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In a normal market, we’d recommend constructing a gold portfolio mainly consisting of gold coins. In particular the most liquid well-known coins such as Sovereigns and Krugerrands.
However, the gold market has recently exploded on the back of the US rating downgrade.
This has caused demand for gold to hit the roof, especially for sought after coins. Supply of these coins has obviously taken a hit, leading to modest delays for gold coins, increased premiums or having to consider alternatives such as gold bars.
So are you compromising your portfolio by buying gold bars, or should you wait or pay extra for coins
The simple answer is – if you can buy gold coins at reasonable prices now – then do it.
However, in reality with so many people desiring these coins, something has to give. If you have a modest amount of money to invest, I’d say you should persist with gold coins. It may be worth waiting a week or two for delivery or paying a higher premium to secure the right gold coins. Very simply, small gold bars just don’t offer great value as you’re generally able to buy a well-known coin such as a Krugerrand for the same price.
If you’re investing a substantial sum into gold, then gold bars do represent a valuable option. Once you start to increase the size of gold bar the premium on the gold falls. So using a 1KG bar for example, as part of a portfolio can reduce your overall cost, thus increasing the amount of gold you get for your money. They also add variety to your portfolio which is always a good thing.
The negatives are that you lose some flexibility as you cannot cut the bar in half if you need to realise some profits. But if the bar makes up part of a larger portfolio including coins, you will still have some versatility. In addition, the bar is not Capital Gains Tax free like the UK coins, but this may be more important to some investors than others.
So the answer to whether gold bars are a good option is – maybe! It will depend on the individual’s circumstances and the market at the time. I can only see premiums on Sovereigns, Britannias, Krugerrands and the other major bullion coins increasing temporarily while we’re in this supply squeeze. Is 3% extra premium worth paying to obtain top grade coins Probably. Is 10% extra premium worth paying Maybe not.
I guess, only time will tell, and the supply-demand dynamics of the gold market will no doubt find the equilibrium pricing point. In the meantime, if you’re thinking of gold investment don’t wait too long as the price is going up and supply down!
Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.