Eagles, Buffalos and America the Beautiful: Investing in US Coins

From gold- or silver-backed exchange-traded funds (ETFs) to high-risk junior exploration plays, options, futures, coins, bars or shares in senior mining companies, the modern investor has no shortage of ways to invest in precious metals.

Often overlooked in favour of simpler electronic or paper-based transactions, gold and silver coins can be a surprisingly easy and liquid investment. They also represent one of the only ways investors can take physical possession of the metals themselves — an appealing option for the more cynical among us during times of economic uncertainty, unsustainable government debt and volatile fiat currencies.

Provided you avoid buying rare or numismatic coins, modern bullion coins allow any investor — no matter how sophisticated — to buy investment-grade gold or silver between 0.90 (22-karat) and 0.9999 (24-karat) fineness at just a small premium to the spot price of gold. The value of the coins from then on is determined almost solely by the spot price of gold.

Minted in the U.S., Canada, South Africa, Australia, the United Kingdom and many other countries, most gold and silver coins come in a range of sizes suiting almost any budget: 1/10 oz., ¼ oz., ½ oz. and 1 oz. Some mints, like the Royal Canadian Mint, even produce a limited-edition 1 kilogram gold coin, but at $59,995 for 32.15 oz. gold, it does not come cheap.

While buying new coins direct from the mints is safe and secure, they typically do not offer the best terms for buyers. The U.S. Mint, for example, currently sells its 1-oz., 24-karat gold coin, the American Buffalo, for US$2,010, a 16% markup from the Feb. 9 spot price of US$1,734 per oz.

Some coins sold by the Royal Mint in the U.K., meanwhile, are priced at more than four times their metal value according to Richard Lobel, managing director of leading London-based coin dealer Coincraft. In an interview with the Antiques Trade Gazette, Lobel argues, “Many of the limited issues are worth considerably less than the ticket price at the point of sale, with absolutely no hope of ever recouping the cost, let alone seeing values rise beyond that … I am tired of having to tell collectors that the silver proof £5 they bought from the Royal Mint at £99.50 is only worth £20 in the trade.”

Buying coins in the secondary market, however, either through online auction sites such as eBay or through professional coin dealers, can be a significantly cheaper alternative.

Speaking to The Northern Miner by telephone from New York, Neil Berman, an expert numismatist and rare coin dealer since 1968, explains his margins for customers looking to buy modern coins: “For an American Buffalo in the original packaging, I pay US$30 over the spot price and I sell them for US$60 over the spot price. It’s not a big-profit item, but they’re easy to buy and they’re easy to sell.”

That represents an approximate 3.5% commission for an investor to buy the coin and a negative 1.75% commission to sell it.

For American Silver Eagle1-oz. silver coin, the, Berman says he buys them for US$1.50 over the spot price and sells them at US$2.50 over the spot price.

When asked if he would recommend buying gold or silver coins as a way of investing in physical gold, Berman replies, “For an amateur, absolutely. Because it’s very hard to sell bars, I don’t care what form they are. There are a lot of people who will not buy bars without an assay. Meanwhile, you can sell coins to any coin dealer in the world, and there are literally coin dealers everywhere. The reason people buy gold coins as opposed to gold bars is because of liquidity issues — the coins are easier to sell than bars.”

Berman advises newcomers to the coin market to stay away from rare coins initially. “It’s very difficult to navigate for an amateur and I don’t recommend it for anybody that doesn’t have an interest in it. If you’re not willing to educate yourself in it enough to have an opinion, you shouldn’t be buying or selling them for an investment. I recommend it highly as a hobby, but if you’re going to invest in it you’re going to have to go out of your way to follow the market.”

Berman also explained why American coins typically trade at a premium to their Canadian or European peers: “Under U.S. law, if you want to invest in gold and silver in an IRA, it has to be U.S.-made gold. You can’t put foreign-made gold in a U.S.pension. That’s why the premium is higher on U.S.gold. In order to put gold in American pension plans, it’s gotta be American coins. It can’t be Maple Leafs (Canada’s equivalent 1-oz., 24-karat gold coin).”

Maple Leafs and Krugerrands (South Africa’s gold coin that weighs 1.09 troy oz. but is minted from a gold alloy that is 91.67% pure so as to contain exactly 1 oz. of gold) also have their advantages, mainly that they demand a lower premium to the spot price. Berman says he buys Maple Leafs for US$10 over the spot price and sells them at US$30 over spot.

Prospective coin investors should also be careful when buying coins on-line, as some websites will offer coins at outrageous premiums to unsuspecting buyers. On-line vendor Goldline International, for example, currently sells 1-oz. American Gold Eagles for US$2,981, nearly 70% above the spot price of gold.

For large investments, it can make more sense to buy bars instead of coins, as you can get better prices for buying in bulk. Typically, bars of gold or silver offer the lowest premiums over the spot price, however there can be increased storage and insurance costs associated with bars, about 1-2% of the total value each year. They are also more difficult to sell in times of economic duress, as they are not readily divisible and would require finding a large buyer.

As a result of a gold coin recall by the U.S.government in 1933 that prohibited the hoarding of gold during the Great Depression, American gold coins from the early years of the U.S. Mint through to 1933 are quite rare and demand relatively high premiums to the spot price. These coins are leveraged to the gold price and their value will generally increase faster than the spot price in a bull market (due to their historical and aesthetic value as well as their rarity), and will conversely decrease by more when gold is in a bear market.

Featuring an American bison standing atop a mound of dirt on the reverse and a Native American chief’s head on the obverse, the U.S. Mint has produced the American Buffalo coin since 2006. The 1-oz. gold coin has a face value of US$50 and is the only U.S.gold bullion coin minted in 0.9999 fine gold.

The U.S. Mint’s American Gold Eagle coin is more widely traded and more popular with collectors and investors, having been produced since 1986. The 1-oz. coin has a face value of US$50 but is minted in 0.9167 fine gold (22-karat), with the rest comprising silver and copper to make the coin more durable. The gold in these coins must, by law, come from sources within the U.S.The coin features a full-length figure of Lady Liberty on the obverse side holding a torch and an olive branch, and a male eagle flying above its nest and hatchlings while carrying an olive branch on the reverse.

As for Canada’s Gold Maple Leaf, it is minted in 0.9999 fine gold and is made from gold mined exclusively in Canada. The coin features the head of Queen Elizabeth II on the obverse and the traditional maple leaf on the reverse.

The U.S. Mint produces several other types of gold and silver coins, including: America the Beautiful silver bullion quarters, a series of individual 5-oz., 0.999 fineness silver coins featuring varying designs of national parks and historic sites; Presidential US$1 coins, a series of coins featuring the images of all United States presidents as well as Lady Liberty on the obverse; and Native American US$1 coins, featuring depictions of important or symbolic Native Americans.

It stopped producing the Presidential US$1 coins in December 2011, however, after Secretary of the Treasury Timothy Geithner directed the mint to suspend circulation.