Price Sensitive but Value Foolish
August 22, 2019
At the American Numismatic Association World’s Fair of Money in Rosemont, Illinois I had various conversations with other dealers about how some customers and potential customers are incredibly critical about small differences in prices quoted by different dealers for a particular product, but who end up purchasing an item that does not offer the best value for the purpose for which they made the purchase.
Let me share with you three real-world examples of what I mean.
In the experience at my company, a customer in our area who wishes to acquire some bullion-priced physical gold typically conducts research on the internet on prices charged by different dealers. Commonly, the coin they focus on is the one-ounce gold American Eagle. Then they may come into our store for the convenience of being local and the opportunity to take immediate delivery upon making payment. Then they might complain that they saw another dealer online quoting a price that was fifty cents to maybe a dollar less than we quoted for these coins. Often, they don’t take into account that a purchase of a single or just a few coins may incur a postage charge for a mail-order transaction, meaning that our delivered price is lower.
Beyond that, it may well be that someone purchasing one-ounce gold American Eagles as a way to own bullion-priced physical gold maybe is not purchasing the product that represents the best long-term value. As we have seen repeatedly over the decades, when enough quantity of a bullion-priced issue has been sold, there will be a growing quantity being liquidated by retail owners at any time. When this occurs, the retail premium on the issue tends to decline, usually permanently.
So, my company’s general recommendation is to acquire the gold bullion issues that have already seen their premiums decline instead of purchasing issues such as the one-ounce gold American Eagle that could lose premium in the future. The retail premium on one-ounce gold American Eagle is currently about two percent closer to gold value than it was two years ago, while low premium alternatives such as the Austria 100 Coronas, Hungary 100 Koronas, Mexico 50 Pesos, and US American Arts Medallions (the US Mint’s flawed 1980-1984 predecessor of the American Eagle program that began in 1986) have held steady. While gold prices are up substantially from two years ago, the lower premium issues we recommend have outperformed the one-ounce gold American Eagle by about two percent (around $30 per ounce). That has proved to be a much better value than trying to save 50 cents or a dollar or so on the higher-premium coin.
In silver, several first-time purchasers of that metal in our store ask about the price for the US silver Eagle dollars. Again, when they find that they might be able to purchase them online for 50 cents or a dollar less elsewhere, they often go back to purchase from the online seller. But, once again, if their interest was in owning some bullion-priced physical silver for the long-term, they probably bought the wrong product. The US Mint charges its primary distributors $2.00 per ounce above the London silver price plus these buyers have to incur the costs of picking up the coins at the Mint facilities to take to their own vaults. As a result, these coins sell at a far higher premium to other options.
Ingots and bars ranging in size from one ounce to 100 ounces cost far less per ounce of silver content than do silver Eagles. Yet even they are not necessarily the best value. At our company, we recommend US 90 percent silver coins, where we are now selling $1,000 face-value bags to retail customers at only 35 cents per ounce above the ask silver spot price. By purchasing US 90 percent silver coins, customers are receiving more than 15 percent more ounces of silver content for the same price as their purchase of silver Eagles.
Premiums for all bullion-priced silver coins and ingots can decline over time. But, since the 90 percent silver coins are selling now so close to the silver value, there is less risk of a premium decline than for ingots, Canada silver Maple Leafs, and silver Eagles.
In 1997, Warren Buffett’s Berkshire Hathaway purchased commodity futures contracts for 129.7 million ounces of silver. That was more than 30 percent of worldwide annual silver mining output that year of about 420 million ounces. A high percentage of contracts purchased by Berkshire Hathaway had a maturity date of March 1998. Most traders of commodity futures contracts liquidate their position before maturity, as they are only trading in the price changes. Therefore, many sellers of contracts to Berkshire Hathaway were naked short sellers, meaning that they had no physical silver to deliver if Berkshire Hathaway asked for delivery upon maturity.
