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Johannesburg - "How do I buy gold coins?" a Fin24.com user asked Money Clinic recently.
The short answer: carefully.
Demand for gold coins boomed during the global financial crisis as investors fled collapsing share markets and sought an investment that could survive an apocalypse.
During the past year, however, markets have rebounded, stockpiled canned food is being consumed sheepishly and - while the gold price has remained relatively steady - the allure of gold coins has faded somewhat.
Some European gold coin producers report that demand for their products is down by as much as 80% this year.
While the gold price has rocketed 335% in the past nine years, the strong rand has hit local investors in gold coins.
A one ounce Krugerrand for R10 500 (commission included) bought in February last year now sells for about R8 750.
The gold price strengthened somewhat from $989 per ounce to $1 094/oz in the same time frame, but the conversion into rands eroded the gains - and then some.
Still, many investors do not believe rand strength is sustainable and expect further growth from gold.
They believe the global economy is not out of the woods yet and the US currency will come under pressure as central banks in Asia and the Middle East lose their dollar appetite. Gold is seen as an alternative currency.
There are a few different ways to invest in gold. Buying shares in gold companies is one option, as is investing in gold exchange-traded funds.
Recent legislation has also allowed South Africans to invest in gold bars.
Two kinds of coins
An investment in gold coins has a number of advantages, says Yaseen Theba of Gold World. It is very easy to trade in coins and capital gains tax is not levied on transactions.
Theba adds that coins can help if you want to invest internationally, and as a hedge against the rand. The coins will keep their dollar value until you want to exchange them.
However, unlike other types of investments, gold coins do not give you an income. An investment in shares, for example, will yield dividends.
If you don't need an income, coins can be the ultimate insurance policy in the event of catastrophe, says Alan Demby of the SA Gold Coin Exchange.
There are two types of gold coins. Collectable coins include old and modern coins whose value depend more on rarity and condition than the actual gold content, says Demby.
There are different kinds of collectable coins. Proof coins, like the Nelson Mandela coins, have a legal tender value. They are usually produced by the national mint and regulated by the central bank. No VAT is charged on these coins.
Medallions are coins that are not legal tender. These coins can be minted by any accredited mint and have no legal tender value. Buying these coins is like buying bullion gold or silver. VAT is charge on dealing in these coins.
Bullion coins - like Krugerrands and the Canadian Maple Leaf coin - track the gold price.
The price of these coins can be quite volatile at times, as it also has to take rand movement into account.
While the price of collectable coins tends to be more steady over time, some have performed extremely well - helped by the fact that no VAT is payable, says Demby.
When buying gold coins:
- Don't buy too many. Even if you expect the end is nigh, don't put all your money into gold. Demby thinks a maximum of 10% to 15% of your investments should be in gold (two-thirds in bullion coins and the rest in collectables).
Some investment experts don't think exposure of more than 5% is prudent.
- Choose a reputable dealer. There has been a mini boom in the number of gold coin traders since the start of the financial crisis.
- Do a thorough price check. The mark-ups charged on gold coins can differ a lot. Make sure you understand what the dealer is charging you above the metal value of the coin.
Only deal with members of the South African Association of Numismatic Dealers (Sndaa), says Theba. These dealers have to follow a code and the ethics of the association, and should you have a dispute the SAAND will also mediate between parties. The Rand Refinery, which produced Krugerrands, will only sell its coins to Saand members.
Do your homework about a dealer before you buy anything, says Demby.
Get references and talk to other investors about their experiences.
Usually the price of a Krugerrand is between 2% and 5% more than the value of the gold it contains.
Collectable coins can be much more expensive - up to 500% more than the metal value, says Theba.
Usually the spread is between 10% and 20%, depending on desirability and demand.
"If coins trade at a premium over the gold price it is usually because of the rarity. Demand will determine the price for limited edition coins and coins no longer in circulation."
Understand the risks
The biggest risk is a collapse in the gold price. The precious metal is not a steady climber.
Following the great gold bull market of the 1970s, gold peaked in 1980 and then slumped for 20 years before its latest upturn. Adjusted for inflation, it is still 30% below levels reached 30 years ago.
Storage
Crime is a big factor to consider, says Theba.
"Holding large volumes of coins and dealing with suitcase dealers makes investing more of a risk."
Make sure you consider storage options (and the costs involved) before you invest.
Beware of scams
There have been some cases of counterfeit coins - also involving Krugerrands - in recent times. Be especially wary when coins are offered at a bargain price.
- Fin24.com
