Investing in Gold and Silver: Information Shared with New Investors

Every once in a while we like to stray slightly off topic and share with our readers conversations that we have with our customers during the week. In this instance, we recently met with a Generation Z couple in their early 20’s. After doing extensive research, they determined that investing in gold and silver was a smart decision not only as a hedge against inflation and a depreciating currency, but also as a long-term investment. I was quite impressed with their understanding of how the economy works and why gold and silver is a good investment.

In this particular case, the couple was most interested in acquiring silver bars, as they believe that silver is the more underpriced of the two metals. Furthermore, they liked the lower premium privately produced silver bars over silver coins, as they have a limited budget and want to accumulate as much silver as possible.

When we wrapped up the transaction, the young man asked me what financial or investment advice I would give you a Generation Z couple that is just starting to invest for the future. We’ll share with you a summary of the conversation in hopes that this information will be of assistance to you.

Numismatic Silver Coins Versus Silver Bullion

We touched briefly on the difference between collectible or numismatic coins and silver bullion, but it bears repeating. For those individuals unfamiliar with the term numismatic, it is simply referring to a coin that is collectible. Numismatic coins can sell for a substantial premium over their underlying silver value. In some cases, the silver value or content is negligible relative to the value of the coin. Bullion or bullion coins, on the other hand, trade primarily for their underlying silver value.

We talked about the difference between the two and what he was trying to accomplish. Considering that his primary goal was to accumulate silver at the lowest possible price, it was clear that he’s not in the market for collectible coins.

I recommended that he continue to pursue his current investment strategy, considering his primary goal was to accumulate silver as an inflation hedge.

While it’s clear that our customer was best served by staying away from numismatic coins, as these are coins primarily purchased by coin collectors, it might make sense for him to add some silver bullion coins to his holdings.

The difference between silver bullion and silver bullion coins is that silver bullion coins are government-issued, have a face value, are legal tender, and are guaranteed by the country of origin, as opposed to silver bullion, which is privately produced.

An example of a government mint is the Royal Canadian Mint, while an example of a private mint is the Sunshine Mint. An additional benefit of silver coins is that they’re more widely traded and recognizable than silver bullion.

We suspect that he’ll continue to acquire silver bullion and possibly add in some silver coins as part of his future investments.

Sell Coins & Bullion When Markets are Hot

Our customer seemed to have a good understanding of the difference between collectible and bullion coins in part because he had with him a certified trading card that was valued at approximately $4,000. He said that in a relatively short period of time, he saw his $3,000 investment grow to $4,000 and was considering selling the trading card and investing the proceeds in precious metals.

Considering that I’ve dealt with trading cards for years, with my first purchase back in 1981 at the age of 8, I’ve seen ups and downs in the trading card market. Early on sports cards were trading at ridiculous levels, which in retrospect was indicative of a bubble. I distinctly remember paying $100 or more for a 1983 Topps Traded Darryl Strawberry rookie card. Today, the card might be worth $1, if even that.

Once the bubble in the sports card market popped it took what seemed like decades to recover. At the time of this writing, sports cards are once again a hot commodity and in this writer’s opinion, are in another bubble. In fact, I’ve been liquidating some sports cards from my collection over the past year or so to take advantage of record high prices.

While we may not be at the top of the market, we’re likely not too far from the top. I explained to our customer that there appears to be little upside potential and substantial downside risk at these levels and encouraged him to sell now and lock in a nice profit as opposed to waiting to see if the market increases.

I explained to him that I’ve recently sold my sports cards and was astounded at some of the prices that I realized.

It’s typically only in retrospect that you’re able to see that we were in a bubble. However, when you look at historical pricing relative to current pricing, at the very least, it’s apparent that the trading card market is highly valued. If you want to roll the dice and hope for even higher future returns, it might make sense to take some money off the table. The ideal situation is to lock in profits to cover your basis and play with house money.

Be a Contrarian

The term contrarian might be new to some of our readers. Dictionary.com defines contrarian as “a person who takes an opposing view, especially one who rejects the majority opinion, as in economic matters.” Being a contrarian requires a good bit of discipline and intestinal fortitude, as we’re bombarded with media propaganda that most of the public has bought into. As a side note, consider getting your news from the alternative media as opposed to the legacy or mainstream media.

