In our series of how to buy gold and silver, we are entering a very interesting debate when we look at Gold Bars vs Gold Coins.
Currently, we are spoilt for choice because both bars and coins are widely available at low prices in terms of the real dollar value after adjusting it for inflation. Our decisions will become harder down the road when the price of these precious metals have shot up beyond the average Joe’s means. Once that happens you have to take what you can get. Fortunately, we are not in that precarious situation yet.
Your conclusion of whether you should buy gold bars or gold coins is obvious after you have considered a few questions and answered it based on your own unique circumstances and preferences.
The decision process of buying gold bars or coins is the same as buying a motor vehicle
I compare the decision of gold bars vs gold coins to the same decision as when you are buying a motor vehicle.
- You need transportation – You need to buy gold to preserve and enhance your wealth and diversify.
- What you decide to buy, depends on your unique circumstances, like the roads that you ride on. You might have to buy a 4×4 vehicle to withstand the dirt roads. – Like buying a gold cast bar that doesn’t look pretty, it is rough around the edges but you can buy bulk quantities at low premiums over the spot rate.
- The purpose of the vehicle. Is it a minibus, a pick-up truck or a single-seater vehicle? – Gold coins can be divided into smaller pieces from a 5 Ounce Coin to 1/10th of an ounce coin. Bars are even manufactured in monster sizes of over 400 ounces. These bars are good for big deals, storage in bulk and not ideal for dividing it into smaller dimensions.
- What color car do you like? – Do you prefer gold coins with beautiful designs that are double struck and polished into proofs or a simple rectangular minted gold bar? When it comes to beauty you have different choices.
- What are the safety features of the car? Some cars have added safety features taking additional measures in protecting the passengers. – Gold bars and gold coins have different security features and require different methods of testing their authenticity.
Coins may have more visible features embedded whilst bars require weighing & measuring, magnetic, conductivity and ultrasound testing. Protective castings may prevent certain counterfeit testings to be performed.
- What is your budget when buying the car? – If you can and want to stack up large volumes of gold, which will require a vast amount of money, bars would be the answer.
If you can only afford to buy small quantities at a time, coins might be better.
- What is your car’s resale value? Some cars have added features, it cost more to manufacture which adds to the price of the vehicle. – Gold coins have added features of design, manufacturing process and post-manufacturing requirements that take more labor and capital compared to producing gold bars.
- And so on…
So, while there are these differences in gold bars and gold coins, one constant remains and that is that gold which is the main ingredient which is regarded as being valuable.
Why is gold valuable?
Whether you are buying bars or coins, both capture the value of gold as its main or only ingredient in the final product. The value of gold is driven by supply and demand. The inherent characteristics of gold make it desirable and drive the demand for it making it valuable.
These characteristics are:
- Scarcity: Gold and silver are only found in limited quantities.
Many years ago humans stumbled upon gold by accident from pure luck, it was gathered from water streams as miners sought through millions of pieces of rocks to find it.
Through the development of technology, gold could be easier detected and extracted from the earth. One thing remains constant, it requires many man-hours and now machinery investment to find and bring gold into the final product in pure form.
Gold takes up all that human labor and capital costs required to bring it into its physical form and preserves it over time.
- Durability: Precious metals have the ability to last for thousands of years without losing their physical properties even if exposed under the most severe conditions.
- Stability: Gold and silver do not change their form over time. In a volatile ever-changing world, something that remains constant over time is hard to find. When you find stability within the most rapid turmoils, most people would like to keep it.
- Beauty and feel: The physical properties of gold are mesmerizing. In history, wars have been fought over gold. Kings have paraded their gold to display its beauty. Churches have been decorated. Love, trust and companionship have been sealed with gold jewelry.
Gold can be produced in different forms as bars or coins to fulfill people’s different needs. There are certain factors that play a role in determining the value attached to gold bars and gold coins.
A cast gold bar requires the least amount of labour and costs as the melted gold liquid can be poured into a mold and once it has cooled down, it can be easily removed from its casting and be packed and delivered to the buyer. The process is simple and cheap resulting in the lowest premium over the spot price.
