On February 12th of this year, we received an email from Jim Sinclair under the title, “Dear Comrade in Golden Arms” which posed the question, “Where do all the ETFs get their gold bullion from?” In Mr. Sinclair's letter, our attention was drawn to one big whopper, a casual assertion about the availability of gold bullion in February of 2009: see text of Jim Sinclair's article.

“The physical market is so tight that coin minting has all but closed down compared to what it was one year ago,” wrote Mr. Sinclair, ignoring all published evidence. The truth is that “one year ago” from Mr. Sinclair’s writing (February 2008) the US Mint produced only 24,000 1-ounce gold Eagles. see U.S. Mint production figures 2008.

Yet at the same time that Mr. Sinclair was claiming that “coin minting has all but closed down,” monthly production of 1-ounce gold Eagles was on its way to 113,500, adding to the 656,500 produced in the previous six months, a NINE-FOLD increase over calendar year 2007. And the same was true the world over - every bullion mint and refiner was working overtime to meet the tremendous demand. see US mint website production figures 2009.

Not to single out Mr. Sinclair, whose long presence as a gold market commentator is a testimony to the power of dogged persistence and good public relations. He was far from alone, as many others in the gold bullion blogosphere also asserted, primarily via anecdote, that gold bullion production from September 2008 until March of this year was just a trickle, when in fact it was a deluge.

The main problem with the dissemination of such untruths is that numismatic marketers seize upon this sort of commentary to whip their customer/victims into a conspiracy-laden frenzy. After all, when a famous and often-quoted gold ‘expert’ says that “gold coin minting has all but closed down” – what better argument is there to buy some available old numismatic gold coins?

Unfortunately, this level of ‘truthiness’ is too often the default standard in the field. Facts sometimes require real research (such as, in this case, checking the US Mint's public website), and sometimes those darn facts don’t support the causes or prejudices of those who earn their living in this field.

As we wrote last week, marketers of numismatic coins to the unwary all too often base their pitch on disinformation campaigns. Naturally, their aim is to discourage potential investors from buying gold bullion (which afford very low profit margins for the seller) and steer them instead to old and/or exotic numismatic coins, some of questionable value, and all sold at markups unknown to the customer/victim. The field of gold marketing is staffed by unlicensed salespeople, reading from sales scripts un-vetted for truthfulness, to the disservice of novices who are persuaded to part with their hard-earned cash for items they know very little about, for the flimsiest of reasons, at markups unknown and unregulated.

And for that customer/victim, a bit of Internet research usually isn't much help. Websites, blogs, and chat-rooms, often sponsored by marketers themselves, constitute a virtual echo chamber of misinformation, each citing and linking to the other in a daisy chain of factoids, opinions, and unverified assumptions, many of which are harmless and easily dismissed. However, some of these myths take on the status of urban legend, something that everyone knows to be true because they heard it from somebody who read it somewhere, and saw it again somewhere else, usually in the dark reaches of cyberspace.

So let’s get started with a few random whoppers.

“When you buy gold bullion it is reported to the IRS.”

* Wrong. There is no IRS form required to be filed when you purchase gold bullion.

“When you buy gold bullion, you have to give the dealer your Social Security number.”

* Please don’t. Speaking for bullion dealers, we are not required to have it, have no use for it, and would rather not know it.

“When you buy gold bullion in amounts of $10,000 or more, it is reported to the IRS.”

* Not if you pay for that purchase via check or bankwire. Of course, if you show up at your dealer’s premises with US currency in that amount or more, then that vendor is required to file an 8300 CTR report of cash received in payment. This has nothing to do with gold - the same report would be filed if you were to carry a suitcase full of money down to your local car dealership or yacht broker.

“All purchases of gold bullion are registered with the US government.”

* No such registration process exists.

“Many banks will not allow the storage of gold bullion in a bank safe deposit box. But those banks will let you can store numismatic coins that trade for twice their gold value or more.”

* This Internet story was first spotted last year, and we know nothing about its origin. Of the thousands of banks in the US, it is unlikely that any of them even know the difference between bullion and numismatic coins.

“You should only buy gold coins made before 1933, because those coins were exempt from confiscation when Franklin Roosevelt called in all US citizens’ gold.”

* This time-honored prevarication is one of our all-time favorites. Think about it: Exactly what gold coins were required to be turned in when FDR removed gold from circulation in 1933? Coins made before 1933, of course!

Having thus established the bogus case that bullion is bad for you, the numismatic sales pitch goes on to assert:

“With our population growing, you can’t go wrong with older numismatic coins because they aren't’t making them anymore.”

* Well, of course they are not making old coins anymore - and that’s a good thing, because there sure are plenty of them around. For instance, the most popular American coin grading service, PCGS, has, in the last 23 years, certified and graded 1,149,606 of the US $20 Double Eagles that were made from 1849-1933. Tens of thousands of them change hands every month, and at any given time you'll have no trouble purchasing these coins in quantity from the enormous floating supply. Which brings up the question, what exactly is so ‘rare’ about them?

