Gold Coin Premiums Explained
Gold coin premiums are the additional costs beyond the intrinsic value of the gold content in a coin.
They are calculated as the difference between the price you pay when you buy gold coins and the current gold spot price. These premiums are essential to understand when investing in gold, as they can significantly influence gold coin prices and your overall return on investment
When considering gold investments, it is crucial to note that premiums vary among different types of coins. Factors such as size of coin, rarity, coin age, supply & demand, manufacturing costs, and legal tender status can all impact the premium you pay.
The gold spot price refers to the current price at which gold can be bought or sold for immediate delivery.It is a crucial factor that influences gold coin prices, as it represents the base value of the gold content within a coin. Gold spot prices are determined by global market forces and can fluctuate throughout the trading day
The premium of a particular coin is then added on top of that spot price as a percentageAs the gold price increases, the cost of the gold content within a coin also rises, leading to higher premiums in real terms as the percentage calculation is based on a higher price. Conversely, when gold prices decrease, the premiums typically follow suit.
As an example, let’s assume the gold spot price is £1,000/oz and we have a 1oz coin which commands a 5% premium. On this basis, the coin would be sold for £1,050, or an actual premium of £50.
If the gold spot price increased to £1,500/oz, that same coin (assuming the % premium hasn’t changed), would sell for £1,575, or a real terms premium of £75.It is essential to monitor gold spot prices when buying gold coins, as they can influence your overall investment and the best gold coins to buy for investment.
In the next sections, we will explore other factors that can impact gold coin premiums, such as manufacturing costs, size of coin, coin rarity, supply and demand, coin age and history, and quantity being traded.By understanding these factors, you can make more informed decisions on how to buy gold coins and buy gold sovereigns, ensuring you choose the right types of gold coins for your investment needs.
Manufacturing costs play a significant role in determining gold coin premiums.
These costs include the expenses associated with producing, packaging, and distributing gold coins. Manufacturing costs can vary based on the complexity of the coin design, the production process, and the mint’s overhead expenses.
Bullion grade and Proof grade gold coins differ in their production quality and design intricacy. Bullion grade coins are produced primarily for their gold content, and benefit from lower manufacturing costs.
Bullion finish coins are struck just once in the die to produce a consistent shiny finish. Their mass-production approach leads to significant economies of scale, reducing manufacturing costs and premiums.
For this reason, they tend to be popular with investors seeking the lowest possible premiums. Proof-grade gold coins, on the other hand, are more expensive to produce and therefore have higher premiums. Unlike bullion coins, proof gold coins are struck twice in the die, producing a more 3-dimensional finish with backgrounds tending to by polished and raised areas in a matt finish.
Proof coins are targeted more at the collectable market rather than at investors and tend to be sold in expensive presentation boxes. They’re minted in far lower numbers than their mass-produced bullion cousins, which again impacts cost.
Higher manufacturing costs for gold bullion coins and proof coins directly impact their premiums. Coins with more complex designs and production processes tend to have higher premiums than those with simpler designs and lower manufacturing costs.
Premiums also tend to vary between the different sizes of coins. Partly linked to the cost of manufacturing, the general rule of thumb is that the premium decreases with size. In other words, investors will pay far higher premiums for tiny coins and lower premiums for 1oz coins. This is down to economies of scale and the relative cost per gram of production.
A great example is to look at gold Britannias. As with all the world’s best known 1oz gold bullion coins, the Britannia was initially launched just in its standard 1 ounce size. Since then, it’s also minted in half oz, quarter oz and tenth oz versions.
Generally it costs the same in time, power and staff to produce a 1oz coin versus a tenth oz coin. Once that ‘manufacturing cost’ is calculated as a percentage of the coin’s value, it becomes clear that the cost of producing tiny coins is far higher per gram of gold than larger coins.
Additionally, it’s not uncommon for various mint’s to further inflate premiums of fractional coins. They know that many buyers are willing to pay extra to either complete a full set of that year’s coin sizes or for the convenience of having smaller gold units to trade.
It can also be argued that the mintage quantities of the standard coin are far higher than the fractional versions, leading to further cost efficiency.
To illustrate the impact of coin size on premium, here are common premiums when buying the various sizes of gold Britannia.
Commemorative or limited issue coins, such as the King Charles III Coronation coin, often have slightly higher premiums due to their limited availability and historical significance.
In contrast, more common coins, like bullion grade gold coins, typically have lower premiums.A great example of relatively recent bullion coins which now trade at inflated premiums are the Royal Mint’s Queen’s Beasts series of gold coins.
When first launched, this collectable set of eleven 1oz gold coins could be picked up at premiums only slightly above those of 1oz Britannias. However, due to their limited issuance of just 6 months per coin, combined with their collectability and popularity, some of the coins are now trading at premiums at least 30% higher.
Historical and rare coins can trade at significantly higher premiums. Old coins not only offer a historical value just like an antique, but due to its age, it’s also possible that far fewer still exist due to many being worn away or melted down over the years.