To produce a coin there is an element of artistry involved requiring workmanship to design the observe and the reverse of the coin. These artists need to be paid.
Special dies have to be build and great care has to be taken to produce the artist’s impression on these dies. The die manufacturers have to be paid. Sometimes mistakes happen with the dies that mint coins with errors on like typos, portraits facing the wrong way, stamped skewed or the wrong year on the coin. These faults make the coins rare in a way and can be valued higher than normal coins.
Even before the coins are struck the gold is cut into precise shapes and lengths and undergoes further processes and finishes.
Each coin is individually struck, cleaned and encased in protective castings. More money needs to be paid to carry the labour cost of striking and finishing coins into the final packaged product. Adding costs of handling and special storage of the coins up to delivery to the customers.
The stark difference between the process of manufacturing bars vs coins is crystal clear. With gold bars the value is mostly derived from the pure metal content. With gold coins there is added costs from the complex process of creating the product to its final glorified state. When buying a bullion coin you buy much more than just the metal content.
Date markings and the effect on the price
A limited quantity of Gold Coins is struck each year by the mints. The coins are marked with the year issued. In the future coins with that particular year issued with the year’s design will not be released. In the following year, new coins are issued with the new dates. A limit on the annual quantity increases the scarcity of a particular coin and drives the price upwards.
In contrast, gold bars do not have a year issued and there is no reference to the year that the bars are issued. It makes no difference to the buyer of gold bars as to when the bar was manufactured. The product’s properties remain the same. There is less emphasis on the limited quantity of a bar and as a result, the premium price for gold bars is lower than that of gold coins.
Different sizes, different price per ounce
The economy of scale plays an important role in the manufacturing of gold bars and gold coins. It is cheaper to produce One kg bar than it is to produce Ten 100 gram bars. You can just imagine you need one mold and it is poured once vs needing 10 molds that need to be poured, removed and packed. The larger the product, the cheaper the price per ounce.
Now compare a single ounce gold coin with a one-kilogram gold bar. One kilogram bar of gold is equal to 32.15 troy ounces of gold. Imagine the difference in manufacturing costs between 32 precisely created 1 oz gold coins with a one-kilogram gold bar. Per ounce, the one-kilogram gold bar is much cheaper to produce than 32 gold coins.
Your budget is one of the most deciding factors when it comes to buying gold bars vs gold coins. Per ounce, a gold coin is more expensive than a gold bar but a gold coin is generally smaller. Large gold coins that are issued in 10 ounces and higher like the coins issued by the Perth Mint are extremely difficult to handle and stack.
The most popular are the 1 oz gold coins. A one ounce gold coin cost less than a 100 gram or kilo gold bar. It is also easy to gauge its price as the gold spot price is mostly quoted in an ounce.
Premium above the gold spot price
When comparing gold bars and gold coins you must consider the premium above the gold spot price that you pay.
The larger the weight of the gold product the lower the premium above the gold spot price.
The more complex the production process the larger the premium over the gold spot price.
Optimal future liquidity
It is not only the current situation in the buying process that is important. Your future liquidity needs also need to be considered. If this is ignored you can lose a great deal on your gold profit.
Well, if you buy a one-kilogram bar of gold, you can only sell again a one kilogram bar. You can find yourself in the future only wanting or needing to sell half a kilo of gold or fewer fractions. By selling a kilogram of gold and then buying half a kilo it will cost you more because you have paid a premium twice on the same product.
A person in that scenario should rather have bought 2×500 gram bars of gold or 1×500 gram and 5×100 grams of gold. This person is then able to sell only 100 gram when needed. Paying a premium over the spot price only once.
Gold Bars vs Gold Coins, there is no clear cut answer and no one right answer for all. For me, the bottom line is that both retain their value over long periods of time. We understand that producing coins is more complex and hence more expensive than gold bars. Gold coins have added beauty features and are issued in limited quantities making them more valuable. Gold bars in their simplest form are ideal for people who are only interested in collecting gold weight.
It is not only the buying process that is important but also the possibility of the partial resale of your gold. In our current economic circumstances of low returns on other asset classes and an explosion in fiat currency creation, it is exciting to take a position with gold in any format that you choose.