It’s a story that we’ve seen again and again -- and again and again. Shrewd gold bullion and precious metal investors should remember the critical importance of diversifying their precious metal portfolios.
This is because there are significant differences between precious metal bullion and certified precious metal coins, including their markets, valuations, fluidity and supply. As a result, both precious metal categories have different advantages and limits. During times of great flux, it’s particularly important to maximize your options and your wealth protection with a diversified precious metal portfolio.
The most significant difference between the bullion and certified precious metal coins is the premium that coins carry over the spot price of gold. This premium can be sizable and there’s a good reason for that. It's typically built into the price and it reflects the added value that certified precious metal coins present.
Coins could certainly be valued solely upon their precious metal content. Thus a one-ounce gold American Eagle coin could be valued based upon the spot price of gold. But it isn’t. Certified precious one-ounce metal coins are not simply the equivalent of one-ounce gold bullion. You wouldn’t melt it down for the value of the gold, because the value of being pressed into a certified coin is typically greater. The gold purity and content of U.S. certified coins are guaranteed by the government, and the gold is scarcer as a coin than it is as pure bullion.
A case study from a story in the International Business Times illustrates this principle very clearly. In it, financial writer Mike Getlin wrote about his own observations and analysis of the difference in bullion and certified coins.
In September 2011, following a summer where gold hit new all-time highs, there was a drop in the market. But Getlin was impressed by something he learned from a trader, and its ramifications for precious metal investors.
“One of [the trader’s] clients who bought a diversified investment grade coin position early in the month was actually dead even on his overall position,” wrote Getlin. “While gold had tumbled by over $300 per ounce, his coins had stayed right where they were showing him no loss whatsoever.”
Getlin proceeded to illustrate how that was possible, using a $20 Liberty coin in Mint State 66 condition, a one-ounce coin that sold well above $15,000 at the time of his article, when gold bullion was selling below $1,600 an ounce.
“Most investors look at that and wonder why in the world anyone would buy a one ounce coin for over 15 grand!” Getlin wrote. “Yet this month, the one who did would be laughing all the way to the bank while the rest of us dream longingly of weeks gone by and $1900 per ounce.”
Getlin’s article featured a chart showing a variety of Liberty coins held their value relative to gold’s correction from Sept. 6 to Sept. 26, 2013.
“Gold closed at $1895 on Sept. 6. Over the course of the next 20 calendar days, it shed $297 to close at $1598 on Sept. 26. That is an overall correction of 18.58 percent in 14 trading days. The certified $20 Liberty coins fared much better,” wrote Getlin, whose chart illustrating the comparison can be seen below.
Of course, this should not suggest to anyone that they move all of their bullion investments into precious metal coins.
“There is clearly an advantage to be gained by owning some of these products that help insulate investors from these volatile markets,” Getlin wrote. “Some people swear by investment grade numismatics, while others think only a fool would buy anything other than bullion. So who’s right? Both of course. As with most arguments like this, there is a lot of truth to both sides, and each strategy has significant advantages and disadvantages.”
Scarcity & Buoyancy: The Case for Certified Coins
Those who study and follow coins, known as numismatists, point to one cold hard fact: value comes from scarcity. If you buy a bar of gold bullion now, and sell it in five years, there will have been millions of gold bars produced and sold into the market during that time. Whereas, when you buy a certified $20 Liberty coin, you can rest assured knowing that not one more will ever be produced. That’s why the $20 Liberty MS66 in the chart above actually increased in value. There was no new supply.
“The premiums on certified coins can move quite independently from the gold market and often times increase when gold goes down. This provides strong buoyancy during gold market corrections; something a lot of gold buyers would have loved over the last few weeks,” Getlin wrote.
Fluidity & Efficiency: The Case for Bullion
On the bullion side, the main argument against certified coins is that they are too expensive. Why pay a premium for an ounce for a certified gold coin when you could simply buy a Gold Eagle or a bar for a fraction of the cost?
“Certified coins are more difficult for dealers to procure and source, so their cost is higher,” explained Getlin.
“The other argument against them is they tend to move more slowly than bullion coins. For investors who need instant liquidity, or are trying to pop in and out of the markets with some frequency, certified coins present some major drawbacks,” he wrote.
A Diversified Precious Metal Portfolio: The Solution
All in all, there is no real ‘right’ answer as to whether investors are better off with bullion or certified coins. As such, we’re strong believers in owning both,” explained Getlin.
“Ideally, a healthy gold portfolio would have both bullion and certified coins. The bullion will move more quickly, provide more gold per dollar invested, and can be bought and sold at lower margins. The certified coins may have higher long term profit potential, benefit from strong demand and scarcity, and can provide stability in a gold market that is likely to become increasingly volatile in the coming years."
“As with most arguments, the best answer probably borrows a bit from both sides," said Getlin. “As with most investments, the best strategy is probably a diversified one.”