This is part 2 of my little series on bullion investing.
If you haven't yet read the first part, please do do so first by
clicking here.

I will now cover some of the methods of investing in gold, and also a few of the suppliers that I recommend and trust. I would like to declare now that I have no financial interest in any of the companies that I will recommend, and I am not receiving any gain (monetary or otherwise) by recommending or promoting them. They are companies that I trust and would like to point you to in order to save you a lot of time and headaches in navigating the minefields (pun intended, lol) for legitimate dealers and companies. Also, I am not a financial advisor in any shape or form, so what I say cannot be taken to be financial advice.

In this post, I will cover the 2 most common ways of investing in physical gold and taking ownership thereof, and that is krugerrands and rare gold coins. There are ways of investing in physical gold and not taking possession thereof, but don't worry about that right now.

But first, some more terminology:
bullion coin  -  coin made of precious metal and traded at current bullion prices. Value is close to the intrinsic metal value
obverse  -  the front of a coin
reverse   -  the back of a coin
rare        -  a coin or collectible that has very limited mintage
mintage -  the quantity produced of any particular coin
legal tender -  coins, paper money or other currency issued by a government and used as money
Fineness or fine gold  - the purity of a gold coin or metal. Fineness of 0.999 means 99.9% solid gold


Krugerrands

Krugerrands were first struck in 1967 by the South African Mint as a means of private ownership of gold. It is a gold coin containing exactly 1 troy ounce (31.1g) of pure gold. It gets its name from the bust of Paul Kruger being depicted on the obverse of the coin. It was the first gold coin of its kind to be produced worldwide. By 1980, the krugerrand accounted for over 90% of the global coin market. It is only later that other countries followed suit and produced their own coins, including the Canadian Gold Maple Leaf in 1979, the Australian Nugget in 1981, the Chinese Gold Panda in 1982, the American Gold Eagle in 1986 and the British Brittanica coin in 1987.

So do you see how lucky we are to have the krugerrand at our disposal right here in South Africa? It was not only the first coin of its kind, but to this day it is still the most popular gold bullion investment coin in the world. People from all over the world import krugerrands as investments, even though they may have a bullion coin of their own in their own country.

Ok I'll stop with the history lesson now. I know you actually want to get down to the real facts, the how's and the why's.

KRUGERRANDS are easy to buy, store and sell

The krugerrand is the most recognisable gold coin in the world, and it can be sold to any gold coin dealer quickly and easily. The price of the kruggerand is linked to the gold price and buying it carries a very small premium over the spot price of gold at any given time. Because it is legal tender, it has to be durable enough to be handled, so it is 22 carat gold. It has 22 parts gold, and 2 parts copper to harden the coin. 

I have shown this picture in the previous post as well, but here is the trend for krugerrands again since its inception.



Because it carries a small premium over the gold price, one doesn't need to shop around much for these. The price won't vary a lot, but do make sure that you are are not paying too much by checking the quoted price given against the price of gold for that day.

The coins come in different denominations too, to make it easier to purchase financially. They come in 1oz, 1/2 oz, 1/4 oz and 1/10 oz.

The one place where I can guarantee that you will almost always get the cheapest price to buy krugerrands is Investgold. They have offices in Cape Town, Johannesburg and George where you can collect coins without delivery charge. If you are elsewhere in the country (or the world), they can ship it to you via courier. Investgold has the price of krugerrands on their website, updated daily. If you are in another major city and you do not want to pay the courier costs, look around for a reputable coin dealer in your city. The South African Gold Coin Exchange has the Scoin shops that you can also buy krugerrands at. Another place that is easy to deal with is Cape Gold Coin Exchange in Cape Town CBD.

A word of caution: There is also another type of krugerrand called the "proof krugerrand". This comes in a limited mintage and is more expensive than the normal krugerrand. DO NOT BUY THESE. There is absolutely no advantage to buying these and it does not make sense to pay more for something that is not going to give you a greater return. That's why I do not recommend buying krugerrands from the South African Mint, because they will be proof krugerrands. If you have no idea what I just said, don't worry. You don't have to understand. Trust me, just don't buy them.

When you want to sell your krugerrands, call up 2 or 3 dealers again and ask what they will offer you, or just check online. Whoever gives you the best price, take it there in exchange for cash or an EFT into your bank account.

