Gold has a centuries-long history of serving as money due to several factors — it is durable, scarce, divisible into smaller units, easily transported, and readily hidden or stored. As you consider the many ways to profit from owning gold, bear in mind this question: What kind of gold investor will you be?
- Opportunistic traders look at gold as you would any other commodity and attempt to capitalize on the uptrends while sidestepping the downtrends. Based on trend analysis or other timing indicators, they would buy gold only when an attractive opportunity seems to present itself and sell when the uptrend appears to have ended. This is the approach to owning gold we take in our DAA strategy.
- Long-term accumulators don’t regard gold as primarily a commodity to trade but rather as a valuable asset to be acquired and held — possibly for decades. Their basic motivation is not merely capital appreciation, which is possible through a variety of other investment strategies. Rather, the primary, over-arching goal is to protect one’s wealth against the debasement of the U.S. dollar. Accumulators want to own the actual metal, not a trading vehicle. With that in mind, let’s look more closely at three ways one can accumulate this precious metal.
Gold coins have been around for thousands of years, of course, but the kind of bullion coins that are popular today date only to 1967 when South Africa introduced the Krugerrand (named after former South African leader Paul Kruger, whose image is on the coin).
Each Krugerrand contains one “troy ounce” of gold (precious metals usually are measured in troy ounces; a troy ounce weighs about 10% more than a regular ounce). However, the coin actually weighs more than one troy ounce due to the addition of a small amount of copper to add durability. As a result, the coin is only 91.667% pure gold (22 karats). Don’t let that confuse you — Krugerrands still contain a full troy ounce of gold.
Eventually, fractional versions of the Krugerrand came on the market: a half-ounce coin, a quarter-ounce coin, and even a one-tenth ounce coin. This put gold ownership within the reach of millions of buyers who couldn’t afford to purchase a one-ounce Krugerrand. Today, with nearly 60 million coins in circulation, the Krugerrand is the most widely held gold-bullion coin in the world.
A significant shift occurred in the gold-coin market in 1979 when Canada introduced a pure gold coin. The one-ounce Maple Leaf is 99.99% fine (24 karats). After the Maple Leaf came on the market, many investors preferred Maple Leafs over Krugerrands because of the intangible value associated with holding a “pure gold” coin, even though the amount of gold in a Krugerrand and a Maple Leaf is almost exactly the same (Maple Leafs weigh slightly less than Krugerrands because there is no base metal added).
The U.S. was late in coming to the gold-coin party. It wasn’t until 1985 that Congress authorized the U.S. Mint to produce legal-tender gold coins. The first American Gold Eagle coin appeared the following year. The U.S. followed the South African model of using a formulation of 91.667% fine gold, choosing to alloy the gold with both copper and silver. This gives the Eagle a slightly different color than either the Krugerrand or Maple Leaf. In addition to producing a one-ounce Eagle, the mint eventually added half-ounce, quarter-ounce, and tenth-ounce sizes as well.
Given the growing popularity of pure-gold coins (not only Maple Leafs but also coins introduced to the market by China, Australia, and Austria), the U.S. ultimately entered the pure-gold market with the introduction of the American Gold Buffalo in 2006. Based on the design of the old Buffalo nickel, American Buffalo coins come in one-ounce, half-ounce, quarter-ounce, and one-tenth ounce varieties.
(We’re excluding from this discussion numismatic (collectors') coins. Their value depends on their rarity and condition rather than their gold content. These are best left to those with specialized knowledge and experience.)
The most popular gold-bullion coins are those shown in the table below. Three levels of gold content are shown for each coin. Notice the “premium over spot price” increases as the degree of gold content decreases. (The spot price, which can change minute-by-minute, is the current market price of gold where it is being sold for cash and delivered immediately. The terms spot price and cash price are used interchangeably.)
The premium is the difference between the spot price and the price dealers typically charge — in other words, their markup. Because the smaller coins aren’t as profitable for the dealers, they charge a higher premium to compensate. Typically, the lowest premiums have been asked for Krugerrands followed by the Maple Leafs; higher premiums have been charged for the Gold Eagles.
So, if you are investing in one ounce gold coins in the current environment, you will get the most for your money by focusing on Krugerrands. In a recent SMI survey, the dealers with the lowest premiums on the most popular coins are shown in the table below. You might start your price research with them. You need to know at least three important things about the market for gold-bullion coins.:
- Gold coins can be sold by anyone. Dealers are not regulated and there are no licensing requirements. So it’s “buyer beware” all the way.
- Gold coin prices aren’t standardized. This means it’s not uncommon for inexperienced investors to overpay. Make sure the price you pay is competitive (i.e., shop around!).
- Gold coin prices fluctuate throughout the day along with the spot price of gold. On a volatile day, this can make it difficult to compare dealer prices for the same coin. You should focus instead on a dealer’s premium, which doesn’t change as frequently.
Gold bars tend to be more complicated to buy and harder to resell than gold coins, so we don’t consider them as attractive as coins. An exception would be if you intend to make a very substantial purchase. The standard industry unit for gold bars is 10 troy ounces which, at current price levels, would cost you about $10,000 per bar. They sell at a smaller premium (i.e., markup) than coins do, so there’s an opportunity for some savings when making a sizable investment.
Digital gold currency
Digital gold currency, or DGC, is an electronic form of money valued in terms of gold rather than a currency. It takes the form of a savings-like account through which you can buy, store, and sell your gold via the Internet in any quantity at any time from anywhere. You make a deposit that is converted into gold and credited to your account. Your statements refer to how many grams or ounces of gold you own. DGC is convenient, and the buy/sell commissions and storage costs are low.
There are several players in this market, but the leader is GoldMoney. Let’s look more closely at their service. The firm was launched in 2001 by James Turk, an internationally-recognized expert on the precious metals markets, with offices in Jersey, one of the Channel Islands of the British Isles. According to their website, they had more than 41,000 active clients spread over 100+ countries with $1.8 billion in their accounts at the end of 2015.
The main features of interest to prospective clients are:
- Ownership Rights
The gold in your account is legally your gold held in your name.
- No Counterparty Risk
Your direct ownership rights mean you are not dependent on GoldMoney’s financial solvency for protection. If for any reason the company failed, your gold would be delivered to you.
- No Minimum Purchases
You can buy and store in amounts that fit your particular strategy (whether little or much). This ability to make “fractional” purchases frees you from the common denominations found with gold coins/bars, and makes the accounts ideal for dollar-cost-averaging.
- Low Commissions
When converting your dollars into gold, the premium is only 2.5% (and less for larger purchases) over the spot price. There is no charge for selling your gold.
- Fully Insured
All metals holdings are insured 100% against theft by a policy underwritten by Lloyd’s of London.
- Low Storage Fees
The gold is stored in your choice of eight high-security vaults located in Canada, Europe, and Asia. The fee for this is as low as 0.12% of the value of your gold holdings per year. This includes the cost of the insurance.
- Regular, Mandated Audits
Quarterly reports from the vault operators and database auditor (companies independent from GoldMoney) verify that the amount of gold shown on your statement is, indeed, in the vaults. Further, a “Big Four” accounting firm provides an annual audit and report.
- Option of Taking Physical Possession
At any time of your choosing, you have the option of having your gold delivered to you in 100-gram units (a little over three troy ounces). There is a 4% redemption fee for this service (less for 1000-gram bars).
For these reasons, this service has a lot of appeal. However, while we found no red flags during our research, you should carry out your own careful investigation of GoldMoney (or any of the other DGC companies) to gain a satisfactory comfort level. Information is available at www.goldmoney.com.