SAN FRANCISCO (MarketWatch) — Apart from a New York City phone book listing, gold dealer Manfra, Tordella & Brookes, Inc. does no advertising. Lights are on all day because the shop sits in a basement.
Yet MTB, as the firm is known, has never been busier. Every day, people find their way to the Manhattan store with one thing in mind: getting their hands on gold bullion coins, as soon as possible and as much as possible, before the financial Armageddon they fear renders the dollars in their pockets worthless.
Welcome to the world of bullion coin investing, a business that has soared alongside the popularity of gold despite its disadvantages. The world’s thirst for gold coins has risen more than sovereign government mints can quench it, with demand on track this year to outpace 2009, itself a record.
The coin craze is part of gold’s growing investment allure, based on fears of currency debasement, inflation, a debt debacle in Europe, and rising debt levels in the U.S. But the boon has also brought the practices of some retailers in the industry to question, with at least two U.S. companies under investigation for allegedly misleading consumers.
Bullion coin investing caters mostly to a subset of investors who want physical possession of gold and regard anything else as lesser investments, no matter how much more they have to pay, ounce per ounce, over gold futures prices or the difficulties they are likely to face when unloading their bullion.
Long having captured the hearts of a few in the periphery of the investment world, gold has won over some of Wall Street’s elite. Investment stars such as Paul Tudor Jones, of giant hedge fund Tudor Investment Corp. and John Paulson, of Paulson & Co., all have invested heavily in gold in recent years.
Investing in bullion coins is not to be confused with investing in collectable coins, although both are manufactured and sold by mints across the world. Bullion coins are valued entirely for their metal content, not for their collectible value or the denomination hammered on them. For many, they are an affordable and portable way to invest in gold.
It’s no coincidence that May was one of the best months in recent memory for the bullion coin business, and gold in general. It was also the month that concerns about a European debt crisis reached their highest note, and gold hit its first nominal record high since December.
“It’s been unbelievable. May was phenomenal,” with June sales and so far July a bit slower but still way above average, said Michael Kramer, one of the owners of MTB.
Precious-metals research firm GFMS estimated that 229 metric tons of gold coins were sold in 2009, up 22% from the 187 metric tons of 2008 and almost 70% from the 135 metric tons that moved in 2007.
“It looks as though we are going to surpass 2009,” said Phillip Newman, research director of the U.K.-based firm.
The U.S. mint ran out of some bullion coins last year and in 2008, and the Austrian mint added a third shift to catch up on their stocks. In his Manhattan store, Kramer caters to about 45 coin buyers a day, up from fewer than 10 a day in previous years, as the firm’s forte is wholesale.
MTB is one of only eight authorized firms in the U.S. able to purchase U.S. Mint bullion coins directly and sell them to coin shops nationwide and abroad. The U.S. Mint does not sell bullion coins to the public, as it does with commemorative and other coins.
In addition to the new swarm of retail customers, MTB saw heightened interest from European coin retailers. “They couldn’t find enough coins in Europe, and they were buying from us.”
The Austrian mint, which, alongside Canada’s mint and the U.S. Mint is a top mint by sales, had to add a night shift to its two day shifts to counter delivery delays of two to three weeks and depletion of stocks.
“We did run out of stocks, we were living off our daily production.” said Kerry Tattersall, director of marketing at the Vienna-based mint. The third shift was recently discontinued after the mint built up its inventory.
Ongoing fears about the pace of the global recovery have only given gold more momentum, with futures prices hovering just below $1,200 an ounce and the consensus looking for $1,300 an ounce before the year is out.
Gold coin buyers already pay $1,300 and beyond for their morsel of shiny metal. Premiums for coins are around 5% to 10% for one-ounce coins, and higher for lesser-weight coins.
In contrast, gold bars, which are cheaper to produce, carry premiums half as expensive. In gold investing, the premiums for coins are only higher than premiums paid for jewelry, where prices also reflect fashion, artisanship, and other factors.
