Should You Invest in Proof American Gold Eagles?

Should You Invest in Proof American Gold Eagles?

The American Gold Eagle coin is one of the world’s most successful bullion issues, but are proof American Gold Eagles a good investment?

Since the inception of the U.S. Mint’s Gold Eagle program in 1986, over 25 million ounces of these bullion coins have been released to precious metal investors.  However, there are important questions regarding these beautiful coins that surface repeatedly.  Are modern gold bullion coins – even proof versions – truly collectible?  Should you invest in Proof American Gold Eagles?

Proof coins are carefully struck collector’s versions of existing “business strike” coins.  In the case of American Gold Eagle coins, the vast majority of pieces minted are intended for the bullion market.  These bullion business strike coins are struck quickly in a highly automated fashion in order to satisfy the considerable quantities demanded by precious metal investors.

In contrast, proof American Gold Eagles receive special care.  The actual minting process is very involved and occurs exclusively at the U.S. Mint’s specialized West Point facility located in the Hudson River Valley of New York state.  Specially selected, hand-polished coin blanks are individually hand-fed into a press fitted with the best coin dies available.  The coins are then struck a minimum of two times at low speed to ensure the best impression possible.

The resulting gold coins are then hand-inspected, one-at-a-time, by white-gloved mint employees.  Any coins showing even the slightest imperfection are immediately rejected and condemned to be melted down.  Proof coins that pass this rigorous inspection process are sealed in plastic capsules for preservation purposes before being mounted in a satin-lined, luxury presentation case that includes a certificate of authenticity.

Proof American Gold Eagles are a sight to behold.  The exacting production steps adhered to by the U.S. Mint create a coin with a mirror-like field – the flat “background” area – and highly frosted devices – the raised design portion.  This highly desirable effect, a mirrored field with contrasting frosted devices, is known by coin collectors as a cameo proof.  Third-party grading services, like PCGS and NGC, will note the cameo effect on proof coins they certify with the designation CAM (for cameo) or DCAM (for deep cameo).  While the highly desirable cameo effect is normal on proof coins today, it was rare before the invention of highly advanced minting technology in the late 1970s.

In addition to proof coins, the U.S. Mint’s West Point branch also strikes another variety of collector’s coin, called burnished American Gold Eagles.  These burnished uncirculated coins are specially struck using many of the same exacting procedures as proof coins, including individual handling.  However, the resulting burnished American Gold Eagles are not proof issues and do not have the mirror-like, cameo finish of proof coins.  Instead, burnished American Gold Eagles look similar to matte proof coins, with both the fields and devices possessing a softly frosted appearance.  For the purposes of this article, proof American Gold Eagles and burnished American Gold Eagles have very similar attributes and can be viewed interchangeably.

In spite of the incomparable beauty and technological triumph of proof American Gold Eagles, there are some people in the bullion industry who don’t like them.  If you search the internet for information on these paragons of modern Americana, one of the first results you will see is an article titled “Hidden Dangers in Buying Proof American Gold and Silver Eagle Coins“.

This article contends that many bullion dealers selling proof American Gold Eagles mark up the coins excessively, leaving clients with overpriced collector’s coins that are actually worth only a modest premium above their spot values.  There is an element of truth to this charge.  Some unscrupulous gold dealers, especially fly-by-night companies that advertise aggressively on television or talk radio, do charge far too much for these coins.  But, of course, all industries have their share of morally questionable business people who wish to take advantage of the ignorant.  An informed coin investor buying proof American Gold Eagles from a reputable dealer will have nothing to fear.

Proof American Gold Eagles are aesthetic gems that echo the golden age of American coinage.  The obverse design of the American Gold Eagle was borrowed from one of the most iconic U.S. coins ever produced – the Saint Gaudens double eagle gold coin.  In the early 20th century, President Theodore Roosevelt strongly believed that a great nation deserved great coins.  Therefore, he commissioned renowned sculpture Augustus Saint-Gaudens to create a circulating gold coin modeled on the Greek numismatic masterpieces of ancient times.  The result, minted from 1907 to 1933, was the incomparably beautiful Saint Gaudens $20 gold coin.  Its front displays the personification of Liberty boldly striding forward as the rays of the sun burst forth around her.

