Good financial products are bought, not sold. We are beginning a series of articles analyzing some of the most aggressively sold financial products – those which are advertised on television. This is the first installment in our series.
As a debt clock ticks in the background, a Lear Capital spokesman warns viewers that Americans face an end that will be “rapid and very destructive.” “It’s not a question if we are going to have a crash,” says Chris Martenson, “but when.” If you believe this, then the way to protect yourself is with precious metals sold by Lear.
I’m not going to critique Martenson, who runs a web site called Peak Prosperity that is devoted to an investing strategy based on, among other things, a belief that natural resources are being depleted and our government is overextended as a result of quantitative easing.
But I caution anyone against buying precious metals from Lear Capital. It is not an SEC-registered investment advisor and its web site states that there is no fiduciary relationship between it and its customers.
Lear versus eBay
Lear’s primary business is selling gold and silver coins. But you can buy coins more cheaply elsewhere.
For example, Lear will sell you a $10 circulated Liberty gold coin (1/2 ounce) for $753.00 (plus $24 shipping). I did a quick search on eBay and found a circulated Liberty coin selling for as low as $666 (with free shipping).
Buying silver is no different. Lear will sell you a pre-1921 circulated Morgan silver dollar for $30 (plus $10 shipping). On eBay, I quickly found one of these for $22.00 (plus $2.62 shipping).
For those coins, Lear’s prices are approximately 20% above those on eBay. It offers many other gold and silver coins, and I will leave it to the reader to check the prices on them.
Lear’s prices for those two coins are approximately 37% higher than the spot price for gold and nearly 2.5-times the spot price for silver. Precious-metals ETFs, however, track spot prices more closely. The ETF GLD tracks the spot price of gold, less the expense ratio of the fund. The same is true of the silver ETF SLV, which tracks the spot price of silver. The difference is that an investor in those ETFs does not have physical possession of the gold or silver; he or she must rely on the trustee, the Bank of New York Mellon, to oversee the physical ownership. Conversely, if you purchase gold or silver coins from Lear or another source, you must incur the costs of storing them yourself, such as in a safe-deposit box.
There are also a number of precious-metal mutual funds, such as those offered by Tocqueville, which are viable alternatives to precious-metal ETFs.
Lear also offers precious metals IRAs. Unlike purchasing coins on eBay, this is not something an investor can easily do on their own. You must have a custodian for the IRA. Lear acts as the broker for the transaction, and it uses either Brinks or SDIRA as its custodian. I spoke to someone at Lear, who explained that only certain government-approved coins are eligible to be held in a precious-metals IRA. He said that the prices of those coins are relatively close to the prices advertised on Lear’s web site, but that customers cannot set up an IRA through the web site. They must fill out forms and speak to a Lear representative.
The primary advantage of a precious-metals IRA, as compared to an IRA that holds mutual funds or ETFs such as GLD or SLV, is that you can take delivery in the form of the actual coin, without having to liquidate and sell the coin. But you must also pay annual administrative costs to maintain the precious-metals IRA.
A deceptive calculator
Lear provides a highly deceptive “portfolio comparison calculator.” It allows the user to compare a portfolio that is 100% allocated to the Dow to three options: (1) 20% gold, 80% Dow; (2) 20% silver, 80% Dow; or (3) 10% gold, 10% silver, 80% Dow. What Lear doesn’t tell you is that it is using the Dow without dividend reinvestment. Lear’s results show that the portfolios including precious metals outperforming the Dow. Had it used the proper index with dividend reinvestment, the Dow would have been the better investment over almost all time frames.
Moreover, Lear’s calculator allows returns to be calculated using a starting date between 1997 and 2007. That happens to be the period when gold prices were relatively low (the spot price ranged between $537 and $752). Had it allowed starting dates prior to 1997 or after 2007, even the Dow without reinvested dividends would have been a superior choice for most starting dates.
In fairness to Lear, I expect that its prices and business model are no different from other companies that advertise precious metals and coins on television.
You may believe, as Lear’s advertising proclaims, that “China is making its move now” and will “burst our bond bubble and crash our dollar.” But don’t let fear-driven marketing impair your investment results. If you want to buy precious metals, carefully research the options, including gold-based ETFs and mutual funds.
Read more articles by Robert Huebscher
