Guide to Investing in Gold Bullion Coins and Gold Bars

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Guide to Investing in Gold Bullion Coins and Gold Bars

Published: 12:49 BST, 18 February 2009 | Updated: 18:14 BST, 4 July 2020

We explain the best ways to invest in gold through funds, exchange traded commodities, bullion and coins.

The first pure gold coins werestruck by King Croesus of Lydia (present-day Turkey) during his reignbetween 560BC and 547BC – and gold coins have continued as legal tenderever since.

Many years down the line, investors still love gold and the precious metal has proved a valuable winner in recent years.

All that glitters. Gold jumped to its highest price in more than six years at the end of June

Gold’s recent performance

Gold’s attraction as a safe haven and long-term store of value is something that goes back far beyond the histories of today’s central banks.

But despite its port in a storm reputation holding gold can be a rocky ride, with the price driven by sentiment and prone to sharp rises and falls – and the potential for years spent in the doldrums.

Over the past decade, gold commentators have often questioned its reputation as a safe-haven asset, with prices becoming more volatile than ever.

For example, after hitting a record high of $1,921 per ounce in September 2020, the gold price slumped significantly, hitting a five-year low of $1,064.33 by December 2020.

It has since seen some recovery and at the time of writing in early July 2020 the price stands at $1,419, which is 25 per cent price down on the record high but also the highest price in over six years.

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Investors are eyeing gold again due to uncertainty – and because the price has been rising.

The 5.9 per cent increase across June 2020 in dollar terms – the strongest gain for US investors since February 2020 – was led by a surge in speculative betting on futures and options contracts, as interest rate expectations collapsed on the back of dovish comments from the US, UK, European and Japanese central banks.

The Gold Investor index saw its steepest plunge in almost two years, down by 5.6 per cent

Some gold fans say i f it had its own sector, it would have comfortably topped the tables in June with eight of the top 10 best performing funds investing in gold and precious metals.

While in the short-term traders may lose money, the long-term fundamental case for investing, based on gold’s historic store of value as nations around the world printing money, still stands up.

Ben Yearsley, director at Shore Financial Planning, said: ‘After such a torrid fourth quarter of 2020 for global markets, many would have looked ahead to 2020 with dread. However as usual, the Fed rode to the rescue in January with an effective halt to rate rises and hints of cuts.

‘Those hints have become stronger even if there has been no action thus far. Interestingly gold had a standout month on the back of expected US rate cuts – it ended June at $1,418 having started below $1,300. Historically as real yields have fallen, gold has done well.’

Roller-coaster ride: Gold has recovered from its five-year low but is still a long way from its 2020 peak

Gold is often described as the ultimate ‘safe haven’ asset because it holds its value when other asset classes fall.

For example, bonds can perform badly in a rising interest rate environment because inflation causes them to lose value, while equities can fall when there is bad economic news, because they are deemed to be risky.

Gold can provide protection in both of these scenarios. It is a long-term store of value with a track record going back thousands of years.

But inflation has remained almost non-existent in many western countries, one of the reasons the price fell to those five year lows in 2020.

On top of this, uncertainty around the upcoming presidential election and poor economic data have caused investors to return to the perceived security of gold and weakened the dollar. This spells good news for gold buyers as the precious metal is priced in dollars, meaning they can get more for their money.

Gold’s long-term returns

Although gold is vulnerable to investor sentiment, and experiences strong volatility at times, its long-term returns are strong.

Over the past 10 years, the price of an ounce of gold has risen from $956 to $1,419 – a 48 per cent increase. Meanwhile, over 20 years, it has increased from $297 – a whopping 377 per cent rise.

That’s compared to a 135 per cent rise for the FTSE 100 over two decades.

Famously, when Gordon Brown was Chancellor of the Exchequer, he sold off more than half of the UK’s gold reserves – some 395 tonnes – in a series of auctions between 1999 and 2002, when the price of bullion was in the doldrums. The move cost the public purse billions of pounds as the average price achieved in the auctions was $275 an ounce.

It is very important to remember, however, that while gold has a strong track record of holding its value in terms of what you can buy with an ounce, its price is also entirely dependent on investor sentiment. It can also be very volatile, as it is widely traded by people hoping to turn a quick profit.