In addition to their rich history and meticulous striking process, both proof American Gold Eagles and burnished American Gold Eagles have mintages that are far lower than their bullion counterparts.  With the exception of its first two years of production when mintages were higher, 1 troy ounce proof American Gold Eagles have averaged fewer than 40,000 specimens issued per annum from 1988 through 2016.  After 1987, no year had a proof mintage greater than 100,000 pieces and over half of the series sports mintages of fewer than 40,000 examples.  And the fractional 1/2, 1/4 and 1/10 troy ounce coins often have even lower mintages than the 1 troy ounce pieces.

These low mintage numbers for proof American Gold Eagles are in sharp contrast to the business strike, bullion version of the coin.  The average mintage of bullion 1 troy ounce American Gold Eagles is over 600,000 pieces struck annually (from inception through 2016) with several individual years exceeding 1,000,000 coins.  The proof versions, on the other hand, have dramatically lower mintages – often 1/10 or less of the bullion coins.

Burnished American Gold Eagles, like their proof cousins, also have shockingly low mintages.  Mintages for 1 troy ounce burnished American Gold Eagles have averaged a scant 13,000 examples per annum through 2016.  These modest mintage numbers are absolutely dwarfed when compared to those for circulating U.S. coins, which generally vary between millions and billions of examples.  Simply put, burnished and proof American Gold Eagles are some of the rarest modern U.S. coins in existence.

Another little known advantage of proof American Gold Eagles is that they are the only type of proof gold coin eligible for ownership in a precious metal IRA account.  While collectibles and antiques are specifically prohibited in U.S. retirement accounts, a carve-out was made for holding physical bullion bars and coins in a precious metal IRA.  Luckily for the savvy tangible asset investor, the U.S. Congress overlooked the numismatic potential offered by gold bullion coins held in a precious metal IRA.

With premiums generally ranging from a modest 10% to 40% over spot for common date coins, burnished and proof American Gold Eagles have a lot of hidden investment potential.  Despite possessing little numismatic potential, regular bullion American Gold Eagles have premiums that aren’t much lower, ranging from around 4% to 20%.  Paying a slightly higher premium for the aesthetically desirable proof or burnished versions makes a lot of sense when you consider their inherent numismatic optionality.

Now there are situations where burnished or proof American Gold Eagles don’t make sense.  If you are simply interested in buying the most gold bullion possible for your money and don’t have any interest in generating higher investment returns via numismatic potential, then you should pass on these coins.  But, provided you pay a reasonable premium above their bullion value, burnished or proof American Gold Eagles represent a wonderfully low-risk, high-return investment.  Not only that, but they are some of the only collector-oriented coins that can be legally purchased in a precious metal IRA.

19th Century Japanese Pumpkin Netsuke

19th Century Japanese Pumpkin Netsuke
Photo Credit: matsu-kaze-japan

19th Century Japanese Pumpkin Netsuke

Buy It Now Price: $330 (price as of 2017; item no longer available)

Pros:

-Here is a wonderfully patinaed, hand-carved pumpkin netsuke from Edo era Japan, circa 18th or 19th century.

-In the Edo era, before 1868, Japan was ruled by the Tokugawa shogunate and its samurai retainers.  At the time, everyone wore kimonos, even samurai.  Netsuke were functional wardrobe accessories used to secure a traveler’s purse to his kimono sash.

-This antique pumpkin netsuke measures 36.5 mm (1.44 inches) tall by 45 mm (1.77 inches) wide.  Although it may not seem like it, this is actually a fairly sbustantial size for a netsuke.

-Technically, this netsuke carving isn’t actually a pumpkin!  Pumpkins were originally endemic to North America and were extensively cultivated by Native Americans.  While a few people in 19th century Japan certainly knew about pumpkins, this carving almost certainly represents a kabocha – a type of pumpkin-like Japanese squash.

-This old pumpkin netsuke is probably made from boxwood, the world’s premier carving wood.  Boxwood was used extensively in miniature hand-carved objets d’art in both Europe and Japan before the industrial era.

-Although freshly-cut boxwood starts off as a neutral, cream-colored wood, it gradually darkens over time, developing a beautifully rich and deep patina.

-I love the way the artist left some of the wood’s natural fissures and gnarls intact in order to add texture and interest to this pumpkin netsuke.  It is this phenomenal attention to detail that elevates antique Japanese netsuke to their status as legitimate works of art.

–Japanese antiques in general, and netsuke in particular, distill the very best attributes of Japanese craftsmanship and aesthetics into tangible objects that you can hold in your hand.  These works of art are, in my opinion, extremely undervalued in today’s market.

