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Money, a concept born of necessity

Before money existed, goods were traded in a form of exchanges and bartering. Livestock such as oxen, horses and sheep, commodities like wheat, fruit & vegetables, wood, silver and of course gold were all traded against each other depending on needs (demand) and availability (supply). However, there was an obvious difficulty that would arise which was how to equate the value of items to each other. There needed to be a reference value so that prices could be agreed upon and defined as quantities of this “stable” known value. There was also the problem of giving change or what to do if you only had enough to buy half a sheep and we’re hungry!

A popular and plausible hypothesis by Hauser* was that as gold was also being traded against various goods, its weight was used to agree an exchange. Soon people realised that gold could easily be divided into different weights which equated to multiples of its value and therefore the value of other commodities. This led to the concept that of weights of gold were indeed useful “units of value” and quickly prices for oxen, sacks of wheat etc became equivalent to a certain weight of Gold.
Naturally gold started to become a reference point for the exchange of all goods particularly because it was easily divisible and impossible to fake.

The birth of gold coins

In Egypt, gold was exchanged against goods in the form of rings which had fixed weights and therefore different multiples of value could be used for pricing goods. Elsewhere however, gold stayed in the form of ingots for a long time but their weights were often variable and trading was tedious because of these discrepancies. Weight variations meant that trades were seldom a direct equivalent to the goods being traded and so much haggling ensued.
In search of something more convenient, reliable and safe, small gold discs of a fixed weight were made and each one had a value struck on it. They were easier to carry around and allowed trade to be more flexible, retail as well as wholesale.
Thus the first gold coins were born and indeed the first recognisable currency. This took place around 700 BC according to Erik Chanel.

Whilst gold was not the only metal used for coins – silver has been widely used as well- gold, however, was the ideal metal because of its unique combination of properties such as: it is stainless, rustproof, divisible, malleable, ductile and of course rare, which made it from the outset a symbol of riches.

Is Money as good as Gold

We have previously mentioned the Gold Standard on Goldcoin.org which has several meanings depending on the era.
The Gold Specie Standard was a system that associated units of money to gold coins in circulation or when lesser metal coins drew their reference of monetary value from a circulating gold coin.

The Gold Exchange Standard was when circulating coins made of various metals such as silver and copper drew their reference monetary value from a fixed value of gold independent of their own metal value.
Finally, there was the Gold Bullion Standard which did not involve circulating coins. This was when governments had agreed to sell gold bullion at a fixed price in exchange for a quantity of circulating currency. In other words, each unit of currency effectively had a value related to gold. This allowed the mass introduction of paper currency, which was easily transportable and practical for payments.
It was also the mechanism which allowed banks to not only look after your gold deposits as they had previously but led to the credit creation system, fractional reserve banking, loans and mortgages. The problem here was that greed got the better of bankers who realised they could lend more than they had in Gold reserves and print paper money whenever they wanted as long as nobody caught them out. Sound familiar.
If you are interested in the story of money, banking and the credit crisis have a look at this video when you have a chance. It’s very relevant to our current problems.

Without Gold, Money as Debt

Anyway, the Gold Bullion Standard ended in 1971 when Nixon felt the strain of expenditures from the Vietnam War and he effectively untied the value of the dollar to gold. This also effectively untied all the other currencies which had been part of the Bretton Woods Agreement to form the IMF (International Monetary Fund) in 1944.

Paper is worth as much as Paper!

So nowadays currencies are not “covered” by a relationship to gold or a fixed unit of reference so they can be extremely volatile, easily devalued and printed at infinitum. The problem is that today’s money is based on pieces of paper that are printed with a value but there only real value is the piece of paper they are printed on. Currency value comes from economic confidence. When there is none the currency becomes worthless and it is not because the central bank has printed a number on a piece of paper that it becomes meaningful.
What actually counts is whether anybody will accept the paper in return for goods or services or dare I say it an oxen or two. We’re back where we started. The value of currency has to be real and cannot be created otherwise it will not be accepted.
Much of the problems we face today are because an excess of credit has led to an excess of debt. Pressure on currencies causes devaluation which in turn decreases the value of assets, investments and therefore wealth.
This is causing people to look for ways of protecting their wealth outside of paper money. This brings us full circle to gold which has proved through the ages to be the best safe haven for value.
The choices today are to own a physical asset that will always maintain its value i.e. Gold or to invest in the labyrinth of debt ridden, financial institutions whose products are heavily advertised but rarely realised for the poor customer. They spend more on marketing their wares than they do in paying out customers at term. Remember HSBC charging 80% over the 32 year term of a pension fund leaving some poor old retired guy broke. He’s in no position to fight back especially with the expensive legal eagles they can afford with his hard earned money!

Should we return to a Gold Standard?

Unfortunately, that is virtually impossible because there isn’t enough gold to go around. There are only 20m3 in the world and about another 100,000 tonnes in the ground. There would have to be a huge devaluation of currencies to restart the Gold Standard and of course it’s unpopular with Central banks as they would have to behave properly.
We referred recently to the state of Utah and how people are taking the matter into their own hands because they require more certainty about the money they earn and spend. The dollar has failed them and so they are now looking at creating their own Gold currency which will maintain value better than the greenback.
It would seem we have turned full circle and more and more people are turning to Gold because it offers a safe haven for their savings and is an insurance against instability.
Gold coins are an excellent investment vehicle and more and more people are turning to the value of gold. Gold coins are actually worth more than their weight in gold because they have a dual leverage. The gold content of the coin increases in value with the spot price and the premium (added value) of a coin increases with demand. During a crisis or unstable economic conditions the premium of certain coins can rise more than 40% irrespective of the spot price.