“Gold coins from other countries are not subject to reporting or taxation of capital gains,” or, depending on the seller, you will hear the opposite, “Gold coins from the United States, unlike foreign coins, are not subject to reporting or taxation of capital gains.”

* Which is correct? Neither, since the US tax code essentially treats all gold coins the same.

“Numismatic coins always outperform bullion because of the limited supply of the older collector coins.”

* Wrong. For example, let’s take what happened during the last broad-based US gold rush, that which occurred during the pre-Y2k panic of 1998 and 1999. Some of you will remember the time before the turn of the 21st century, when people became interested in gold (and silver) just in case the computers stopped working on January 1, 2000, we woke up in a world without ATMs or electronic banking, and we therefore had to use precious metals coins to buy our groceries and gasoline.

As always when a bit of fear is in the air, numismatic marketers have a field day when new money is thrown into the precious metals market. And what did these marketers offer for those who were concerned with a total economic catastrophe? Collector coins, of course. As if during a total breakdown of our economy, numismatists would be desperate to add specimens to their precious coin collections. Really?

The saddest thing about people getting talked into numismatic ‘magic beans’ during the pre-Y2k gold rush is that spot gold prices averaged less than $300 in 1998 and 1999 –so a simple investment in gold bullion made back then would today be worth about THREE TIMES what it cost pre-Y2K. In contrast, the numismatic portfolios that were promoted at that time have underperformed gold bullion by a wide margin.

“Anytime you sell gold bullion, that transaction is reported to the IRS, but numismatic coins are not reportable.”

* This is a basic premise of the ‘numismatic’ argument, that US investors will always attempt to hide their capital gains from Uncle Sam. In other words, the outrageous assumption here is that any fairly prosperous US citizen will naturally attempt felony tax fraud, given what might look like an opportunity to do so. A debatable point, at best.

But just for the sake of argument, if you do buy numismatic gold coins, what kinds of gains are you likely to experience? They say the proof is in the pudding, so let’s take a look at some recent collector coin price history.

Our price source is the Coin Dealer Newsletter, published by CDN Inc. in Torrance, California. This is by far the most popular weekly numismatic guide, one which has tracked US coin wholesale trading since 1962.

We took, more or less at random, the December 9, 2005 edition of the CDN, a week in which gold spot prices averaged about $508.90. We then tallied the dealer “bid” prices back then for the twelve most widely traded US gold type coins (coins struck between 1849-1932): Gold dollars in types I, II, and III, $2.50 Liberties, $2.50 Indians, $3.00 Princess, $5 Liberties, $5 Indians, $10 Liberties, $10 Indians, $20 Liberties type III, and $20 Saint Gaudens. We compiled prices of these twelve types in three different mint state grades (MS60, MS63, and MS65) and compared them with the totals of the same type coins in the same grades on May 1, 2009.

In December of 2005, the twelve US gold type coins in MS60 grade totaled $7,455.00. Last week, those same coins were being bought by dealers for $8,685.00, an increase of 16.5%. That amount would probably be swallowed up by a typical retail markup, leaving the numismatic investor no actual net gain in a 3 ½ year period in which gold prices went up 75%.

Moving up to the rarified prices of MS65 graded gold coins, our twelve-coin type set wholesaled for $95,850.00 in late 2005, and today dealers are paying $113,775.00 for those same coins, according to the Coin Dealer Newsletter. This is an increase of 18.7% over 3 ½ years, which, after commissions and markups, looks pretty punk compared to gold going up 75%.

The worst performance was in the middle mint state grade of MS63. Those twelve coins started out at $26,305.00 on 12/8/2005, and as of last week they had fallen to only $23,450 on the dealer bid side, even while gold spot prices have risen So, in a 3 ½ year span, without even counting commissions and markups, a numismatic investor choosing MS63 US gold coins would have paid a 10.85% penalty ($2,855.00) for the privilege of being a coin collector, while his friend who bought bullion for $26,305.00 would be ahead some $19,000.00.

Our conclusion from this exercise is: If you buy numismatic coins as an investment, it's true that you probably will not pay any taxes on net capital gains, because you won't have any gains.

In summary, if you are a relative novice to precious metals, you may find yourself the target of fear-inducing sales pitches that are craftily tailored to appeal to your natural desire for secrecy and avoidance of any government scrutiny. Real diligence is going to be required on your part to sort out truth from fiction. Each of us has to determine our own path to financial security, by arriving at a suitable strategy which hedges our dollar assets against the threat of future inflation.

But when putting together your anti-inflation plan, you can reasonably ignore the numismatic sales industry, with its unsupported puffery, opaque retail pricing, and tall tales about why you shouldn't buy gold bullion.

Richard Smith May 11, 2009