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Don't be crushed by premiums

I pulled out the June 1, 2010, issue of Numismatic News for a quick look this morning.

The front page featured a gold story that reported the precious metal had nearly reached $1,250 in the prior week before retreating a bit.

Silver traded at the same time at $19.64 an ounce.

I got the idea to look at this issue after I saw this morning’s gold and silver prices. Kitco reported gold to be at $1,269.20 and silver at $21.27.

That puts long-term owners of gold bullion at roughly the break-even point while silver holders are still ahead by roughly eight percent.

However, in 2010 everybody was saying that the sky was the limit for precious metals and many people were jumping into coins as the preferred way of owning them.

Since I am working on this month’s Coin Market that lists prices of American bullion coins I thought I would check out how these expectations panned out.

Back in that June 1, 2010, issue it was reported that the one-ounce American Eagle bullion coin was trading at $1,325 while the proof was $1,960.

The prices in this month’s Coin Market will show the one-ounce bullion coin at $1,391 and the proof at $1,625.

The bullion coin buyer is still showing a gain of approximately 5 percent while the proof gold Eagle buyer has a serious loss of 17 percent even as the price of the precious metal is higher.

Why is that?

It’s the premium charged. In 2010, the premium on the proofs was a huge 58 percent over bullion price while today it is 25 percent. Coin buyers need to watch the premium like hawks.

A premium is always charged, but they balloon at times when everybody tries to barrel into a coin investment at the same time.

The consequence as you can see here is a huge difference in how two very similar investments performed.

Silver American Eagles show the same pattern. The common ones went from $27 in 2010 to $29 today while the proofs took a big step backwards from $68 to $57, or a negative 16 percent.

Individuals cannot change their actions from 2010, but going forward, coin buyers need to watch those premiums.

You might be absolutely right as to where the prices of precious metals will go, but if you are dead wrong about premiums that won’t be good enough.

Buzz blogger Dave Harper is winner of the 2013 Numismatic Literary Guild Award for Best Blog and is editor of the weekly newspaper "Numismatic News."