Gold as a future currency?

Gold as a currency of the future may seem far-fetched but given the state of paper money and the interest in Gold who knows, it is already being planned as an alternative stable money in certain places. Even if gold coins do not re-enter circulation they are being used as a more certain tangible investment.
Some of the most popular coins for investment are those commonly sought the world over such as the Krugerrand, The British Sovereign, The American Eagle and the French Napoleon.
These are a way of preserving your wealth and savings in something of real, timeless value.

* H. Hauser, Gold, Vuibert & Nony publishers, Paris, p.307.

It is remarkable and a tribute to the sovereign that it remained legal currency long after the war due to the unstable drachma until eventually in 1965  the Greek government placed restrictions on trading resulting in many hoarders cashing in their stocks. Even so at the slightest hint of uncertainty, and there have been many, the Greeks turned to their favourite foreign gold coin.

Greece has not really had a true period of financial stability for decades and markets are wondering whether they will default on repaying their debt given past behaviour  so the uncertainties  are understandable. The population is in panic resorting to strikes and riots and fear that Greece may leave the eurozone.

Once again  have returned to their known safe haven, the sovereign, as a hedge against financial collapse causing the the demand to increase year on year and the price to rise dramatically. For weeks citizens have been queueing at Athens central bank to buy sovereigns and have been prepared to pay the highest prices. It is estimated that in the first 4 months of the year 50,000 sovereigns were sold legally and as the demand increased so did the black market  and at least 100,000 were sold illegally with price up to €300 (£252).  The uncertainty and fear has driven people to pay a huge premium of almost 40% over the current value of the gold content to protect their wealth.

Without doubt the British sovereign has been the gold coin that has world wide recognition as mechanism for survival  whether it be a financial or physical crisis – see our article “Gold sovereigns open doors”

Maurice Hall

The half sovereign was first introduced in 1544 under Henry VIII. After 1604, the issue of half sovereigns, along with gold sovereigns, was discontinued until 1817, following a major revision of British coinage. Production continued until 1926 and in Australia’s Perth mint until 1933 and, apart from special issues for coronation years, was not restarted until 1982 and then only as a proof issue

During Victorian times the half sovereign was more widely circulated than the full sovereign. The average life of both a sovereign and the half sovereign was around 15 years before it fell below the lowest legal weight. It is estimated that only 1% of all gold sovereigns that have ever been minted are still in collectable condition In 1891 a proclamation was made that members of the general public could hand in any gold coins that were underweight and have them replaced by full weight coins. Any gold coin struck before 1837 also ceased to be legal tender. This recycled gold was subsequently reminted into 13,680,486 half sovereigns in 1892 and 10,846,741 sovereigns in 1900.

In 1982 2.5 million coins were issued and mostly throughout history the design has followed the full sovereign with the reverse side, featuring the famous and beautiful St. George slaying a dragon designed by Benedetto Pistrucci, whose initials appear to the right of the date. There were variations on the reverse with royal shield and the simplified George and dragon. There were only proof issue until 2000 when bullion production commenced.

1989 marked the 500 year anniversary of the first gold half sovereign ever issued, for Henry VII in 1489. The entire design, including the lettering, in a style inspired by the original 1489 sovereigns. The obverse design is Her Majesty, Queen Elizabeth II, seated enthroned, facing forwards and the reverse a crowned shield at the centre of a Tudor rose. Again this design, and the lettering, are in a style similar to that on the very first gold sovereign issues. A total of 23,471 coins were produced in individual and coin sets. This proof issue and a single date issue makes it doubly attractive to collectors  thus  it attracts a high premium.

There is good availability of the half sovereign with some rare issues and they are popular as a first entry into gold coins or to purchase as memento. Because they are quite small many half sovereigns have been mounted in jewllery either as rings or pendants. In general you would expect to extra premium on the half sovereign as is the norm with most small coins and on occasions that is true. The average over the last month was 7.5%  but here are also some huge spikes in the premium differential such as in October 2009 where the premium was over 90% so it is a coin that needs to be watched carefully. Of course as the half sovereign is a gold coin of  legal tender it is not subject to VAT or Capital Gains Tax

Specifications

Isambard Kingdom Brunel in 1843, while performing a conjuring trick for the amusement of his children, he accidentally swallowed a half-sovereign coin which became lodged in his windpipe. A special pair of forceps failed to remove it, as did a machine to shake it loose devised by Brunel himself. Eventually, at the suggestion of Sir Marc, IKB was strapped to a board, turned upside-down, and the coin was jerked free.

