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Thursday, November 13, 2008

Lower Gold Price = Buying Opportunity

Our Opinion
We don't tend to hype the future gold price as do many other gold dealers, partly because it is often difficult to make any predictions. We explain this in our other gold price page which you should read first.

Update as at 7th March 2002
Gold prices and demand recently made a few strong upward surges, mainly sparked by the Japanese Government announcement that they were to reduce or withdraw guarantees to Japanese bank depositors. This caused strong demand in Japan, which we expect to continue.

A Lull
In the past few days, gold prices have been slightly lower. We believe this creates a good buying opportunity for those looking to invest in gold. Many investors wait for prices to start rising before they buy. We believe this is an error, and that it is better to buy when prices have recently softened.

In General
Although this page ws originally written at the time of a specific brief dip in gold prices, the advice we give is good general advice at all times. It is better to buy when prices are lower than when they are higher. It just seems so obvious, that we don't find ourselves saying it often enough.

Gold Bars or Gold Coins?
Which is the better way to invest in gold?
On this page we will assume that we are considering the options for a larger investor, although smaller investors will benefit by reading our advice also.

Gold Bars
For the serious and large scale investor, gold bars are a simple and efficient way to invest in gold. The larger bars are usually available at the lowest premiums over their intrinsic gold value, smaller bars tend to cost more. There is a trade-off however, in that larger bars are not as flexible when it comes to selling. If you own a kilo bar, and you wish to sell, say 100 grams, it's not easy to slice off one end of your bar. Your choice of buyer is also more restricted as you will need to sell to a larger dealer, it is unlikely that you will find a private buyer as most people are not familiar with gold bullion bars.

Gold Coins
It is sensible to consider modern one ounce gold bullion coins as being one ounce circular bullion bars, guaranteed by a government rather than a refiner.
Because coins are mass produced, and very efficiently so, they are available at very competitive prices compared with similar size bars.
Because gold coins are almost universally recognised, they are also easy to resell.

Changing Premiums
By "premium", we mean the percentage over and above the current gold value at which an item trades.
In the past (the 1960's), we have seen the premium on gold sovereigns as high as 40%. The exact prices and premiums depend on the market factors at the time, and can change from day to day or hour to hour. It is more likely for us to pay a premium for "older" gold coins such as sovereigns than "modern" coins such as Krugerrands.
For large purchases, typically 100 or more Krugerrands or 1,000 sovereigns, the premiums can be very close to those on gold bars. Small changes in percentages can make sovereigns, Krugerrands or bars more or less attractive. These changes are the result of changes in supply and demand.

Resale Considerations
It's very simple to look only at the percentage premiums when buying. In this case, most people would conclude that kilo bars were the "best buy", but this ignores the strong possibility that coins, particularly the older types, can be resold at premium prices, and can often be resold privately to collectors.
In the last quarter of 1999, we were paying about 10% premium for sovereigns, and about 4% premium for Krugerrands. Although our buying prices often represent a small discount to the current gold price, at times we do pay a premium for almost all types of coin. More dealers, jewellers or individuals worldwide would recognise and buy coins than bars.

Older Traditional Coins versus One Ounce Bullion Coins
It's also worth considering whether to opt for modern one ounce bullion coins such as Krugerrands, or older traditional bullion coins such as British sovereigns, Swiss francs, etc. For smaller quantities, these older coins will usually cost more than the one ounce coins, but for larger quantities, the premiums can often be comparable with Krugerrands or bars. Much depends on current market conditions, but any time that these older coins can be bought for similar premiums or only slighter higher, then they are worth considering.
Please see our Older Bullion Coins page for more information.

Our Recommendation
It's a slightly personal view, but we believe that if you can buy British gold sovereigns at around 1% or 2% above the premium on Krugerrands or gold bars, the we would prefer sovereigns. We also think that one ounce coins such as Krugerrands are a better buy than gold bars. Other one ounce coins are worth thinking about, but as Krugers are normally the lowest price, then Krugers automatically win.