Hidden Dangers in Buying Proof American Gold and Silver Eagle Coins

by George R. Cooper, J.D.

3-April-2014 (USAGOLD) Today the new 2014 Proof American Gold and Silver Eagle coins are being released. There has been a lot of talk about today’s release, not by us but by our competitors who would like to sell you these coins. The truth of the matter is that 2014 is no better than 2013 or 2010. Some people will try to make a case that newer is better. The truth is that the US Mint makes only a certain number of coins each year and then sells them at a much higher profit than the regular business strike American Gold and Silver Eagle coins. The Mint sells these coins to individuals, who buy them for their own portfolios. However, if an individual wants to put these coins in a self-directed IRA, then there is a completely different way of buying them. First of all, all purchases of gold and silver coins for an IRA must start with cash. This restriction prohibits an individual from buying proof coins from the US Mint and then funding the IRA with those coins. Because of this restriction, the wholesale and retail broker/dealer network comes into the picture. Usually the wholesale distributors buy the coins from the Mint, and then sell them to the retail gold and silver broker/dealers when they have clients who have placed orders for their IRAs. As you can see, there are two layers of sellers between the US Mint and you, the investing public. In most cases, the prices fpr these proof American Gold and Silver Eagles are considerably higher than for the regular business strike coins, which USAGOLD recommends.

Let’s use an example to illustrate this point. If spot gold is trading at $1281/oz., then the wholesale asking price for the 1 oz. Proof Gold Eagle is about $1540/oz, which represents a 20% mark-up. However, you, the retail buyer, of the Proof Gold Eagle will have to pay anywhere from $1700 to $2000 per coin, depending on where you buy the coin. These prices represent a mark-up of between 33% to 56%. Most companies who advertise on the radio or TV are forced to mark up their coins to cover these costs–which can add as much as 10% to your price–and also make a generous profit to pay staff and the brokers. These companies usually will charge the higher price in our illustration. Next let’s compare this example to buying the regular business strike 1 oz. US Gold Eagle coin. If spot gold is trading at $1281oz., then you, the retail buyer, will have to pay about $1345/oz. or roughly 5% above spot gold. The 5% mark-up consists of about 3% profit for the US Mint to make the coin, 1% profit for the wholesale distributor and 1% for us, the retail broker/dealer. When you go to sell back, we can offer you spot gold, which means your spread between buying and selling is currently 5%. This is considered normal and average among reputable gold dealers. This is why we believe our clients should only buy the regular 1 oz. US Gold Eagle and not the 1 oz. Proof Gold Eagle.

Last month I had a real life example of a woman who got caught in this trap. She was from Virginia, just outside Washington, DC. She called me to ask if I could help her liquidate her proof 1 oz. US Gold Eagles and proof 1 oz. US Silver Eagles in her IRA. I asked her why she did not go back to her original dealer. She replied by saying that the broker/dealer had gone out of business. I told her that we do not buy or sell these coins because we think they are bad investments due to the inherent mark-ups already discussed earlier. I wanted to try and help her the best I could so I asked this woman a couple of questions. It turned out that she bought them in 2010 when gold was around $1100/oz. She had invested $160,000 but her IRA statement showed their present value of $130,000. I explained that the difference in value was not due to the gold price because gold was actually higher by $150/oz. The difference could be attributed to the excessive commissions charged by the broker/dealer she used. And now that broker/dealer was out of business. If she had bought regular 1 oz. US Gold and Silver Eagle coins instead of the high-priced proof ones, she would have made a profit on her holdings. Instead she lost about $30,000.

The bottom line here is this: Don’t fall for the sales pitch that proof coins are better than regular business strike coins. I have seen over and over again too many stories of people who ended up losing money when they thought they were ahead. I would say that almost all investors in the proof coins never ask the broker/dealer what the spread between buy and sell is. It is not to the advantage of the broker/dealer to disclose this spread because the truth would come out, which is bad for their business. While the internet is a wonderful invention, there are still many dangers lurking there. Even with the so-called information superhighway offering many choices, the old rule of “caveat emptor” applies more now than ever.

We encourage all prospective clients to be smart investors and ask the hard questions before choosing a broker/dealer. Price alone should never be the sole determining factor. Be sure to examine the track record of the company by checking the BBB rating. Look for how many complaints have been lodged and how they were resolved–successfully or unsuccessfully. See if there any pending lawsuits or if there were any lawsuits in the past. See if any government agencies have taken action against the company for unfair or deceptive trade practices. And finally, trust your gut instinct when you make that phone call.

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