Should you buy gold coins?

The cheapest and most trusted gold is Good Delivery bullion

When you buy gold coins and small bars they are priced according to the world market inter-bank gold price. On top, you will pay a hidden mark-up which, though it varies from dealer to dealer, is rarely less than 6% and often much more. When you sell back the discount is typically a further 2%. Buying and later selling gold coins will cost you about 8% of your capital.

Good Delivery bullion is what defines the benchmark inter-bank gold price. It’s a bigger more liquid market than gold coins. It trades without a mark-up, and it guarantees no fakes. You can buy Good Delivery bullion directly on the wholesale markets as a private investor.

There you will pay the current world market inter-bank gold price. You will be buying accurately assayed, 100% fine*, permanently guaranteed gold bars. For purchases from zero up to [approx] £60,000, €70,000 or $75,000 – you will pay just 0.5% in commission. Beyond this you will pay only 0.1% commission.

Buying and later selling Good Delivery bullion will cost you a maximum of 1.2% of your capital. On larger sums that comes down to about 0.3%. This is much less than the 8% cost of buying and later selling gold coins.

* Fine gold is the pure gold content of an assayed bar. It’s calculated by multiplying the bar’s gross weight by its accurately measured purity.

Good delivery bullion

Good Delivery bullion is standard-sized, large bar gold (or silver) of proven weight, purity, origin and history. These bars are the assumed settlement form for professional bullion market trades, where pricing is keenest.

You cannot settle a professional bullion market trade with gold coins. They will neither be delivered to you nor accepted from you. If you buy coins you will have to trade with coin dealers, where liquidity is not nearly so deep and prices are not nearly so competitive as on the professional bullion markets.

With Good Delivery bullion you used to have to buy a whole bar – fully 12.4kg of bullion – which looks like this.

A Good Delivery Bar
Weight : ~ 400 Troy Oz [12.44 kg]
Length : ~ 11 inches [28 cm]
Purity : > 99.5%

That has changed. Since 2005 BullionVault has allowed you to deal part of a bar in amounts down to 1 gram. So instead of investing $500,000 you can now buy from $40 worth.

You buy at professional market prices, continue accumulating at your own pace, and sell back whatever amount you have, whenever you want, again at the professional market price.

BullionVault

BullionVault – where you would buy your Good Delivery bullion – is much bigger than most coin merchants, and much more financially robust. It’s a member of the London Bullion Market Association, and specialises in looking after private investors who want to buy and store gold in the form of wholesale market Good Delivery bullion, although not often whole ones. BullionVault looks after more gold than most of the world’s central banks.

BullionVault guarantees you the cheapest prices, arranges insured onshore and offshore vaulting for you at the authorised, independent, professional bullion market vault of your choice*. Then it provides you direct access to the liquidity of the world market when you want to sell.

It is the safest and most economical way to own real gold; and with 100,000 users and a five star rating one of the most popular too.

* You choose from Zurich, London, New York, Singapore and Toronto, in any combination. They are all authorised professional market vault operators and independent of BullionVault itself. They produce a bar list every day which BullionVault publishes – and next to it is published a pseudonymous register of all the owners of the gold on the list – matched to the gram. Your gold balance will appear on that register, under your pseudonym which only you know.

Gold coins can be expensive to buy because:-

1. The economic refining process for gold gets the purity to just over 99.5%, which matches the Good Delivery bullion specification for purity. Because, from here, about half of all gold will be alloyed for jewellery manufacture (e.g. back down to 75% purity, or less) and because most of the rest will be retained as stored bullion, further expensive electrolytic refining to 99.99% is usually pointless.

   Consumers worldwide increasingly demand 99.99% gold coins - and they pay for the privilege. So called four nines gold requires electrolytic refining, and of course the cost is passed through to the ultimate buyer.

   No intrinsic value is added with 99.99% refining. In fact if gold coins are later re-cast into large bars (as many are, to be sold at the Good Delivery bullion price) this loses both the cost of electrolytic refining and the 99.99% rating.

   There is little trading benefit to 99.99% gold. On wholesale markets both 99.99% and 99.5% are traded ‘fine’, which means amounts are calculated as gross weight * assayed purity. If dealers deliver 99.99% gold to settle their sales they are unnecessarily wasting the cost of electrolytic refining. So for all practical purposes cost conscious investors should stick with 99.5% bullion, traded fine, as Good Delivery bullion.

2. On top of refining costs gold coin manufacturers charge fabrication fees and/or seignorage – a fee covering minting royalties. Producers will usually buy their gold as Good Delivery bullion bars, so these extra charges apply when converting large bars into smaller articles, and naturally the costs are passed on to the ultimate buyer.

   Neither seignorage, nor fabrication, imparts a lasting value to bullion products. In fact it’s the opposite. The highest bid prices for gold are for raw bullion in Good Delivery form.

3. Coin dealers suffer highly variable demand, which routinely multiplies during financial stresses, and then turns negative when the financial world is calm and customers are selling back to the dealers. For coin dealers the result is a cycle of shortage, then glut, which means high prices or low prices at the time of maximum disadvantage to the majority of their customers.

