are € euro gold coins, say €500, which are over €1000 in gold terms that you could use to spend €500 in a shop or exchange for € currency notes at a bank. This is because they are official legal tender. As they are official legal tender in currency terms, the same tax treatment applies as to currency bank notes and coins of that country. These 'exemptions' also apply to numismatic coins classified as such by the tax authorities of individual jurisdictions.

Naturally, you can also go the route of the private seller and sell coins, as you do when selling furnishings of your home, an antique or painting. Most tax jurisdictions do not regulate such private sales. Specialised coin auction houses are big business and they know what tax treatment applies. From what I have learned, you only pay the auction house's commission. Those can be steep and therefore, I only suggest to use them when you have tons of coins to sell, or exquisite ones which need a wide audience in order to achieve their merited price.

In sum, either by doing your homework with the help of a professional tax advisor, or by treating your coins as private property you are selling in the secondhand market, saving in gold coins is extremely tax efficient.

Is It Practical?

The final topic is about an issue I came across when discussing saving in gold coins with high net worth individuals, well yes, even very wealthy ones.

Their argument is that you cannot lock up enough currency capital in gold coins. That it is just not efficient to handle large amounts of currency.

Yes, this is partly true but it also depends on your knowledge about coins. This would be way out my league but there are coins worth hundreds of thousands in currency. 10 NGC slabs tucked away could represent millions in currency which are easily converted back into currency by any leading auction house in any OECD country. I once was given the example of a bag of diamonds or Rolex watches, as a much better way to 'save'. This could not be more besides the point. If you finish reading this article with the same conclusion, then I failed miserably in trying to open the world of 'saving' for you. Either that, or you are refusing to understand that the currency based financial system is failing us. Indeed, it may be working for you and you think it will continue to keep on giving. However, for the most of us common mortals, it is not and the cards are increasingly being stacked against us. All said and done, it is also true that I am not arguing to 'save' only. Investment, sorry, speculation rather, still has its place in your portfolio allocation. However, I do think it is time that you include 'saving' in gold coins in your portfolio allocation. How much, depends on where you are in your biological and financial life, how much you feel comfortable in today's political and financial world and how much security you want to leave to your loved ones with the maximum of discretion. After all, no institutional power knows about what you have in your safe and coins are much easier and cheaper to divide up, than real estate or a stock portfolio. I do not need to get into this one, do I?

I hope you enjoyed this brief immersion into an esoteric topic. I am pretty confident, it will become increasingly sought after in the next few years. In case I piqued your interest and you have any questions, then by all means send me a message. Also send me a message, in case going through this article was a total bore. OK? Thanks!