Buying physical gold or silver may sound like a straightforward investment. Often people associate the investment of precious metals with gold bars and jewelry. Though investing in the precious metal industry may be more complicated than it seems. It is incredibly easy, especially for investors that are just starting out to get overwhelmed by all of the options available to them within the precious metal industry.
It is common for new investors to look for collectable gold coins and gold jewelry, without comparing price or premium, because these items may seem like good investments. Wise investors use the price and premium over the current price of gold to compare various bullion options before making a purchase.
On top of all the choices that beginner investors are faced with, there are the gold dealers that will try to encourage people into buying collectable items with a huge premium, that will not retain the value over a long period of time.
With all of the options that are available to investors, it is essential to have an understanding of the precious metal market before getting started.
This article will answer commonly asked questions by people that are beginning their investment journey with the precious metal industry.
A common question that beginner investors have is which precious metal, gold or silver, is better to invest in.
Both gold and silver have unique features that may attract investors, though gold is the better investment option for most investors.
Compared to silver, gold has a much larger liquid market. This means that gold has more buyers and sellers available, and lower transaction costs than silver does. Gold’s liquid market is driven by investment as well as high demands for gold jewelry.
Silver, on the other hand, is more speculative and closely related to economic activity which is due to numerous industrial uses. As a result of this, it is beneficial to invest in silver during downturns, though these may be difficult to keep track of for beginner investors.
Overall, for investors that are just beginning, investing in the gold industry is better than the silver industry.
Before making an investment in gold coins it is important that you understand how premiums affect the price of gold coins. Understanding how premiums work will prevent you from purchasing a gold coin with an extremely high premium that will not hold long-term.
So, how do premiums work?
Ever notice how two bullion coins with the same amount of a precious metal occasionally sell for a different price? All of these coins have the same amount of the precious metal in them, so they should sell for the same price, right?
Unfortunately, it is not that simple with gold coins. For a variety of reasons, a gold coin that has the exact amount of gold as another gold coin can cost more or less.
Why is this the case? Where is the extra cost coming from?
The extra cost of some gold coins is called a “coin premium”, which is an additional cost of a bullion coin. Coin premiums are above market value for the amount of gold that the coin contains.
The factors that usually lead to a coin premium are the costs of:
In turn, the gold dealers, who typically purchase their gold from mints, will also mark up the price of the coin to cover the costs of purchasing the coin, and to make a small profit for themselves.
This series of buying products and increasing the price as it continues down the chain of distribution is not exclusive to the gold industry. In fact, it is seen in a lot of other industries.
Gold coins work just as every other market does with supply and demand. The level of availability of a gold coin (supply) works with the popularity of the gold coin (demand) to influence the price that the coin can be sold at in the same market, even though the coin may have the same amount of gold in them.
In the gold industry, you may hear people speaking about the gold spot price. This term is a fancy way of speaking about the price of gold in the present time, opposed to speaking about gold prices sometime in the future.
The gold spot price can refer to the price of gold per:
The most common way to refer to spot gold is per ounce while using U.S. Dollars. Though, quotes can use other currencies as well. When comparing the spot gold price, it is important to ensure that both the currencies as measurement are the same.
There are a lot of factors that may affect the spot price of gold, though the simplest answer comes back to supply and demand within the gold industry.
As an example, let’s use a hypothetical scenario about the demand of gold bars.
If there are a lot of investors that are purchasing gold bars, then gold dealers will raise the pricing of gold bars as a result. This will raise the spot gold price of gold bars, though prices within the gold industry tend to fluctuate so the price of gold bars will not stay high.
On the other hand, if there are not a lot of people that are interested in purchasing gold bars, then gold dealers will be forced to lower the prices of gold bars to increase their sales. This will lower the spot price of gold bars, but again prices within the gold industry fluctuate. The prices of gold bars will not stay low.
For most investors, bullion coins are the best type of gold to invest in. Bullion coins are easy to recognize, easy to trade, and typically sell at higher premium rates than gold bars do. Gold coins tend to have lower costs which may be beneficial to people beginning their gold investments.
If you are trying to invest on a budget, or just getting into gold investing, gold coins are a better option compared to gold bars.
In short the answer is yes. A popular, or recognized, mint is identified by the precious metal market for their desirability, purity, and validity. Buying gold from a recognized mint will come with the perks of an easy liquidation process, and higher resale values.
Popular Mints include:
Coins and bars do not have a face value or a numismatic value. Gold and silver are purely worth their weight in gold and silver. In most cases, bars do not have dates, but instead have serial numbers. Despite this, mints rarely track where their bars are sold.
The premium on coins is usually higher than that on bars, but they also have a higher resale value. A coin has a face value (e.g., a $50 gold maple). Most coins have a date on them, identifying the year they were minted. However, they are also often desired by collectors who want to buy bullion as a gift for birthdays or anniversaries.
Precious metals should be a part of every investor’s portfolio. With the uncertainty in today's global economy, it has never been more important to diversify and incorporate the safety of physical precious metals into your investment strategy.