Investments: Fool's Gold

I don't like to dwell on the negative, but there appears to be an unhealthy cacophony of questionable schemes and just plain bad deals being heavily promoted these days, sometimes by people who should know better. It seems that the wave of speculative fever that engulfed this country in the inflationary '70s has continued on into the '80s. The only real change has been the specific kind of unorthodox investment schemes.

For some reason, the "hard money" camp seems to be highly susceptible to these kinds of deals, perhaps because of their anti-establishment, nonconformist tendencies, motivated by fear of hyperinflation, world war, domestic chaos, and social collapse. They have never been content to invest in stocks, bonds, bank deposits, and other conventional vehicles. Instead, they recommended "hard assets," such as gold, silver, and Swiss francs. Some went further, recommending such exotic fads as "investment grade" diamonds, strategic metals, rural real estate, and freeze-dried foods, none of which have ever recovered from their popularity of the 1970s. Under the Reagan '80s, none of these vehicles have done well, so the hard-money advisors are looking elsewhere. Consider:

? "Investment-grade" rare coins. This is a treacherous market that can be manipulated by coin promoters. I'm not talking about collector coins, which have genuine appeal to serious numismatists, but rare coins that appeal primarily to inexperienced investors, such as Morgan silver dollars and St. Gauden's $20 gold pieces in "mint state" condition. Some nationally known coin dealers are trying to corner the market in specific coins, pushing the price up sharply in order to establish an impressive track record. For example, most Morgan silver dollars are moving up modestly in price, but the 1880-S in MS65 condition (the finest grade) has jumped from $245 to $475 this year. There is no apparent fundamental reason for this rapid rise other than that it has been heavily promoted.

Some respected coin dealers also believe that some promoters are manipulating the grading standards of rare coins. What used to be an MS65 10 years ago is only an MS63, or less, by today's new standards. What this means is that the prices of today's higher-graded coins are being compared to yesterday's lower-grade coins, thus giving the impression that rare-coin prices are continuing to rise spectacularly, even though in reality the market may be flat or rising only moderately.

Coin dealers can get away with this because even the experts disagree on grading. So how can you, the average investor, be assured of getting a fair deal on a rare coin? You can't, unless you find a trustworthy dealer. Also, be aware that you need to make 15–25 percent on your coins just to break even, because of the high commissions on rare coins.

I recommend that you stay clear of this speculative bubble and invest only in common-dated "semi-rare" coins in "brilliant uncirculated" condition (MS60 only). You may also wish to invest in the genuine "collectors" market, but only if you really appreciate historical coins.

? Penny stocks. These are low-priced mining stocks that typically sell for $1 or less and trade on the Spokane, Salt Lake City, or other regional stock exchanges. Like rare coins, the bid-asked spread and commissions can amount to 10–20 percent of your investment, so penny stocks are not for short-term trading, except perhaps in a full-scale bull market. Most hard-money advisors recommend that you randomly buy a dozen or more and hope they move up when gold returns as an inflation hedge. (When gold jumped to over $800 an ounce in 1980, some penny stocks increased tenfold or more!)

But you have to be careful—you can get burned. Some brokers sell "pennies" from their own stock, thus artificially controlling the price. When you need to sell, the stock may be highly illiquid, and you may have to wait weeks for a buyer. Your broker may not even be in business in the next few years, especially if gold doesn't recover. (Advice: always take possession of all penny-stock certificates, even if your broker is "insured.")

I'm not saying there aren't any legitimate penny-stock brokers. There are. I've even made money in pennies. But you have to know what you're doing, and you can't go into this market blindly, or you will be killed.

? Cellular telephones. Some promoters are charging $5,000 or more to jump into the Federal Communication Commission's lottery of "cellular telephone" licenses. Cellular may indeed be the "hottest new technology of the '80s," but it's too late to get an FCC license, now available only in the smallest cities in the United States. Unfortunately, several hard-money investment counselors have recommended it, and I'm afraid it's money down the drain for those who took their advice. Cellular is a pretty good bet in the big cities, and you can still profit from this potential, but not by purchasing a lottery ticket. Better to buy stock in cellular technology, although these stocks aren't moving up right now. Consider Cellular America (currently selling in the Over-the-Counter market for about $2) or Cellular Technology (OTC, $3.50).

I consider myself a member of the "hard money" camp, but I sometimes get disillusioned. Sure, I'm a believer in gold and silver as a "survival" hedge and as a monetary standard. I support less government intrusion in our financial, business, and personal lives. But I don't bury my head in the sand, constantly harping on the same song year in and year out when the trend is clearly in the opposite direction. For that reason, I've switched my primary emphasis in the 1980s away from hard assets and toward the more conventional investments of stocks, bonds, and money market funds.

In any case, the most important advice I have is to stay away from high-commissioned, illiquid, unorthodox "investments" that are being heavily promoted and thus experiencing an artificial rise. The collapse will be far from artificial for those on top when the bubble bursts. Better to be motivated by fear than greed.

Mark Skousen, author of 10 books on economics and finance, is adjunct professor of business management at Rollins College in Winter Park, Florida. He is also editor of his own newsletter, Forecasts & Strategies.