The Precious Metal Market: The Attractions Of Bullion Coins?

Michael B. Clark - Fri 24 Aug, 2007

The precious metals markets have been on a tear. In fact, precious metals have been the top performing asset class in recent years and with this trend looking likely to continue, many investors want exposure to these markets. But how does one go about making a precious metal investment that safely affords the investor with such exposure?...Here we discuss what is perhaps the easiest and most convenient way for individuals to acquire and directly own physical gold, silver, and platinum by investing in precious metal products known as Bullion Coins...

The precious metals markets have been on a tear. In
fact, precious metals have been the top performing
asset class in recent years and with this trend looking
likely to continue, many investors want exposure to
these markets. But how does one go about making a
precious metal investment that safely affords the
investor with such exposure?

To be sure, there are numerous precious metal
investment vehicles available to the individual
investor today – including futures and options
contracts, government certificates, digital gold,
exchange traded funds (ETFs), mutual funds, mining
shares, as well as direct ownership of physical bullion
itself. All enable an investor to add a precious
metals component to his/her investment portfolio and
participate in what is likely to become another multi-
year secular market.

However, each of these vehicles is unique in its nature
and complexity, and investing in them requires a
specific understanding of their individual
advantages/disadvantages and risks/rewards. Here we
discuss what is perhaps the easiest and most convenient
way for individuals to acquire and directly own
physical gold, silver, and platinum– by investing in
precious metal products known as Bullion Coins.

Bullion coins are highly refined precious metal
products that are round in shape (as opposed the
rectangular shape of a bullion bar), and produced to
exacting specifications by numerous federal governments
throughout the world specifically for investment
purposes. These coins are produced in large quantities
and come in a variety of sizes - typically one, one-
half, one-quarter, and one-tenth troy ounces. Their
content – that is, the weight and purity of precious
metal they contain - are guaranteed by the governments
that produce them. Also, they are ascribed legal tender
status in their country of origin, but are actually
valued in the market for their precious metals content.

South Africa introduced the first investment bullion
coin - the gold Krugerrand - in 1970. Since then, many
more countries began to produce their own series of
gold, silver, and even platinum bullion coins,
including the United States (American Eagle), Canada
(Maple Leaf), Australia (Kangaroo), Austria
(Philharmonic) and China (Panda), to name but a few.
For example, the United States Congress directed the
U.S. Mint to produce the American Eagle Gold and Silver
bullion coins in 1986 and later, the American Eagle
Platinum bullion coin, in 1997.

To further understand the nature and function of a
bullion coin, consider this excerpt from the United
States Mint web site:

“A bullion coin is a coin that is
valued by its weight in a specific
precious metal. Unlike commemorative or
numismatic coins valued by limited
mintage, rarity, condition and age,
bullion coins are purchased by investors
seeking a simple and tangible means to
own and invest in the gold, silver, and
platinum markets.”

Bullion coins are referred to as “un-circulated coins,”
because while they are bought and sold in the precious
metals market place on a daily basis, they do so at
values reflecting their precious metals commodity
content. They do not circulate in any of the world’s
national economies, nor are they used as money, or as a
medium of exchange, anywhere in the traditional
commercial sense.

Today, bullion coins are widely traded as a form of
precious metal commodities throughout a world-wide
system of dealers and retailers, and their market
values are globally publicised on a daily basis. Though
ascribed legal tender status by the governments that
mint them, bullion coins trade in the marketplace at a
modest premium above the prevailing value of their
precious metals content, typically 3 - 15%, depending
on the size of the coin. Thus, their actual market
value bears no direct relationship to what a given
coin’s assigned legal tender (or “face value”) may be.

As an example, at the time of this writing, a one-ounce
American Eagle gold bullion coin, which has a U. S.
legal tender value of $50, was trading in the market
place at about $700.00 (USD), while gold itself was
trading at a “spot price” of approximately $665.00
(USD) per ounce. Thus, the price of the 1-ounce gold
Eagle included a $35.00 (USD) premium (5%) above the
prevailing gold bullion price.

It is important to understand that the premium charged
for a bullion coin over the current “spot price” of the
corresponding commodity it contains, reflects the costs
of production, insurance, transportation, handling, and
storage. It also accounts for the manufacturer’s and
the selling dealer’s profit, all of which are
associated with the manufacturing, delivery and sale of
the coin. This premium is not a value ascribed to the
coin as the result of any scarcity or uniqueness
considerations, as is the premium paid for rare coins.
In fact, bullion coins are purposely manufactured in
large volumes by federal governments to specifically
ensure they do not become “rare” or “scarce,” but
remain as common as the many types of bullion bars and
ingots that are also produced by commercial refiners
for investment purposes.

[Note: It is not uncommon for a federal mint to produce
a separate series of specially manufactured, limited
edition un-circulated bullion coins for a given mint
year. These particular coins, known as “proof coins,”
are produced specifically for the coin collector and
hobby markets, as they do often take on rarity
(numismatic) characteristics, as a result of their
limited mintage. Proof coins are a separate category of
the bullion coins discussed in this article.]

Recognising precious metals bullion coins as viable and
widely held investment products in their own right, the
Wall Street Journal and other leading financial news
services publish daily market prices for both bullion
and the most widely traded bullion coins.

To be sure, there are significant advantages for the
investor wanting to own physical precious metals to do
so by buying bullion coins. For example, since they are
produced and guaranteed by federal governments, bullion
coins are universally recognisable by bullion and coin
dealers, and by many banks, throughout the world. Thus,
they are highly liquid and immediately tradable without
the need for a costly and time-consuming assay, as may
be required for bullion bars and ingots.

Moreover, many investors have found that the large
quantity of bullion coins that they may own is directly
divisible, allowing them to readily sell or bequeath
smaller quantities of their precious metals holdings at
various points over time. For example, investors can
easily and directly liquidate or gift some portion of
100 one-ounce pure gold Austrian Philharmonics, in 20-
ounce, 25-ounce, or other desired increment at the time
of their choosing, without any impact on the remaining
Philharmonics in their investment portfolio.
Conversely, if one held a 100-ounce gold bullion bar
instead, its owner would first have to sell the bar and
either convert it to smaller bars (or coins), or sell
it for cash, in order to distribute or liquidate some
smaller portions of it. This is a time-consuming,
costly and inconvenient exercise.

Other advantages to owning bullion coins are that
they are highly portable and are perfectly suitable
for delivery, personal transport and/or storage in a
bank safe deposit box or one’s own personal vault, if
so desired.

Perhaps the only drawback to buying a large number of
bullion coins (400 one-ounce coins, for example) is the
somewhat higher premiums that must be paid when they
are purchased, as compared to the lower premiums paid
for an equivalent amount bought in bullion bar form (a
400-ounce gold bar, for example). However, the
disadvantages of owning the bullion bar, as opposed to
the bullion coins, are many (including its large size,
the requirement for storage, and the need for a costly
assay if personal delivery should be taken.). Besides,
a significant portion of the premium one originally
pays when acquiring bullion coins is re-captured at the
time of their sale.

Without question, if you desire to reap the many
benefits of owning precious metals as a part of your
overall investment portfolio, direct ownership of the
physical commodity through the acquisition of bullion
coins is an excellent choice. But, you should fully
understand and be entirely comfortable with making such
a purchase. To learn more about the advantages of
owning precious metals bullion coins be sure, as with
any investment, to do appropriate due diligence, and
then talk with an experienced and reputable precious
metals bullion dealer before you invest.

Regards,

Michael Clark
For The Daily Reckoning 

Michael B Clark is U.S. Consultant of
Gold and Silver Investments Limited

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