When you buy a share you take ownership of a small part of a company that aims to grow, generate profits and return cash to investors either through share price growth, dividends or both.

When you buy gold, you are buying some precious metal that people hold as valuable, albeit a lot of people over thousands of years.

Time to go back to the safe havens? Uncertainty has been rife in the UK amid Brexit negotiations and Theresa May’s announcement that she is stepping down as Prime Minister

What you need to know about investing in gold

The main way to tap direct into actual gold is by buying bullion or coins.

This can either be done through a traditional dealer or through one of the new online services that have multiplied swiftly in recent years – and there is evidence to suggest plenty of investor appetite for the commodity.

Historic company The Royal Mint launched a trading platform in September 2020, and within a year the sales of its gold and silver bullion had risen by 57 per cent.

But Royal Mint is not the first organisation to offer gold trading and storage services.

For example, typical of firms quietly making physical gold investing easier for investors is BullionVault. It offers different services, but the premise is easy online dealing, safe and secure storage, and low charges. Investors can put in relatively small amounts of money to buy their share of some gold.

Bars of gold are sold in different weights but even a smaller one will prove expensive. Investing in coins is a popular alternative, although these can also be very expensive.

There are a variety of different gold coins minted, popular options include Sovereigns and Kruggerands and Maple Leafs. A QE2 mixed years Gold Sovereign would cost an investor £305.54 on 3 July 2020, says The Gold Bullion Co, while a one ounce Kruggerand would cost £1,158 according to Bullion By Post.

It is important to consider secure professional storage when buying gold and consider how much this will cost you. Keeping thousands of pounds worth at home is not a good idea, as you are likely to find that it is not covered by your home insurance.

Established gold dealers include Chard, Baird & Co and ATS Bullion.

Alternative: Investors can buy gold coins instead of bullion, although they are very expensive

Exchange traded funds

Exchange Traded Commodities – the commodity equivalent of Exchange Traded Funds (ETFs) are a direct route into gold. These track a particular sector, or in this case, a commodity.

They are passive investments and should merely mirror gold’s moves, although some will offer leveraged returns or the opportunity to short the price.

Make sure you understand the difference between ETCs that are physical (actually buying gold) and synthetic (set up to mimic its price). Read this guide to ETFs .

Russ Mould, investment director at AJ Bell, says: ‘ETFs spare investors the costs and inconvenience associated with issues such as storage and insurance when it comes to holding physical gold coins or bars and offers exposure to the gold price.

‘The trackers will move pretty much lockstep with the underlying metal price, although this does mean that they can follow it down as well as up.’

Investors may also wish to choose between those trackers which actually own the physical gold to provide performance and those which use futures contracts and derivatives instead. ETFS Physical Gold or iShares Physical Gold, for example, own the metal while ETFS Gold ETC uses derivatives. Another popular gold ETF is ETFS Gold Bullion Securities (GBSS).

Funds and investment trusts

Investing in shares carries greater risk and gold mining shares have fared far worse than the gold price in recent times.

Not only did shares lag the gold price on the way up, they fell further on the way down.

A number of factors have contributed to this: while the value of the gold they mine has risen, companies have seen the cost of getting it out of the ground climb too; gold miners are seen as a high risk investment and have been shunned in the current uncertain climate; and finally, much of the money that would traditionally have gone into gold mining shares has been finding its way into exchange traded funds that track the gold price.

However, many of the gold miners’ have started to bounce back.

Picking individual gold miner’s shares is a hugely risky business, so spreading risk through funds and trusts makes more sense.

Adrian Lowcock, head of personal investing at Willis Owen, likes the £1billion Blackrock Gold & General fund, which gains exposure to gold and precious metals via related quoted equities.

He said: ‘Evy Hambro and co-manager, Tom Holl, execute a disciplined investment approach that incorporates detailed commodity and company analysis with the aim of outperforming the FTSE Gold Mines Index in a risk and liquidity aware manner.

‘At the company level, the valuation analysis is rigorous and aims to find companies offering the best exposure to commodity prices within an acceptable level of risk, taking a long-term view. This leads to an emphasis on larger producers with quality assets and ability to grow their production in a relatively low-cost manner.’