 

Cons:

-This 19th century Japanese pumpkin netsuke carving is unsigned; it would have been more valuable with a signature.  Netsuke carving was treated as a bona fide art form by the Japanese, and many of the very finest examples were signed by their creators.  In spite of this minor drawback, I believe this netsuke is still worth every penny of its $330 asking price.

-This netsuke carving has a very small, unobtrusive crack on the underside of the pumpkin that does not compromise the structural integrity of the piece.  It is not only acceptable, but expected for 150 to 200 (or more) year old wooden antiques to have minor defects of this nature.  I believe it has little to no impact on the value of the piece.

Value Density and Tangible Asset Investing

Value Density and Tangible Asset Investing

Hard assets – precious metals, gemstones and antiques – can be remarkably portable, concentrating significant dollar values in relatively small objects.  This phenomenon gives rise to an idea I call “value density”.  At its core, value density quantifies the dollar price of an item in relation to the volume it occupies.

The more dense and valuable an object is, the higher its value density.  This concept is pivotal to anyone interested in alternative assets today.  Tangible assets with high value densities are compact, making them easier to discreetly transport and securely store.  As trust in traditional finance and banking continues to wane, value density becomes increasingly important for the savvy tangible asset investor.

Below is a chart showing the value density of various currencies and tangible assets expressed in dollars per cubic centimeter.  Remember that these numbers, while current as of fall 2017, are subject to change due to fluctuating market prices.

Tangible Asset Value Density per Cubic Centimeter
Silver Bullion
  $            5.73
U.S. $100 Bills  $         88.56
European €200 Bills  $        168.75
Palladium Bullion
  $       387.22
European €500 Bills  $       403.41
Rhodium Bullion
 $       476.79
Platinum Bullion
  $       644.81
Gold Bullion
  $       797.62
Vintage 18K Gold Rolex Submariner (ref. 16618)  $          1,010
Ancient Gold Stater of Philip II of Macedonia  $       16,849
Sapphire  $    198,990
Diamond  $    315,900
Emerald  $   326,400
Ruby  $   844,200

The first thing you’ll notice is that the precious metals vie with physical currency in the rankings.  This is a bit misleading, however.  The highest value note in the world that commonly sees circulation is the European €500 bill.  The limited circulation Swiss 1000 Franc note doesn’t count.

A stack of €500 notes not only has a similar value density to an identical volume of palladium or rhodium bullion, but also weighs substantially less.  But the European €500 note, while still legal tender, has been discontinued due to the irrational fear that it is used extensively by organized crime and tax cheats to stockpile ill-gotten gains.  However, many experts believe the real reason the high denomination notes are being phased out is in preparation for an extended period of widespread negative interest rates in Europe.

The discontinuation of the €500 note leaves the €200 note as the European Union’s next largest denomination.  With a value density of just $169 per cm3, the €200 note – along with every other nation’s physical currency, barring the uncommon Swiss 1000 franc note – falls significantly below the precious metal complex on the scale.  Even a stack of redoubtable U.S. $100 bills only has a value density of about $89 per cm3.  Only silver, the least valuable and dense of the precious metals, is lower at a mere $5.73 per cm3.

In contrast, palladium, rhodium, platinum and gold bullion have value densities that range from $387 to $798 per cm3.  Interestingly, platinum, although slightly denser than gold, currently has a lower value density than the precious yellow metal.  This is a very unusual situation; historically speaking, platinum has almost always been more expensive than gold.

Going further up the list we come to two very different antiques.  The first is the iconic solid 18K gold Rolex Submariner (ref. 16618) wristwatch.  This vintage wristwatch has a value density of just over $1,000 per cm3.  Next on the list is an ancient gold stater coin of Philip II of Macedonia, struck during the mid 4th century BC.  This numismatic masterpiece has a value density of nearly $17,000 per cm3 – a jaw droppingly high value.

But the very top of the chart is reserved for precious gemstones.  The “big four” gemstones – sapphires, rubies, diamonds and emeralds – have value densities ranging from almost $200,000 to over $800,000 per cm3 for top quality specimens.  This is only possible because of the amazingly high prices that nearly flawless gemstones of excellent color bring on the world market.

The positioning of gemstones near the top of our list helps explains the persistence of jewelry as a savings vehicle across the centuries.  Throughout history, fine jewelry has traditionally been a way to display high quality, high value density gemstones.  If you want to own exceptionally valuable and portable tangible wealth, few things can compare to fine jewelry.

