The Problem With Buying Gold And Silver Proof Coins In Your IRA

Mar. 01, 2013 3:45 PM ETGLD, SLV33 Comments
Doug Eberhardt profile picture
Doug Eberhardt

The gold market has been retreating for awhile now and investors are looking at their IRA statements to see how their holdings in precious metals are doing. For many, they are shocked at the low value of their account, not because of the recent pullback, but because they made one simple mistake, they listened to someone who told them to buy Proof American Eagle gold or silver coins.

When one opens a Precious Metals IRA, which allows you to acquire physical gold and silver coins or bars for future delivery, they can do so with a 401k rollover or IRA rollover. They have various metals to choose from that can be put into an IRA as long as they qualify under section 408 (m)(3) of the Internal Revenue Cod (IRC), and as long as it's not a collectible.

(3) Exception for certain coins and bullion

For purposes of this subsection, the term "collectible" shall not include-

  • (I) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112(a) of title31, United States Code,

  • (A) any coin which is-

  • (ii) a silver coin described in section 5112(e) of title 31, United States Code,

  • (III) a platinum coin described in section 5112(k) of title 31, United States Code, or

  • (iv) a coin issued under the laws of any State

Most Popular Coins and Bars for a Precious Metals IRA

The most popular coins and bars for a Precious Metals IRA are the following:

  • American Eagle 1 ounce gold coins
  • Canadian Maple Leaf 1 ounce gold coins
  • American Eagle 1 ounce silver coins
  • Canadian Maple Leaf 1 ounce silver coins
  • 100 ounce silver bars .9999 pure
  • 1000 ounce silver bars .9999 pure

What Are Many Precious Metal Investors Told to Buy for Their IRA?

But what many IRA investors in precious metals are led to buy are proof gold and silver coins.

Proof gold and silver coins are American Eagle coins that have a nice shiny finish to them. They truly are beautiful coins. According to the U.S. Mint, proof coins:

Refers to a specialized minting process that begins by manually feeding burnished coin blanks into presses fitted with special dies. Each coin is struck multiple times so the softly frosted, yet detailed images seem to float above a mirror-like field. After scrutiny by white gloved inspectors, each American Eagle Proof Coin is placed in a protective plastic capsule and mounted in a handsome satin-lined velvet presentation case.

While these proof coins are acceptable under the IRA guidelines mentioned above, the investor more than often pays 10%, 20% or more in commissions to acquire these coins.

Below is an example of a recent phone call I have received from an investor who had bought proof coins looking for advice as they noticed their accounts were down considerably from when they had purchased the coins (personally, I refuse to sell proof coins and advised investors not buy them.

Investor A Paid this price for proof coins on 1/22/2012:

$1,635.00 Spot price of gold 1/22/12

$ 30.36 Spot price of silver 1/22/12

$1,895.00 per gold proof coin

$ 83.74 per silver proof coin

Investor A Buy back price on 2/25/2013:

$1,566.00 Spot price of gold 2/25/13

$1,678.00 per gold proof coin

$ 57.00 per silver proof coin

Observations On Pricing of Gold and Silver Proof Coins

The price of gold had fallen $69 or 4.2% during those 13 months the client held the proof coins. The price of silver had fallen $1.19 or 3.9% during those 13 months the client held the proof coins.

Yet the buy back price for the gold proof coins was 11.5% less than the purchase price and the buy back price for the silver proof coins was a whopping 31.9% less than the purchase price.

It looks from this example the investor paid a higher premium for the silver proof coins over the gold proof coins, more than twice the spot price of silver!

Liquidity Issues for Proof Coins

I did check with two of my metals suppliers, who don't like buying these proof types of coins, and their prices were much lower than the company that originally sold the coins to this investor. My suppliers wanted on average to pay $1,644.60 for the proof gold coins, and $47 for the proof silver coins.

The reason the company that sold the coins to begin with is willing to buy them back at a bit higher price, is because they know they can sell them for a 10%, 20% or more commission again. They won't do this to anyone else who calls in to sell proof coins. I advised her that if she wanted to sell them, to sell them to that same dealer and test to see if they will give her the higher prices I quoted above even if she doesn't want to do any further business with them. My guess is they won't.

The total loss for this investor was almost $20,000 or 20% on her investment in just one year, when the price of gold and silver fell only 4%. Even with the 1% commission in and out if they had bought bullion coins originally, like the American Eagle coins, they still lost big by buying the proof coins.

Of course their goal is to ride the gold and silver prices higher and really had no intentions to sell now. So they have to make a big decision, sell now and buy bullion, or take the chance the proof coins will take off in price. Either way, liquidation now or later will be a point of concern.

Note: There were also those who bought proof sets in their IRA. These are a set of One, Half, Quarter and Tenth ounce American Eagle gold coins. These are very difficult to sell as well and are typically marked up 10%, 20% or more.

All You Need to Know in Buying Gold and Silver for Your IRA

There is one simple rule I have when buying gold and silver coins bars or any other type of proof or collectible coin for an IRA. Ask these questions;

1. At today's spot price, what will my total cost be for each coin I buy?

2. At that same spot price, what will you buy the coins I just bought from you for if I turn around and sell them to you immediately?

When receiving the answer to that second question, keep in mind the gold dealer may try and tell you they have no fee or just a 1% fee. What they don't tell you, is that they are paying you 10% or 20% less than what they are selling the coins for.

Caveat Emptor

You must understand what you are doing BEFORE you buy.

For those who have bought proof coins, it is quite a dilemma you are in. You bought for the right reasons, but you might have been taken advantage of without knowing.

In fact, it's not just proof coins that investors in physical gold and silver IRA's need to worry about. Some gold dealers will charge you 10%, 20% or more for just buying bullion gold and silver coins.

Keeping It Simple

If you want to keep things simple for buying precious metals with your IRA, buy only the coins and bars listed in the most popular section above. You can also choose to invest in an ETF like GLD or SLV. I have found that many investors naturally want to have control of their gold and silver and take possession of it if they choose to. Sprott Asset Management offers this to investors, but the premiums can be high at times.

The bottom line: Do your due diligence and ask the right questions before buying precious metals for your IRA, and stay away from proof coins.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am a Precious Metals Broker Selling Bullion Gold and Silver Coins and Bars

This article was written by

Doug Eberhardt profile picture
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