Another long-running fund is the JP Morgan Natural Resources fund. The portfolio invests in companies globally engaged in the production and marketing of commodities and aims to provide capital growth over the long term.

Meanwhile the Merian Gold & Silver fund, managed by Ned Naylor-Leyland, invests in both physical gold and silver (via bullion funds) and shares in mining companies. Launched in 2020, the manager rotates exposure between the physical metals and mining shares according to the prevailing economic and market conditions, with a higher allocation to mining shares during bull markets.

Darius McDermott, managing director of Chelsea Financial Services, said the fund offers a ‘good mix that alters depending on the manager’s outlook’ and prefers it to natural resources or more general commodity funds for gold exposure.

He added: ‘We also like Investec Global Gold, which invests mainly in gold miners but also a little in silver miners.’

On the closed-ended side, the CQS Natural Resources Growth and Income investment trust aims for capital growth and income from a portfolio of mining and resource equities as well as mining, resource and industrial fixed interest securities.

Jason Hollands, of Tilney Investment Management Services, said his key pick is the Invesco Physical Gold P-ETC GBP though he stressed he is not a great fan of funds focused on gold mining shares as the ‘diversification benefits are very poor’.

He added: ‘These are, essentially, providing you with exposure to one of the most volatile parts of the equity market. The FTSE Gold Mines Index has annualised volatility of 26.8 per cent. By way of comparison, that’s over double the volatility of the MSCI Emerging Markets Index at 12.5 per cent.’

Should I buy Gold Coins or Bars?

Should you buy gold coins or gold bars?

The answer requires the potential gold bullion buyer to weigh a few factors aside from the gold bullion itself.

Things like the overall gold price, gold guarantee government or private mint, gold purity, gold-selling privacy, gold unit size, and more.

The best answer(s) require about 10 minutes of research for most gold bullion bar and gold coin, buyers. Many often choose a mix of both.

Which is better? Gold Coins vs. Gold Bars?

Let us begin the debate by defining both forms of gold bullion products in the 21st Century.

Gold Coins – (n) a precious metal wafer struck in a coin format by a government mint typically stamped with a legal tender face value (the most significant exception being the famous South African Krugerrand Coin). Sizes vary from fractional grams to kilos and larger.

Gold Bars – (n) precious metal lump or ingot struck by both government mints and private gold mints. Typically gold bullion bars do not carry legal tender face values and cost less per troy ounce or gram vs. gold coins.

The answer on which is better will be often get determined by the gold bullion buyers highest objectives.

We shall discuss whether gold coins or gold bars have an advantage in the following determinants:

Overall Gold Price on Like-Kind Weight between Gold Coins and Gold Bars

Government vs. Private Mint Gold Bullion Guarantees

Gold Purity levels of Gold Coins vs. Gold Bars

Gold Bullion Coin and Gold Bullion Bar selling privacy factors

Gold Coin vs. Gold Bullion Bar size variances

PRICE: Gold Bars vs. Gold Coins?

In general, gold bars (even when struck by government mints) enjoy lower prices or premiums over the fluctuating gold spot price although the most economical price does not always win the day for gold bullion buyers.

Many gold bullion buyers will choose to pay a slightly higher price or premium per ounce or gram of gold to have a government guarantee and government mint hallmark.

If getting the overall lowest price is the most critical factor for your gold bullion buying, try buying highly respected private mint gold bullion bars like Republic Metals Gold Bullion Bars.

If a getting a low price yet having some government guarantee is essential to you, try Royal Canadian Mint Gold Bars .

In general as well, the larger the gold bar is the lessor its price per gold weight will be due to lessoned fabrication costs associated with large gold bars (whether private mint or government mint struck).

In terms of overall lowest price, in general, gold bars win out as they are typically slightly less costly than similar weight gold coins.

GUARANTEE: Gold Bars or Gold Coins?

Both private gold mints and government gold mints guarantee the several gold bars and gold coins they strike and issue.

The question a concerned gold bullion buyer might ask themselves perhaps is who enforces this guarantee and which entity has a longer potential to last.

