Investing in Gold Coins

Individuals interested in gold coins have a choice to move down one of two paths. There are collectors that purchase coins because of their scarcity and beauty. While others buy the American Eagle, the Austrian Vienna Philharmonic, the Canadian Maple Leaf, and the South African Krugerrand as part of their investment portfolio.

This second type of investment, holding bullion, is a fairly common strategy used as a hedge against inflation. To understand why gold can be used as a hedge, it's critical to understand its use as an exchange rate standard.

Historically, gold was used as a universal exchange commodity. Between the years 1870 and 1914, there was a fixed exchange rate for gold throughout the world. That means the currencies of different countries (U.S. Dollar, Canadian Dollar, British Pound) were all linked to gold. This was known in the monetary world as the Gold Standard. By standardizing currencies, those participating countries could easily exchange goods and services, and the value of their currencies was relatively stable.

During the Bretton Woods Conference, gold was abandoned, as a currency standard and a set of complex rules were put in place to help stimulate international trade and maintain currency stability. World currencies were to be fixed to the U.S. dollar, which was also fixed to gold at $35 per ounce.

This fixed price was maintained until 1971, when international governments adopted a floating system. But the relationship between gold, the U.S. dollar, and monetary policy remains strong. This relationship is why gold can still be used as a hedge against inflation.

When inflation hits one country hard relative to another, the value of its currency is eroded. That's because the relative strength of the currency is diminished. It takes more of it to buy something from another country, which is not experiencing a high rate of inflation.

In the United States, when the dollar is weakening against other currencies, some investors will want to hold hard assets, such as gold. This is because all countries recognize the value of gold; therefore, the price should rise, in terms of U.S. dollars, with inflation.

In other words, just because the dollar is devalued by other countries, the value of gold remains constant in terms of their native currencies. This means gold will be worth more in terms of the dollar when it's weakening internationally. In this manner, gold acts as a currency hedge.

Investors understand the above relationship; so the price of gold often begins to rise even when inflationary times only threaten. Because investors are uncertain of the future value of paper assets they might be holding (for example, the stock of an American company), they look to gold's stability to ride them through these inflationary hard times.

Now that we've explained why investing in gold coins is so popular, especially during inflationary times, it's important to point out that coins are not the only way to invest in gold. Our article, Investing in Gold, walks through a number of options, including:

• Bullion and Coins: produced by refiners in increments that range from one gram through 400 ounces (25 pounds) worth nearly $760,000 at today's prices (October 2020).

• Collectible Coins: also referred to as numismatic, or the hobby of collecting old or rare coins.

• Jewelry: the purchase and holding of gold jewelry for investment purposes is more common outside of the United States.

• Gold Certificates: a paper certificate indicating ownership of gold held by a financial institution.

• Mining Company Stocks: investing in the gold mining company itself can bring additional rewards as well as risks.

• Mutual Funds: an alternative to creating a portfolio of mining stocks, gold mutual funds eliminate the risk associated with a single company's operating performance.