There are, of course, some limitations to the concept of value density.  For example, I used the prices of top quality gemstones and antiques when compiling the data for this list.  Unless you are rolling in money, you are unlikely to purchase or own items of this superlative quality.  The value density of more attainable art and antiques would naturally be somewhat lower, though still impressive.

The theoretical value densities for some tangible assets shown in the above list will also generally be lower due to their irregular shapes.  This is a limitation that precious metals and physical cash will not share for the most part.  Gemstones, on the other hand, may have incredibly high value densities, but cut stones cannot really be distilled down to completely fill a cube of space.  There will always be air gaps.  This may reduce the effective value density of gemstones by 50% or even more.

Antiques, jewelry and other abnormally shaped tangible assets will suffer even greater reductions in value density than gemstones.  Of course, this is ultimately a very minor drawback.  An effective value density of $5,000 or $10,000 per cm3 will be more than enough for most of us.  Only the mega-rich have to worry about trying to shove a million dollars into a space the size of a lipstick tube.  In any case, high value density is a compelling benefit if you are looking to put significant amounts of money to work in alternative assets.

Did Korekiyo Takahashi and the Bank of Japan Cause World War II?

Did Korekiyo Takahashi and the Bank of Japan Cause World War II?

Japan’s Finance Minister during the early 1930s, Korekiyo Takahashi, is talked about by modern-day economists in hushed, reverent tones.  His economic policies are widely credited with having saved Japan from the worst effects of the Great Depression.  In fact, Korekiyo Takahashi is sometimes called the Japanese Keynes, after John Maynard Keynes, the British economist whose radical theories gained widespread credibility in the wake of the Great Depression.

Before we continue, let’s review some historical background.  In the late 1920s most nations were on the gold standard.  The gold standard allowed citizens to exchange their national currency for a predetermined amount of gold on demand, usually in the form of gold coins.  It was very effective at controlling inflation and imposed significant fiscal discipline on both governments and the banking industry.  It also established de facto fixed exchange rates between all nations that followed the gold standard.  This allowed entrepreneurs and businesses to more accurately project the long-term viability of international commercial ventures.

However, the Great Depression shattered the prevailing economic and monetary assumptions of the era.  Although it started with Wall Street’s infamous October 1929 crash, the Great Depression did not stay isolated in the U.S. financial sector for long.  After steadily increasing in severity for many months, the Great Depression entered its most virulent phase with the collapse of the venerable Austrian bank Credit-Anstalt in May 1931.

After this coup de grâce, the pre-existing global economic order rapidly disintegrated.  Between 1929 and 1932 the value of global trade fell by a stunning 50% or more.  Unemployment also rose to dizzying heights, reaching 25% in the U.S. in early 1933.  Foreign nations experienced similar, although generally not quite as severe, spikes in unemployment.

This was the dreadful scenario in which Japan’s finance minister, Korekiyo Takahashi, found himself.  He reacted to the crisis both decisively and in a way that would forever endear him to modern economists.  First he abruptly took Japan off the gold standard in December 1931, causing the yen to depreciate by 60% against the U.S. dollar and 44% against the British pound.  The resulting weaker yen stimulated Japanese exports.

Next, Korekiyo Takahashi slashed interest rates several times in the 1932-33 period.  The Bank of Japan’s discount rate fell from more than 6% in early 1932 to well under 4% by mid 1933.  This helped ease the economic pressure on Japanese companies and financial institutions.

Finally, the Bank of Japan also engaged in large-scale, direct monetization of government debt.  In effect, Korekiyo Takahashi, in his capacity as the Japanese Minister of Finance, encouraged the national government to run extremely large budget deficits.  This was done with the explicit understanding that the Japanese central bank would buy all government bonds issued to finance this deficit spending, thus resulting in no impact on interest rates.  In other words, the Japanese central bank, at the behest of Korekiyo Takahashi, printed oodles of money and gave it to the government to spend.

These radical new economic policies appeared to be entirely successful.  After experiencing double-digit deflation in both 1930 and 1931, Japan’s wholesale price index went positive for the rest of the 1930s, only briefly flat-lining in 1934.  Industrial production followed a very similar, upward path to wholesale prices.  Although the Great Depression tore into the Japanese economy in the very early 1930s, Korekiyo Takahashi’s quick action seemed to save the day.

