Gold Coins vs. Gold Bullion

People buying Gold Coins for added value can find they bring more costs than benefits...

THINKING about how to sell your gold as part of buying it? Investors who prefer to own physical gold they can see and touch have many ways to achieve that comfort level, says George Avalos at Hard Assets Investor.

But when you stack up the choices, Gold Bullion appears to have the edge over Gold Coins for investors who also think about selling as much as acquiring.

"Everyone should keep a little physical at hand," says Adrian Ash, head of research with London-based BullionVault. "The problem with using coins or small bars for the bulk of your precious metals is threefold: cost, liquidity and security."

It's clear buyers who want physical gold have an array of purchase options to pick through. And these choices come at a time when buyers clamor for owning the real thing.

"We're seeing an increase in demand by investors for gold ownership in all forms," says William Rhind, managing director of ETF Securities US. Gold Coins, the smallest of the physical units, can be bought in some surprising venues, adds New York City-based attorney David Ganz, a past president of the American Numismatic Association and an expert in the gold market over a period of decades.

"There are even machines at airports that have them," Ganz said. "I was at an airport in South Africa where I saw them. Cape Town has vending machines where you can buy gold in about half-ounce increments."

Many vending machines for gold have also popped up in Europe and Asia. Yet the precise form of gold ownership might not matter as much as making sure to be an owner of the metal, Ganz opined.

This may seem something of a throwback to the past in an era of gold and silver ownership through financial instruments like ETFs. New channels of ownership have proliferated along with the remarkable jump in the price of precious metals, led gold and silver. But "I'm a strong proponent of gold ownership, whether in bullion form, ingots, bars, rounds, an ounce or more, or coins," Ganz said.

"The advantage of coins, bars and bullion is they are physical," Rhind said. "The disadvantage of an ETF is it is not tangible. You can't see or touch or hold the gold." Experts also point to advantages and disadvantages in owning Gold Coins compared with bullion, however.

"They are very different products," said Sharlene Dozois, a marketing director for Kitco Inc., a Canadian retailer in bullion and other precious metals products. "Coins are more of a collector's item. Bullion is more of an investment product. But you can argue that the coins can grow in value with time."

Overall, ownership of Gold Coins is a good idea, Ganz notes. "Coins have a numismatic value," he says. "This is true of coins that are intended to be bullion. You know what is the mint, what is the condition, and there are people who collect them."

Gold Coins themselves are offered in multiple categories when it comes to investment goals. Some gold coins are more appropriate for numismatic-oriented investors. But "The public generally does not have the experience or the knowledge level to buy numismatic coins," said Walt Breitinger, president of Breitinger & Sons, a commodities futures brokerage.

"Investing in numismatic coins is a subspecialty that would require an enormous amount of homework to be undertaken to be done properly."

Buying bulk Gold Coins, or purchasing bullion, is a different matter altogether.

"The most popular bulk Gold Coins include Krugerrands, Canadian Maple Leafs and American Gold Eagles," Breitinger said. "These have been mass produced in such quantities that they tend not to retain much numismatic value." Typically, these kinds of coins contain one ounce of gold. Their weight varies a bit, depending on the amount of copper melded with the coin.

Investors also need to consider the availability of potential buyers when the time comes to sell coins, compared with selling bullion. "Bullion coins are very liquid, but not as liquid as a 100-ounce bar," Breitinger said. And witha bullion coin, buyers also face a markup in price when they buy the coin and a markdown when they need to sell.

That markup on plain Gold Coins could be $20, $30 or even $40 an ounce, which can be a noticeable additional cost even on an $1800 purchase. On the selling side, investors should be braced to see the flip side, too.

"When they walk back into the shop to sell, the shop owner who's buying the coins has to make a profit too," Breitinger said. "The owner is keeping an inventory, there is risk of theft, of robbery, of fraud. There is also the risk that somebody might have sold the dealer a gold coin that is really a gilded piece of lead."

Ubiquitous market forces can also come into play. "There is the risk that the price might move the wrong way at the wrong time," Breitinger said. "The owner has all kinds of risks in the business." So owners will often add 5% to the price of gold so they can harvest a small profit when they sell a Gold Coin. In contrast, somebody trading 100 ounces of gold bullion might have to employ a markup as low as $1 per ounce to make a profit.

Investors who own gold coins face risks beyond the price discounts and markups linked to the retail market. These other risks are why BullionVault's Ash suggests using storage outside one's own country. "Keeping it all at home also risks becoming a victim of history," Ash said. "History is littered with people who rightly feared severe trouble in their own country, but then made the mistake of not owning gold overseas."

Ash points to the current turmoil in Zimbabwe, and economic and political upheavals in Argentina in 2001, Yugoslavia in the 1990s, Vietnam and Cambodia in the 1970s, Nazi Germany in the 1930s, the United States during 1933 and Russia in 1917.

"When people needed it, they could not release the value of their gold, because it had become contraband."

Either way, though, risks are present whether buying coins or their bulkier cousin, bullion. "Anytime anybody buys physical gold, there is the potential that they are not buying pure gold," Breitinger said. "Counterfeit coins or counterfeit bullion are things that have happened quite a bit through history."

Regardless of what method investors pick, "I am certain that if you take all the gold in the world that has been mined and refined from the time of the Lydians to the present, melt that into a giant ingot the size of the Washington Monument, it would only go up about two-thirds of the way," Ganz said. "There is not that much gold available. But there is a lot of demand."

Yet even that isn't a guarantee of future profits. "People are concerned that paper currencies could continue to decline, compared with commodities in general. That could make buying precious metals more popular," Breitinger said. "But it's also possible we could see a deflationary swing. In that case, people who own paper money would wind up as winners and the price of gold would decline."

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