The Ten PM Tutorial

Three questions tonight on The Ten PM Tutorial:

Tess of Kansas asks: “Which is best for investment purposes, bullion, numis coin, or rare coins?”

She also asks: “I have been hearing the word, austerity, often in relation to Greece and other countries within the European Union. What is the U.S. word for this sort of action, thus yielding a similar effect? For example the U.S. uses the expression Q.E. 1, and Q.E. 2 for meaning they are running the printing presses to flood the world with more FRNs. ”

Anonymous asks: “What is the price of a bond? . . . How can the price of a bond change? Isn't it always simply the amount borrowed?”

The answers after the jump: 

Precious metals: “Bullion” is a precious metal in bulk, often bars; before the metal is turned into coins. “Numis coins” and “rare coins” are the same thing—“numis” refers to numismatics.

Rare coins, or coins marked up because of their numismatic value, are a speculative investment class as complex as, say, stamp collecting or art collecting or baseball card collecting. Would you buy a 1963 Pops Mickey Mantle baseball card for $20,000, just because I told you it was worth $20,000? No you would not. 

Unless you know exactly what you are doing, never ever buy rare precious metal coins for their alleged rarity or “numismatic value”. Many people looking to invest in precious metals are suckered into paying a 10% to 30% (or even higher) premiums, for something that is common and has no intrinsic value.

Imagine it this way: Imagine I said I had a quarter coin from 1998, and told you I would only sell it to you for 38¢ because it had “neumismatic value”. Would you pay me 38¢, though it’s only worth 25¢? Would you believe me if I told you that this ordinary-looking quarter coin would “substantially appreciate in value”? Obviously not. 

If you buy precious metals, never pay more than 5% over the spot price—and even then, negotiate. In Europe, you can buy gold coins for a premium of 50¢ per ounce: That is, a 1/30th of 1%.

As a bonus question: Will they ever confiscate gold? The answer is, they never have: In 1933, when the Roosevelt administration declared a banking holiday and ordered the confiscation of gold, it was in order to devalue the dollar against it. No gold was actually confiscated. No police went to people’s houses, none of that. It’s gold-bug nonsense, designed to drive demand with horror stories of “gold confiscation”—ignore it. 

Austerity: Austerity means budget cuts—that’s not happening in America any time soon. Quantitative Easing in its various iterations (#1 in 2008–‘09, lite in summer ‘10, #2 this past November through June 2011) is indeed money printing. In America there’s no austerity, only more spending and printing. 

Bond pricing: Something is worth what someone is willing to pay for it. A bond is no different. Nominally, it may be worth $100. But it’s value fluctuates with the credit-worthiness of the borrower. When the borrower looks like it will pay its debts, the price of the bond rises, and so the yield conversely goes down. When the borrower looks like it will not pay, the bond price goes down, whichi is refelcted in the yield, which conversely goes up.

“Yield” means “yield on investment”: If the yield is 6%, that means an investment in a bond will earn 6%. Yield goes up when the price of the bond goes down, and yields go down when the price of the bond goes up.

If you have any question, please leave it in the comment section here, and the gnomes at THG Command Central will answer them in tomorrow’s post.