Physical Gold or Paper Gold?
Physical gold comes in the form of gold coins or gold bars that have been delivered to you or to your storage operator and are owned by you. Paper gold refers to a written agreement to receive physical gold or the market value of the paper gold at some point in the future. Examples of paper gold include certificates issued by banks & mints, shares in exchange traded funds, mining shares and futures contracts. With paper gold you don’t actually own gold, you own a promise. The organisation issuing the paper gold owes you physical gold or the market value of the paper gold and therefore paper gold is subject to counterparty risk. So if the organisation goes bust then you may not get your gold or the value of the paper gold. This is similar to putting money in a bank. Paper gold agreements may contain clauses allowing settlement in cash instead of the market value of the equivalent amount of physical gold under certain market conditions. Given that gold is often bought as protection against counterparty risk, it makes sense to buy physical gold in the form of coins or bars without counterparty risk, rather than paper gold which has counterparties between you and your gold. This website only deals with buying physical gold.
Gold Coins
Gold coins can be either “bullion” coins or “collectors” coins (also called numismatic coins). The price of bullion coins closely reflects the underlying value of their gold content. The price of collectors coins is also driven by the supply and demand of collectors. This website only deals with gold bullion coins. Gold bullion coins are issued by many national mints and come in different weights and purities. Coins issued by the UK mint are known as gold sovereigns. The market for gold coins is liquid so sellers and buyers can be found easily when needed. Gold dealers will buy gold coins more easily than gold bars, which may need assaying (verifying for gold content) or refining first. Fake gold coins are less common than fake gold bars and easier to identify. Gold coins have the added endorsement of a government mint, which provides a level of guarantee. The purity of gold bullion coins varies between about 0.9000 and 0.9999. The gold content of bullion coins varies between about 0.1toz and 1.2toz. The cost of gold bullion coins varies between about £100 and £1,000.
Gold Bars
Most gold bars are 0.9999 pure, also known as “four nines” or “24 carat”. Gold bars can be either small gold bars or big gold bars. Small bars come in weights ranging from a few grams to 1kg. The cost of small bars ranges from about £200 to £25,000. The market for small gold bars is liquid so sellers and buyers can be found easily and small gold bars are available in many different weights. Fake bars can usually only be spotted by dealers and are harder to spot than fake coins. This is because gold bars can be drilled out and filled with an alternative such as lead. As a result assaying (verifying for gold content) or refining may be necessary before a dealer will buy gold bars, unless they supplied the gold bars in the first place. Bars are obviously more convenient for larger value purchases, but you should also consider what denominations you might want to sell the gold in, taking in to account any tax implications.
Big bars (also called good delivery bars) have a standard gold content of 400 troy ounces and weigh about 12kg. They are made by accredited refiners, kept in accredited vaults and moved by accredited couriers. Due to big bars costing several hundred thousand pounds each, they are not usually suitable for private buyers. However it is possible to buy partial ownership in a big bar.
Gold bars usually have the following information engraved on them – the refiner’s name, serial number, weight and purity.
Gold Weight
The total weight of gold coins and gold bars is measured in grams or kilograms.
Gold Purity
Gold purity refers to the ratio of the weight of gold content to the total weight of the coin or bar. Purity is measured in fineness or carats. Fineness is expressed in parts per 1,000 (eg 999.9 or 0.9999). Carats are expressed in parts per 24 (eg 22).
Gold Content
Gold content is measured in troy ounces. 1 troy ounce equals 31.103 grams. Be aware that troy ounces (toz) weigh slightly more than normal (avoirdupois) ounces (oz).
Gold Content (toz) = Weight (g) X Purity (parts per 1000) / 31.103g
Gold Cost Calculation
The gold price is expressed in pounds per troy ounce (£ per toz). When buying gold you need to consider the gold content of the coin or bar, not the total weight of the coin or bar.
Gold Cost (£) = Gold Content (toz) X Gold Price (£ per toz)
eg What is the cost of a 1Kg 0.9999 fine gold bar, if the gold price is £700 per troy ounce?
Gold Content = 1000 X 0.9999 / 31.103 = 32.15 toz
Gold Cost = 32.15 X 700 = £22,505
Gold Dealing Costs
The difference between the buying or selling price of physical gold and the gold price can be up to about 3.5%. The cost of buying partial ownership of big gold bars can be lower.
When buying gold it is worth considering the gold storage options.