Fools and their Money – Fool’s Gold!

With gold going from about $300/oz. a decade ago to about $1,200/oz. today (vs. for example, the Dow Average going DOWN 9% in the same period), average people are starting to hear about investing in gold.

Unfortunately, the TV ads buying and selling gold cost so much to produce and run that gold advertised for sale (or purchase) on TV already has a vast overhead cost which must be covered before you even get to the value of any actual gold – a lot like whole life insurance where a varying but high percentage of the first year’s payments go to the salesman not to paying for insurance.

There are lots of really, really bad investment deals being advertised but one particular ad recently caught my attention.

The AD begins by talking about the perfectly legitimate (but overpriced) U.S. Mint 24-karat American Buffalo Gold Bullion Coin. (Which isn’t what they are selling.)

Then the ad makes a subtle switch to a completely bogus .9999 24k gold glad (plated, layered, washed, etc.) American buffalo coin which looks exactly the same as the Mint’s coin but actually has nothing in common other than the appearance.

So, what are the differences between the first coin described and the actual one being sold.

Well, there are two important ones.

First, the $50 U.S. Mint coin produced at West Point is always going to be worth $50 U.S. The advertised coin actually being sold is clearly described as having no monetary value (if you are sophisticated enough to understand what this means.)

Second, the Mint’s coin contains 31.108g or 1.0001 Troy oz. of 24-karat gold. If you melt it into a lump today it is still worth more than $1,100. By contrast, the advertised coin is made from some base metal (probably copper) and clad, “plated” or “layered” with an extremely thin coat of gold. This layer is thinner than any spray paint you have ever used and so thin it will quickly wear away if you even handle the coins.

The U.S. Mint’s coin sells for about $1,400 and today (January 5, 2010, at 10:30 a.m. (New York time) contains about $1,124.10 worth of gold (both vary daily or hourly.)

For example, you can price this coin at Blanchard, a long-time precious metal and coin dealer.

Or other legitimate bullion dealers.

You can get gold prices at

(This is the quantity price, buying retail you pay about 4% more and selling back to a dealer you should get about 5% less if you have a recognized standard coin or ingot.)

By contrast, the buffalo gold coin sold in the TV ad contains 31 milligrams (mg) of actual gold and sells for $19.95 plus unspecified shipping and handling charges.

31 milligrams sounds like a reasonable amount of gold if you don’t know what a milligram actually is – one thousandth ( 0.001) of one gram.

Gold sells for about $1,100 per oz. (remember, this varies minute by minute.)

There are 28.35 grams in one oz. so even one gram of gold (let alone 31 thousandths of a gram) isn’t much.

But don’t stop there in calculating the actual value of the advertised coin because gold is actually measured in TROY ounces and there are 31.1035 grams in one Troy oz.

So 1 gram of gold is worth (approximately) $1100/31.1035 or $35.37.

31 milligrams of gold (the total amount in the $19.95 advertised coin) is worth about $1.10. But if you sell it you will be selling at wholesale and the buyer will subtract the cost of removing and refining the tiny amount of gold (this cost is probably about $2 in small quantities.) In reality, a gold dealer won’t even consider buying this coin for its gold content.

For me the real kicker in the ad comes when the announcer implies (but doesn’t actually cross the line and state) that this coin is an investment in gold. This is suggested by saying something about the current price of gold being so high.

So, my question for you is whether a non-monetary (zero value as spending money) coin with $1.10 worth of gold really a good investment at only $19.95 plus S&H.

Or, is it a good idea to stick a screwdriver into a live power outlet or use $100 bills to light a 50-cent cigar?

But, stupid as this sounds when you do the simple math, a lot of people are obviously falling for this and other gold “investment” claims on TV or the sellers couldn’t pay for the ads.

It turns out to be true that you might never use all that math you learned in school – unfortunately it is only true if you don’t mind wasting lots of money and looking really, really dumb.

As always, I don’t want to tell you WHAT to think, I am just urging you TO think. Try it, contrary to cartoons, it doesn’t really make your head hurt.

I’m also neither recommending for or against investing in actual gold coins such as the Krugerand.

In a later “Fools” issue I will look at which, if any gold coins should be considered IF you choose to invest in gold. But for now I’ll just remind you that the U.S. Government has outlawed private ownership of gold bullion in the past and did so when there was a looming depression.