   When dealers are short of stock they ration buyers by raising the price for immediate delivery, and only those prepared to pay higher prices get their gold while the panic is on. In such a crisis, if you want to pay a fair price, you will have to wait several weeks for coin delivery while the mints catch up with their orders. Most people don’t like waiting when a panic is on.

   When calm returns, and savers are selling, the dealers rapidly become overstocked. The resulting gluts will force them to finance and hedge (which is punitive) or to re-cast their surplus gold coins and small bars as large bars, to sell where the liquidity is deepest.

   That will complete a redundant and expensive circuit from bullion bar, to coin, to bullion bar, which is never experienced by those who elect to own their gold as Good Delivery bullion from the outset.

4. Coin shops are both labour and capital intensive. Even small shops require two staff (for security reasons) and maintaining both a secure workplace, and a workable stock of gold products, requires a lot of capital. Yet typically they only average a few customers a day.

   On-line shops do save on location costs, because they are not on the High Street, but they suffer from the high costs of marketing and insured bullion delivery.

Coin dealers usually address their high cost-base with high mark-ups [see panel below]. So before you buy gold coins download the BullionVault App to your mobile phone. Its ‘Live Order Board’ is free, and pricing data is not delayed, so it’s one of the few places you can view wholesale gold prices in real time. Use it to check the price you would be paying on BullionVault, against what is quoted by your gold coin dealer.

Gold coin storage:-

Storage space for gold coins is relatively inexpensive. You have two main options :– a highly rated safe at home, or a commercial safety deposit box.

NB. Do not be tempted simply to hide your gold coins somewhere at home. Thieves often use modern metal detectors, which are gold-sensitive.

1. A modestly sized and sufficiently rated home safe will cost £300 - £500. Battery operated electronic combination safes are generally recommended because they avoid the problem of what to do with the key. Take care to ensure your lock includes an emergency power socket in case of dead batteries.

   You will need a concrete floor and a brick or stone wall behind, which should not be accessible from the rear. Your safe will probably be installed with 6 inch bolts set in resin, applied into holes drilled in the floor and wall. Installation is not complicated and will cost another £100 - £200. Once complete you can usually only remove the safe intact by drilling out the bolt heads from the inside the safe.

   This sort of mid-range domestic safe, professionally installed, will likely be insurance rated for something like £3,000 in cash and £30,000 of valuables. Check the rating before you buy.

   Although this sort of safe will deter most intruders it will also advertise where the valuables in your home are stored, and it would be unlikely to hold a determined thief at bay for long. An ordinary metal cutting wheel on a household drill, and an uninterrupted hour, would defeat your defences. So it is essential that you extend your home insurance to cover your gold coins.

   In fact it’s your household insurance, rather than the safe itself, which is most likely to create problems for you.

2. An extra small safety deposit box – sufficient for most gold coin reserves – is generally priced at around £15 - £18 per month.

   Some services include a modest level of insurance cover up to £10,000. If this is not the case, or if your deposited items are likely to exceed this value, the insurance though relatively straightforward to arrange is usually very expensive. Testing the market for top-up safe deposit box insurance for 100 * 1oz gold coins produced a quote of £724.56 pa.

The standard storage fee on BullionVault is $4 per month (about £2.80). This covers storage and insurance for up to $40,000 of gold (about £28,000). Thereafter it costs 0.01% per month. So for a direct comparison 100oz of gold priced at £1,000/oz costs just £120 per year for both storage and insurance. It’s a tiny fraction of the cost of insured safety deposit boxes, and both cheaper and less hassle than installing a safe and amending your insurance.

For those who already have a safe, and who are storing only small numbers of gold coins, the minimum fee of $4 per month makes BullionVault slightly less competitive. Beyond this small quantity you are unlikely to find a cheaper or easier way than BullionVault to both store and insure your gold.

Gold coins can be expensive to insure because:

1. Gold coins and small bars are easily sold. They are attractive not only to thieves but also to insurance fraudsters, who sell them and then fraudulently claim theft. It happens all the time, especially during recessions, when people are desperate for money. At such times the frequency of insurance losses always rises mysteriously, and the result is that honest people subsidise insurance fraudsters.
2. It is a low volume marketplace in which few underwriters choose to compete.

The mathematics of risk for gold storage are well understood, and insurance actuaries know that although there are certainly risks during transportation, an approved long term storage vault within the professional bullion market system is by far the safest place to keep gold.

So it is very much cheaper and easier to insure gold when it is kept in these professional vaults.

That’s where all BullionVault gold is kept, and it’s why all BullionVault gold is insured automatically within your regular storage fee of 0.01% per month.

Also you won’t be exposed to those higher transit risks. On BullionVault you buy your gold in situ – i.e. already in the vault where you want it. This saves you organising shipments, paying shipping costs, and making yourself available to sign the receipt on delivery to your door.

