Laila Keith
Gold has been a valuable commodity for thousands of years. It is seen as a way to preserve and pass on wealth from one generation to the next. Gold coins are a popular way to invest in gold, but there are several pros and cons to this method.
Gold coins are a tangible investment, which can be satisfying for investors who want to physically hold their assets. They can also stabilise your portfolio during market declines and safeguard against inflation. However, gold coins are not an investment in company growth, and they do not offer dividends or interest. They are also at risk of theft and can be costly to store and insure.
What You'll Learn
Gold coins can be a hedge against inflation
Gold has been a store of value for thousands of years, and it has real-world uses in jewellery and electronics, which provides it with tangible value. Gold tends to go up when other investments decline, providing a stabilising effect for your portfolio. It is also a safeguard against inflation.
Gold's performance as an inflation hedge has been mixed. While it generated impressive returns during the US's last period of high inflation in the 1970s, its performance since that time has been lacklustre. Some studies have found that gold can be an effective inflation hedge over a very long time horizon of more than a century. Over shorter periods, gold's inflation-adjusted price fluctuates dramatically.
Gold coins can be an expensive way to buy gold due to the high transaction costs involved. The difference between the dealer's selling price and buy-back price, known as the 'spread', is typically around 7-10% for gold coins, which is a very high transaction cost for a modern investment. Additionally, gold coins are neither the cheapest nor the safest way to buy gold, and they can be expensive to store and insure.
However, gold coins have the advantage of being a tangible, physical asset that can be held and kept at home or in a safe deposit box. They also offer privacy, as no one needs to know that you own them. In worst-case financial scenarios, such as massive currency devaluation, gold and silver coins can be used to buy and sell.
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They can also protect against deflation
Gold coins can be a good investment to protect against deflation. Here's how:
Gold's Purchasing Power
Gold's purchasing power relative to consumer prices can increase during deflation. While the nominal price of gold may fall, its purchasing power can rise, enabling you to buy more goods with gold. For example, during the deflationary period from 1814 to 1830, gold's purchasing power increased by 100% while prices fell by 50%. Similarly, between 1864 and 1897, gold's purchasing power rose by 40% while overall prices dropped by 65%.
Hedge Against Paper Currency Devaluation
During deflation, governments and central banks often inject large amounts of paper currency into the financial system to stimulate the economy, which can lead to concerns about currency devaluation. Gold is a globally accepted currency and asset, and its value is not directly tied to a single economy or market. As a result, investors may turn to gold as a hedge against the potential devaluation of paper currencies.
Diversification
Gold typically moves in a different direction than other assets like stocks or bonds. When other assets falter due to deflation, gold often increases in value, providing a diversification benefit to your portfolio.
Historical Performance
Gold has a long history of retaining its value over time, even during market downturns and economic uncertainty. For example, during the period of high inflation from 1970 to 1980, gold prices skyrocketed, shielding investors from the impact of inflation.
Finite Supply
Gold has a limited supply, and its production cannot be rapidly increased like paper currency. During deflation, when investors seek to protect their wealth, the demand for gold increases, leading to a rise in its price.
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Gold is a crisis commodity
Gold is regarded as a secure investment and is a popular means of coverage in times of crisis. Its high value, rarity, and uniqueness make gold a secure financial investment that also withstands inflation. Gold is one of the world's oldest forms of investment, and investors often turn to gold in times of uncertainty.
Gold is also one of the most important industrial raw materials due to its physical properties. It is resistant to air, moisture, heat, and many solvents, and it has a high density. Gold is easily workable and conducts electricity and heat, making it particularly useful in the electrical industry.
Gold's value is also derived from its historical significance as a form of currency. The first gold coins were minted in 50 B.C. in Rome, and people have always been fascinated by gold's rarity, durability, and beauty. Today, gold is most frequently used in the jewelry industry, which accounts for around 75% of the gold worked.
Gold is seen as a safe haven and a crisis-resistant capital investment. It is possible to invest in gold in its physical form or through securities such as gold certificates, gold funds, or gold ETFs.
However, it is important to note that investing in gold coins specifically may not be the most efficient way to invest in gold. Gold coins are bought through traditional coin dealers with a high "spread" or difference between the selling and buy-back price, resulting in high transaction costs. Additionally, gold coins may be more expensive to store and insure compared to other forms of gold investment.
Overall, gold is a crisis commodity that has been valued by societies throughout history and continues to be an important investment option today.
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Gold coins are collectables
Gold coins can be lucrative collectables. For example, a $5 'Half Eagle' gold piece coin from 1821 sold in an auction last year for $4.6 million (£3.6 million). The Knight Frank Luxury Investment Index shows that collectable coins have surged 59% in value in the past decade, with an 8% increase in the last year alone.
The value of a gold coin as a collectable depends on its rarity and beauty, as well as its material. For instance, a coin may have been struck in error, or it might point to a milestone in history. A $20 "Double Eagle" from 1933 became the world's most expensive gold coin sold at auction when it fetched $7.6 million (£5.7 million) in 2002.
If you are acquiring gold coins as collectables rather than investments, you should choose coins with designs that you find appealing or interesting. Only the weight and purity of the gold matter for investors.
Gold coins that are considered collectables are known as "numismatic" coins. These have value as collectables over and above their gold value. Numismatic coins include the Chinese Panda, the American Eagle, the American Buffalo, the Maple Leaf, the Gold Panda, and the Gold Nugget.
If you are buying gold coins as collectables, look for respected third-party graders like PCGS (Professional Coin Grading Service) or NGC (Numismatic Guarantee Corporation). This will ensure that you are buying authentic, professionally graded coins.
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Gold is a safe-haven asset
Gold is often referred to as a "safe haven" asset, particularly in times of economic crisis or uncertainty.
Gold is a physical commodity that, unlike money, cannot be printed, and its value is not impacted by interest rate decisions made by governments. Gold has historically maintained its value over time, making it a form of insurance against adverse economic events.
During times of market turmoil, investors turn to gold due to its perceived safe-haven status. For example, during the Russian invasion of Ukraine in February 2022, the price of gold reached $1,974 per ounce, the highest it had been since September 2020.
Gold tends to increase in value when other investments decline, providing a stabilising effect for an investment portfolio. It is also a safeguard against inflation, which can erode the purchasing power of investments.
However, it is important to note that gold does not always act as a reliable safe haven. For example, during the 2008 financial crisis, gold prices declined by over 30%. Additionally, gold is not a good hedge against currency risk, as its price is largely independent of changes in currency values.
Overall, while gold may provide some protection during turbulent economic times, it should not be relied upon as the sole safe-haven asset in an investment portfolio.
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Frequently asked questions
Gold coins can be a good investment because they are a tangible asset that can stabilise your portfolio during market declines and safeguard against inflation. Gold has historically maintained its value over time, and it is also used in certain industries such as electronics and dentistry.
Yes, gold is often seen as a "crisis commodity" and can be a good investment during times of economic uncertainty. Gold is also a good hedge against inflation, as its price tends to rise when the cost of living increases.
Gold is fairly liquid and can be easily converted to cash. However, it is important to note that gold coins may be more difficult to sell than other forms of gold such as bullion or ETFs.
Some of the risks associated with investing in gold coins include price volatility, high storage and insurance costs, and the risk of theft. Additionally, there is no guarantee that the price of gold will always increase during inflationary periods.
It is recommended to buy gold coins from a reputable dealer or financial institution. You should also ensure that the coins are stored securely, either in a safe at home or in a safe deposit box at a bank.
