Guide to Investing in Gold Bullion Coins

For the ‘gold bugs’ out there who want to hold a small amount of gold, but don’t want to break the bank investing in gold bullion coins is a viable method. Gold coins are remarkably beautiful and great to look at, and they also make for great collections to ‘wow’ friends and family. If a specific design of coin is especially rare or popular with collectors, the value of the coin may well reach way above its bullion value!

Gold is thought to be the worlds greatest and safest store of value, because it has been used as a currency for thousands of years. Recently however, speculators have been buying gold to create new wealth rather than preserve it, because the price of gold has tripled in the past 10 years. An investment in gold is unlikely to let you retire at 50 on its own, but it is increasingly being seen as having a place in the average diversified portfolio. If you’re new to the area of gold, check out our common myths about gold article.

Difference between Gold Bullion Coins and Commemorative Coins

What makes investing in gold coins better than investing in standard coin collections such as this Royal Wedding Coin? The difference mainly comes down to the cost of the coins, and what causes changes in their value. Purely collectable coins made from Cupronickel or nickelbrass are produced from inexpensive materials. This means that their value is wholly subjective, and like the price of art, wine and stamps will ebb and flow with collector sentiment. The minimum value of a commemorative coin is the nominal face value, typically £5 or less for special editions.

Gold bullion coins on the other hand tend to track the market price of gold. You will notice that many gold coin websites refresh their prices every minute to reflect the changes in the gold spot price.

Gold Bullion Coin Guide

Denomination

Gold bullion coins struck by official mints carry an official denomination. Its an implausible thought, but this means they can be used to pay government taxes at face value. When investing in gold coins, the denomination is a trivial matter and shouldn’t really impact your decision. A £1 gold coin is no less valuable than a £5 denominated gold coin.

Purity

Purity is the measure of the level of perfection in the gold composition. Higher purity means that for a given coin weight, a higher quantity of pure gold is contained. Purity can be measured in Carat or millesimal fineness. Fineness is expressed as ‘parts in a thousand’. Thus fineness of 999.99 means that 99.999% of the coin weight is pure gold. Fineness of gold bullion coins will vary between 999.99 and 900.

To translate fineness into carat, the conversion is easy. Carat is simply espressed as ‘parts in 24′, meaning 24 carat is 100% pure, and 12 carat is 50% pure. While carat is a common term, it is mainly applied to jewellery, while the precise fineness scale is used for investment grade bullion.

24 carat = millesimal fineness 999 or higher
22 carat = millesimal fineness 916
21 carat = millesimal fineness 875
20 carat = millesimal fineness 833
18 carat = millesimal fineness 750

Suppliers

When sourcing gold coins, buy from government mints to ensure authenticity. The mints of  the UK, the US, in Canada, Australia, China, South Africa as well as and other countries will provide coinage. Mints do charge a premium atop of the gold bullion price, to cover labour, tooling and profit, however if the mint is reputable, this shouldn’t be excessively expensive. It is not disimilar to the upfront ‘loading’ fees charged by mutual funds, so don’t be put off.

Be aware of websites and suppliers that sound legitimate, but are actually private companies. An example is the London Mint Office, which even bares an official insignia as part of its logo. It is infact just a retailer, and will therefore add a mark-up to any coins it sells. It is often cheaper and less risky to buy direct from the official mint in question.

Popular Gold Bullion Coins

British Gold Sovereigns and the South African Krugerrand are the most popularly traded coins in the market. This makes them one of the best ways to hold gold, because active markets result in lower trading costs and increased liquidity.

The Krugerrand (as originally struck) contained the memorably gold content of 1 troy ounce. Since then, other sizes have been created, including 1/2, 1/4 and 1/10 oz. The larger the coin, typically the lower the premium. The coin is 22 carat (916 fineness). It is said that in 1980, Krugerrands represented 90% of the investment gold coin market, so they are certainly not to be overlooker by potential investors!

British Gold Sovereigns are also 22 carat, and have been produced in different sizes (named Double Sovereign, Half Sovereign etc). Due to their limited supply and historical significance, British Sovereigns trade at a large premium to the gold bullion price. As long as premiums remain constant, this doesn’t necessarily harm investors, however it does reduce their expected value in times of real hardship, when sentimentality will be temporarily forgotten and gold content will be the only valuation factor.

Definition of Proof Coins

When buying gold bullion coins, you will see some coins described as ‘proof’ coins. This means that the coin has been struck in a different way and produced with greater care to ensure that the surfaces of the coin are polish and unscratched. The typical process of producing coins involves carrying bags of them around, resulting in the coins scraping against each other and reducing their aesthetic appeal. Proof coins contain the same weight of gold as their standard counterparts, but appeal more to collectors because of their attractive mirror-like shine and high quality finish.

Therefore if you wish to hold a coin purely as an safe investment, I would advise against proof coins, as a greater % of their worth is subjective and in the eye of the beholder. The picture to the left isn’t a bullion coin, but the modern 50p coin circulating in britain today.

Security & Insurance

Gold bullion coins are incredibly valuable by weight, meaning that extra care must be taken to ensure their safekeeping. A diversified stock market investor doesn’t need protecting against the risk of an individual company going into bankruptcy because each individual company only represents a fraction of a percent of their portfolio. Gold coin investors on the other hand, tend to store their coins together, for obvious reasons. This means that a theft or accident that affects one of them, will likely affect all of them, wiping the investor out.

This means that gold investors need to take out insurance to cover their holdings (whilst equity investors rarely purchase insurance for stocks). For investors storing their coins at home, upgraded home insurance can be purchased that specifically covers collectable and bullion coins. Investors who keep their coins in a bank safety deposit box will still need to take out insurance, however their premiums will likely be lower.

Of course, investing in gold bullion coins is just one of the many ways to go about investing in commodities. Also, be wary of the valuation of gold at the time you buy a coin. If the gold market collapses after you make a purchase, it may be many years before you make your money back. Is gold overvalued / overpriced?

Simon OatesGuide to Investing in Gold Bullion Coins