“Coins are unable to give you the most bang for your buck,” said Jon Nadler, an analyst with Kitco Metals Inc., a dealer of coins and other bullion products. “Secondly, you are going to have questions about liquidity … it’s not going to be as easy as you think to sell them.”
Coin owners are also exposed to total loss in case something happens with their storage arrangements, Nadler said. Even bank safes are not covered in case of catastrophes and physical damage to the buildings that house them, to say nothing about the danger of home burglaries.
The financial breakdown scenarios invoked by some die-hard gold coin and bar buyers also don’t work for Nadler. With the collapse these scenarios envision, “you probably need lead, not gold. And who’s going to make you change?”
Most buyers are not concerned with small change or exit strategies. Some people sell their coins to raise emergency cash, but most are in for the long run and eschew the ups and downs of the futures markets and exchange-traded funds, which are “paper gold,” said Parker Vogt, owner of Camino Coin, LLC, a retailer in Burlingame, Calif.
In recent months, two Southern California coin retailers have drawn attention for the allegedly high premiums charged to customers and their sales tactics.
Earlier this week, Santa Monica’s City Attorney’s Office announced an investigation into Goldline International and Superior Gold Group, both based in the city, after receiving dozens of complaints in the past two months. The city said the Los Angeles County District Attorney’s Office is also involved and the investigation is in its early stages.
In May, Rep. Anthony Weiner (D-N.Y.) requested that the Securities and Exchange Commission and the Federal Trade Commission investigate Goldline, a frequent cable television advertiser. The agencies haven’t yet responded.
Weiner accused the company of high-pressure sales tactics “and tall tales about the future of gold to sell overpriced coins that can be bought somewhere else for cheaper,” according to a report produced by Weiner’s office. The average Goldline markup was above 90% the melt value of the coin, the report said.
Goldline executive vice president Scott Carter said in a telephone interview that the company takes the complaints made to the City of Santa Monica seriously, but they represent only a fraction of Goldline’s thousands of transactions.
Congressman Weiner’s contention of price gouging is also unfounded, he said, as Goldline charges premiums of 35% for its highest-priced collectible products and the average 5% to 10% for bullion coins.
“The allegations are inaccurate,” Carter said of Weiner’s report. Clients are offered “comprehensive” disclosure documents and must review a risk information package before doing business with Goldline, he said. The company has a seven-day, full-refund policy, one of the most generous in the industry, he added.
At Superior Gold Group, Managing Partner Bruce Sands said in an email that he was “not aware” of either Santa Monica’s or Los Angeles County’s investigations.
“We have a full compliance department which is a third party verification,” Sands said.
“We record every call to make sure any decisions made by a potential client is documented,” he added. “Potential and current clients call the Superior Gold Group of free will with concerns about economic market conditions and look to precious metals as a hedge for diversification. We also have any and all clients sign an account agreement that outlines our terms of service to process their order(s).”
There are alternatives to coins, even for those willing to pay the premiums for physical gold. A few companies offer vault storage for bars purchased, and the Perth Mint sells gold certificates, with the metal sitting in vaults in Western Australia.
Some exchange-traded funds also offer physical gold, including SPDR Gold Shares
iShares Comex Gold Trust
ETFS Physical Swiss Gold Shares
and Sprott Physical Gold Trust
though actually taking delivery can be costly. See related story.
For some, the portability of coins is their best feature. Kitco’s Nadler recalls buying gold coins from Iranian and Vietnamese refugees in Southern California.
The ability to buy less than one ounce is also a big draw. A similar coin craze swept the world in 1999, as some feared a social breakdown — and inoperative ATMs — caused by the Y2K bug.
Yet there’s no denying that, for many buyers, tangible coins simply carry an emotional appeal. If customers are investing a big chunk of their money, MTB’s Kramer said, “they want to see what they are getting. They don’t want to see a piece of paper.”
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