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Which Form of Physical Gold Is Best to Invest?

By Ed Moy, MoneyNews.com

Depending on your investment goals, there are many forms of physical gold available, each with their own pros and cons.

The most common form is jewelry. That is because the two largest purchasers of gold in the world are India and China, and individual investors there have three preferences that drive those markets.

First, they want to pay as little of a markup as possible over the price of gold. Second, they want the gold to be easily portable. Third, they want to show it off.

Jewelry meets these three preferences the best. However, the risks are potentially buying poor quality or even fake gold and jewelry is not as liquid as are some other forms of gold.

The cheapest form is ingots and bars. While used interchangeably, bars are usually larger, while ingots are smaller. Because their manufacturing costs are minimal, they are the cheapest to buy. Private sector gold companies dominate this market, because few government mints make them (mints were created to make coins). Bars are very popular with large individual investors and institutional investors who do not want the hassle of storing 400 1-ounce coins when they could own a 400-ounce bar. As with jewelry, there is the risk of buying poor quality or even fake gold. Further, when it is bought and sold, the buyer usually insists on each bar being assayed to determine its purity and weight.

The world standard among investors is government-made bullion coins. These bullion coins are produced for the sole purpose of providing investors with security and confidence of the official standards and specifications of a government treasury. In addition, each government guarantees the weight, content and purity of each coin it makes. Even the design for each type of coin is standardized, making the bullion coins easily recognizable among investors. Because of the government guarantees and standards, there is a ready market for buying and selling, and therefore these bullion coins offer the greatest liquidity. Their disadvantage is that it costs more to manufacture a coin with these high standards, but that premium is generally accepted in the pricing of the coin as it is bought and sold.

The modern bullion coin started with South Africa’s Krugerrand in 1967. It is a 22 karat gold coin that contains exactly 1 ounce of gold plus a little alloy to make the coin harder. Among other 22 karat gold bullion coins, there is the English Sovereign but the U.S Mint American Eagle reigns supreme. Because 22 karat gold bullion coins have been around longer, they dominate the market.

Today, there is great interest in the 24 karat gold bullion coin. While containing exactly 1 ounce of gold, it weighs less than a 22 karat coin because it does not have the addition of alloys. Modern manufacturing methods, better engineering and design result in a pure gold coin that is just as durable as a 22 karat coin. The world’s best sellers are the American Buffalo, Australian Golden Nugget, Austrian Philharmoniker, Canadian Maple Leaf, Chinese Panda, English Britannia and the Mexican Liebertad.

As the director of the United States Mint from 2006 to 2011, I oversaw the increase in demand of American gold bullion coins by investors during the financial crisis. The number of new American Eagle gold bullions coins sold skyrocketed from 198,500 ounces in 2007 to 860,500 ounces in 2008 to 1,435,000 ounces in 2009. ‘

Since 2010, the number of ounces sold has gradually come down to 856,500 ounces in 2013. Note that all this was new supply to supplement all the gold bullion already in the market. New gold bullion sales have slid as the global economy has gotten better from the depths of the financial crisis, but they are still robust considering what the steady state was prior to the crisis.

When buying physical gold, an investor has many choices. The best form depends on what the investor’s goals are. But for many investors, government-made gold bullion coins are the world standard.

This piece was originally published at MoneyNews.com.

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