Maurice Hall

You may be driven to gloom and despair when you come across many hypotheses on the dangers of Fiat currency, whereby central banks are printing money and devaluing currencies be that USD, GBP or the Euro. You will certainly not be comforted by articles on Sovereign Debt £1.4 trillion coming up in the UK, the greater and more dangerous debts of the US, Japan, and the current difficulties with Greece, Italy,  Spain and Portugal in the Euro zone. We have already seen the collapse of Iceland and some former eastern European countries and Ireland on the brink (UK citizens who hold money in our Post Office should be aware that this is directly with the Bank of Ireland who is now 1.9 billion in debt). If you delve further you will see more political manoeuvring in the East and Russia, where there is a drive to move away from the USD as the reserve currency, additionally China has a long term strategy for financial domination. You may be forgiven for feeling that the world as we know it will come to a halt as you listen to many experts predicting an inevitable systemic crisis that would make  2008 pale into insignificance and global contagion would cause capitalism itself to collapse.

I am not saying we should ignore those warnings, far from it but the optimist would have some faith that the western world could stabilise, otherwise we will not be concerned with gold and money but food and weapons, and yes you will find that advice already common amongst the growing number of survivalists in the USA.  There will no doubt be rocky roads to follow, financial difficulties, pressures on currencies, but currency is not money.  There is no doubt that many people will be looking for a safe haven, an insurance policy and the only world wide respected haven is gold.  This gold must not be in the form stocks, un allocated gold at a bank or certificates but physical gold which is tangible either held secured at your residence or in a vault where you own it.  Even the survivalists after the guns and ammo recognise that a stash of gold coins would be necessary as a medium to exchange for supplies.

I would say that the majority of investors are optimistic enough to believe that we will overcome a financial crisis to a greater or lesser extent and not be plunged back into the third world. There is no doubt that we are in an investor “safe haven” and even the most optimistic are and should be hedging by diversifying part of their portfolio into gold.  We in the UK have always believed in our currency otherwise we would be part of the Euro zone, we have not been successfully invaded for almost 1000 years hence we have no country wide safe haven investment history. Twenty two miles across the channel, our nearest neighbour France, following a century of invasion, dramatic devaluation understand the safe haven that gold provides.  Families have survived through crisis because they put their wealth into gold napoleons and today French citizens have 3000 tonnes held privately in gold coins. Should a new crisis occur then many French families will be able to ride out the storm whereas hardly any in the UK would be in a similar position. There is a lesson to be learned here.

I have researched long and hard and think I understand the drivers, the risks the patterns.  The case for owning gold is clear but investors will always be looking for Return On Investment so clearly the timing of buying and selling is essential.  We saw in December 2009 the gold spot touch $1227 per ounce and is now holding around $1100. Where will it go is the big question and what are the drivers and is their anything to be gleaned historically or seasonally.

Let’s take a look at the drivers that keep the price low:

• The West has become complacent and does not have the level fear of financial crisis that it perceived a few months ago. The truth is that we are not out of the crisis the economy is recovering very slowly and is very volatile and we have the £1.4 trillion sovereign debt to face
• The West although no longer fearing a crisis is still tightening is belt and there is not the money around to spend particularly on jewellery. People are taking note of the volatility, companies who have vacancies are fearful of taking on new staff and unemployment is still a huge issue
• The USD has been relatively strong recently and as we al know a strong dollar weakens the gold price. Interestingly the GBP and Euro price has risen from the all time high dollar spot price due to weakening exchange rates.
• India’s private demand dropped in 2009 as people did not buy as much jewelry due to the high price although India’s central bank bought 200 Tonnes off the IMF to back its international commitments
• China is now the largest consumer and the greatest producer of gold but is playing a very political game as it is determined to increase its reserves and shed dollar assets but it does not want to do anything to increase the price of gold or weaken the dollar while it holds $2 trillion of dollar assets
• It is believed if demand continues at the current rate it will not overstretch supply.

What will drive the price up?

• At some point inflation will incur and the dollar will weaken as more money is printed
• It is likely that there will be another financial crisis that will send all the gold bugs scuttling to protect their wealth
• China, Russia and India will take up any slack in demand particularly China who want to increase their gold reserve but also have encouraged their citizens to save gold
• Central banks do not find holding foreign currencies attractive so they can only turn to gold
• There is a finite supply of gold all that has been produce in the world to date would fit in a 20m cube. It is more difficult and costly to mine and the ability to supply is falling off.

The new drive will come from the East as their central banks diversify from dollar assets and the new found prosperity of their consumers will lead to purchase of gold for jewellery and investment. Eastern currencies will appreciate as the dollar losses its status thus driving up the price in dollars over a period of time.

When is gold bought and sold?

• Seasonally – Over the last 30 years the gold price has been at lowest with remarkable consistence in the northern hemisphere summer as European jewellery fabricators and customers are on vacation with the biggest drive in the fourth quarter. This coincides with harvest and wedding festivals in the East. On average throughout this period gold bought in summer turned profitable by the end of the year. Professionals tend to sell at the beginning of the year.
• Historically – Gold has reached a high in cycles followed by quite severe corrections and periods of consolidation. In fact in the last several years gold’s peak highs have followed a super cycle of around 22 months.  Gold reached its famous high in 1980 at $850 which equates to around $2200 when adjusted for inflation so there is a very strong argument that gold still has a long way to go before it reaches its previous high and now we have in addition Russia, China and India as major players. Bearing in mind that cycles constrict and expand please look at the chart below where the next predicted super cycle high will be around 21 months from the high in December 2009 and that will be Q4 2011 and this also coincides with the seasonal trend.

