Investing in Gold Coins and Rounds
Gold bullion coins and rounds are investment-grade products minted solely for investment purposes. Bullion coins are different from numismatic and commemorative coins:
While commemoratives and numismatics are routinely valued based on their rarity, condition, age, and general desirability to collectors, the value of bullion is driven by their weight and purity, not by any other factors. They are minted simply to give investors a cost-effective way to diversify their investment portfolio to include gold, silver, platinum, and palladium.
The term bullion comes from the French term for boiling, referring to the act of melting down metal to make coins, rounds, and bars.
Because the minting of bullion is carefully controlled, bullion coins, rounds, and bars all hold their value well, and can be quickly traded for very close to the spot price at any time, anywhere in the world. Larger coins tend to attract collectors who are typically willing to pay a premium to the spot price to add coins to their collections.
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Advantages of Gold Bullion Coins
Bullion coins have two major advantages over gold bars:
- They are much easier to transport and store. They are easily “stacked,” and can easily be wrapped in tubes or other protective containers.
- They can be bought at a much more reasonable entry point. At the time of this writing (early May 2020), a 1-kilogram gold bar (ingot)is selling for more than $58,000. A 1-ounce gold bar is selling for more than $1,700, or roughly the current world market spot price for gold.
- By making bullion coins available in smaller dominations, the U.S. mint and other mints are making it possible for ordinary investors to purchase gold without having to write huge checks.
There are many different types of gold bullion coins, available in a variety of sizes and values. You can purchase fractionals, from just a fraction of a gram or ounce, all the way up to a kilogram, which is 32.15 troy ounces. The one-ounce coin is the most popular and has good liquidity, meaning it is easily bought and sold.
The most well-known U.S. Mint bullion coin product is the American Eagle coin, which comes in four sizes:
- one ounce,
- ½ ounce,
- 1/4th ounce,
- 1/10th ounce.
American Eagle Silver, Platinum, Palladium, and American Buffalo Gold Bullion Coins are each available in the one-ounce size.
Larger sizes are popular among collectors, and usually sell at a higher premium to their weight than smaller coins.
Gold coins tend not to be widely circulated as an everyday currency. Gold's nature as a soft metal makes it vulnerable to damage from everyday use. Most investment-grade bullion gold coins are at least 99.5% pure gold, and are too soft to withstand regular use as currency.
Coins that have seen use as an everyday currency among consumers, such as the South African Krugerrand, are frequently cut with an alloy to make them more durable.
Coins vs. Rounds
Coins are legal tender, minted in government facilities. Rounds are manufactured in private mints and do not hold legal tender status. Their weight and purity are well established and generally considered guaranteed. While the spot price for gold overwhelmingly drives the market value for both coins and rounds, coins tend to have higher demand, and buyers frequently pay a small premium to own coins – often 3% to 5% over their spot value.
Rounds, on the other hand, have no guaranteed weight and purity. Their quality is only as good as the manufacturer. Rounds will rarely fetch more than the spot price for their weight in the open market, and sometimes sell at a discount.
Newly-Minted vs. Secondary Market Coins
You can buy coins directly from the mint or manufacturer, or you can buy them via the secondary market. As with many items, brand-new coins and rounds typically sell at a small premium to the spot price.
When buying gold coins from a dealer or any other secondary market source, you should take the condition of the coin into account. Gold is a soft metal and is prone to scuffing and scratching. Severely damaged coins typically sell at 'scrap' gold prices.
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Gold in IRAs
Gold is a popular investment for self-directed IRA investors. Using an IRA to own gold allows investors to trade coins, rounds, and ingots freely without incurring a current-year capital gains tax.
The law prohibits investors from owning certain types of assets within IRAs, including jewelry such as gold necklaces, gems, and collectibles. However, investors in IRAs can own specific gold coins and bullion of sufficient purity.
If you want to hold the gold in your IRA, you cannot buy the gold from or sell the gold to a prohibited counterparty. A prohibited counterparty is defined as:
- your spouse;
- your descendants or ascendants or those of your spouse;
- any advisor who handles your IRA in a fiduciary status;
- any entities (corporations, LLCs, etc.) controlled by any of the above.
Possession and Storage
IRA rules prohibit you from taking personal physical possession of the metal. Instead, you must have a third party custodian hold the gold on your IRA’s behalf. According to IRS Publication 590, "The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian."
Until age 59½, taking personal possession of the gold coins or bullion within your IRA
would constitute a prohibited transaction with yourself, and your IRA could become disallowed. You would have to take a distribution of the entire IRA, triggering taxes and penalties.
Instead, you must have a custodian hold the metal on your IRA’s behalf.
Once you are 59 ½ years old, you will no longer face penalties for taking possession of the gold yourself. But you will still owe any income taxes due on the value of the gold you take out in your distribution (exception: Roth IRA accounts, where you've held the gold for at least five years).
IRA rules also restrict the type of gold you can own within an IRA or other retirement account. Generally, IRA’s must be limited to gold bullion produced by a national mint or an accredited assayer/manufacturer. The bullion must have an established purity of at least 99.5 percent – a level of purity that would exclude most rounds on the market. However, Congress wrote in an exception for the gold American Eagle coin. Those are permitted within IRAs, even though they have a purity of 91.67%.
That means not every popular coin on the market is permissible within an IRA account. The South African Krugerrand, for example, is a prohibited investment, because it has a purity level of just 91.67%.
IRA-Eligible Gold Coins
The following types of gold coins are approved for IRA accounts in the United States:
- American Gold Eagle bullion and proof coins
- American Gold Buffalo uncirculated coins (but not proofs)
- Australian Kangaroo/Nuggets
- Austrian Gold Philharmonics
- Canadian Gold Maple Leafs
- Chinese Gold Panda coins
- U.K. Gold Britannia coins (from 2013)
- U.K. ‘Queen’s Beasts’ coins
- U.K. gold Shēngxiào Lunar Series
- Gold bars and rounds manufactured by a NYMEX or COMEX-approved refinery or national government mint, meeting the general purity requirement of 99.5%.
The term "stackers" refers to those who accumulate gold and other precious metals in their own personal possession. There are several different reasons people do this:
- Preppers worried about economic collapse and hyperinflation;
- Investors, speculating on future price movements;
- Asset allocators, using gold and precious metals to further diversify an investment portfolio;
- Hobbyists, who may hope to make money, but are primarily driven by personal enjoyment.
Hobbyists are more likely to purchase non-bullion coins and other products. Demand for these items can be very uneven and unpredictable. Buying non-bullion coins, rounds, and bar products adds another layer of risk. Unless you are passionate about the hobby, it is usually best to stick to bullion, which is always tied to the spot price.