Investing in gold coins

Gold coins are an investment that can and do appreciate, depreciate or keep a steady value depending on when they are invested in and liquidated. Gold coins are a dynamic investment that have a reputation for being 'safe' and 'stable' because gold traditionally holds value, and gold is by virtue of its rarity, in short supply. In other words, there are some reasons to invest in gold coins, however there are also good reasons not to.

Gold coins experience price fluctuations as does the spot gold price, and they are subject to inflation that is the very thing some investors buy gold for in the first place. This is because gold offers inflation protection when its price rises due to the weakening of major currency such as the U.S. Dollar. Gold coins are also a more complex investment than they appear on the surface due to elaborate global economics, historical asset diversification, and market mechanisms. This article will discuss the dynamics of gold coin investing in terms of advantages and disadvantages.

Advantages of investing in gold coins

Global gold coin demand increased 40% from 137 tons to 191 tons between 2007 and 2008 as per the World Gold Council's gold statistics. Since demand is a driver of price when supply is limited, the increased demand in relation to price is positively correlated. In recent years, gold has appreciated in value a great deal. There is a lot of analysis and thought in to the reasons why this has happened. Among those reasons are those listed below:

Image source: Petr Kratochvil

Reasons to invest in gold coins

• Gold supply is limited
• Gold prices rise during and with inflation
• Traditionally gold is a safe asset
• Lower currency values mean higher gold prices
• Gold coins may have aesthetic and collector appeal
• Gold is forecasted to continue rising (2)

In addition to the reasons for buying gold coins are the types of gold coins on the market. This is an important aspect in gold coin purchasing as the type of coin can affect its value, liquidity, and availability. Some gold coins are only partially gold with other metals within the coin, other gold coins are almost 100% gold. Gold bullion coins are considered investment grade and are 99.9% gold and between 22-24Karats.(3) Being aware of the percentage and authenticity of gold within a gold coin is an important aspect in its valuation, as gold is valued by weight so a mixed gold coin trader may charge more or less for gold depending on their skill and objectives in assessing and valuing gold.

Types of gold coins

• Rare and historical gold coins
• Collectible gold coins
• Gold bullion coins
• Gold and base metal coins

Disadvantages of investing in gold coins

The disadvantages of investing in gold coins are reasons why investing in gold coins is not a simple decision if one is expecting a guaranteed large profit. The very fact that reasons exist not to invest in gold is a sign that gold is not necessarily as safe an investment as some investors may like to believe. These disadvantages of investing in gold are presented below and are not few and far between. Three of these points are elaborated upon to illustrates the complexity of gold investment.

Reasons not to buy gold coins:

• Gold coins are subject to premiums and taxes
• The global recession is ending
• Gold prices are not historically constant
• Gold is subject to inflation just like currency
• Gold is one of many valuable assets
• Control of gold supply affects prices
• Historical reasons for buying gold are invalid

The type of gold affects its worth

The type of investment in gold may not be as profitable as investment in other types of gold such as gold futures, gold exchange traded funds (ETF's), gold mining company stocks and non-coin gold bullion. This is because of dynamic business, economic and market variables that compete against other types of assets.

Gold is one of many valuable assets

Back in 1500 C.E., gold may have indeed been a good investment, however times do change and gold is no longer the only precious metal on the planet, nor is it only one of few assets to invest in. In the modern era, gold constitutes a mere fraction of global worth and investment choices. Additionally, gold is no longer used as a common currency so the gold has no common purchasing power. In other words, gas pumps, automated teller machines, internet shops and online brokerages don't except gold as currency so you can't use it.

Gold coins are subject to inflation:

The same logic that tells investors to buy gold coins can also be a reason not to buy gold coins. For example, inflation adjusted gold prices indicate the true value of gold reached a peak in 1980, this was a time when inflation was high, so naturally the price of gold became high.

To buy a lot of things gold has to be converted back to cash that has inflated. So, if an ounce of gold purchased in 1970 cost in the vicinity of $30 USD, however, those $30 USD adjusted for inflation would be worth $164.58 2008 U.S. dollars using an online inflation calculator. This means, $1000.00 estimated 2009 gold price per ounce/$164.58=6.07 X $30=$182.28. Thus gold has only increased $17.70 or 11% per inflation adjusted ounce within the last four decades.

Another competing investment such as 10 shares of International Business Machines (IBM) cost approximately $169.20 in 1970. Those same 10 shares would be are worth around $1,200.00 USD in the middle of September 2009 or $708.80 in 2008 inflation adjusted dollars. Adjusted for inflation using the same inflation calculator, those 10 shares of IBM would be worth $92.82 in 2008 dollars when the price per IBM share fluctuated between $83-$130 USD per share. of about $1200/$708.8=1.693 X $169.20=$286.456. Thus 10 shares of IBM have increased in value by about $117.256 or around 69.4% in inflation adjusted dollars.

Sources:

1. http://www.inflationdata.com/inflation/Inflation_Rate/Gold_Inflation.asp
2. http://libertyvalley.com/rough_projection_gold_and_silver_prices
3. http://www.taxfreegold.co.uk/22carator24carat.html
4. http://catalog.usmint.gov/
5. http://www.goldprice.org/