Getting the best deal on precious metals.

As Y2K draws closer, the demand for gold and silver is increasing. Even though official daily "spot" (the commodity exchange) prices for both metals has been weak, strong retail demand for gold and silver has led to higher prices and tight supplies.

Why do people invest in the metals when they don't pay interest or dividends? So-called hard money advocates point to Article 1, Section 10 of the Constitution, which declares, "No State shall ... make anything but gold and silver coin a tender in payment of debts."

There is an important reason why the Founding Fathers emphasized a sound currency. During the American Revolution, the Continental Congress issued paper notes that were known as Continentals. When they first circulated, Continentals were valued at one Spanish 8 reales (a silver coin about the size of a pre-1936 silver dollar), which was the standard trade coin of the era.

As time passed, a flood of Continentals emerged from the printing presses. Eventually, it took 600 Continentals to obtain one 8 reales silver piece. Why did this happen? The Continental was a fiat currency, meaning that it was not backed by gold and silver and was money only by fiat or order of the government.

Every national currency in the world (including the U.S. dollar) is now a fiat currency. When gold and silver certificates served as paper money, the government's ability to print notes was limited by the amount of precious metal in the vaults.

That discipline is completely eliminated when fiat currencies are the medium of exchange. Governments are free to produce as much "money" as their printing budgets allow. Until the larger-denomination bills were redesigned and made more secure earlier this decade, it literally cost the same amount (about 3 cents) to print a $1 bill as it did to print a $100 bill. As gold bug and economist Ludwig von Mises noted, "Only government can take commodities like paper and ink and make them worthless."

Since virtually all governments in history have had the spending habits of a mob of drunken sailors, it's no surprise that every fiat currency has been completely devalued and destroyed over time. The dollar is no exception. Relatively speaking, the Yankee dollar has been "stable" when compared to Latin American, European and African currencies that were nuked by hyperinflation, but any honest evaluation quickly reveals what has happened to the "world's benchmark currency."

Hard money backers correctly note that the dollar has lost 90 to 95 percent of its value since 1940. For example, if someone had 50 $20 bills or $20 pre-1933 gold pieces in their possession at that time (Franklin D. Roosevelt banned gold ownership in 1933, but savvy folks hid theirs), they had the necessary assets to purchase a brand-new Buick.

Let's assume that the paper money and gold owners both stashed their nest eggs away, and their descendants just discovered the proceeds. Discounting anything over a modest amount of collectible value for the coins or currency, the paper money holder could only get an old, beat-up vehicle with his funds. The gold owner could still purchase a new Buick with his coins.

Privacy is a major concern for some people, and hard money investors are especially sensitive to that topic. Today, a moderately talented computer hacker can quickly discover your assets, liabilities and other financial information. Tangible assets don't appear on a computer screen.

With popular investments such as stocks and mutual funds, the asset is often nothing more than a recent statement or a computer entry. Bonds are merely an attractive IOU, a promise to pay back a debt at some time in the future.

Gold and silver are not someone else's liability or subject to a debtor's whims. Like buildings, land and equipment, they are real wealth. However, the metals investor must maintain possession of the bullion to reap its benefits. There are countless stories of how naive people trusted a third party to store their goods only to find them missing when they needed the coins most.

More than any other asset, gold and silver have almost instant liquidity. You can sell the metals with a phone call to a precious metals dealer in another state, to another person, or to a local rare coin and bullion shop. The spot price of bullion might not be as high as what you had hoped it would be, but you can literally cash out in a minute. Try doing that with real estate or a '67 Mustang.

There are three general categories of bullion-related items. Numismatics, or collectible coins, are a highly specialized field that often acts independently of the metals markets. Liquidity is lower, and buy/sell spreads can be steep. Prices are heavily based on scarcity, state of preservation and collector demand.

For example, a high-grade 1832 Bust dime priced at $850 has about 40 cents worth of silver. Coin collecting is more akin to other hobbies such as comic books or baseball cards than it is to using the metals as economic insurance. It can be a worthwhile pursuit, but don't look at an old coin as a precious metals purchase.

Semi-numismatics have been popularized by promoters ranging from honest businessmen to sleazy rip-off artists. These are coins such as pre-1933 U.S. $10 and $20 gold pieces and lower-priced silver dollars. While they are fairly common, these coins are no longer minted, so they have some collector demand along with a fair amount of bullion value.

One of the favorite arguments of the semi-numismatic specialists is the so-called "15 percent rule." This is a proposed IRS regulation from the mid-'80s that would have made private party sales to dealers of large quantities (25 or more one-ounce gold bullion coins, large silver hoards) of precious metals reportable to the Feds unless the items being sold had a 15 percent or greater premium above the bullion price for collector value.

"When the final regulations were done, there was no mention of that," according to Diane Piret of the Industry Council for Tangible Assets. "The 15 percent is not a determinant in any current law."

The real question is: If a dictatorial government was bent on knocking down your door and seizing bullion coins, wouldn't their thugs also scarf up the semi-numismatics? If things get that bad, all property is ripe for pillage. So why do firms aggressively promote the semi-numismatic stuff?