When to buy and when to sell:

All the indicators point a period of consolidation, both seasonally and historically gold should reach a 2010 low in July to August probably $1050 – $1060 and that is probably the time to buy. Do not expect  an immediate significant rise but the trends show that there will be an increase towards the end of the year and probably another period of consolidation in early 2011 so time to hold your nerve.  Late in 2011 the seasonal and the super cycle trends combine and we shall reach the next peak. Conservatively that would be in excess of $1300 but many experts are expecting the next peak to be $1500 or higher. If you are a speculator you may want to take your profit now but if you consider your gold to be your insurance policy then you will hold on to it. If you are in the later category then you will hold your gold until there is a stabilisation and that would not happen until we stop printing currency and take our contractory medicine. See the article on When should we sell gold for more details

What to buy and how?

I mentioned in the opening paragraph that there are pitfalls to avoid and it is not too difficult. Apart from fakes, which can easily be avoided by using reputable sources and not trusting to buying through private individuals through auction site, everything else is designed to take away you profit.

Buy:

• Investment gold(1) to avoid VAT
• Investment gold to include in your SIPP so the UK government will pay you back 20% or 40% depending on your income tax bracket
• Legal tender gold coins(Sovereigns and Britannias) to avoid Capital Gains Tax on profit
• From a reputable source

Avoid:

• Dealers or companies that charge a high premium
• Proof coins that can have a premium of almost twice the gold value
• Any gold coins that demand a high initial premium
• Numismatic coins as they are best left to the experts in that field
• Large bars that are difficult to liquidate
• Removing your gold from the professional system as it immediately depreciates by 10-15%

Sovereign Elizabeth II Obverse

Buying gold bullion is good because the premium is low but we would recommend gold investment coins and in particular semi numismatic coins can attract a premium differential over the gold price particularly in times of crisis. Coins have greater liquidity than bullion bars which can be difficult to split.There is  quite a choice  and that may be appropriate to the country in which you live. The Krugerand is one of the oldest and well known bullion coins and can be purchased with little premium over a bullion bar. In the UK, the British sovereign is in my opinion is the best investment,  ”safe haven” and emergency coin in the world and can be bought at very little premium from the right source with added attraction of owning a beautiful historic coin with aesthetic value.

There is clearly a case for a platform that enables the discerning investor to incorporate the factors that removes the risk and reduces purchase premium and commissions to the minimum. This mechanism did not exist until a unique platform was developed to enable the buying and selling of gold in real time with best prices and secure storage,  in France in 2008 AuCOFFRE.com.  The  UK website is currently under development and will be available very soon.

(1) Investment gold is

(a) gold of a purity not less than 995 thousandths that is in the form of a bar, or a  wafer, of a weight accepted by bullion markets or:

(b) a gold coin minted after 1800 that:

¨ is of a purity of not less than 900 thousandths

¨ is, or has been, legal tender in its country of origin; and

¨ is of a description of a coin that is normally sold at a price that does not exceed 180% of the open market value of the gold contained in the coin; or:

(c)  an investment coin as specified in Notice 701/21A Investment gold coins.

Maurice Hall

Money, when considered as the fruit of many years’ industry, as the reward of labor, sweat and toil, as the widow’s dowry and children’s portion, and as the means of procuring the necessaries and alleviating the afflictions of life, and making old age a scene of rest, has something in it sacred that is not to be sported with, or trusted to the airy bubble of paper currency. Thomas Paine (1737 – 1809)

Currency is still a medium of exchange but is not a store of value as it only derives its value by government degree or “fiat”. It’s value is based on the issuing the authority’s guarantee to pay the stated (face) amount on demand, and not on any intrinsic worth or extrinsic backing. All national currencies in circulation, issued and managed by the respective central banks, are fiat currencies.

A days wages in Germany 1923

The problem is that fiat currency runs the risk of central bankers printing too much and causing large inflation or worse. The more that is printed the more the currency is debased just as the Fed is doing now with the dollar. This has been going on for decades with central banks indiscriminately creating money to cover expenditure and ever increasing debt.  There are examples throughout history and in the 20^th Century most of us are aware that in Germany in 1923 it would take a barrow load of Deutschmarks to buy a loaf of bread but an ounce of gold could buy a reasonable house and one dollar was worth 4 trillion marks

This irresponsible printing of money has eaten away at the value of the world’s reserve currency the USD dollar and dollar based assets, to such an extent that they have lost 82% of value since 1971, the year the US cut links with the gold standard. The GBP has fared even worse that the USD losing around 85% of value since 1971.   There are many illustrations of then and now and how owning gold with intrinsic value would have more purchasing pro rata than currency. E.g the latest model Cadillac Eldorado would have taken 180 ounces of gold at $42.02 to pay the showroom price of $7,546. This same 180 ounces is now worth over $200k and would buy two Cadillac convertibles with enough left over to fuel to first service. In the UK an average family car cost £1000 around 60 oz of gold and now the same would cost £17000 around 23 oz of gold. The 60 ounces would have bought the same family car for you a sports car for your wife and a hatchback for your son or daughter. Gold retains its purchasing power year after year.

