Wednesday, January 12, 2011

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.


  1. Hi Gonzalo,

    Re: Bond Pricing, all bonds have a "risk premium" component in their yields compensating for the perceived possibility of default (except perhaps AAA-rated instruments such as US Treasury securities), but usually the variations in their prices only correspond to changes in the general level of interest rates caused by the general availability of credit in an economy (a function of national monetary authority policy, expectations about future inflation, and general market sentiment). Let's say you've bought a $100,000 bond (i.e. lent someone $100,000) at 6% annual interest, but then some company with the same credit-quality later finds that it only borrow money at 7%, due to a change in the general credit climate - then no one will want to buy your 6% instrument at $100,000 anymore but rather at a lower price.

    The fluctuations you describe caused by changing perceptions of credit-worthiness are unfortunately now making the headlines (most spectacularly with regard to European sovereign debt), but are exceptional cases. Prices of debt instruments do fluctuate all the time, but in the vast majority of cases due to the other reasons I listed above, i.e. not due to credit-worthiness considerations which are instead usually a stable element in pricing calculations, so I feel you should have emphasized that mechanism in your explanation instead.

  2. Gonz, I most certainly would love to pay a premium of just 50 coppers an ounce for gold bars and bullion coins but the reality is that you cannot, not in America, Europe or anywhere else for that matter.
    Generally speaking, if a person can purchase gold bullion coins or bars for 1% an oz or less then they are either extremely lucky or they are buying in bulk. The lowest per oz premiums for straight up generic bullion bars and coins I have found in the world is the Tulving Company in Newport Beach Cal. The catch with Tulving is that to get the low premiums is that you have to buy in quantity, usually 20 oz's minimum.
    When a person decides to invest in gold they absolutely, positively must understand the "buy - sell" spread a dealer offers.The better the spread a dealer offers then the bigger bang for the buck you get because at some point you may need to unload that gold and the dealer you have a relationship is the forst person to call when it's time to sell.
    Here's a basic example: Tulving may have British Sovereigns for sale at spot plus a premium of $9 a coin. He will buy that same coin back on the day you purchase it for spot plus $1 a coin. This equates to a "spread" of $8 a coin. In other words, the spot price of gold needs to advance $9 from the time you buy the coin for you to be "in the money". It's very similar to the old days when I bought stock thru a full service broker where I paid them a premium on the stock I purchased and again when I sold it. It workss the same with my gold dealer, that's why spreads are important.
    This is how I play the physical gold market and I'm sure others play it differently with other dealers. But no, you cannot buy gold for 50 cents an ounce over spot anywhere and if there is a dealer who will sell me gold for that low premium please let know.
    Also, and this is worth meantioning. Purchasing gold is essentially for wealth preservation. If you don't have a relatively large amount of cash to protect then buying five, ten or twenty ounces of gold isn't going to get you much protection becasue you don't have a lot to protect. Your money may be better spent paying down debt. Just my opinion, mileage may vary.
    Lastly, do your homework before buying physical gold from anyone. When you hit the send button on that $100,000 bank wire transfer to the dealer you damn well need to be assured the gold will get to you. Also, stay the hell away from numis's unless you are collector and know what the hell you're doing. Make a gold play for gold's sake alone relative to spot and dealer spreads and you will do fine.

  3. Explain yield curves.


  4. Police did not go door to door, but it was confiscation. If you had a safety deposit box in a bank, when you came to open it, you were subject to having a federal officer there to inspect the contents. Also, even after the dollar was devalued to $35 per ounce, there was no legal market for the coins you had, if you needed to make use of the stored value. So you had to exchange them for nice $20 bills, not the new value. And you could be prosecuted for holding more than the 5ozt limit. So you're wrong there.

  5. This comment has been removed by the author.

  6. This comment has been removed by the author.

  7. Please explain "Peak Oil." It seems the pro's and common folk use the expression within more than one context. - Thanks, Tess of Kansas


Knock yourself out!

The cult of stability is a culture of death.