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Wednesday, August 08, 2007

Bullion Coins

By Michael B. Clark
President, Solidus Associates, LLC
Wilmington, Delaware

The precious metals markets have been on a tear. In fact, precious metals have been the top performing asset class in recent years and with this trend looking likely to continue, many investors want exposure to these markets. But how does one go about making a precious metal investment that safely affords the investor with such exposure?

To be sure, there are numerous precious metal investment vehicles available to the individual investor today – including futures and options contracts, government certificates, digital gold, exchange traded funds (ETFs), mutual funds, mining shares, as well as direct ownership of physical bullion itself. All enable an investor to add a precious metals component to his/her investment portfolio and participate in what is likely to become another multi-year secular market.

However, each of these vehicles is unique in its nature and complexity, and investing in them requires a specific understanding of their individual advantages/disadvantages and risks/rewards. This article provides an in-depth discussion about what is perhaps the easiest and most convenient way for individuals to acquire and directly own physical gold, silver, and platinum– by investing in precious metal products known as Bullion Coins.

Bullion coins are highly refined precious metal products that are round in shape (as opposed the rectangular shape of a bullion bar), and produced to exacting specifications by numerous federal governments throughout the world specifically for investment purposes. These coins are produced in large quantities and come in a variety of sizes -- typically one, one-half, one-quarter, and one-tenth troy ounces. Their content – that is, the weight and purity of precious metal they contain -- are guaranteed by the governments that produce them. They also are ascribed legal tender status in their country of origin, but are actually valued in the market for their precious metals content.

South Africa introduced the first investment bullion coin -- the gold Krugerrand -- in 1970. Since then, many more countries began to produce their own series of gold, silver, and even platinum bullion coins, including the United States (American Eagle), Canada (Maple Leaf), Australia (Kangaroo), Austria (Philharmonic) and China (Panda), to name but a few. For example, the United States Congress directed the U.S. Mint to produce the American Eagle Gold and Silver bullion coins in 1986 and later, the American Eagle Platinum bullion coin, in 1997.

To further understand the nature and function of a bullion coin, consider this excerpt from the United States Mint web site:

“A bullion coin is a coin that is valued by its weight in a specific precious metal. Unlike commemorative or numismatic coins valued by limited mintage, rarity, condition and age, bullion coins are purchased by investors seeking a simple and tangible means to own and invest in the gold, silver, and platinum markets.”

Bullion coins are referred to as “un-circulated coins,” because while they are bought and sold in the precious metals market place on a daily basis, they do so at values reflecting their precious metals commodity content, and they do not actually circulate in any of the world’s national economies, nor are they used as money, or as a medium of exchange, anywhere in the traditional commercial sense.

Today, bullion coins are widely traded as a form of precious metal commodities throughout a world-wide system of dealers and retailers, and their market values are globally publicized on a daily basis. Though ascribed legal tender status by the governments that mint them, bullion coins trade in the marketplace at a modest premium above the prevailing value of their precious metals content, typically 3 - 15%, depending on the size of the coin. Thus, their actual market value bears no direct relationship to what a given coin’s assigned legal tender (or “face value”) may be.

As an example, at the time of this writing, a one-ounce American Eagle gold bullion coin, which has a U. S. legal tender value of $50, was trading in the market place at about $700.00 (USD), while gold itself was trading at a “spot price” of approximately $665.00 (USD) per ounce. Thus, the price of the 1-ounce gold Eagle included a $35.00 (USD) premium (5%) above the prevailing gold bullion price.

It is important to understand that the premium charged for a bullion coin over the current “spot price” of the corresponding commodity it contains, reflects the costs of production, insurance, transportation, handling, and storage, as well as the manufacturer’s and the selling dealer’s profit, all of which are associated with the manufacturing, delivery and sale of the coin. This premium is not a value ascribed to the coin as the result of any scarcity or uniqueness considerations, as is the premium paid for rare coins. In fact, bullion coins are purposely manufactured in large volumes by federal governments to specifically ensure they do not become “rare” or “scarce,” but remain as common as the many types of bullion bars and ingots that are also produced by commercial refiners for investment purposes.

[Note: It is not uncommon for a federal mint to produce a separate series of specially manufactured, limited edition un-circulated bullion coins for given mint year. These particular coins, known as “proof coins,” are produced specifically for the coin collector and hobby markets, as they do often take on rarity (numismatic) characteristics, as a result of their limited mintage. Proof coins are a separate category of the bullion coins discussed in this article.]

Recognizing precious metals bullion coins as viable and widely held investment products, the Wall Street Journal and other leading financial publications the world over each business day publish the market prices not only of gold, silver, platinum and palladium bullion, but the prices the world’s most widely traded bullion coins, as well.

To be sure, there are significant advantages for the investor wanting to own physical precious metals to do so by buying bullion coins. For example, since they are produced and guaranteed by federal governments, bullion coins are universally recognizable by bullion and coin dealers, and by many banks, throughout the world. Thus, they are highly liquid and immediately tradable without the need for a costly and time-consuming assay, as may be required for bullion bars and ingots.

Moreover, many investors have found that the large quantity of bullion coins that may own is directly divisible, allowing them to readily sell or bequeath smaller quantities of their precious metals holdings at various points over time, as they may desire. For example, investors can easily and directly liquidate or gift some portion of 100 one-ounce pure gold Austrian Philharmonics, in 20-ounce, 25-ounce, or other desired increment at the time of their choosing, without any impact on the remaining Philharmonics in their investment portfolio. Conversely, if one held a 100-ounce gold bullion bar instead, its owner would first have to sell the bar and either convert it to smaller bars (or coins), or sell it for cash, in order to distribute or liquidate some smaller portions of it. This is a time-consuming, costly and inconvenient exercise.

Other advantages to owning bullion coins are that they are highly portable and are perfectly suitable for delivery, personal transport and/or storage in a bank safe deposit box or one’s own personal vault, if so desired.

Perhaps the only drawback to buying a large number of bullion coins (400 one-ounce coins, for example) is the somewhat higher premiums that must be paid initially when they are purchased, as compared to the somewhat lower premiums paid for an equivalent amount of precious metal that can be bought in bullion bar form (a 400-ounce gold bar, for example). However, the disadvantages of owning the bullion bar, as opposed to the bullion coins, are many (including its large size, the requirement for storage, and the need for a costly assay if personal delivery should be taken.). Besides, a significant portion of the premium one originally pays when acquiring bullion coins is re-captured at the time of their sale.

Without question, if one desires to reap the many benefits of owning precious metals as a part of his/her overall investment portfolio, direct ownership of the physical commodity through the acquisition of bullion coins is an excellent choice for investors. But, you should fully understand and be entirely comfortable with making such a purchase. To learn more about the advantages of owning precious metals bullion coins, be sure as with any investment, to do appropriate due diligence, and then talk with an experienced and reputable precious metals bullion dealer before you invest in them.

Copyright © 2005-2007 Mike Clarke and Gold and Silver Investments Limited. All rights reserved.

A consultant to Gold and Silver Investments Limited (www.gold.ie), Mike Clark has operated in the precious metals industry for 25 years. He first oversaw Deak-Perera’s Precious Metals Certificate Program, America’s largest retail precious metals investment program, in the early 1980s. Later he became Vice President of Precious Metals Services at Wilmington Trust Company, and then President of both Delaware Depository Service Company and First State Depository Company. He obtained licenses for Wilmington Trust and DDSC to operate as Nymex and Comex approved depositories.