Not long ago the gold standard imposed monetary discipline on countries as they had to hold enough gold to cover the money in circulation but this all changed with the Jamaica agreement in 1971 when the decision was taken by President Nixon on the 15th August 1971 to suspend the direct convertibility of dollars into gold, the keystone of the financial system created in July 1944 (the Bretton Woods Agreement).  On the 1st October 1971 the general assembly of the IMF asked the board of trustees to study and propose a comprehensive reform.  This would be adopted by member States during a meeting held in Kingston (Jamaica) on the 7th and 8th January 1976, and included a set of provisions which put an end to the reign of gold.  The US money supply in 1971 was $776 billion and quickly became an upward curve which rose dramatically over the last decade where the US money supply doubled from below $7 trillion to $14.3 trillion indicating that spending is out of control.

What is the effect as the US and other governments including the UK go on this spending spree. It means that the risk of sovereign debt default becomes very high indeed. We have already seen Iceland’s debt rise to 7 times GDP and then go into financial melt down and economic depression. This is a warning and recently Greece has been the sick man of the Euro world  with its debt forecast to reach 130% of GDP, its credit rating cut, the country in turmoil and it has placed pressure on the Euro itself.  The UK has not reached that level yet, but we are heading that way with debt estimated to be 65% of GDP this year and a forecast for 78% by 2015.  Japan the world’s second largest economy has debt of twice its GDP but continues to spend. In the Euro zone Spain, Italy, Portugal former Eastern European countries all face serious financial issues.

Most worrying is that the US, whose dollar is still the world’s reserve currency, has debts of 100% of GDP and budget deficits over the next few years will send that figure soaring. Their solution instead of cutting expenditures is create more fiat currency which will inevitably lead to devaluation of the dollar.  There are already moves afoot to seek alternatives lead by Russia and China and gold has featured in their strategies. China’s long term goal is to dominate financially and replace the US and they are currently playing a political game as they have up to 2 trillion in dollar assets that they do not want to destroy but off load at the best value.

It comes as no surprise that both China and Russia are increasing their gold reserves along with India who recently bough 200 tonnes from the IMF to back its financial commitments. China is now the worlds largest producer of gold and has recently surpassed India as the worlds greatest consumer and actively encourage their citizens to put part of their savings into gold.  China has a predicament in that it wants its central bank to diversify into gold without increasing the gold price and to shed dollar assets without devaluing the dollar so they are building reserves from internal sources and buying small quantities during price dips.  The UK made a very bad move when Gordon Brown sold off 395 tonnes of gold a decade ago when gold was at less than 25% of todays value. In light of the of the world economic situation this was doubly bad as gold reserves are more important than ever.

In summary:

• Currency is not money and its value can be changed by monetary policy makers
• Currency can be created and printed at will with no substance to support it
• Currency depreciation in value is accelerating with subsequent loss of purchasing power
• National debt is increasing to disastrous levels with threat of sovereign debt default
• Confidence in the  USD is waning and its use as a reserve currency is under threat
• Countries and investors are shedding their dollar assets
• Central Banks are diversifying into gold and out of dollar assets
• Smart investors are diversifying their portfolios with a proportion of gold
• The value of gold has been consistent in retaining its purchasing power
• Gold is insurance for your wealth
• Gold is the only real money

The price of gold rose to its all time high in December 2009 to $1212 an ounce and since then it dropped to a low of $1048 but now is in a period of consolidation of just above $1100 which follows a pattern that has been consistent over the last decade. It is likely that we will face another financial crisis due  irresponsible printing of currency, the risk of sovereign debt and political pressure. Of the millions of investors throughout the world only a tiny proportion see gold other than as a commodity. Central banks have seen the need to diversify into gold. The discerning investor understands that apart from ROI gold is a protection for wealth and the person who holds gold will see out a crisis and that has been proved time and again throughout history.  Once a greater proportion of investors become educated in the need to diversify, as they inevitably will, the price of gold will rocket.  Now is the time to protect your wealth in the safest investment – GOLD and I would recommend that you invest in the form of gold coins and in the UK gold sovereigns.

For details of the worlds most popular investment coins http://goldcoin.org/investment-coins/

Maurice Hall

We have heard people say “Personally I think that the price of gold will continue to drop because of all this news about a recovery.”  Recovery? What recovery?  The recovery of city traders’ morale because they have been offered two or three jobs a day for the past few months?  The recovery of your bank manager’s morale now that he is able to do his job like he did “before“?  No one has spoken to me about a recovery.  The budgets of many companies are still frozen as they wait for better days.  The bank accounts of some are nearly empty and uncertainties about their employees’ jobs have never been so great.  The global debt situation is frightening and the UK national debt is reaching dangerous heights, estimated at £1.1 trillion next year. In summary, nothing has been settled and we are currently navigating through a period of uncertainty, a vast smoke cloud. Most experts agree that gold is in a period of correction that falls into a pattern that has been repeated through out the last decade. There will be consolidation and that could be around $1100 an ounce and that will be followed by a rise of anywhere between $1300- $1500 by the end of the year.

To continue with this metaphor, the house is on fire in the basement but there is still time for those who don’t have any insurance to take some out.  The structure has been affected but there are still embers alive here and there and no one really knows where and how to extinguish them.  You can even consider yourself lucky because you know that the house could soon burn down entirely.