For example, the US Mint has the US Secret Service helping to ensure that all US Mint gold coins issued never get counterfeited successfully.

The Royal Canadian Mint has the Royal Canadian Mounted Police ensuring its gold coins, and gold bars also never get counterfeited successfully.

Private gold mints have been faster to respond to fake Chinese gold bars by adding cutting edge technological applications to many of their products, like Sunshine Minting’s MintMark SI technology.

The penalties for counterfeiting government legal tender gold coins, for example, are punitive Federally as well as counterfeiting private mint gold bars .

In terms of overall guarantee between gold coins vs. gold bars, the entities with the longer track records and monopoly on violence win this debate; government mints have the edge.

PURITY: Gold Coins or Gold Bars?

Many government mints still issue 22k gold coins today. They often get traded mainly on their overall gold content. For example, a 22k, 1 oz American Gold Eagle Coin which has a 1.09 oz weight overall due to additional copper and silver added. They are traded based on their overall one troy ounce of gold content.

These 22k gold coin issuance typically have additional silver and copper mixed into their makeup to make the gold coins harder and resistant to dents or warping.

Two of the most popular gold coins in the world are, in fact, 22k gold.

The most popular gold coin of the 1970s 1980 gold bull market was the 22k South African Krugerrand Coins.

The Gold Krugerrand coin remains very popular and well trusted to date.

Today the most purchased gold bullion coin remains the 22k American Gold Eagle Coin.

With either .999 fine gold coins or .999 fine gold bars, one could rather easily make an indentation in then with a fingertip of pressure applied. That is how soft pure gold is.

This fact makes 24k gold coins very fragile in terms of protecting them from dings or wear. Mainly this is why most modern .999 fine gold bullion coins come in protective plastic tubes and slips. Even many small 1 ounce or lessor sized gram .999 fine gold bars come in protective packaging as well.

Often government gold mints and private gold mints will make gold coins with .9999 or even .99999 purity. Achieving this four-9 or 5-nine fine purity level frankly is mostly gold refining differentiation and for marketing purposes. Just do the math.

The value of 0.0009 oz of gold is worth $1.22 in fiat US dollars, based on a gold spot price of $1350 oz USD.

Move the decimal over to the left again, and 0.00009 oz of gold is worth just over 12 ¢ USD based on the same spot price (i.e., a cupronickel dime and zinc-based pennies of legal tender face value, in other words not much value).

Gold purity can matter when moving gold across national or governmental boundaries. For example, .999+ fine gold can go into Canada tax-free while 22k gold gets slapped with taxes. Mostly this situation is due to governments setting up laws to give their respective government gold mint an advantage versus other competing government gold mints (i.e., Royal Canadian Mint gets an edge over competitors like South African Mint and US Mint).

This debate is a draw, dependent upon a gold buyer’s overall preference of gold purity hardness and the ability to move gold internationally if desired.

PRIVACY: Gold Bars or Coins?

Based on current bullion privacy rules in 2020 within the United States, if you sell gold bullion to a gold dealer in a short related time frame, the questions of (#1) what kind of gold you are selling and (#2) how much gold you are selling to the gold dealer are crucial to whether the transaction gets reported to the IRS via the IRS 1099-B form.

Of course, regardless of the transaction being private or not, the IRS wants all capital gains and losses to get reported on investor income tax reporting. Consult your professional tax advisor with any questions you may have.

Will Coins And Bars Save Gold?

There is a disconnection between paper and physical gold prices and the former has to catch up with the latter eventually. Myth or fact? We invite you to read our today’s article about demand for gold coins and bars and find out whether it will save the yellow metal.

The best stories are about the conflict between good and evil, or light and dark. In the precious metals market, we also have such a narrative, or actually several variations on the theme. But one of the most popular thread is the ‘disconnection’ between paper and physical gold. The characters are clearly identified: paper market is the powerful Empire while the physical gold is Rebellion, which heroically fights a stronger and more vicious opponent.