Profit margins are much fatter on the semis. Bullion items usually trade for a 2 to 7 percent spread, while the semi-numismatic coins have a 15 to 100 percent markup, depending on which company is doing the selling. Those who scream the loudest about the virtues of old $10s and $20s often lack any sense of objectivity and are acting out of self-interest.

Another favorite sales pitch is that when FDR banned gold, he exempted coins that had recognizable collector value, so the semi-numismatic coins are presumably "safe" from future government attacks.

You could drive an 18-wheeler through the huge holes in that illogical argument. Since when has big government ever been known to act consistently or fairly? The "seizure exemption" is being broadcast with such volume and regularity that it's safe to say the bureaucrats are well aware of it. If you like older U.S. coins and have the knowledge to play that market, then they might be for you. However, you will pay a somewhat higher price per ounce for your gold.

Pure bullion coins are the third category. Their value is based almost entirely on precious metal content. This group includes recently minted gold pieces such as the American Eagle, Canadian Maple Leaf, South African Kruggerand and Austrian Philharmonic. Some older European gold coins such as the Austrian 20 and 100 corona, British sovereign, French, Swiss and Belgian 20 franc and Dutch 10 guilder also fall under this description. Mexico once issued gold coins ranging from the tiny 2 peso to the gargantuan 50 peso, which contains just over 1.2 ounces of gold.

In silver, the bullion choices include a wide range of privately minted one-ounce rounds and bars, silver Eagles and Maple Leafs, and circulated (not shiny) pre-1965 U.S. dimes, quarters and half dollars. Known in the trade as "junk silver", these coins are anything but junky, especially for the small investor.

If your primary purpose for buying silver is for potential barter use in a Y2K or economic meltdown, junk silver is definitely the way to go. Fourteen silver dimes equal just over one ounce of silver for greater divisibility and flexibility. You wouldn't want to be out trying to swap a one-ounce gold piece for a few gallons of gas or a sack of food.

Do your homework and learn about prices. While the vast majority of dealers are honest, there are more than a few slimeballs who prey on the uninformed. I recently saw a mass mailing from one firm offering tenth-ounce American Eagles for $60 to $70 each, depending on the quantity purchased. A fair price at that time would have been $34 to $37. Likewise, prices for common-date certified MS-63 $20 Saint-Gaudens gold coins can range from $575 to $1,200. Let the buyer beware!

There will always be at least a small premium over the spot price. The price of junk silver is quoted in multiples over face value. If a dealer says his silver dimes are "four times face," multiply four (or whatever the price is) times $1.40 to arrive at the cost per ounce. Since $1,000 face value bags often trade on the market, the price quoted might be the cost of a full bag. Smaller quantities may cost a little more per coin.

Is silver or gold the better choice? Hard money types would tell you to own some of both, but the beginner (especially one on a modest budget) should start with silver and move on to gold once a fair amount of silver has been obtained. Silver is historically cheap compared to gold at this time, and it tends to have more volatile price moves. For basic bartering and economic activity, silver is an ideal metal.

If you just want to have a flashy gold coin or two in your possession, the Eagle and Maple Leaf are minted in half-ounce, quarter-ounce and tenth-ounce versions along with the standard one-ounce model. The smaller pieces cost more per ounce than the one-ounce coins, but they do provide an option for the low-budget gold investor.

Numismatic News is a weekly publication that tracks the collector coin and bullion markets. Contact Krause Publications, 700 W. State St., Iola, WI 54990 for a sample copy. NN will provide you with current prices and trends and some education on how the markets work. COINage (48 80 Market St., Ventura, CA 93003) is a monthly magazine that often has articles on the bullion markets.

Listed below are experienced coin and bullion dealers who have a reputation for good customer service and competitive prices.

Camino Coin, P.O. Box 4231, Burlingame, CA 94011, [phone]

The Coin Shop, 2909 E. 20th St., Farmington, NM 87402, [phone]

Dillon Gage, 15301 Dallas Pkwy., Suite 200, Dallas, TX 75248, [phone]

Gaithersburg Coin Exchange, 16 E. Diamond Ave., Gaithersburg, MD 20877, [phone]

Julian Jarvis, P.O. Box 626, Greencastle, IN 46135, [phone]

Wayne Miller, JW Coins, 303 Fuller Ave., Helena, MT 59601, [phone]

Franklin Sanders, P.O. Box 341753, Memphis, TN 38184, [phone]. Sanders also writes and publishes The Moneychanger, a monthly newsletter and is the author of Silver Bonanza, a book on the history of silver usage and prices.

Silvertowne, P.O. Box 424, Winchester, IN 47394, [phone]

Tilden Co., P.O. Box 3501, Vero Beach, FL 32963, [phone]

Universal Coin & Precious Metals, 148 S. Dowlen, Beaumont, TX 77707, [phone]

F.J. Vollmer, 3 Towanda Service Rd., Bloomington, IL 61701, [phone]

RELATED ARTICLE: Y2K, market fears, heat up coin market

Coin dealers we talked with (in October) say August and September were their busiest months in many years. And the U. S. Mint sold more than 250,000 gold Eagle coins in August--compared with fewer than 100,000 for virtually every month since October, 1987. In fact, for most of this decade, monthly sales have been below 20,000. They attribute this tremendous increase to the volatile stock markets and Y2K.