So in summary, krugerrands are very simple to buy, and easy to get rid of very quickly. It is an excellent way to store your money instead of keeping it as cash.

The disadvantage of krugerrands, is that its value is only linked to the price of gold, and it can be recalled by the government at any stage at a price determined by them (more on this later).
But wait... didn't I use the gold price linkage as a selling point earlier? Why is it suddenly a bad thing, you may wonder?
Well, it's not a bad thing, but you can get much greater returns if you consider what I will introduce to you next...


Rare Gold Coins (also called Limited Edition coins)

There is another type of coin that is both more exciting to invest in, and yields much, much higher returns than krugerrands for a very small premium higher when buying. These coins appreciate in value based not on the gold price alone, but also its rarity and different factors affecting the demand for them. In fact, these coins, for most of their life, are not exposed to fluctuations due to the fluctuations in gold price or R/$ rate at all. Once again I will concentrate on the South African situation, because most of my readers are from here. Incidently, SA also produces some of the best and most valuable rare coins in the world.

I must state up front here that limited edition coins should be kept for a MINIMUM  of 5 years before a considerable return can be expected. So if you cannot guarantee that you will not need the investment money within the next 5 years, krugerrands would be a better option. It is best to build up your portfolio over time to have a mix of krugerrands and rare coins. Like in any investment plan, diversification is the smart way to go.

So how does this work?

Every year, the South African Mint mints and issues a few series of limited edition coins.
The Natura series depicts an African animal, and within it they have had some very successful subseries, namely The Big 5, Monarchs of Africa, Wild Cats of Africa, Giants of Africa. The Protea Series depicts historical South African political events, and cultural events. Some of the subseries in this one was Nobel Prize Winners, New Constitution 2006, Cricket 2003, and many others. There was also a Mandela series which had a few years of coins dedicated to Madiba. These Mandela coins have seen the most astronomical growth imaginable. I will show you some of those graphs later.

The best time to buy these rare coins is when they are issued, at the issue price. This will be the cheapest that you will get them because they will be sold at a higher price by the dealers in subsequent years. The limited mintage is typically 1500-2000 for the 1 oz and 1/2 oz coins, and 3000 for the 1/4 oz and 1/10 oz coins. Last year's Natura coin was the African Painted Wolf (The Wild Dog). If you bought a 1/10 oz coin for R1,500 then, you would have one of only 3000 of those coins in the entire world. The value just climbs and climbs every year, because there is only so much of it that will ever be minted, no matter what.

Affordability is obviously going to be one of the key factors in your choice of investment. Understandably, not many people can afford to drop close to R14k on a 1 oz gold coin. Luckily, you can purchase coins in denominations of as small as 1/10 oz for just over a 1/10th of the 1 oz price. I am careful to state prices in my blog posts because they are so volatile and I intend for these posts to be useful for many years to come still, but right now that would equate to around R1.5k - R1.6k. It's still a pretty penny, but it is something that is definitely worth seriously and regularly saving towards. Here's a little secret that I'm sharing with you to say an extra special thank you for reading this far... The 1/10 oz coins actually appreciate and grow slightly FASTER than the bigger 1 oz ones. This is simply because of the demand factor again. The demand is higher if the price is lower, so if you have enough funds to purchase a bigger coin it might be wiser to rather purchase a few 1/10 oz ones instead.

In 2011 the Natura coin depicted the Meerkat, part of the Nature's Families subseries. The coin won the "Most Beautiful Commemorative Gold Coin" award at the Annual Mint Directors Conference in Vienna, Austria. This event is hailed as the Oscars of coin industry. Even buying the smallest of those coins (the 1/10th oz) a year later when the price would have increased to around R2000, it would still yield phenomenal returns because the demand for the coins with awards continues and climbs even faster than the normal ones. There are still only 3000 of the coin available in the world. They don't suddenly mint more because the demand from all over has increased. What increases is the price, the price of the commodity that you hold. Imagine what the price will be in 10 years' time!!

Here are some charts of typical growth that can be expected. I took all of these charts from the Investgold website. The scale on the vertical axis of the graph is not always even, so don't depend on the bars to judge. See the figures shown on the bottom axis for the actual stats.

This graph of the Big 5 Natura series shows a pretty average growth and these are figures that can be quite safely used to predict growth stats of a South African coin. The 1995 Rhino coin, for example, shows a growth of 2267% over the span of 18 years. This means that it is now worth over 22 times what the investor would have paid for it in 1995. However, this does NOT mean that it will fetch this price when you try to sell it. 




