Precious Metals vs. The Investment World

Finding The Best Values for 2014

In the investing world and life in general a rule that cannot be overlooked is value. Am I getting the most value out of my money and is the asset that I am purchasing overvalued or undervalued? In 2014, this is a question that is easily answered.

   With stocks trading at all-time highs from Fed induced stimulus programs like Quantitative Easing – I, II, and III, how easy is it to ascertain what the value of a stock really is? With some stocks trading at more than 100 times earnings how can one come to the faulty conclusion that these stocks offer value? They don’t. When the Federal Reserve chose to inject markets with monetary heroin, they severely impacted investors being able to measure value.

   David Stockman, former Reagan Advisor and Director of the OMB, recently commented on the stock market saying what we are seeing is “the kind of speculative froth you get at the top of a cycle where valuation loses any anchor in the real world; from earnings or the prospects of the economy.” Mr. Stockman – we couldn’t agree more.

Buy the All-Time High?

   With stocks at all-time highs and real estate showing signs of a bubble how do you plan on protecting your assets in the current investing environment? If you were about to make an investment and had two choices – one market that was trading at unheard of valuations and was near an all-time high and another market that could double and not be trading where it was within the last five years – where would you choose to put your money? The answer to that question should be an easy one.

Goldman Sachs Chief Strategist David Kostin recently commented on the current valuation problems that stocks will face in 2014 saying:
“The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock…the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of Operating EPS and about 45% overvalued using As Reported earnings.”

   Even the Federal Reserve joined the chorus regarding valuations.  From the recently released minutes of the FOMC:  “In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some smallcap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans.” - FOMC

   JP Morgan recently released a report showing that US Stocks were trading at over two standard deviations above their average valuations and were the most expensive (overvalued) in the entire world. 

   Companies like Pinterest are valued at $3 billion yet they have never earned a profit. Twitter has never made a profit and actually lost nearly $65 million last QUARTER but is currently valued at about $22 Billion. Facebook is trading at an equivalent of 100 years of earnings yet is supposedly worth more than $100 Billion. 

   It is hard to deny the argument that there appears to be an enormous amount of misplaced optimism regarding the economy. The last time markets were this frothy was in back in 2007 leading into the Great Recession.

The Rest of the Story

On the bright side – there are tremendous values in the investment marketplace – you just aren’t going to find them in stocks, bonds, and real estate. Since 2011 Precious Metals like Gold have declined more than 35%. Silver in the same time frame is down about 50%. At these levels, there is little doubt that Gold and Silver are currently undervalued.  The fundamentals that started this bull market are firmly in place and the metals seem poised for their tremendous gains of the past to return full force. 

   In terms of valuations, Gold and Silver couldn’t be more different than stocks, bonds, and real estate.
On one hand you have hard assets like Gold and Silver that are beginning a recovery after a strong correction. On the other you have assets that are trading at valuations never before seen and are clearly entering bubble territory. Which one would you rather be holding?

Three Best Values in Precious Metals

   Based on the information above it becomes evident that Precious Metals offer far more value than traditional investments like stocks, bonds, and real estate. However, it is also important to lo
ok further than just making a decision to buy Gold and Silver.  Even within the Precious Metals complex there are some areas that offer far more value than others. In this section we are going to focus on the three areas that seem to be the most undervalued.

Even though Gold and Silver are down significantly over the last two years, a longer term outlook shows something entirely different. Since 2004 Gold is still up more than 200% and Silver is up about 225%. Compare this to the Dow Jones that is up just 55% since 2004 or the S&P 500 which is up about 60% during the same timeframe.

(See graphs above and below)

Most Undervalued Items for 2014

   Best Buy #1 – Silver:  At current levels Silver could double in value and it still wouldn’t be trading at the highs seen in 2011. In 2014, our advice would be to acquire Silver in bulk. What kind of Silver that you purchase isn’t nearly as important as getting it in the first place. We are recommending clients purchase anything that isn’t nailed down – bars, rounds, and coins – whatever the type. 

   However, modern Silver coins with limited mintages appear to offer even better value than Silver itself. Coins like the Canadian Timberwolves and Hawaiian Volcano from the America the Beautiful series doubled in price during a time when Silver prices were falling.