In this context, buying gold is a bit like placing Pascal’s wager: by not having it you have everything to lose.  By having it the worst possibility is that you will keep it and have to catch up on the rest (stocks, property etc.) Or put another way “Gold is not an investment, it doesn’t earn anything.  It’s a security blanket when monetary markers disappear.  Which is the biggest risk: having gold or not having gold? Not having it of course.”  – Simone Wapier Chief editor MoneyWeek

Those who today believe that you shouldn’t buy gold because the stock market is showing signs of recovery are those that systematically buy gold when its price is rising because it is talked about on the TV who sell when the price is dropping because no one is talking about it anymore.  In short, the same people who systematically lose on shares because they apply the same strategy to their stock portfolio. The simple chart shows a typical investment  cycle where the heavy public buying is a result of  greed and and the selling follows fear and despair but the overall trend is upwards for the discerning investor who holds his nerve.  Gold is still at this time the preferred investment of contrarians even if others are discovering its qualities.

Today, the price of gold coins means they are still worth purchasing, particularly because Napoleons have a premium of less than 5% and Krugerrands have a premium of between 5 and 7% as have sovereigns if bought from the right source.

All gold coins are not equal depending on what you want to do and where the coins are located and where you live.  You must choose coins that correspond with your profile and you must know how to diversify. Coins are also global and it pays to understand how coins are bought and sold in other countries and how profit can be made outside of your own country. We have this international experience.

Generally in Britain we should buy sovereigns, Britannias as they are our national coins and free from both VAT and Capital Gains Tax (CGT) but we may also consider the Kruggerand but accept CGT will have to be paid on profit.  However, we should be aware of the vibrant gold coin market in France where we can take advantage of their obsession with Napoleons where the premiums will rise at the slightest hint of any trouble. People who live in France  should buy Napoleons, also we have advised them to buy Tunisian 20 Franc coins (not sought after in France therefore a low premium potential in France) because they have a second home in Tozeur, in the middle of the Tunisian desert (place where the premium for this coin will be higher because of strong demand for gold).  We  have advised other people to buy sovereigns rather than Krugerrands because they travelled between France and China for business.

Generally speaking we advise the following:

• Medium and long term investors buying and selling in the UK should concentrate on the sovereign, Britannia or Krugerrand.  Other coins to consider internationally are the Napoleon, the Swiss 20 Franc Vreneli and the 50 Peso Centenario.  For info: the Sovereign is highly sought after in all the former British colonies but also in Germany, Greece and China. Without doubt it is the coin that has the greatest worldwide liquidity and is the coin of choice for use in an emergency and is issued by many nations armies, to personal likely to be exposed to danger. The Napoleon is essentially recognized in France, Switzerland and Belgium and could be interesting to the UK investor for the reasons above.  The Krugerrand is the international gold bullion coin and wherever you go this coin is sought after it may also be useful in shorter term investments.  The Swiss 20 Franc is the gold coin familiar to all the former investors in physical gold in particular the Germans, Swiss and French.  Finally the 50 Pesos Centenario can easily be traded for cash in all Hispanic countries.
• Those who like to play the markets and like us think that the price of gold will continue to rise and that there might be a rush on gold coins towards the end of the year, can consider the  Krugerrands which could become short in supply.  They could also follow the price of the $ 10 and $20 US  (Eagle and Double Eagle) which have very large differential premiums ( the difference between the base premium and the highest premium) and buy therefore when the premium is low (don’t expect the base premium to be lower than 10% however).  Such coins could gain or lose £40-45 in less than one day.  Finally, for those that want to play the French card, our preferred coin for trying to make a profit with is undoubtedly the 10 Franc Napoleon or the half Napoleon which can make 10 Euros in less than a day (which is enormous for a coin that is listed for around 80 Euros).  In France the half Napoleon is the coin with the highest differential premium.  But be aware, we recommend it for experts only because you have to know when to buy it at the best time (premium between 12 and 20%) and you must above all be certain of its quality (minimum VF condition)
• For Insurance, Investment and world wide liquidity and the added advantage of no Capital Gains Tax in the UK  buy the sovereign

An index of the most popular investment coins can be found at http://goldcoin.org/investment-coins/

In summary:

• You still don’t have any gold coins?
• You already have coins? Don’t sell them, strengthen your holdings.
• For the long term: Buy Sovereigns (antique but not numismatic or Elisabeth II), Napoleons, Swiss 20 Franc or 50 Pesos.
• For the short term: buy Krugerrands, $10 or $20 Eagle or double Eagle with a declining premium, or even very good quality half Napoleons when the premium is between 12 and 20%.  You know that you are taking risks with these purchases but in terms of profits you could very quickly increase your outlay.  This takes time, but you have everything to gain by monitoring the price of these coins and by creating email alerts for when a threshold (price and/or premium) is passed upwards or downwards.

You will find the following articles interesting:

• Investing with gold coins.  The novices guide – (to be posted)
• Analysis of Gold – Price consolidation

The Sovereign and Kruggerand also have internationally appeal but  the Swiss 20 Franc Vreneli, and the 50 Pesos are also interesting due to its very low premium but strictly as a long term investment for the day when everything implodes…

Updated by Maurice Hall for the UK market from an original article by Jean-Francois Faure president and founder of AuCOFFRE.com

Belgium gold coin from Latin Monatary Union - Leopold II

The story began when Belgium adopted the French franc in 1830. Switzerland harmonized its currency to the franc in 1848 and Italy joined in 1861, both retaining the names of their national currencies but adjusting their values to match the franc. In 1865, this arrangement was formalized as the Latin Monetary Union. Greece and Bulgaria joined in 1867, and a number of states (Spain, Romania, Austria, Finland, Venezuela, Serbia, Montenegro, San Marino and the Vatican) issued currency following the conventions without officially joining the Union.

