One of the things I didn’t realize until recently is that there is a big difference between the types of precious metals coins you can add to an IRA. I thought that gold was gold and all you had to do was buy it and watch the spot price. But it turns out I’m wrong.
There are two types of precious metals for investing, bullion and rare.
Bullion is precious metal that is minted in large quantities. Almost every country produces gold bullion. It is legal tender. Its value is tied solely to the quantity of gold (or silver) it contains and the spot price.
The most popular gold bullion coins are:
- American Eagle
- Chinese Panda
- South African Krugerrand
- Austrian Philharmonic
- Canadian Maple Leaf
- American Buffalo
Gold bullion is used in industrial applications, by jewelers, and anyone who might melt it for personal use. As far as investing, it is favored primarily by short term investors and day traders who would speculate primarily through gold ETF's on the stock exchange. Such traders would be looking to make a profit by taking advantage of the volatility of precious metals pricing. Because protecting wealth is one of the main themes of this blog, I wouldn’t encourage this kind of short term speculation but it is interesting to note.
On a related note, I found this recent video interesting regarding the current interest in precious metals coins:
- Depending on the type of bullion involved, you could be subject to reporting a sale to the IRS. This loss of privacy only applies to bullion.
- There can be limitations as to how much bullion you can travel with outside of the U.S.
- Executive Order 6102, invoked by FDR in 1933, could be invoked again in extreme times, allowing for the confiscation of your gold bullion. This is not likely and would only be considered in the case of a national emergency, but it is something to be aware of.
Rare coins are any precious metals that are no longer being minted or are minted in limited supply by the government. As pointed out in previous postings, they are minted to a higher standard of quality than bullion. But the main thing to note about rare gold and silver coins is that they have a sort of “double-edged” value. Their value is determined by the spot price and the availability or population, if you will, of their inventory. The amount of inventory acts as a kind of multiplier on the spot price. It is for this reason that rare coins have typically outperformed bullion by 1.5 to 2.5 times.
There are no ETFs for rare coins. You must physically possess them to own them. A side effect of this is you don’t see nearly as much volatility as you would with ETFs.
The only slight risk with rare coins is if there happens to be a new discovery – such as a sunken ship – which would increase the inventory of a coin that you owned. Of course this would reduce its value, but again, this is a slight risk at best.
There are a couple of other things to know about rare precious metals:
- Rare coins are exempt from extensive disclosure when liquidating.
- There are zero restrictions as to how much rare gold or silver you can travel with when traveling outside the U.S.
So I conclude in some cases that for the long-term investor looking to preserve wealth and hedge against inflation that rare coins are the better way to go.
There are some other things to be aware of regarding gold bullion: