The main division when it comes to gold for investment is between gold bars and gold coins. But products can be classified according to several parameters, which shows how much flexibility this asset class offers.
One characteristic that can be used to make a choice is the pure gold content. Historical gold coins generally contain impurities of other metals because they used to be used in daily payments and required a high degree of strength, while pure gold is relatively soft. Modern ones are mostly pure gold with a purity of 0.9999 because they are not produced for the purpose of being used for transactions. An exception is the American Gold Eagle coin, which contains 91.67% pure gold, i.e. 22 carats.
Investment gold is available in a wide variety of weights. The smallest bars contain 1 gram of pure gold, while the largest contain 12.5 kilograms or 400 troy ounces. They are mainly used in bank payments, as central bank reserves and as a standard on some exchanges. Coins also have a wide range of pure gold content. For example, the Chinese Panda is available in 1, 3, 8, 15, and 30 gram weights, and the Vienna Philharmonic in 1/10 troy ounce or 1 troy ounce weights. In addition, coins can be divided into historical and contemporary.
There may also be a difference in the purity of the gold in individual products. Historical gold coins generally contain impurities of other metals, so a lower gold content. Modern ones are mostly pure gold with a purity of 0.9999 because they are not produced for the purpose of being used for transactions. The exception is American Gold Eagle coins, which contain 91.67% pure gold or 22 carats.
Last but not least, products can be distinguished by whether or not they have a certificate of authenticity. Gold bars are usually accompanied by one. The only form of certification that certifies the parameters of an asset is that issued by the refinery or mint that produced it.
How The Price Of Physical Investment Gold Is Formed?
Investment gold is the classic way to purchase the precious metal. This is no coincidence – buying and owning it can be very affordable, contrary to the popular belief that the precious metal is a tool only for the very rich. The smallest gold bar for investment weighs 1 gram and costs 316 RON at the time of writing. But how is this value determined?
Price Premium – Natural And Market
The price of gold bars or coins is determined by the pure gold they contain, the spot price of gold at the time of purchase, and the price premium charged. Expressed as a percentage, it represents the difference between the spot price and the final amount paid by the investor. This makes investment gold slightly more expensive than the spot price visible online, due to objective factors.
The price premium has 2 components. The first is the natural price premium, which is formed by the processes of physical processing of the gold up to the production and delivery of the finished product to the merchant. The natural price premium is a smaller portion of the final price for larger investment gold products and a larger portion for smaller sized ones. Simply put, the production cost for one 100 gram Valcambi gold bar is lower than for 100 1 gram Valcambibars . Therefore, the final price of the larger products is, other things being equal, closer to the spot price of gold than that of the smaller products.
The second component is the market premium. It reflects the demand and supply for a particular product in the market. What would happen if refineries and mints cut production globally, but demand for gold bullion was high? Their market premium would increase, respectively their final price would increase. If the difference between the ‘buy’ rate and the ‘sell’ rate remains unchanged, the price at which consumers can sell their investment gold to gold dealers will also be higher.
The impact on individual products is the same. If refiners have reduced production of smaller ingots, but their demand has not changed or increased, the price component will also increase, leading to higher final “buy” and “sell” prices.
The difference between the “buy” and “sell” rates, which reputable gold traders clearly indicate for each individual product, is called the price spread or price spread. Like the market premium, the margin is determined by the supply and demand for a particular product. But sometimes it takes into account factors such as the quantities of gold available in the markets or price volatility.
Both the spot price and the premium and margin are subject to change. Additionally, different products may have different premiums, even if they contain the same amount of pure gold. Let’s see why.
Some Examples Of Differences And Different Premiums
Price differences are caused precisely by differences in premium, margin, or both at the same time. It is relatively common for 1oz American Eagle coins to be more expensive than 1oz Australian Kangaroo coins . The reason? Sometimes the US Mint cannot produce enough quantities to meet the high demand. This leads to an increase in the coin’s market premium and, consequently, its final price.
Largely because of the natural premium, the 1-ounce Valcambi bullion has a slightly lower price premium than, for example, the 1-ounce gold coin of the Vienna Philharmonic . Under other conditions, it is cheaper to produce a bullion than a coin of equivalent gold content and purity.
Last but not least, limited edition products such as Australian Monthlys , for which there is no new supply, can have a much higher premium and spread than mass-produced ones. Their design changes annually based on the Chinese calendar year and are produced in precise numbers for each weight. Therefore, coins from previous issues may have a higher final price than coins with the same gold content.
The price premium is the only markup consumers pay when buying gold for investment – there are no additional taxes or fees. The only other possible costs are related to storage and delivery to a specific address. The latter can be easily avoided, even for online orders, by picking up the products at a physical office. Protecting physical gold is an open question that only the buyer can answer.