The basic idea was that each member country would have identical coinage made from gold and silver. While the names of the individual currencies were kept, the weights were identical, so 5 French francs were worth exactly the same as 5 Italian lire and could be used through the Union like national currency (minus a 1.25% handling charge). Each country could mint as many coins as it wanted, there being no risk of inflation due to the intrinsic worth of the metal. The following coins were issued throughout the Union:

Belgium used French gold for all its dealings and therefore made it legal tender in 1861.  The Belgian delegate remarked that because his country was situated between France, England, Holland and Germany it formed the perfect natural link for payments to these States.  Some were using gold and others silver.  The balance of the National Bank was suffering from the aftershocks of these actions which disrupted credit and trade.  Belgium, Italy and Switzerland therefore demanded adoption of the gold standard.  The agreement was signed reducing the fineness of coins worth less than 5 francs to 835 thousands.  The money supply was voluntarily limited.  Individuals could only make maximum payments of 50 francs.  Each country was also forbidden from printing more than 6 francs per capita.  A very simple system that Greece joined in 1868.

However, there were problems that eventually lead to failure. The exchange rate of gold to silver was fixed at 1:15.5, which soon turned out to over value silver significantly. The Union countries tried to unload their silver coins into other countries, so they could profit by turning them into gold. Speculators could buy 16 francs of silver, go to the Mint and strike four 5 franc coins which enabled them to go and buy a beautiful Napoleon. France’s gold was disappearing.

Germany shamelessly profited and benefited greatly from the situation.  German agents came to Paris and Brussels with silver ingots from the recent demonetisation of thalers and transformed them into 5 franc coins which were then converted into notes and then gold.  To put an end to these practices Belgium, France, Italy and Switzerland limited (1874) and then soon after suspended (1876) the striking of écus. A larger problem was that there was also a second set of subsidiary silver coins for smaller amounts, issued by each country on its own and not fully convertible elsewhere. Even though these coins had a lower silver content than the primary coins, Union members were by law required to accept up to 100 units of them at face value per transaction, very much a loss-making proposition for the receiving side. Also, while the ending of silver convertibility stopped the minting of new silver coins, outstanding ones remained legal tender. With the advent of World War I and the massive financing strains involved, not to mention war between members of the Union, the system collapsed totally, although it remained in legal fiction until the end of the 1920s.

The United Kingdom entered discussions of  Britain joining the Latin Monetary Union. The proposal involved reducing the amount of gold in one pound sterling by less than 1% to make one pound equivalent to 25 Francs and also decimalising the currency. During the period of the Latin Monetary Union, the United Kingdom was already in a monetary union with territories now commonly known as the “Commonwealth” The gold standard of the British gold sovereign existed in these territories until the outbreak  World War I.

Maurice Hall

WWII Survival Kit

They have been nicknamed “the gold survival coin”. As early as 1916 Pilots were supplied with gold sovereigns (for which they had to sign a form before each flight) in packets of either 4, 6, 8, or 12, depending on the perceived dangers of the mission. During World War II American and British airman and SOE operatives carried a supply of sovereigns as they could be relied on to buy the way out of trouble,  irrespective of the country in which they found themselves in difficulty. With paper currencies fluctuating wildly, SOE commandos who raided the Nazi missile base at Peenemunde in the Second World War took gold sovereigns with them as means of persuasion if captured. This inspired Ian Fleming to write them into From Russia with Love, where Q gives James Bond a special briefcase containing hidden weaponry and 50 gold sovereigns secured in the lining.
More recently many armies have included sovereigns in the survival pack, both British and American airman and Special Services had sovereigns sown into their clothing to buy emergency food, shelter, safe passage or bargaining power if confronted by unfriendly forces. In 1991 the Ministry of Defence  purchase £1 million of gold sovereigns for use in the gulf war and sold those that were returned at very good profit some years later.

It was not only allied military who believed in the power of the sovereign but in history people as diverse as the Sikh freedom fighters in the 1920’s who were opposed to British rule in India made good use of the sovereign. They concealed the coins in a pouch in their throats  and used them to bribe their way out of Prison.  The son of a wealthy industrialist residing in Thessaloniki, Macedonia recalls how his family converted their entire wealth into 3000 gold sovereigns and hid them in door frames just before the German occupation. This allowed them to survive the war without starvation as did many of their friends who did the same, but others lost their entire fortune when left with bundles of worthless Greek currency.

Many of you may remember the well loved 1960s’ BBC TV series based on the Home Guard during WWII in the seaside town of Walmington.  In the episode entitled “Miser’s Hoard”,  private Fraser the local undertaker of Scottish decent, has his life saving of hundreds of sovereigns discovered. Captain Mainwaring, who’s day job is the bank manager trys to persuade him that he should put his fortune in safety but Frazer does not trust the bank. However, his fortune becomes known to the community and he has to try and bury it at night to avoid his spying neighbors.  He would never feel safe again and would always worry his wealth would be lost. Private Frazer’s catch phrase was “Doomed, we’re doomed”

So the sovereign is the worlds most respect and liquid gold coin from, Arab souks to Punjab mountains to occupied Europe. History has proved that in time of conflict your best safeguard would be to hold some gold sovereigns. Unlike paper money they can be neither burnt, shredded or destroyed by water and will retain their value whilst the paper currency can in many circumstances become worthless. However, as private Frazer discovered, if you keep  all or part of your wealth hidden, apart from the worry of discovery, it will always be subject to exposure and loss.  Our advise would be to store any significant quantity of gold in a secure vault under your control such as those provided by LinGold.com.

