Tuesday, May 27, 2008

Collect and Invest in Gold Coins

With the security that precious metals provide from the recent economic and political instability, most investors understand that it is a wise idea to invest in gold or silver. But many can't decide what the best way to invest in gold or silver is. The way you choose depends on your reasons for investing in gold, and how much you are looking to spend.

One of the best way for the average person to invest in gold is with gold coins. Gold coins have several benefits over large gold bars. With the exception of the smaller gold bars (say, an ounce or less), gold bars come in large denominations that are somewhat illiquid. For example, if you have a 10 ounce gold bar and you want to sell a half-ounce of it, you can't slice off a piece of the bar. You have to sell the whole thing. On the other hand, if you have 20 half-ounce coins (or small bars, which are available), you can sell just one coin and keep the rest of your investment intact. This liquidity would also be useful in times of severe crisis. Imagine a time of total war and hyper-inflation. Let's say you wanted to exchange some gold for an escape option, or for some necessities such as food or clothing. Smaller denominations would be more useful for buying such necessities. Otherwise you could easily be exploited by people who demanded the entire gold bar. Like being stuck with taxi driver who pretends he doesn't have change for a twenty, you could get taken.

Gold coins are durable and last hundreds of years. Alloys (gold with another metal added) can last for thousands of years. They don't tarnish and don't scratch easily. They're also easily stored because of their small size. Many investors prefer to store their gold coins in their homes, stashed in some secret place, unlikely to ever be found because of their small size. Large gold bullion bars require professional storage and security services, which costs you money. And obviously the reputability of the storage provider needs to be confirmed.

Coins and small bars are also easy to buy, with reputable vendors existing in basically every major city and also online. So how do you choose which gold coins to invest in? There are two things to keep in mind:

1) Some gold coins are pure (999/1000 is considered pure gold, also known as 24 carat gold), but others are only 917/1000 parts gold (aka 22 carat gold). Both are reasonable investments, and as long as the real weight of gold contained is printed on the coin then two one-ounce gold coins will contain the same amount of gold. But pure gold does have slightly higher prestige and may be more easily sellable because they can be melted down easily. In a time of crisis that ability to be melted down may be worth something to someone. I personally prefer the purest gold I can find because I just find it aesthetically more pleasing, and more impressive to imagine its contents. And if you are going to invest in gold coins you should enjoy it!

Some popular coins of 917/1000 purity are:

The US American Eagle
US American Eagle Gold Coins: popular and safe gold coins to invest in.
The South African Krugerand
Invest in gold or silver with South African Krugerands.
British Sovereigns
Invest in British Sovereign gold coins. Own not only gold but a piece of history.

Some popular coins of 999/1000 purity are:

Canadian Maple Leaf coins
Canadian Maple Leaf gold coins: perhaps the best way to invest in gold. With the official gold prices high and ready to head higher, buy the best of the best.
Australian Kangaroos
Australian Kangaroo gold coins: with official gold spot prices skyrocketing, you'll want to get your hands on these.
The Chinese Panda
How to invest in gold and silver: Chinese Panda coins

(Nice stereotypical names, I know!)

2) Some coins, particularly older coins and rare coins, have "numismatic value", or additional value due to collector's prestige. While these can be just as good investments as any because their prestige is unlikely to decrease, their value doesn't depend only upon the official gold spot prices. If your motivation for buying gold is not as a hobbyist but rather as an investor, it may make more sense to buy a common coin whose value is based strictly on the official gold spot prices (plus a markup/commission, generally ranging from 1% to 5%).

One downside to buying coins or small gold bars rather than large denomination gold bars is that the markup on gold is often higher the smaller the amount you buy. Buying one ounce of gold may cost you 5% more per ounce than buying 5 ounces of gold. With the current gold prices per ounce hovering around $900, that means you could pay $45 extra if you only buy a single one ounce coin. Also remember that, as with large denomination gold bars, there is a bid/ask spread. That means that the price you buy the gold at will be different from the price you can sell the gold back at on any given day. The buy price is typically 3% higher than the sell price. So you can see that buying and selling coins quickly to make quick profits is not a very enticing option. It's a much wiser idea to buy gold with the intention of holding it for security, wealth preservation, longterm investment, and enjoyment. And with such reasonable goals in mind, gold coins are one of the best way to invest in gold.

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