The Protea Nobel Prize series shows great growth. This was a series of 3 coins over 3 years depicting the South African Nobel Peace Prize winners. They have shown a considerably better performance compared to the norm. A 1oz Desmond Tutu coin purchased in 2006 for R5,750 is now worth R43,000. That equates to a 747% growth in just 7 years. The coin is woth 7,5 times what it was when it was issued, only 7 years ago. The values of these coins will continue to climb, and other factors in the future might even cause it to climb faster than it has before. The chart below summarises what I stated in this paragraph.




The Mandela series shows phenomenal growth, which you should not typically expect unless it's a very special coin.
Between 1994 and now, there have been numerous coins minted depicting the face of Nelson Mandela, our beloved Madiba, in some form or other. I don't even have to go into the reasons, but these coins have seen an astronomical growth. I'm going to take the most average growth depicted in the chart below; The 2004 Democracy in SA coin fetches 1454% what its issue price was in 2004, which was only 9 years ago. Have a look at the numbers on the chart
. I must state here however that in my experience I have found that it is extremely difficult for private sellers to get these types of valuations when you try and sell your coins. The dealers usually just want to offer you the value of the gold, and then they go on to sell it to their clients at hugely inflated prices. Also, the Mandela coins have been minted in different forms so often over the past 2 decades that they hardly ever fetch the prices quoted here and on other dealers' websites. I therefore no longer recommend buying rare gold coins if you are looking at it as an investment vehicle only, unless you are experienced and know exactly what you are buying in terms of expectations of performance. (paragraph edited: 15 July 2016)



Other good places to buy limited edition coins are:
  1. The South African Mint Company  http://www.samint.co.za/
  2. Rand Coin    http://www.randcoin.co.za/
  3. Select-a-Coin  http://www.selectacoin.com/
If you would like to have a look at coins, go to one of the Scoin stores or kiosks, just to look. I assume that it's because they actually have a store and retail staff that their merchandise is a lot more expensive than you'd pay at the places I mentioned above. So I would not recommend buying there unless you've already researched the baseline and know what you should be paying.

These coins are not legal tender, and so are not meant to be handled on the metal. It is 24 carat gold, with a fineness of 0.999. It only contains a miniscule amount of alloy in order to make it set, and is therefore very soft. The coin will come in a clear perspex casing which it should never be removed from for the entire life of the coin. You can see all the detail of the coin through the casing very clearly. Do not open the casing and handle the bare metal. You will leave fingerprints and 'soil' the metal and it will be flawed thereafter. If you do happen to soil or flaw the metal, do not attempt to clean it. Just leave it and place it back into the protective casing. The perspex-cased coin will typically come in a little leatherette box, unless it's a special set, in which case it comes in a special packaging. Each coin will have within its box a certificate of authenticity stating the mintage of the coin, and the number of the coin. For example it may have a mintage of 2000 and that coin is number 1275


When and how to sell rare coins

When it comes to the time that you want to sell the coin, it will require a bit more work to get the best deal than just selling a krugerrand coin. Contact as many coin dealers as you can with the details of the coin and ask them what they are prepared to offer you for it. They will give you a prelim offer, which is subject to final inspection of the coin. Because these prices are subjective, offers sometimes vary by up to 100% or more between offers. Do not sell in a hurry! Take your time. You've worked hard, invested smart and waited the time out patiently for this. It's worth the time spent in getting the best deal, even if it takes a few weeks to finalise. As I mentioned earlier, dealerships may try to just offer you the gold value of coin for your rare gold coins. In this case it may be better to try and sell it on the open market to other investors, although this will most certainly take longer and carries slightly more risk. Don't ever surrender possession of your coins to a private buyer without being fully paid for it first.
 (paragraph edited: 15 July 2016)

That will be it for now.
My next post will cover some new concepts and forms of investing in gold.

COMING SOON:
  • GoldMoney online platform
  • Exchange traded funds
  • Co-ownership plans
If you still think you cannot afford to purchase any gold after reading this, you should keep an eye out for my next post.

Also, I would appreciate some comments in the comments section below if you found this useful, or if you have any questions that I have not covered that you think I should have. I would be more than happy to fill in the gaps that I might have missed.

The next, and final instalment in this series can be found here.