Maurice Hall

Bank of Russia

Within its framework , the Bank of Russia issues commemorative coins made of precious and non precious metals as well as investment coins made of precious metals, which are distributed inside and outside the country. The Bank of Russia has been engaged in this work since its founding in 1992 (previously, in  1965 – 1991 commemorative and investment coins were issued by the State Bank of the USSR).

For the first time in 1996 Russian citizens were offered investment coins on domestic market, gold uncirculated Chervonets coins minted in 1975-1982 and the  silver “Sable” coin of 1995.  The Board of Directors of the Bank of Russia, declared on March 5, 2001, that the gold Chervonets and the silver “Sable” are legal tender in the territory of the Russian Federation.

To create conditions for gold coins to be used  as an independent instrument  for investment  the gold Chervonets, and a new 24 carat gold coin “George the Victorious” were relieved of VAT as declared in the Article 149 of the second part of the Tax Code of the Russian Federation.

The coins of the Bank of Russia are struck in the Moscow and St. Petersburg mints and have a high artistic standard and perfect striking quality. They are popular in Russia and abroad, some of them repeatedly took prizes in opinion polls  held by specialised foreign numismatic publications and organizations.

The Chervonet is gold coin that was issued both for circulation and as a trade or bullion coin. First minted in 1701 under Peter the Great. The origins of the word are derived from the word “Chervonny”, meaning in Russian literally “Red” but also “of a High Quality” and had gold composition of 0.986 and weighed 3.47 g.
The second issue was an attempt to strengthen Soviet economics with “hard” currency backed by the gold reserve but was not successful due to political reasons. These were larger and weighted 8.6 g. with a gold composition of 0.900
There was another attempt in 1925 to strike more Gold Chervonets coins, but it is believed that all but one were melted down.

From 1975 to 1982, the Soviet Union was issuing Chervonets gold coins, equal to 10 Roubles, using the old design but with the new dates in relatively modest amounts as a bullion coinage and is the only issue commonly found.

Chervonets 1976 Obverse

Chervonets – in the center – the State Emblem of the RSFSR (the abbreviation for Russian Soviet Federative Socialist Republic): the shield surrounded by a wreath of ears and bearing the picture of hammer and sickle against the background of sunbeams; the inscriptions along the rim framed by a circle of dots: at the top – “ПРОЛЕТАРИИ ВСЕХ СТРАН СОЕДИНЯЙТЕСЬ!” (WORKERS OF THE WOPLD, UNITE!), at the bottom, under the State Emblem – “Р.С.Ф.С.Р” (R.S.F.S.R.).

Chervonets 1976 Reverse

The picture of a peasant – sower against the background of a plough, the rising sun and factories. The inscriptions along the rim framed by a circle of dots: at the top – “ОДИН ЧЕРВОНЕЦ” (ONE CHERVONETS), at the bottom to the left – the year of issue (1975 – 1982).The edge is bearing the pressed inscription: “1 ЗОЛОТНИК 78,24 ДОЛИ ЧИСТОГО ЗОЛОТА” (1 ZOLOTNIK 78,24 PARTS OF PURE GOLD). The coins were struck by Moscow Mint (ММД) and Leningrad Mint (ЛМД).

"George the Victorious" slaying the dragon

In February 2006 a new 24 carat gold investment coin featuring the Saint Georges the Victorious was introduced  by the Bank of Russia. This is very similar to the reverse of the British Sovereign and should prove popular in the UK.  So far 1,500,000 coins have been minted.

Obverse – in the centre – the Emblem of the Bank of Russia [the two-headed eagle with wings down, lower – the semicircular inscription – «БАНК РОССИИ» (BANK OF RUSSIA)] framed by a circle of dots and inscriptions along the rim: at the top – «ПЯТЬДЕСЯТ РУБЛЕЙ» (FIFTY RUBLES), at the bottom – the year of issue «2006», the letters to the left indicate the metal sign and the fineness, to the right – the fine metal content and the mint trade mark.

The Reverse  depicts the image of St. George the Victorious sitting on horseback and slaying a dragon.

Future Mintage

In 2010, the Bank of Russian are planning to issue 700,000  of the 50 rouble St George the Victorious coins, and in 2011 they plan to issue a new design 24 carat gold coin with the same specifications to commemorate the XXII th Winter Olympic Games – 2014 in Sochi.  This will be a 50 Rouble denomination coin and the planned mintage is 2,000,000. So Russia apart from being one of the major modern players in the world gold market is planning to be much more active in the bullion coin investment market.

Specifications

Russia has also produced in modest quantities commemorative gold coins in 10,25,50 and 100 Rouble denominations with themes of the Russian Ballet (most common) , the 22nd Olympiad in Moscow,  anniversary of the Russian State Russian featuring architecture, monuments and Leo Tolstoy

Maurice Hall