Do you like generating high returns on precious metals investments? If so, you have probably thought about how to buy gold and silver cheap. Buying precious metals cheap can significantly juice your returns and lower the hurdle rate above which, for example gold, must rise to make you double-digit returns. Time and time again, a question comes to investor and collector minds. Sooner or later we all ask why are gold coins more expensive than bars?
If you are happy with incrementally sub-optimal returns on your investments, you might not get into the finer details. Still, the extra returns over the long-haul can hardly be ignored. For instance, imagine you buy a 100 oz silver bar for $2000. Let's say you saved $100 by buying a bar as opposed to buying silver coins. Now let's say you-reinvested the $100 to buy a 5 oz silver bar. And let's say silver goes up 10% per year, on average, and you hold it for 20 years. First, your $2000 oz bar would turn into $13,455. Second, your $100 bar would turn into $672.75 (an extra 5%).
This article will explore whether or not that really is the case. Answering why are gold coins more expensive than bars should help you make better informed decisions. Ideally, it will help you get the most bullion for your buck. Regardless of whether or not a gold standard returns you will be in a better off position.
Your Return on Investment is a technical measurement of your profit or loss in proportion to your original investment. You would normally express it as a percentage return and use it to help make better financial decisions. One way of doing so is to compare the return on two investment opportunities in front of you.
On our earlier analysis you could make by buying a bar,
(14,127.75 - 2,000)/2,000 = 572.75%).
On the other hand, buying the coins would earn you
(14,127.75 - 2,000)/2,000 = 540.71%.
Given our assumptions, that's a whopping 32.75% difference in your return over a 20 year holding period!
The first opportunity to really maximize gold bar value is when you buy in bulk. The larger the volume of your order, the less work goes into it, per oz. Ergo, the cheaper it will be per oz. Yet, there is so much more to this. In fact, the minting of gold coins is almost always confined to expensive coins not greater than one ounce in size. Buying, for instance, a 10 oz gold bar is just factually cheaper to produce, even before shipping and handling.
Thus, a simple way for small investors to build a voluminous collection of gold is to focus on putting their dollars towards gold, and not premiums. Second, gold bars offer much less collectible value and are therefore more likely to reflect a widely-accepted investment value. The downside is that you are guaranteed almost to no collectible premium hen selling the bar.
So what justifies buying gold coins? First of all, while the premiums are lower on bars, if you happen to really enjoy the look of gold coins, go for it. Likewise, gold coins are much easier to get as fractionals (less than 1 oz of gold). Some investors consider adding these smaller purchases up and exchanging them for a larger gold coin. One pertinent benefit to gold coins is the ability to sell them at the drop of a hat, and at a slightly higher premium than most gold bars.
The main question people ask is do the benefits of buying gold bars always outweigh coins? The truth is that despite bars being a generally preferable investment medium, there are some upsides to coins. Below, I take a look at the pros and cons of coins over bars generally.
1. Coins are More Collectable
This fact encompasses all associated factors with collectability beyond their face value. From rarity, numismatic value, and quality of craftsmanship, to historical importance, current physical condition, unique design, and commemorative value. Moreover, there are psychological appeals to gold coins, having once been used in currency circulation.
2. Easier to Resell (Liquidity).
Many people keep gold coins at home. For them, the convenience of knowing buyers trust a gold maple more than a private mint gold bar is paramount. If you want to cash in on some of your coinage, anyone from a bullion dealer like us to a pawn shop across the street will be able to buy it from you. Heck, even you neighbour might. Still, always remember to do your homework.
3. Supply and Demand.
There is usually a strong demand for coinage that outweighs supply. This has to do with the fact that coins are considered more unique. They tend to be coveted for reasons above-and-beyond a pure investment mindset. This keeps their prices over spot generally well higher than bars.
4. Higher Premiums.
We already looked at how coins usually comes with much higher premium than gold bars. Although dealers always have control over premiums and you might get lucky, coins are just normally more expensive to manufacture than bars. Moreover, the marketplace is and has been okay with this for years. Unfortunlty, there is little that can mitigate higher production, distribution, and selling costs added on by the dealer.
5. Market Pricing.
A gold coin is only worth as much above spot as the person buying it is willing to pay. A dealer with an especially bright rare gold coinage collection might not pay as much for rarer issues. Moreover, if you want to buy a gold maple leaf online you can expect to pay less than in a local store. Furthermore, circulated coin grades are difficult to accurately asses so do plenty of research before buying or selling circulated gold coins.
6. Higher Resale Value.
Gold coins kept in great condition, like most coinage, become slightly more sought after as it ages. One reason is that coins get melted or damaged. This is hardly the case for gold bars, which are worth about exactly the amount of gold they contain.
Answering this fundamental question of approach will help guide you in making gold investment decisions. Gold coins are more expensive for a number of reasons, but because they are easy to sell they make an excellent investment decision.
In an interview with one of the leading experts on silver shorts, GBS talks to Chris Marcus to learn more about the many angles of the silver story everyone has been talking about for several weeks.