What To Buy Now

There are only two reasons to buy gold.  The first, and most important, is for insurance.  Gold protects ones wealth against confiscation through devaluation of paper currencies.

The second reason one buys gold is for investment purposes.  It's hard to argue that gold hasn't been a good "investment" over the last decade.

Once the decision has been made to purchase gold, then comes the decision on what type of gold to buy.  Should one by the cheapest gold one can find, ie. gold bullion bars or coins, or should one pay a little more up front and buy gold that has a "collectible" component to it?

Let me phrase this question another way.  Should you buy as many ounces as you can for preparation against financial meltdown, OR, should you buy a type of gold that may perform better as an "investment" in case the coming financial meltdown is delayed 5, 10 or 15 years?

Tough decision isn't it?

To help you answer that question for yourself, let's go back in time to a period not unlike today and look at the performance of two different types of gold.

Pre-1933 US Gold

Prior to 1933 the United States minted gold coinage for circulation.  Whether you had a one ounce $20 gold piece in your pocket, or a $20 bill, both would buy the same thing.  Both were readily accepted as payment for goods and services, and either could be easily exchanged for the other at your local bank.

The US quit minting gold coin in 1933 and outlawed private gold ownership.  Citizens were required to turn in their gold coin in exchange for paper currency.  The surrendered gold coinage was subsequently melted down by the government and stored at Ft. Knox.  Some citizens refused to surrender their gold and kept it quietly hidden until 1971 when private gold ownership was once again legalized in the US.  Still others simply shipped their gold out of the country into foreign deposit boxes.

Because of this, there is a very limited amount of Pre-1933 US Gold Coinage still in existence.  Because of this "rarity" factor, the price of this type of gold generally carries a premium over its gold content.  For example, today the spot price of gold is $1,200 per ounce.  Common 1 ounce gold bars can be purchased today for about $1,260 each, about 5% over the spot price of gold.

However, an older Pre-1933 $20 gold piece that is almost one ounce of gold (.9675 oz.) can be purchased at present for around $1,500, which is a 30% premium over the spot price of gold.

Now, any rational person would be asking at this point in time "why would anyone want to buy the more expensive gold?"  And here's the answer.

Back in 1989, the peak of the last gold bull market, premiums of the $20 gold pieces skyrocketed to over 100% of the underlying value of the gold.  Therefore, the investment return of the investor who bought the cheapest gold he could find was based solely on whether gold went up or down in value.  But the investor who bought the $20 gold pieces not only saw the value of his investment go up or down based on the underlying swing in the price of gold, but also saw the value of his investment go up over 100% based on the premiums demanded for these type coins.

Although I doubt this will ever happen, many investor feel like the Pre-1933 gold coins would be exempt from confiscation should the government ever come for our gold.  The logic is that these types of coins would be considered "collectible" whereas bullion coins are not.  And the last time gold was made illegal for private ownership, "collectible" gold was exempt.

So, everytime there is a new gold rush, premiums on the older coinage go through the roof, and it is for THAT reason that, strictly as an "investment," Pre-1933 gold makes more sense than bullion.

The $5 Liberty
Today, I personally am buying $5 gold Liberties.  Here is why:

1.)  RARITY - Because of the above, I know the premiums on these coins will likely see a substantial increase as our economic/governmental situation deteriorates and citizens become more alarmed that the Feds will once again confiscate gold.

2.)  SIZE -  I like the fact that it is a smaller coin, almost a quarter of an ounce, which makes them desirable for barter.  Again, do I personally buy these coins because I think I am going to have to barter them?  No.  But a lot of people do, and THAT's what makes the premiums go up everytime there's a gold rush.

3.)  LOW PREMIUMS - Common date, circulated $5 Libs can currently be purchased at about $375 each, making their cost about $1,550 an ounce, a 30% premium over the spot price of gold.  As you can see from the example below, this could be quite a bargain when you consider that this particular denomination saw premiums soar up to 3,000% in 1989.

4.  DOWNSIDE PROTECTION - Whether you are buying newly minted bullion or Pre-1933 gold coins, the premiums paid at purchase are recouped upon selling your gold back to the dealer.  The percentage difference between the buying and selling price is the same regardless of the type gold you buy.

A Glimpse Of History

Suppose you had the choice of what to buy with $10,000 on Jan. 1, 1984. Since gold was at $383/ounce you could have bought $5 Libs at about $132 each, or you could have bought $10 Libs at about $264 each. This assumes you paid a 44% premium over spot, which is the average like today. Or, you could have just bought some 1 ounce bullion coins and paid about a 7% premium over spot (Today's market average), which comes out to about $410/coin.

You would have ended up with about:

76 - $5 Libs, or
38 - $10 Libs, or
24.5 – 1 ounce bullion coins/bars

All would be worth $10,000 each on January 1, 1984.

But on June 2, 1989 they each would be worth the following:

76 - $5 Libs @ $2,850 each = $216,600
38 - $10 Libs @ $3,050 each = $115,900
24.5 – 1 oz. bullion coins/bars @ $361 each = $8,844

Still think that extra premium isn't worth it?

Trading the Premium
At that point, you should sell your $5 Liberties and lock in your gains on the rise in premium and buy cheap bullion with the proceeds, in which case you would end up with 598 ounces of gold as opposed to the 24.5 ounces that the "smart" investor still has.  This strategy is known as "trading the premim" as has been used by knowledgeable gold investors for years.

Conclusion
If you know the world is coming to an end tomorrow, then buy the cheapest thing you can find.  On the other hand, why not hedge your bets a little just in case this thing takes longer to go down than we think?