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Thursday, November 13, 2008

What is investment gold?

For the purpose of the new VAT exemption, investment gold is defined as:
  1. Gold of a purity not less than 995 thousandths that is in the form of a bar, or a wafer, of a weight accepted by the bullion markets;
  2. A gold coin minted after 1800 that-is of a purity of not less than 900 thousandths, is, or has been, legal tender in its country of origin, and is of a description of coin that is normally sold at a price that does not exceed 180% of the open market value of the gold contained in the coin; or
  3. A gold coin of a description specified in Notice 701/21A Investment gold coins.
Gold Investment Advice
We try to keep our investment advice very simple.
We cannot predict with any certainty what gold or any other commodity or currency will do over short, medium or long periods of time. Because of this we tend to avoid giving any definite advice or strong opinion. There are some areas where we have considerable experience, and feel we can safely give advice. Some of it may appear obvious, but it is surprising how often we find ourselves repeating it.

Buy in the Cheapest Form
This is one of the most obvious pieces of advice we give. But we usually add "within reason". Generally the cheapest ways to buy gold are bars, krugerrands or sovereigns. Of these three options, gold bars can usually be bought for the lowest percentage premium over gold, followed by krugerrands then gold sovereigns. Most other gold coins are more expensive, and therefore better avoided, at least by serious gold investors. You might think therefore that we would advise gold bars, krugerrands and gold sovereigns as the best gold investments, in that order. We believe however, that sovereigns are worth paying a slight extra premium for, because of their smaller size, and the historic and aesthetic values which you get for next to nothing. Our advice will change with changes in the market, but generally we believe the most effective ways of investing in physical gold are as follows:-

* Gold Sovereigns
Sovereigns are a smaller, more attractive, more historic, and probably better known coin than krugerrands, therefore we believe it is worth paying a slight extra premium over and above krugerrands, to buy sovereigns. If you can buy sovereigns for about 2% differential above krugerrands, we believe this makes them a better long term buy. Currently for investors buying at least 50 sovereigns, the differential above krugerrands is under 2%, sometimes as low as 1%, and this makes them our first choice. Naturally this is slightly subjective, and reflects our personal opinion. Consider though that if you were to buy sovereigns at our 100 piece rate, you could resell them singly at 10% profit, and be very competitively priced. You could not make the same claim for krugerrands.
Sovereigns also have the advantage of being exempt from C.G.T. (Capital Gains Tax) in the UK.

* Krugerrands
Krugerrands are the best known of all the modern one ounce gold bullion coin. They are available in greater quantities, and they can generally be bought at lower prices than any other one ounce bullion coins. This fact alone makes them the only 1 ounce bullion coin worth considering. True they are not particularly attractive, and don't possess much in the way of historical interest, but their production quality is consistently high, and they are a very cost effective way for small investors to buy gold. They are also easy to compare prices of, as they contain exactly one ounce of fine gold.

* Gold Bars
Although at a quick look, gold bars may seem the cheapest way to invest on physical gold, there are some points worth noting, and some drawbacks.
Our price for a single one ounce bar is usually exactly the same as for a single one ounce Krugerrand. Buy two Krugers though, and our quantity price breaks make krugerrands cheaper, and therefore a better buy. Also while it is true that larger bars, such as one kilo sell for a lower percentage premium than krugerrands, they are not as easy to resell. Only a specialist gold dealer is likely to give you a good purchase price for gold bars, and then often with less enthusiasm than for krugerrands, sovereigns, or other highly marketable coins. This restricts your choice of buyer, and most dealers would expect to pay slightly less for gold bars than for coins, expressed as a percentage of their intrinsic gold value.
If you buy large bars such as one kilo, it is not very convenient if you decide to sell a portion of it!
For very large investors, it may be worth considering London Good Delivery Bars, but the first thing to note about these is that, although they are usually quoted as being 400 ounce, or 12.5 kilo, bars, there is a large tolerance in their permissible weight range, from 350 to 430 ounces. There is also most tolerance allowed in their purity, the minimum being .995 or 99.5% pure. Most "small" bars are .9999 purity or 99.99%. Because of these factors, 400 ounce bars are usually only traded between governments, central banks, and major bullion banks, and other professionals.

Buy at Low Prices
It makes sense to buy gold when its price is low rather than high. Many people are tempted to buy gold when they hear that the price has risen. Although this can be the right action if the price continues to rise, it is often better to buy after the price has fallen. Conversely, if you believe that the time is right to buy, then don't wait and try to buy it at the absolute bottom, you are very unlikely to get it precisely right. We have heard it said many times that if you can buy within 10% of the bottom and sell within 10% of the top, you would be a very successful and happy investor indeed.

Compare Percentages not Prices
When trying to compare different forms of gold, compare the percentage over the gold price for each option. We call this the percentage premium, or just premium. Because the actual prices fluctuate constantly along with the underlying gold price, simply look at the price as a percentage of, or above the gold content.