I mentioned a few contrarian investments or divestments that I’ve made over the years that were contrary to the consensus at the time. By the way, this doesn’t mean that I’m the next “Oracle of Omaha” – in fact, I’m far from it and have missed out on opportunities that could have made me a multi-millionaire by now, which I’ll also share with you.

I shared with my customer two recent financial decisions I’ve made that are somewhat unconventional.

The first was the sale of my primary residence.  I spend a good bit of time researching the economy and felt like the housing market was in a bubble that is unsustainable. Not only that, but the value of my house increased by over 50% in less than two years following the start of the pandemic in March of 2000. Only time will tell if this was a wise decision, but it was one that was made contrary to nearly everyone’s opinion and advice.

The second was when I recently acquired some cryptocurrency for the first time.

It’s a market that I had been struggling with for quite some time, as I don’t know how to properly value it. I’m perfectly capable of valuing real estate, stocks, bonds, and precious metals, but the cryptocurrency market is a completely different animal. Nearly the entire cryptocurrency market tanked toward the end of 2022, which was compounded by the collapse of FTX and that of other exchanges and tokens. After having been beaten down with concerns of a complete market collapse, I thought it was time to pull the trigger.

At this point, it’s impossible to know if it was a good investment or not and if what we’re experiencing at the time of this writing is a dead cat bounce or is sustainable, but so far, so good.

As far as the missed opportunities go, while it’s painful to bring it up, I’ve known about Bitcoin for years and followed it from afar while it was still under $100. While I liked the concept of having an alternative currency, as the government currently maintains a monopoly on currency, my concern is that they viewed it as competition and would likely ban it. Furthermore, early on, there were rumors that it was being used for illicit activities, such as money laundering, drugs, terrorism and prostitution, which meant that it was likely going to be erased from existence. If I knew a bit more at that time about blockchain and decentralization, I may have made the plunge. Had I made an investment of only 16 Bitcoin at $100 or less and sold at the all-time high of nearly $69,000, I would have been an instant millionaire. Again, hindsight’s 20-20.

While not as financially significant, but just as devastating was an opportunity to purchase beachfront property along 30-A in the panhandle of Florida in 2010 and 2011 following the Deepwater Horizon oil spill for a fraction of the previous value.

We take annual beach vacations to this area most years and were not only shocked at the number of beachfront houses that were on the market for sale, but also the number of bank-owned properties and open houses that were being held by realtors. When we checked out the open houses, we were amazed at the incredibly low asking prices.

Furthermore, in many cases, the real estate agent hosting the open house told us that the bank wanted to get rid of the house and to just make any reasonable offer, which likely would have been accepted. Today, prices on most of those homes have increased five to six times. Again, one more opportunity where we could have become instant millionaires. The moral of the story is to look for these opportunities and take full advantage of them when they appear, as they likely won’t last long.

Buy When There’s Blood in the Streets

Nathan Rothschild is credited with the statement “buy when there’s blood in the streets.” While my wife hates this term, the reality is that you want to buy when the market or a sector of the market is so beaten down that it’s cheap on a relative and standalone basis. However, it’s important to remember that just because a company, a sector of the economy or the market as a whole has declined in value, doesn’t necessarily mean that it’s a good time to buy.

For example, from 2000 to 2002, the Nasdaq dropped by an astonishing 90%, but it still wasn’t a great investment, as it tanked another 40% in 2008. This was during the dotcom boom where any company with “.com” in the name was trading for hundreds of times earnings. In fact, most of the companies that went bankrupt never had earnings to report, as they were valued based on sales and future anticipated earnings.

On the other hand, the S&P 500, which lost 46% of its value from October 2007 to March of 2009 was a good investment following the crash. This is because the valuation of the stock market was low enough to project strong future positive returns. As we saw, the market had strong returns for the next decade or so. The key was to avoid all the noise in the financial media and take a chance to purchase stocks at depressed levels.

Historically speaking, the price earnings (P/E) ratio of the stock market has been 13 – 15. After a return of -20% in 2022, it’s still trading at a P/E ratio of roughly 20. This means that the stock market is still highly valued, which typically translates into lower future expected returns. On a positive note, when the market corrects, it typically over corrects, so don’t be surprised to see P/E ratios in the 7 – 10 range following the next crash.

At this valuation, it would make sense to invest in stocks, as you’ll likely be rewarded with double digit returns over the next decade or so.

Again, the key is to not pay attention to the extent of the pullback in a company, industry or the overall market, but the valuation of the market following the decline to determine if it’s investment-worthy.

