Differences Between Buying Gold Bars And Gold Coins
Should gold bugs invest in buying gold bars or coins? There are some differences between both of these gold investments. Analysts see bars as the real wealth preservers due to their higher gold quantity and cost-effectiveness when purchased in bulk. On the other hand, coins are collectors’ items deriving their value from rarity and condition.
The legendary JP Morgan once said, “Gold is money; everything else is credit.” Die-hard gold bugs continually advocate for the physical ownership of gold, strongly disliking the other digital means such as derivatives and certificates where one doesn’t necessarily have any claim over the precious metal.
Jewelry is the most popular form of physical gold that comes to mind but is undoubtedly the least valuable. Thus, the question then becomes which is the most valuable piece of gold to own and why. Despite the various options available, many analysts generally agree that gold in coin and bullion form is the truest definition of ‘owning physical gold.’
Whether it is an investment, a wealth preserver, or a hedge against a rare hyperinflation event, there are some critical and interesting distinctions between owning gold bars and coins, which this article will explore.
Why physical gold?
It is a known fact central banks globally are massive hoarders of gold, adding hundreds of tonnes in their reserves yearly even after the end of the gold standard in 1971. Unsurprisingly, the US Federal Reserve is the largest collector of precious metals with an estimated 8,100 metric tons at the time of writing.
If accounting for the current gold spot price (as of 19 February 2020) of $1,775 per ounce, the value of this gold alone is worth at least $462 billion. Many may not understand the purposes of owning physical gold when there are cost considerations for storage and insurance.
Gold fans believe if central banks and governments are still buying gold, there must be a reason why. There is a profit potential of owning this precious metal though this is usually the by-product rather than the end goal.
The ‘safe haven’
Investors see gold as the unassuming ‘safe haven’ investment during periods of uncertainty and market volatility. It is a vehicle for which to preserve wealth and purchasing power in times of inflation. Several people are losing faith in the buying power of their native currencies due to the various and somewhat unfavorable monetary practices of central banks or governments.
Though there are many more accessible and non-physical investments, they are mostly still tied in some way to a nation’s legal tender. Gold maintains no liability and has no relationship with any currency.
Main differences between gold bars and coins
Gold bars and coins are very similar yet also possess some notable distinctions. We commonly refer to gold bars and coins as bullion.
A gold bar or ingot is a specially-minted or crafted piece of raw gold with a near 100% purity (with the rest being either alloy, silver, or copper) and weight typically starting from 5g.
Bullion manufacturers and gold mints residing in gold-producing countries like Australia, America, and South Africa create gold bars. For proving ownership, they provide certificates of authentication. Anyone can own a gold bar, which contains an engraving of the manufacturer’s name, weight, and purity, though not every country has a native mint to make them.
For centuries, the purpose of these bars has always been for wealth preservation, with governments, central banks, companies, and private investors alike still buying them. Hence, the reason why the gold purity is so high.
In contrast, most gold coins usually contain a gold purity of about 90 to 92%, with the rest being other metals like silver, copper, and bronze. They are generally tinier than bars. Before the switch towards fiat currencies, many places used gold coins as legal tender or ordinary money, a practice that is virtually defunct nowadays.
These coins are now mainly commemorative memorabilia and collectors’ items to investors and hoarders. Some of the in-demand gold coins include the likes of the South African Krugerrand, American Eagle, the Kangaroo (or Australian Gold Nugget), the Canadian Maple Leaf, French Napoleon, etc.
Should you buy gold bars or coins?
There are several things to consider between gold bars and coins.
Cost and value factor
Suppose we observe the costs between buying gold bars or coins, the former triumphs. We have to appreciate the additional costs dealers incur from manufacturing, handling, insuring, and delivering the metal.
Thus, a gold buyer will very often pay slightly above the gold spot price to factor in these costs. Gold of bar form in a larger quantity is cheaper to purchase than in smaller sizes due to lower manufacturing costs in the unit price, meaning that bars are more cost-effective than coins.
In other words, it is cheaper to make one full 2 kg bar of gold than making 20 separate 100g ones. Furthermore, coins can cost more than buying a gold bar of the same gold quantity since the former is a collector’s item and derives much of its value from condition and rarity (historical value, unique designs, and so on).
In contrast, bars get their value mainly from their weight and gold purity (excluding additional costs).
Bars will naturally be heavier, necessitating them being professionally stored in locations away from their owners’ homes, bearing even more costs. Coins, on the other hand, are much more portable, although it doesn’t necessarily mean that proper storage and insurance are unnecessary.
Generally, most investors buying gold bars seek to preserve their wealth and keep the precious metal for the long-term without any rush to sell. On the other hand, gold coins, due to their significantly more diminutive size, are much easier to trade during a financial crisis and require smaller storage, making them far more liquid.
Gold coins also tend to be more collectible. If an investor intends to be flexible with their gold and perhaps sell a portion later if necessary, they may place more emphasis on coins (the opposite is true for those who don’t believe there’ll be an immediate need to sell).
The intention behind the purchase will inform whether an investor emphasizes mostly on coins or bars.
While bars contain a higher level of gold purity, they can be more cumbersome to transport & store and more challenging to trade due to lower liquidity. However, they are more valuable and cheaper to purchase compared to coins, especially in larger quantities.
Hence, for these reasons, analysts consider them suitable for long-term investing and wealth preservation. Coins, while more expensive at face value, are ideal for investors not looking to tie up their investment in gold for very long. The portability of coins suits this purpose, enabling a bigger and more liquid market for trade for those looking to sell quickly.
Overall, we should appreciate coins and bars serve different functions and are equally risky for anyone considering buying gold.