Gold prices have been in free fall for the better part of a year after the so-called smart money folks abandoned this once-sizzling asset class for stocks.
After topping out at almost $2,000 an ounce in September 2011, gold today trades in the $1,300 range — a 35 percent shellacking.
Throughout all of last year, hedge funds and institutional traders withdrew money from the once-popular SPDR Gold Shares exchange-traded fund. They also obliterated gold mining stocks, like Newmont Mining Corp. and Barrick Gold, which have lost half of their value.
Typically, small investors would cower like mice from this kind of carnage, but an interesting trend is developing in one corner of the gold market. Throughout 2013, as the big boys were jettisoning their gold holdings, the little guys were increasingly buying gold bullion coins, specifically the American Eagle.
The number of these coins sold increased from 1.1 million in 2012 to almost 1.5 million in 2013, according to the U.S. Mint’s website. And so far this year about a half million of these coins have been sold, so if the current trend continues, it will be another good year for sales of American Eagle coins. They contain an ounce of gold and are typically priced about 5 percent above the market price of gold.
A confluence of factors is attracting small investors to gold coins. For starters, they have grown increasingly skeptical of the stock market after two horrendous bear markets since 2000. And they have endured the calamitous trifecta of collapses of the Internet bubble, the housing bubble and the near collapse of the global financial system in 2008.
Further, with U.S. government debt at $17 trillion and rising, many coin investors are hedging against the U.S. dollar tanking.
“They want to have something tangible and a safe haven in case they ever need it,” said Robert Burnside, director of precious metals trading at Dallas Gold & Silver Exchange. “They want something tucked away that they can use to barter for food or to trade during a bad economic situation.”
Also, geopolitical tensions, such as Russia’s recent invasion of Ukraine or the banking crisis in Cyprus, always trigger an uptick in gold coin purchases. There was a run on Cyprus banks early last year.
“Our sales have increased in the last few months,” Burnside said. “We see more buying when we see people in Cyprus who can’t get their money out of the banks.”
Historically, gold bugs have been easy targets for ridicule as they are sometimes portrayed as anti-government nut jobs nervously awaiting financial Armageddon.
However, since the financial crisis, an increasing number of average investors allocate a small portion of their portfolios to gold — just in case. And even the most ardent stock-oriented investment managers now advocate holding a little gold.
Stacy Hail, a 41-year-old Park Cities physician, said she and her husband, an attorney, have been buying gold and silver coins from Dallas Gold & Silver for about four years. She is aware how some people might view her gold purchases, but she believes gold is an important piece of their investment portfolio.
“We are not two crazy folks holed up in a shack in the mountains trying to escape the world and the government,” she said. “I am a practicing physician and my husband is a practicing attorney, and we live in the Park Cities.”
She voices the concern of many people when she says a wicked spurt of inflation awaits the U.S. because of the massive national debt and the easy money policy of the Federal Reserve. Both undermine the value of the dollar.
Secondly, owning some gold coins might come in handy if we ever had a cyberattack on our banks or some other national disaster that forced banks to close.
“I don’t think most people understand that if you put a dollar in the bank, it can loan out $10,” Hail said. “If you walk into a bank and try to take out $9,000, the bank may or may not have the money to give you.”
She and her husband also have a traditional portfolio of stocks and bonds, but she owns gold coins “because I need to have in my possession something tangible.”
Interestingly, she’s not that concerned when gold prices drop, because she’s not buying it as an investment. She told me she has worked her entire life as a physician and she simply wants to keep what she has.
“I am not trying to turn $10,000 into $20,000,” she said. “I’m trying to keep my $10,000 from turning into nothing.”
Those interested in buying gold coins can contact the U.S. Mint directly or one of the many precious metal dealers throughout Dallas. With most of the major traders, hedge funds and institutions curbing their gold purchases, prices aren’t expected to rise much, but as Hail said, that’s not the goal anyway.
“Most Americans are walking around with $5 in their wallet and a credit card,” she said. “Go ahead and make fun of the gold people, but in a crisis you have to ask yourself, ‘What if everything you put your hands on vaporized?’”
Courtesy: Will Deener via Dallasnews
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