Modern economists, at least, fully embrace this orthodox view of history.  They both admire and celebrate Korekiyo Takahashi’s economic achievements, while seeking to emulate many of his policies.  Unsurprisingly, many modern central bank policies are incredibly similar to Japan’s 1930s economic experiment.  That isn’t an accident, either.  Korekiyo Takahashi effectively engaged in Keynesian economic policies before Keynes even fully developed his theories in the mid 1930s!

In fact, Japan’s current economic policies are specifically modeled after the policies Korekiyo Takahashi pioneered during the Great Depression.  Referred to as Abenomics after their chief advocate, Japanese Prime Minister Shinzo Abe, these economic policies are intended to extricate Japan from its 25 year long (and counting), soft depression.  Abenomics relies on monetary easing, fiscal stimulus and economic reforms to jump start the Japanese economy, a combination that intentionally echoes Japanese economic policies of the 1930s.

What they don’t tell you in the history books, though, is that the aggressive monetary policies pursued by Korekiyo Takahashi were actually inflationism.  And while they appeared to be an unmitigated success in the case of Japan’s Great Depression, looks can be deceiving.

For example, the primary mechanism by which the weaker yen contributed to Japanese economic recovery was via stimulating exports.  But this was a zero sum game.  Japan’s benefit only came at the expense of trade partners who refused to devalue their currency as quickly or as steeply as the yen.  This had serious political side effects later on, as it made the European colonial powers in the region less willing to negotiate with a Japanese nation that had exported its way to prosperity on their backs.

Inflationism also creates special interest groups who benefit disproportionately from loose monetary policies.  Whichever group is closest to the central bank money spigot quickly becomes unimaginably wealthy.  These special interest groups are usually dominated by large corporations and politically-connected individuals.  They are able to mobilize significant resources with their newfound wealth in order to influence local or national policy.  They can hire more lawyers, employees and lobbyists than the other groups in society who aren’t direct beneficiaries of central bank largess.

One of the first things these inflation-driven special interest groups attempt to do is ensure that loose central bank monetary policies continue without interruption.  Unfortunately for Korekiyo Takahashi and the Japanese people, one of the special interest groups who benefited most from his money-printing spree was Japan’s military establishment.  Much of the deficit spending that the Bank of Japan monetized in the 1930s went directly into the national military budget.  In fact, Japanese defense spending nearly doubled between 1931 and 1935, rising from ¥563 million to ¥1,134 million.

Takahashi later attempted to “do the right thing” by reducing Japanese military expenditures once it became apparent his policies had succeeded in jump-starting the economy.  But the Japanese military, especially its ultra-nationalist hardliners, were in no mood to see their budgets cut.  On February 26, 1936 a group of ultra-nationalist army officers, along with approximately 1500 troops under their command, staged a coup in Tokyo in the hopes of wresting the government from civilian control.

As part of this plot, they assassinated Korekiyo Takahashi as he slept at home in his bed.  Although the ultra-nationalist coup was ultimately put down by the military, the damage done to the civilian government was fatal.  Korekiyo Takahashi had been an influential voice of moderation in a period of rising Japanese nationalism.  Despite the coup failing, his death effectively ushered in military domination over the civilian Japanese government.  Once this happened, a war in the Pacific against Anglo-American power was inevitable.

Yes, it is possible that the Japanese military would have seized control of the civilian government anyway, but the Bank of Japan’s loose monetary policies made this outcome inescapable.  In effect, Korekiyo Takahashi was indirectly responsible for World War II in the Pacific by enabling the rapid expansion of Japan’s military machine via freshly printed money.  His policies may have shortened Japan’s Great Depression, but only at the expense of the nation’s near total destruction a mere 10 years later.  Only modern-day central bankers could be foolhardy enough to think that recreating Korekiyo Takahashi’s failed policies are a good idea!

Of course, these revelations have major parallels to our own time.  Central banks around the world have been pursing bubble-centric economic policies for a decade at this point.  This has given inflationism, and its associated special interest groups, ample time to entrench themselves in national economies around the world.

The United States is a prime example of this trend, with monopolistic technology companies, merciless healthcare conglomerates and manipulative financial corporations the primary beneficiaries.  I believe that 1930s Japan is a cautionary tale for today’s central banks.  They would do well to keep in mind that sometimes even seemingly perfect policies can have unintended consequences.