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 There are some hobbyists that collect gold coins and there's a five dollar word for that a person with that habit - numismatist. Now while some of these numismatists might realize that gold coins can be a pretty good investment, they're not really investing in gold coins - they are collectors.
Why we have Gold Coins
A numismatic likes to collect coins because they are works of art, they are a lasting reminder of our history and they are rare. Gold has been used in coins for a long time because gold has some pretty interesting properties as a metal (Sorry, but here comes a chemistry lesson.).
When our ancestors selected gold as the metal to be used in coins they put a lot of thought into the selection process. It's always been hard to find, and rare things that are desired are usually valuable - that's the law of supply and demand at work.
It's also easy to work with, because pure gold, the 24 karat variety, is relatively soft metal - it's malleable. That means it could be easily stamped into a coin. Finally, gold does not oxidize (or rust) easily and it does not dissolve - even in most strong acids. For you scientists out there, the only acid that effectively dissolves gold is a mixture of hydrochloric acid and nitric acid called aqua regia - but please don't try this at home!
The point here is the reason we have gold coins is because gold is rare, durable, and it was soft enough to stamp, or mint, into coins.
Gold Coins as Investments
We gave you that quick background because those interested in investing in gold coins usually head down one of two paths. There are those that are interested in investing in gold coins because they are rare and valuable. And there are those that invest in gold coins like the American Eagle, the Austrian Vienna Philharmonic, the Canadian Maple Leaf, and the South African Krugerrand because they want to own gold purely as an investment.
This second type of investment - holding gold bullion - is a fairly common strategy used as a hedge against inflation. To understand why gold can be used as a hedge, you need to understand a bit about gold's traditional use as an exchange rate standard.
Gold Exchange Rates
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 (American Dollar, Canadian Dollar, British Pound) were all somehow linked to gold. This was known in the monetary world as the Gold Standard. By standardizing currencies, or linking them to gold, those participating countries could easily exchange goods and services and the value of their currencies were 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 currency stability. World currencies were to be fixed to the US dollar, which was also fixed to gold at $35 per ounce.
This fixed price of gold was maintained until 1971 when international governments adopted a floating system. But the relationship between gold, the US dollar, and monetary policy remains strong and this relationship is why gold can still be used as a hedge against inflation even today.
Gold as a Hedge Against Inflation
When inflation hits one country hard relative to others, the value of its currency is eroded. That's because the relative strength of the currency is diminished - you're going to need more of it to buy something from another country that is not experiencing a high rate of inflation.
So 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 of gold should rise, in terms of US 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. That means gold will be worth more in terms of the dollar when the dollar weakening internationally. In this manner, gold acts as a currency hedge.
So many investors recognize the value of gold as a hedge against inflation that 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.
Gold in Asset Portfolios
Now that we've explained why investing in gold coins is so popular, especially during inflationary times, we'd also like to point out that gold coins are not the only way to invest in gold.
In fact, we've got another article - Investing in Gold - that walks you through all of your options, but here are the highlights with respect to buying gold as part of your overall portfolio include:
- Gold Bullion and Coins - produced by refiners in increments that range from one gram through 400 ounces (25 pounds) worth nearly $200,000 at today's prices.
- 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 much more common outside of the United States.
- Gold Certificates - a paper certificate indicating ownership of gold that is held by a financial institution.
- Gold Mining Company Stock - investing in the gold mining company itself can bring additional rewards as well as risks.
- Gold Mutual Funds - an alternative to creating your own portfolio of gold mining stocks, gold mutual funds eliminate the risk associated with a single company's performance.
About the Author - Investing in Gold Coins
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