   Had you taken our advice when these coins were originally released you could now double your holdings of Silver just by sending it in on trade. A single Canadian Timberwolf can purchase two ordinary Silver Maples while a 5 Ounce Hawaiian Volcano is worth about 10 ounces in ordinary Silver Eagles.

 Best Buy #2 – Pre-1933 Investment Grade U.S. Gold: During Gold’s pullback of 35%, many Pre-1933 certified coins fell by even more. Coins like these generally will outperform Gold both to the upside and downside. What this means is that if Gold falls these coins sometimes will fall more than Gold itself and on the upside coins like these will likely appreciate more than the gains seen in ordinary Gold. What this has created in the current environment are areas that seem to be severely undervalued at current levels. In our opinion the best opportunities in 2014 in the Pre-1933 Gold arena are as follows:

$10 Liberty MS-64 – Currently these can be obtained for about $1,550 per coin. However, in 2009, with Gold at similar levels as it is today, they were trading for more than $3,100 ea. This has set up a scenario where $10 Liberties in MS-64 could double in value and still only be trading at the price that they were in 2009.

 $10 Indians MS-64 – These are currently trading for about $1,500 per coin but in 2009 they were selling for $3,200 a piece! Another great opportunity to double in value without setting not only all-time highs but recent highs.

$20 Liberty MS-64 – Currently $20 Libs in MS-64 can be obtained for about $2,200, however, they were selling for $4,400 per coin in 2009 with Gold at similar levels to where it is today. If $20 Liberties in MS-64 were to double in price, they would only equal levels seen in 2009.

Best Buy #3 Rare Ancient Coins & Rare U.S. Coins Few people are able to grasp the value of owning rare antiquities like Rare Ancient and U.S. Coins. Over the long-term, investing in these areas has shown steady appreciation. For decades they have outperformed stocks, bonds, even Gold and Silver. Yet, even with a history of producing stellar long-term returns, only a small
percentage of our clients have been able to recognize their true potential as most people over the last several years have focused almost entirely on Gold and Silver bullion. Rare Coins & Ancients add diversity to your Precious Metals portfolio as they are often immune to the price movements seen in Gold and Silver, while collecting Rare Coins is widely recognized as a very rewarding hobby. 

Consider This – Nearly all of the Ancient Coins circulating within the United States have been here since the 70s.  Coins like these are now considered national treasures in the originating country from which they were discovered and today few, if any, are ever allowed to leave. What this creates is a situation where supply is static but demand is increasing. The result is higher prices and greater rewards for those with the patience and forethought to put them aside while they are still available.

Take Notice – The Red Book: A Guidebook of U.S. Coins is a publication that documents every coin that the United States has ever produced and their current values. As part of their research they started including in 2005 a list of the top 250 Rare Coins that have sold publicly.  In 2005, the list included ten coins that had sold for more than $1 Million and the smallest coin on the list (#250) had brought $138,000. As of the most recent listing in 2013 there were an amazing 45 coins that have sold for over $1 Million and the last on the list brought $374,000.  These numbers represent a market that is growing by leaps and bounds.

Take it or Leave it?

   Market euphoria begets short memories. It causes investors to forget the one economic law that should be the primary focus of any investment strategy – value. Where value is and where value isn’t, what is overvalued, what is undervalued are questions that often fall by the wayside when sentiment is tilted heavily in one direction or the other. At the moment sentiment is shifted heavily towards stocks, however, the herd is almost never right and we expect big changes in 2014.

    In this update we hope you have learned that stocks, bonds and real estate seem to be the most overvalued investments anywhere in the world while Gold and Silver offer tremendous upside at current levels. Furthermore, the specific areas that we have pointed out above seem to offer even more upside than Gold and Silver which makes them possibly the most undervalued assets anywhere.  At the end of the day it comes down to a simple question.

   Would you rather purchase assets that are trading at all-time highs or assets that could double in value and still not be at the levels they were trading at in recent history? The answer to this question is an easy one.

   Do yourself a favor and contact one of our experienced Gold & Silver Specialists today. We offer unique one-on-one consultation with clients just like you and we can help answer any questions that you may have. We are currently assembling diversified portfolios consisting of carefully selected coins that will include each area that we documented. Whether it’s $10,000 or $1 Million, the experts at Austin Rare Coins & Bullion can help you in putting together the pieces of the investment puzzle for 2014. Call us at 1-800-928-6468 – you will be glad that you did.

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