The Sovereign coin’s long history offers a great insight into how age and rarity impact coin premiums. As a general rule of thumb, the older a coin is, the higher its premium. So recent Elizabeth II (1952 – 2023) and King Charles III Sovereigns will trade at lower premiums than George V coins (1910-1936).
Edward VII Sovereigns (1901-1910) will have slightly higher premiums again and Queen Victoria Gold Sovereigns (1837-1901) will be more expensive still.Within this basic ‘age rule’ particular years of issue may attract far higher trading premiums due to sheer scarcity.
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Market trends and investor interest can also affect gold coin premiums.
When demand for gold coins is high, premiums may increase as a result of limited supply and heightened competition among buyers.
Conversely, when demand is low, premiums may decrease due to an abundance of supply and a lack of buying interest.
Macro economic trends significantly influence demand for gold as an asset class in general. Recent examples are during the Covid pandemic and the 2008 banking crash.
These periods witnessed a huge spike in demand from investors, seeking the relative safe haven of gold to such an extreme, that global mint’s struggled to keep up with demand. Due to the natural dynamics of supply and demand, premiums on many sought-after brand new gold coins increased temporarily.
Similarly, the recent period of high inflation and bank failures has led to very few sellers of second hand coins as most were looking to add gold rather than reduce their exposure.
The usually very liquid second-hand Sovereign market experienced severe shortages of many historical coins as no one was selling. Consequently, the limited number of pre-owned coins available were trading at substantial premiums.
During periods of economic stability, demand for gold tends to be subdued. In these periods, it’s possible that gold dealers will put sales on in an attempt to stoke demand. This offers opportunities to pick up coins at premiums which are lower than their usual level.
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In a similar way to how many products are priced, gold coins are generally offered at quantity discounts.
In other words the premium paid when buying just one Canadian Maple Leaf coin will be higher than for someone purchasing ten of them. Gold dealers will incentivise buyers to buy more by offering clear discounts on a coin’s premium when buying in bulk.
To better understand the variations in gold coin premiums, it’s helpful to compare popular gold coins like the American Gold Eagle, Canadian Maple, and Britannia coins.
The American Gold Eagle is a popular choice for investors due to its recognisability and liquidity. However, it generally carries a higher premium compared to the Canadian Maple, which is known for its high purity and lower manufacturing costs.
The Britannia coin, a UK legal tender coin, offers tax advantages like capital gains tax exemptions, making it an attractive option for British investors.
Britannia coins and Sovereigns tend to have lower premiums in the UK compared to non-UK gold coins due to availability and lower shipping charges.
Investors can monitor gold coin premiums and track changes over time to make informed decisions when buying or selling gold coins.
Online tools and resources, such as gold price comparison websites and financial news outlets, can provide up-to-date information on gold coin premiums.
Additionally, reputable gold dealers often publish gold coin premiums on their websites, making it easier for investors to compare prices.
Keeping a close eye on gold coin premiums can help investors identify trends and potential opportunities in the market.
Selecting the appropriate type and size of gold coins is crucial for a successful investment strategy.Different types of coins, such as gold bullion coins and limited issue gold coins, offer varying benefits to investors.
Gold bullion coins are produced mainly for their gold content and are a popular choice for investors looking to hedge against inflation or diversify their portfolios.
Examples of gold bullion coins include the Canadian Maple, American Gold Eagle, and South African Krugerrand. Limited issue gold coins, on the other hand, often have numismatic value and appeal to collectors, with examples like the King Charles III Coronation coin or rare British gold coins.
Smaller coins such as Sovereigns and fractional gold coins can offer a more flexible option for investors, as they can sell smaller denominations. This can be a wise approach for buyers looking to buy relatively small amounts of gold.
If only buying one ounce of gold for example, purchasing four quarter ounce coins rather than one 1-ounce coin, offers flexibility to sell part of the portfolio when required.
Similarly, investors who believe the financial system could completely collapse, prefer to have the smallest coins possible so they have small units to trade if traditional currencies fail.
In these situations, the higher premiums of smaller coins can perhaps be justified.
For most other investors, the lower premiums associated with larger coins , makes them a more cost-effective option for investors.
It’s usually a prudent approach to buy a majority of a gold investment in larger low premium coins, with a smaller percentage in higher premium smaller coins to achieve a balance.
When selecting gold coins, consider your individual investment goals and risk tolerance.
If your primary objective is wealth preservation or portfolio diversification, gold bullion coins may be more suitable. If you have an interest in numismatics and are willing to accept higher risk, gold investment coins may be a better fit.
Coin collectors are far more willing to pay higher premiums for coins if they are highly-sought, rare or needed to complete a particular collection.
This may or may not prove to be profitable in the future, but many collectors are driven by passion rather than profit. In this case, they may be less sensitive to premiums.
A really smart approach for investors seeking to obtain lower premiums is to buy ‘best value’ gold coins. Many dealers sell best value versions of most of the well-known bullion coins, depending on stock levels.
They’re pre-owned coins which haven’t yet got a historical value. As such, premiums on these coins can be slightly lower than brand new versions, allowing keen investors to build a portfolio based on value.