If It’s Too Good to Be True

An investment opportunity that the young and old alike tend to fall prey to is an investment that sounds too good to be true. We’re regularly bombarded with investment opportunities promising double or even triple digit returns with minimal risk. While no one wants to pass up this type of opportunity, it’s important to take a step back and evaluate the opportunity to determine if the underlying fundamentals justify this type of return.

While I don’t share this story often, unfortunately, I was caught up in a fraudulent overseas gold mining investment that turned out to be a Ponzi scheme. The difference with this investment was that I knew the Director of Marketing and another primary investor, both of whom had been long-time customers of mine.

The Director of Marketing showed me the results of borings on the site and the extraordinary amount of tailings that were available to be processed. He had been invested in the gold mine for months and claimed that he had been receiving five figure royalty checks for months. This was also confirmed by the other investor in the gold mine.

I met with the CEO and relying primarily on my relationship with the Marketing Director, decided to take the plunge. There was a 6-month waiting period before the royalty checks began, after which I was expected to receive $3,000 – $5,000 monthly checks into perpetuity. I was a bit concerned when my first royalty check was delayed by a few weeks, but was told that it had to do with finding a US bank that would work with the overseas operation.

The real problem began the second month when the check didn’t arrive and we were having problems getting ahold of the CEO. We were finally able to get him on the phone and he claimed that there was a minor hiccup with the local authorities. We later found out that the problem was that he was running a Ponzi scheme and had been stealing money from the company to line his pockets.

We received a report from the Marketing Director a couple of months later than the CEO was reported to have passed away. We suspect it was from the stress of running a fraudulent investment scheme or the involvement and increased pressure from the local authorities. Regardless of the reason, the company went bankrupt and we were paid pennies on the dollar.

These days we regularly hear from individuals that have been contacted from someone in Africa claiming that they are the heirs of a substantial amount of gold from a previous unknown relative. They are asked to pay a sum of money (in some cases a substantial amount) to fund the transfer and delivery of the gold to the United States. These folks are elated at the prospects of becoming instant millionaires. We regularly receive phone calls from them trying to arrange for the sale of the gold that they’re expecting to be delivered. This is always a difficult conversation to have, but we suspect in most, if not all situations, this is a scam and a way to steal money from trusting souls. We try to warn them, but the allure of becoming an instant millionaire in many cases is too enticing to pass up.

Summary

In conclusion, we’ve shared with you what we believe to be investment opportunities and potential pitfalls. We began our discussion with the difference between numismatic and bullion coins and recommended for investment purposes that you stick primarily with bullion coins, bars and rounds, as opposed to collectible coins, if the primary purpose of your investment is to protect against inflation.

We also discussed various markets and to sell when a market is hot or potentially overvalued. In our example, we recommended selling trading cards, as this market has increased substantially in recent years and is due for a pullback. Furthermore, if we enter into an official recession in 2023, which appears likely, fewer people will have discretionary income to invest in sports cards, which could cause a sharp sell-off.

The main takeaway from our article is to be a contrarian.

Don’t follow trends or get caught up in bubbles. Look for opportunities in sectors that have been beaten down and that are out of favor. Furthermore, don’t let public opinion affect your decisions. If in your gut you believe that your house may be worth half what it is in two years, don’t hesitate to make the bold move and sell it now.

Buying when there’s “blood in the streets” is a contrarian approach. In other words, look for signs of panic as opportunities. Chicken Little may be your best friend. If you’re concerned that you might be swayed by the opinions of those around you, don’t tell them about your decision until after the fact. No one ever became successful by following the herd, so we recommend that you go against the grain, whenever possible.

Lastly, if an opportunity sounds too good to be true, then it probably is. Many of these investment opportunities are overseas. If you have a good relationship with the individual that has brought the investment opportunity to your attention, consider starting slowly. Insist on visiting the area or site and if you find that you’re receiving solid and consistent returns, consider increasing your investment over time. Ideally, take some profits off the table and play with “house money.”

While we’re not financial advisors, we’ve been around for a while and have seen different markets and opportunities. With nearly every asset class in a bubble, including stocks, bonds, and real estate, an investment in gold and silver at current levels appears to be a wise investment.

Contact us today at 404-236-9744 to discuss the various options and to see for yourself why we’re metro Atlanta’s leading coin and bullion dealer.