Written by Bron Suchecki, Vice President, Operations Monetary Metals LLC and Company Secretary, Gold Industry Group
The most common question first time gold buyers ask is whether they should buy a coin or bar. However, there are a wide range of options beyond just coins and bars, and the key options are discussed below.
Included in this are futures contracts, options, contracts for difference and FX trading platforms. Trading costs for these are very low but they are risky due to the leverage which can magnify losses, as well as the fact that you have exposure to the company offering the contract.
Exchange traded funds (ETF)
There are three main ETFs on the ASX: GOLD, PMGOLD and QUA. They vary in management fees and buy/sell spreads, and QUA is hedged against the AUD/USD exchange rate. One key benefit is that you can trade them through a stockbroker alongside your other equity investments, making it a convenient option.
Major bullion dealers offer online accounts and they can be cost effective because you do not have to get your gold back to the dealer, so can trade quickly. They often have much wider trading hours (ETFs only trade during ASX hours), so you can benefit from big price moves during overseas trading hours.
Most dealers offer two types of accounts. Unallocated or pool accounts are ounce based balances and should be backed by gold held in bulk by the dealer (check the fine print to make sure the gold isn’t on the balance sheet of the dealer, as they you will get caught up in any bankruptcy). If you want peace of mind, then go with allocated, where specific bars or coins are set aside under a custodial arrangement.
Cast bars refers to gold poured into a mould, which results in a distinctive round-edged look. It is often the cheapest form of gold, but to ensure a good resale price, make sure that you are buying a brand that is well accepted in the market – Perth Mint and ABC Bullion are the most common in Australia.
Minted bars can be considered a half-way between cast bars and coins. Often not made to a higher standard of finish, they can be cheaper than coins; but the stamped finish and secure sealed packaging can make them easier to trade with other investors.
While most people refer to any round stamped blob of gold as a coin, technically “coin” means government issued legal tender. Commonly known as “rounds”, these are issued by private mints and have become more popular in recent years with dealers importing all types of designs. Not being official coins, the pricing can be cheaper, as long as you aren’t buying the more collectible versions, but make sure that the brand/manufacturer is accepted, or that the dealer guarantees to buy them back.
Coins (legal tender)
Many investors prefer government issued coins as the government stands behind the purity and weight. Australian legal tender bullion coins are made by the Perth Mint and Royal Australian Mint, but coins from other countries, like the Canadian Maple Leaf, can also be found at some dealers.
Factors to Consider
Unless you are buying an ETF or unallocated/pool, the size of the physical coin/bar is important to consider. The larger the size, the cheaper (on a per ounce basis) the item is, because the cost of pouring/stamping 1oz is pretty much the same as stamping 100oz. However, if you want to accumulate (average in) over time or sell back in smaller lots, then buying smaller sizes gives you some flexibility.
It is also important to look beyond the immediate cost of buying and think ahead to when you will be selling. There may be a great deal on a privately issued round, but if it is too obscure you may find that there isn’t interest in that round when you come to sell and the buyback price is low.
You should also consider that sellers can play games with pricing. For example, quoting a very low spot price for gold but then they have a very high coin premium (or vice versa). The only way to cut through this is to ask what the seller’s buyback price is at the time you are purchasing. The total difference in selling and buyback prices (the buy/sell spread) is a way to directly compare different types of gold products and cut through creative marketing.
A good way to approach the decision between all of the options above is to think about why you are buying gold (see Gold Investor Series: 4 "whys" driving precious metal investors), as well as what storage option you are comfortable with (see Buying Gold: Where to store). Some suggestions for the four types can be found below.
The most important thing for speculators is costs, as in minimising them. Unless you are trading overseas futures contracts or leveraged online FX platforms, the options for less aggressive speculators are either ETFs or bullion dealer unallocated/pool accounts.
Transaction costs matter to investors, so ETFs and unallocated or pool accounts are common choices; but if you are risk adverse, then go for large cast bars in allocated storage.
Insurance buyers are more concerned about avoiding risk, so medium sized bars or 1 ounce coins stored at home or in non-bank safety deposit boxes is often preferred. Allocated accounts with reputable business may also be considered, including storage offshore in a country relatively close.
As the EOTWAWKI buyer is planning on using gold coins as money to facilitate barter type transactions or to buy essentials, usually the preference is for 1 ounce gold and silver coins with storage at home and often including backyard burying or other hidey-holes.