The battle is about gold and silver . The paper market suppresses their prices by malicious use of derivatives, mainly futures, and other techniques of manipulation. Luckily for the Rebellion, these actions are doomed to failure. When the fraud is exposed and the paper gold market collapses under its own weight, ‘real’ market forces come to the fore, pushing the gold prices eventually back to the fundamental level which would be reflected in the pure physical price market. In other words, after being manipulated for years, the ‘true’ price of gold will surface.

According to this narrative, the declines in the gold prices are practically always seen as something suspicious or even fake. Hence, many investors do not react adequately to market changes, but wait for the “imminent” rebound, missing many opportunities to gain.

The fact that the prices of bullion coins or bars typically lag behind the spot price only reinforces the belief in the disconnection between paper and physical markets. It’s true that prices of gold bars and coins are above the spot price, but this is due to premium for refining or minting and selling to retail investors. Bullion dealers quote prices higher than London fix, since they bear higher costs than wholesale players and add some markup to make a profit.

Another thing is that there is a limited capacity to produce them, which lifts prices. For example, only the US Mint (surprise, surprise) can mint US Mint coins. When strong demand meets limited supply we have higher prices. However, it proves neither a shortage of gold, nor the disconnection between physical and paper market. It rather demonstrates the lack of enough equipment for coining.

Moreover, the fact that bullion dealers slowly cut the prices of coins and bars should not be very surprising. You should know the mechanism from the gas stations: the price of gas rises much faster than it falls in a response to changes in the crude oil prices. One reason for this is limited competitive pressure. But it’s also true that gas stations wait with cuts to cover the costs of the higher-priced gas still in their tanks. The same applies to bullion dealers. They reduce retail prices with some delay, as they wait to cover the costs of the higher-priced coins and bars still in their inventory.

The best example of the perma-bull mindset is the immediate reaction to the plunge in gold prices in 2020. After a decade-long bull market, the sudden dive was a bitter pill to swallow. Therefore, people deluded themselves that the decline was an anomaly. The quote from Doug Casey is very telling:

My first reaction is to suggest that this is only an aberration, and that the fundamentals of the depreciating value of paper currencies will eventually take the price of gold much higher, making it a buying opportunity.

He wrote these words in April, 2020, after the price of gold slid to $1,400 level. Five years later, it is lower, not higher, at the level of about $1,200, as one can see in the chart below. Of course, the price of gold may eventually go higher. But a term “eventually” is not very useful in trading and investments. If the price is going to decline and provide an ultimate buying opportunity at much lower price levels, it simply makes sense to close the positions and reopen them much lower (perhaps profiting from the decline). And you know: Didi and Gogo waited for Godot for a long time, but he never arrived.

Chart 8: Gold prices (London PM Fix) from January 2020 to November 2020.

To be clear, we are not admirers of our monetary system based on paper currencies. We acknowledge that it is more inflationary than the gold standard and may collapse one day. We like gold, but we like objectivity and truth much more. And we care about our clients’ portfolio’s returns much more than we do about the profits of gold sellers and producers that would prefer one to believe that gold is going to always go up and never decline. Still, we are sympathetic to part of gold bulls’ arguments. At first glance, it makes sense: the supply of money increases, the currencies systematically depreciate, so the price of gold should only rise.

However, such reasoning does not take into account market sentiment and investors’ psychology. People react differently to low and high inflation. If we have hyperinflation, or just high and accelerating inflation, gold will shine, without a doubt. But we have modest inflation. Moreover, the US dollar is not the only currency which depreciates – all currencies depreciate in a similar pace. Actually, thanks to strong demand for greenback (due to its status of international reserve), and contained inflation, the dollar looks quite attractive. Especially given that gold does not bear any yield.

The bottom line is that the gold price discovery might indeed not be perfectly honest. Perfect honesty is very rare on Earth, perhaps even rarer than gold. But it does not mean that there is a disconnection between paper and physical gold prices. It’s a perfect… nonsense, as any price differential would create enormous arbitrage opportunities. There might be a disconnection between the paper and physical prices in the future if there is a shortage of a given precious metal (it’s unlikely that we’ll see shortage of gold, but silver is a different story), which has already happened in the palladium markets about two decades ago, but this is unlikely to happen anytime soon and very unlikely without a powerful parabolic upswing in prices beforehand. We have definitely not seen one recently.

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