Storage plus insurance for up to $40,000 of gold costs just $4 per month. This is the only ongoing fee you are required to pay for holding Good Delivery gold at BullionVault.

Problems with storing more than a small number of coins at home

For a small number of coins, of limited value, often the most convenient and confidential storage solution is at home, in an insurance rated safe. This definitely works best when you do not need to itemise your gold coins nor extend your household insurance.

This will require that both:-

• Your coins do not cause your safe’s valuables to exceed your safe’s rating
• Your coins do not cause your high value, or high risk items to exceed your household insurance’s limit for these.

If these conditions are met, and no other terms in your insurance contract are breached, then keeping a small number of gold coins at home is a reasonably safe and economic storage solution.

When the above conditions are not met home storage becomes difficult.

If your safe’s rating is exceeded it is likely your insurance of its entire contents will be voided. Our advice is never to exceed your safe’s rating.

If you have to elevate your household cover to include a larger ‘high value items’ figure it is likely the insurance company will both raise your premium and place a string of onerous responsibilities on you. This will include:-

• installing a regularly serviced and permanently monitored intruder alarm
• maintaining and undertaking to use – every night – high specification key-operated locks on all windows and doors, and
• ensuring windows are never left open in unoccupied rooms.

Once insured remember to monitor the values of your gold coins. If they rise too fast your insurance limit is likely to be exceeded and re-create the above problems for you. This inconvenience never happens on BullionVault because all insurance is adjusted automatically to current bullion values.

Can we ever be entirely certain about fakes and forgeries?

No, not even good delivery bullion is 100% certain not to have been tampered with.

However:-

1. Even though they exit the vaulting system in large numbers, to be made into jewellery and bullion products, it seems nobody in the industry can remember a single good delivery bar extracted from the accredited vaults of the LBMA later being found to be a fake, and,
2. even if it were, BullionVault guarantees to replace it, no matter how long you hold it.

By contrast fake coins certainly exist, and small bars circulating in private ownership are known to have been filled with tungsten – a metal of similar density to gold.

Most of us are forced to rely on the last expert to handle our gold. When we sell – sometimes decades after we bought – we are presented with a difficult dilemma when the dealer goes into a back room to test our gold for authenticity.

Suppose they return saying it’s a fake. What then?

The hidden risk of coin ownership

Many people buy gold coins as a form of ultimate protection from a future crisis.

• Some believe the next crisis will come in the form of a breakdown of social order. This sort of crisis is rare. Were it to happen gold owners would quickly learn the huge risks of using it as money. When the social order breaks down almost nobody pays with gold because they are sensibly frightened to be identified as a gold owner. The gold is unusable while at its most valuable.
• A breakdown of social order is uncommon, but would always be accompanied by a serious financial crisis. Crises in finance also happen independently of social breakdown, and with much higher frequency, making them a much more common style of problem we are likely to face. Most of us will experience local financial crisis in our lifetimes – usually more than once.

  When these cause a run on a rapidly depreciating currency governments tend to initiate capital controls, which are programs for preventing the flight of usable capital from their country.

  It may well be possible to sell gold owned domestically during such a crisis. However formal channels under capital control environments will offer an ‘official’ government-set price in local currency, which will be far below the true world-market price. Meanwhile informal channels (the black market) extract the deep discounts of dealing in illegal contraband, and much of the value will be lost to middlemen.

Whichever crisis a gold coin buyer is seeking to avoid it turns out that making an immediate and sensible choice of offshore storage location is the best guarantor of being able to access the value of the gold when it is required. Domestic governments find it impossible to act effectively against privately owned gold stored overseas.

Gold owners looking for an overseas storage location should try to avoid political instability, negative trade balances and budget deficits, and they should look for countries with a healthy interest in maintaining the trust of international investors.

Switzerland, Singapore, London, Toronto and New York offer different mixes of the above qualities. They are all offered as storage locations at BullionVault. The BullionVault service also allows you to switch location very rapidly, and to spread your geographic risk without paying more than the one ($4) minimum monthly storage charge.

Why you might get a poor price when you sell gold coins

There is a good time to sell gold coins, but very few people ever manage to benefit from it.

It is when there is a mad rush to buy gold coins by the investing public.

At such times dealers get short of stock and sellers who are brave enough to sell into the gold price strength of a panic may well actually get a premium over the published gold price.

Those that do sell will be exceptionally brave and skilful investors. They will judge that the fears of crisis are unjustifiable, and sell to take advantage of the high price available just as gold ownership looks to be the wisest thing they ever did. By definition they will be in the tiny minority. And of course they will live to bitterly regret their decision to sell if the feared crisis deepens.

What is far more likely (again by definition) is that the seller of coins acts at the same time as many others. And then the coin prices drop to a discount to the world market bullion price because the dealers become overstocked.

Guarantee

We guarantee you cannot buy real physical gold cheaper than you can on BullionVault.

If you can find any reputable dealer who, net of all trading costs, lets you buy the same amount of credible, physical gold, cheaper* than us we will refund you all of your commission.

* trading at the same time you traded with us, even if you only find out about it later