Berkshire Hathaway purchased its silver contracts at around $6.00 per ounce. In early 1998, the company announced that it wanted to take physical delivery rather than simply selling back the contracts to short sellers. This sparked a flurry of demand from short sellers to come up with physical silver to fulfill their obligations. As this occurred, the price of silver shot up to over $7.00. In 1997, when the silver price was about $6.00, our company was paying customers at least 50 cents above the spot price to repurchase silver Eagles from the public—about $6.50. But, because silver Eagles were selling far above silver value, this was not the form of silver that the short sellers wanted to purchase. Consequently, when silver topped $7.00 in early 1998, we were paying retail customers about 50 cents per coin below spot—still about $6.50—while those cashing in ingots and 90 percent silver coins enjoyed being paid for most of the price increase.
Now, other factors of US 90 percent silver coins add to its value, beyond the low premium. The 90 percent silver dimes, quarters, and half dollars are far more divisible than ingots, especially the 100-ounce size, where one silver dime contains about 1/14 of an ounce of silver. So, they are a great option if ever needed in commerce after government currencies fail. They are also extremely liquid because of the great quantities of these coins issued by the US Mint. They have legal tender status, which ingots lack. Also, older members of the general public still remember when they always received and spent these coins and are familiar that they contain silver, whereas only a minute percentage of Americans are familiar with ingots or silver Eagles.
l example of what may represent the best value involves numismatics. Did you know that you can today purchase a Brilliant Uncirculated US $20.00 Saint Gaudens Double Eagle for only about 5 percent more per ounce of gold content than you would pay for one-ounce gold American Eagles? While I would not automatically urge that someone wanting to acquire bullion-priced physical gold automatically consider purchasing BU Saints, the price difference is so close that it may be worth considering.
However, there may be an even more attractive value than either one-ounce gold American Eagles or BU Saints. Did you know that you can purchase Mint State-62 1908 With Motto, 1911, 1912, and 1913-dated $20.00 Saint Gaudens certified by either the Professional Coin Grading Service (PCGS) or Numismatic Guaranty Corporation (NGC) at prices within 10 percent of what you would pay for a BU 1924 Saint? The 1924 Saint has a mintage of 4,323,500, while the 1908 With Motto, 1911, 1912, and 1913 have much lower production of 156,258, 197,200, 149,750, and 168,780, respectively.
But MS-62 and higher-grade coins of these dates are much scarcer than indicated by the relative difference in these mintages. In the combined PCGS and NGC-certified MS-62+ populations, all four of these dates are 130 or more times rarer than the 1924 in the same grades. In the past, these coins have sold at much higher premiums above gold value and above the price of BU 1924 Saints. While the higher relative premiums of the past may never return, there is some prospect that premium differences could expand.in the future. At today’s prices that are less than 20 percent above gold content, they may turn out to be a much better value than either one-ounce gold American Eagles or common-date BU Saints. Yet, so many retail customers today are overlooking such coins, that as one Midwest dealer told me at the ANA, “I have a ton of these better-date Saints and I can’t give them away.”
There is one other element to consider for value. A couple of years ago, a customer in our store was complaining that our price for a silver product for a $50,000 transaction was about 50 cents per ounce of silver higher than that quoted by a mail-order company from whom he had previously purchased small quantities. We explained that this company had more than 100 complaints lodged with the Better Business Bureau for extremely slow deliveries, failures to deliver any merchandise at all, and very slow payments or even non-payments for merchandise sold to that company. In the circumstances, we said that we considered there to be a high risk he would never receive whatever he purchased from the competitor. He did not make a purchase from our company. A few months later, after the other company had filed for bankruptcy, he came back to ask if there was any assistance we could offer as he had not received the order he had placed and paid for with that seller. Unfortunately, we could not. As far as I know, he never received any product.
Hopefully, from these examples, you can better understand why the lowest price on something may not be the best value.
We have found over the years, that helping customers find the best value creates strong loyalty. When we provide this value through our radio commentaries and monthly newsletters, even our peers appreciate these efforts. Once again at the ANA last week, Liberty’s Outlook was honored by the Numismatic Literary Guild was honored for Best Investment Newsletter and my twice-weekly radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” received the NLG Award for best Radio Report. Thanks to everyone for the support.