The Other McCain

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Buying Gold? Caveat Emptor

Posted on | November 13, 2010 | 33 Comments

On previous occasions, I’ve made the point that gold prices are going up and that, in times of uncertainty — as, for example, when the Federal Reserve is pursuing a clearly inflationary policy — gold is a good investment. (Did I mention the DJIA lost 251 points this past week?)

The title of my most recent post on this topic was, “You Should’ve Listened to Glenn Beck.”

A reader decided to investigate and created a post at an Internet discussion board, which linked to a very interesting graphic from Ritholtz.com.

Ritholtz.com contends that a gold retail company promoted by Glenn Beck is guilty of deceptive practices. I have no time to investigate the controversy myself, but would urge anyone planning to invest in gold (or anything else) to do their own research and be sure that they are getting a fair value for their dollar.

Economics 101: It is always in the seller’s interest to maximize his profit from any transaction and you, as the buyer, are responsible for looking out for your own interest.

In the interest of fairness, I now link “Why gold is a bad investment,” by Jonathan Burton of MarketWatch. But I am not personally persuaded by Burton’s argument, given that he is obligated to mention that (a) gold is still about $900 an ounce below its 1980 peak in inflation-adjusted dollars, and (b) George Soros has a substantial investment in gold.

Wait: George Soros getting investment advice from . . . Glenn Beck?

Come up with your own crazy conspiracy theory to explain that one.

UPDATE: Welcome, Instapundit readers! A lively discussion in the comments below, including a link to the Classic Liberal, who discusses the difference between bullion coins — sold for the per-ounce value of their gold content — and numismatic coins, sold for their value as collectibles. The later category seems to be where concerns about ripoffs arise.

Let me provide what may be a helpful analogy. I’m a consumer fireworks buff. (You can hit the tip jar and help fund next year’s Fourth of July show.) Fireworks retailers offer all kinds of “discount” come-ons to entice buyers, most commonly the BOGO (Buy One, Get One “free”) and alleged freebies (e.g., spend at least $500 and get a “free” 6-shell mortar kit).

Of course, nothing is “free.” The stores don’t make money by giving stuff away. All this alleged “free” stuff is a marketing gimmick, encouraging the unwary consumer to spend more in the belief that he’s getting an awesome deal.

Sooner or later, the really avid fireworks freak stumbles onto the Pyrouniverse forums and learns that he can buy fireworks by the case from wholesalers. In the process, he discovers that the 6-shot mortar kit that retails for $24.99 ($12.50 with the BOGO “discount”) has a wholesale price of $54 for a case of 12 kits — $4.50 a kit. Furthermore, wholesale companies also have volume discountse.g., 10% off purchases over $500, so that you could effectively get that entire case of mortar kits “free.”

This discovery of the vast gap between retail and wholesale prices frequently results in the fireworks buff becoming profoundly bitter about retailers. “What a rip-off!” he declares, explaining that he spent more than $1,000 retail on last year’s Fourth of July show, thinking he was getting a great deal, only to learn too late that he could have gotten an equivalent amount of fireworks for less than $400 wholesale.

Well, caveat emptor, my friend. And let me ask you, “What else are you buying retail without really shopping around for the best price?” Clothes? Furniture? Electronics? What is true of fireworks is true of nearly everything else you spend money for, including investments.

Except in punishing outright fraud, however, the answer to “rip-offs” is not government regulation or class-action lawsuits. The answer is to stop being a chump.

Government cannot abolish stupidity. If the government can’t abolish the kind of stupidity that leads to fireworks injuries — and they can’t — they certainly can’t abolish the kind of stupidity that leads to people paying too much for collectible coins.

But government never ceases in its tireless effort to “protect” you, and guess what our friends in Washington slipped into the ObamaCare bill?

Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category and coin dealers have been among those most rankled by the change.
This provision, intended to mine what the IRS deems a vast reservoir of uncollected income tax, was included in the health care legislation ostensibly as a way to pay for it. The tax code tweak is expected to raise $17 billion over the next 10 years, according to the Joint Committee on Taxation.

Whoa! A tax on everything you buy, including gold? You want to talk about a rip-off . . .

Comments

  • Choey

    If you are not a billionaire like George Soros you are going to be buying small quantities of gold at retail which is the spot price plus a profit markup. If you are a billionaire you buy gold by the ton as a commodity. That’s why, in my opinion, gold is just not that great an investment. In addition, gold is a commodity which is used in chemistry, electronics, jewelry etc and is subject to the laws of supply and demand just like any other commodity. Its price can change just as fast as the price of a barrel of oil or a bushel of corn.

  • http://twitter.com/JD777 JD777

    Best Gold Blogs

    http://dailyreckoning.com/best-gold-blogs/

    “Today, it takes seventy $20 bills to buy a $20 gold piece, which means the dollar can buy in 2010 what you could get for 2 pennies in 1910. Quite a record for a central bank set up to protect the dollar.”

    http://buchanan.org/blog/the-fed-trashes-the-dollar-4578

    Jobless, Housing Data Support the Case for Gold

    http://seekingalpha.com/article/226711-jobless-housing-data-support-the-case-for-gold

  • http://pulse.yahoo.com/_VMVCDOENPIMHRXQSI7GKLEVSGU Donald

    Silver has outperformed gold for about 30 years and is far-outperforming gold now. The main reason is that gold has practically no use except for jewelry and an (assumed) store of value, while silver does all of that and has many industrial uses as well. In fact, many commodities specialists thinks that silver should now be categorized on the market as an industrial metal, like copper, rather than a precious metal. (There is no industrial use for gold that can’t be done cheaper with another metal.)

    Not for nothing has gold been called a faith based investment and we should remember you can’t eat gold.

  • http://moneyrunner.blogspot.com/ Moneyrunner

    There are several good reasons to buy gold and several good reasons not to. It depends on your objectives. It is currently being bought as an inflation hedge. But it does not pay any interest or dividends so it’s strictly speaking a speculation.

    Buying gold coins for their numismatic value is a gamble squared; you’re not just buying the gold value but also speculating on the increase of the item as a collectible. This is not for amateurs.

    For those who buy gold coins imagining that you may one day pay your grocery bill with them when paper money is worthless, I don’t see as a possibility. That has never happened – as far as I know – in any modern society even one experiencing hyperinflation. Just imagine going to the store and paying with a Canadian Maple Leaf coin. What are you going to accept as change? Try filling the tank and paying with a gold coin. Will Visa or MasterCard accept your coins? The replacement of metal coins for script is just not going to happen.

    Probably the least expensive way of buying gold is via a gold ETF like GLD. But be aware of the tax consequences.